Markets, Politics, and Change in the Global Political Economy 9781685851422

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Markets, Politics, and Change in the Global Political Economy

International Political Economy Yearbook, Volume 4 William P. Avery and David P. Rapkin, Series Editors Board of Editors Jonathan D. Aronson, University of Southern California Richard Ashley, Arizona State University Thomas J. Biersteker, University of Southern California Volker Bornschier, University of Zurich James A. Caporaso, University of Washington Christopher Chase-Dunn, Johns Hopkins University Peter F. Cowhey, University of California, San Diego Robert W. Cox, York University Ernst-Otto Czempeil, University of Frankfurt Alain de Janvry, University of California, Berkeley Judith Goldstein, Stanford University Keith Griffin, Oxford University Hans-Henrik Holm, Aarhus University (Denmark) W. Ladd Hollist, Brigham Young University Raymond F. Hopkins, Swarthmore College Takashi Inoguchi, University of Tokyo Harold K. Jacobson, University of Michigan Robert O. Keohane, Harvard University Stephen J. Kobrin, New York University Stephen D. Krasner, Stanford University Robert T. Kudrle, University of Minnesota Bruce E. Moon, Lehigh University Heraldo Muñoz, University of Chile Lynn K. Mytelka, Carleton University E. Wayne Nafziger, Kansas State University Guillermo O'Donnell, University of Notre Dame Dieter Senghaas, University of Bremen Susan Strange, London School of Economics and Political Science William R. Thompson, Claremont Graduate School F. LaMond Tullis, Brigham Young University Laura D'Andrea Tyson, University of California, Berkeley Raimo Väyrynen, Helsinki University Mark Zacher, University of British Columbia

Markets, Politics, and Change in the Global Political Economy

edited by

William P. Avery & David P. Rapkin

Lyn n e R i e n n e r Publishers • B o u l d e r & L o n d o n

Published in the United States of America in 1989 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU ©1989 by Lynne Rienner Publishers, Inc. All rights reserved

Library of Congress Cataloging-in-Publication Data Markets, politics, and change in the global economy / edited by William P. Avery and David P. Rapkin. p. cm. — (International political economy yearbook ; 4) Bibliography: p. Includes index. ISBN 1-55587-148-8 (alk. paper) 1. Debts, External—Developing countries. 2. Capitalism— Developing countries. 3. Developing countries—Economic policy. 4. Developing countries—Politics and government. 5. Investments, Foreign—Developing countries. 6. International finance. I. Avery, William P. II. Rapkin, David P. III. Series: International political economy yearbook; v. 4. HF1410.I579 vol. 4 [HJ8899] 89-3626 337.05 s—del9 CIP B36'.09172'4] British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1984.

Contents

List of Tables and Figures

vii

List of Contributors

ix

Acknowledgments

xi

1

2

3

4

5

Markets, Politics, and Change in the Global Political Economy David P. Rapkin and William P. Avery

1

Global Debt Cycles and the Role of Political Regimes Christian Suter and Ulrich PJister

17

Global Debt Crises in Structural-Cyclical Perspective: 1791-1984 David Kowalewski

57

The Impact of Arms Imports and Economic Environments on Third World Debt Robert E. Looney

85

Direct Foreign Investment, Repression, Reform, and Political Conflict in Third World States John M. Rothgeb, Jr.

105

v

vi

Table of Contents

6

Markets, Sovereignty, and International Regime Change: Constraints on Nationalization Strategies in Peru and Jamaica Kenneth A. Rodman

127

The Economic Origins of Political Instability: Why the Portuguese Bourgeoisie Abandoned Its First Republic Kathleen C. Schwartzman

151

External Shocks and Instability in Taiwan: The Dog That Didn't Bark Cal Clark

173

7

8

References

199

Index

221

About the Book

227

Tables and Figures

TABLES 2.1 2.2

Kondratieff Cycles and Global Debt Crises Synopsis of Political Regimes

47 48

3.1 3.2 3.3

T-Tests for Kondratieffs in Periphery Exports Loan and Debt-Problem Waves Theme Cycles in Great Britain and the United States

78 79 80

4.1

Impact of Arms Exports on Third World Public External Debt Discriminant Analysis, Total Sample Differences Between Group I and Group II Impact of Arms Imports: Constrained and Unconstrained Countries Differences in Third World Military and Nonmilitary Producers Factors Affecting Arms Imports: Constrained and Unconstrained Countries Impact of Arms Imports: Alternative Country Groupings

4.2 4.3 4.4 4.5 4.6 4.7 5.1 5.2 5.3 5.4 5.5 5.6

Foreign Investment and Political Conflict Foreign Investment and Reform Foreign Investment and Repression Political Reform, Repression, and Conflict Foreign Investment, Political Reform, and Political Conflict Foreign Investment, Political Repression, and Political Conflict vii

98 99 100 101 102 103 104 122 122 123 123 124 124

viii

Tables and Figures

7.1

Cabinet Profile: 1910-1926

172

8.1 8.2 8.3 8.4

Indicators of Economic Development in the ROC Economic and Social Indicators, 1972-1977 Monthly Changes in Bank Deposits and Wholesale Prices ROC Export Performance

194 195 196 197

FIGURES 2.1 2.2

Global Debt Crises Peru: Exports, External Debts, Suspension Periods, and Sequences of Political Regimes 2.3 Liberia: Exports, External Debts, Suspension Periods, and Sequences of Political Regimes 2.4 Argentina: Exports, External Debts, Suspension Periods, and Sequences of Political Regimes 2.5 Ottoman Empire/Turkey: Exports, External Debts, Suspension Periods, and Sequences of Political Regimes

47

3.1 Kondratieffs in Periphery Exports 3.2 Loans: Nine-Year Moving Average 3 3 Debt Problems: Nine-Year Moving Average

81 82 83

7.1

Governments Along Bourgeois-Bourgeois and Bourgeois-Working Class Dimensions

50 51 52 53

172

The Contributors

William P. Avery is professor of political science at the University of Nebraska-Lincoln. His published articles have appeared in the American Journal of Political Science, International Organization, International Studies Quarterly, Political Science Quarterly, and elsewhere. He is co-editor of several books, including (with David Rapkin) America in a Changing World Political Economy. Cal Clark is professor of political science at the University of Wyoming. He is the author of numerous articles and books, including Taiwan's Development. His teaching and research interests focus upon international political economy and comparative public policy. David Kowalewski is associate professor of political science at Alfred University. His works on global political economy have appeared in Comparative Political Studies, the Journal of Political and Military Sociology, and elsewhere. He is also author of Transnational Corporations and Caribbean Inequality. Robert E. Looney is professor in the Department of National Security Affairs, Naval Postgraduate School, Monterey, California. He is author of several articles and books, including Third World Military Expenditures and Arms Production. In addition to his ongoing research on Third World defense expenditures, he is presently investigating industrial development in the Persian Gulf. Ulrich Pflster is senior assistant for information management in the Humanities Faculty at the University of Zürich, Switzerland. His research interests include international political economy and the ix

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Contributors

economic and social history of early modern Europe. He is author of The Origins of Birth Limitation and, with Christian Suter, is currently completing a book on international indebtedness. David P. Rapkin is associate professor and chair of political science at the University of Nebraska-Lincoln. He has contributed articles to Comparative Political Studies, Cooperation and Conflict, International Interactions, and the Journal of Conflict Resolution. Together with William Avery, he edited America in a Changing World Political Economy. He is presently visiting professor at Tsukuba University, Japan. Kenneth A. Rodman is associate professor of political science at Colby College. He is author of Sanctity Versus Sovereignty: The United States and the Nationalization of Natural Resource Investments. His current research focuses u p o n state attempts to enlist multinational corporations as instruments of economic sanctions. John M. Rothgeb, Jr. is associate professor of political science at Miami University (Ohio). His articles on international political economy have appeared in International Studies Quarterly, the Journal of Conflict Resolution, Comparative Political Studies, the Journal of Peace Research, World Development, International Interactions, and Studies in Comparative International Development. Kathleen C. Schwartzman is assistant professor of sociology, University of Arizona. She is completing a book on the collapse of democracy in Portugal and is also working on a comparative study of the role of foreign trade in the twentieth century world system. Christian Suter is University of Zürich, External Indebtedness in the 19th and 20th Pfister on a new book

assistant in the Sociological Institute at the Switzerland. He has published a book entitled of Third World Countries and Global Debt Crises Centuries. Presently, he is working with Ulrich dealing with international indebtedness.

Acknowledgments

This is the first volume of the Yearbook to be produced by the present series editors. Editorial transitions are always something to be avoided when possible; when not, they should be made as tolerable as possible. The able assistance of the previous editors, Ladd Hollist and LaMond Tullis, made this transition tolerable, and we are grateful. From them we inherited sound editorial review procedures, high standards, and a distinguished and capable board of editors. We, along with the chapter contributors, have accumulated a great many debts in preparing this volume. We are especially indebted to the many colleagues who assisted with the evaluation of submitted manuscripts: Thomas Biersteker, Volker Bornschier, Christopher ChaseDunn, Robert Cox, Jeffry Frieden, Stephan Haggard, Ladd Hollist, Miles Kahler, Stephen Kobrin, Stephen Krasner, Juan Linz, Guillermo O'Donnell, Mark Rupert, Philippe Schmitter, William Thompson, LaMond Tullis, and Raphael Zariski. Financial support was provided by Gerry Miesels, dean of the College of Arts and Sciences at the University of Nebraska-Lincoln (UNL). The Department of Political Science at UNL generously provided administrative assistance. Helen Sexton and Deb Dean were particularly good at helping us avoid missed deadlines. Ruth Ediger and Laurie Gottsche, graduate students in the department, were invaluable in the preparation of the reference and index sections. Christian Suter and Ulrich Pfister acknowledge the financial support of the World Society Foundation in the preparation of Chapter 2. Their chapter was originally presented at the ESRC Third World Economic History and Development Group Conference, Birmingham, England, September 1986. Research for Chapter 3 was funded in part by the National Endowment for the Humanities. The author wishes to xi

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Acknowledgments

thank Tom Adams, Tom Denver, Susan Hamer, Steven Jackson, Walter LaFeber, George Modelski, Sidney Tarrow, William Thompson, and Richard Young for helpful comments. Gratitude is also expressed to Donna Devoist, William Martin, Immanuel Wallerstein, and others of the Fernand Braudel Center at SUNY-Binghamton for their gracious assistance. Chapter 7 was supported in part by a grant from the American Association of University Women, and the author is grateful to Michael Burawoy, Adam Przeworski, Albert Bergesen, and Doug McAdam for helpful comments. Support for the research reported in Chapter 8 was provided by the Pacific Cultural Foundation (Taipei). An earlier version of that chapter was presented at the annual meeting of the International Studies Association, St. Louis, April 1988.

David P. Rapkin William P. Avery

Markets, Politics, and Change in the Global Political Economy

Change in the global political economy has become so frequent, farreaching, and rapid that perhaps it should be regarded as constant and usual rather than unexpected and a departure from the stable and familiar. Today statesmen, scholars, business leaders, and laypeople are grappling with the implications of the relative decline of the U.S. economy, the corresponding shift to Japan and East Asia of the locus of economic dynamism, the potential emergence of Europe as a single economic unit, and the opening to world market forces of much of the socialist world. These broad-scale developments are surely related to a number of other recent, more specific changes: decline and surplus capacity in once vibrant industries and sectors; the creation of new technologies and types of industrial activity; the burgeoning of the service sector in the United States and other advanced countries; deterioration of the liberal trading regime; rapid fluctuations in the value of the dollar and other major currencies; and the sudden transformation of the United States from the world's largest creditor to its largest debtor. Of equal importance are changes that have occurred in the periphery of the global political economy: the roller coaster ridden by oil-producing countries over the last fifteen years; the acccumulation of huge international debts, destabilizing both debtor countries and the international financial system; the dramatic developmental successes of the Asian newly industrialized economic systems; and recurrent regime changes, as governments fall victim either to their own failures, to indigenous pressures, or to various systemic forces. It would be easy to extend this laundry list of recent and ongoing

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changes in the global political economy; and with benefit of hindsight, it would be easy to connect causally many of the phenomena on the list. But while each individual connection could be plausibly made—and some persuasively—we would be hard-pressed to impose systematic order on the whole web of interconnected changes. Schematically, we would have a welter of causal arrows, many bidirectional, with most phenomena sending and receiving arrows to and from several of the others. We may not even convincingly identify a base or seminal point from which the other changes subsequently emanated. And if these problems plague our efforts at postdiction, it is not at all surprising that few of the changes in the w e b were anticipated by either scholars or policymakers. Despite the prevalence of extensive change in the global political economy, scholarly literature that specifically addresses such change is scarce. Choucri (1980) and Tooze (1981) each have grappled with the nettlesome problem of conceptualizing change in the international political economy. Pointing out the inadequacy of conventional theories, they argue for the d e v e l o p m e n t of multilevel and interdisciplinary approaches. Keohane (1980) has examined changes in economic norms, rules, and procedures ("regimes") that guide behavior of international actors in specific issues areas. He concluded that "changes in relative power resources available to major states . . . explain changes in international regimes" (Keohane, 1980: 132). A recent study by Moon (1987) discusses the role of political change within states in the evolution of North-South relations. Clearly, much remains to be done if we are to understand the causes, processes, and consequences of change in the global political e c o n o m y . Gaining such understanding poses a formidable agenda—one certainly beyond this volume of the yearbook. The chapters that follow, however, narrow this expansive agenda by focusing on questions of change in what are referred to as less developed, developing, underdeveloped, or peripheral societies. The emphasis is on how influences and pressures from, and changes in, the external environment of these societies affect their domestic political and economic processes. Conceptually, we expect that less developed countries, owing to the lack of various capabilities, should be more vulnerable to systemic factors than their larger and more affluent counterparts (Rosenau, 1966). Recently there have been a number of more specific hypotheses that, reflective of this reasoning, attribute political instability in less developed countries to their links to the world economy (see Rapkin and Avery, 1986, for an overview). The chapters in this volume address this set of questions from various

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theoretical perspectives, in different periods, and with an array of research designs and methodologies. METHODOLOGICAL CONSIDERATIONS

The relationship between change at the national and systemic levels is a species in the genus of what is termed the level of analysis problem. At one extreme, changes in domestic political or economic forms are viewed as determined by forces emanating from the systemic environment in which individual national societies operate. Here the larger system is assigned ontological primacy, the composition of its constituent parts is de-emphasized, and the parts are regarded as "takers" of effects and changes generated by or in the system. At the other extreme, unit-level characteristics such as attributes, regime type, or national strategies are of primary importance; the larger system or environment is merely derivative, the additive sum of national parts, and hence should not be reified into an independent causative entity. An intermediate position, to which the contributors to this volume adhere, sees the systemic environment as exerting less than deterministic effects; it instead shapes or constrains the range of potential national outcomes, while allowing some latitude for domestic influences. Sacrificing the analytical simplicity of the two extremes, this perspective forces explicit consideration of the complex interactions between systemic and national factors. Another methodological issue concerns the possible temporal forms of change and the relationships among these forms. One temporal possibility is a sudden shock or disturbance, as exemplified by the "oil shocks" of the 1970s. Another is change that unfolds more gradually, in either the medium term or in long-term secular trends such as the increasing integration of the global economy. A third temporal possibility is cyclical change such as alternations between periods of growth and stagnation, with accompanying variation in other systemic and/or national processes. These distinctions, though conceptually clear, may often blur in practice, especially if one is trying to interpret events as they unfold. Short term shocks, of course, can erupt at any point along a trend or cycle, and cyclical patterns can occur around a secular trend. Of particular importance to this volume are the ways in which different kinds of change are interrelated. For example, we expect that various kinds of problems faced by less developed countries are more acute in periods of cyclical downturn, and that they will be more vulnerable to short-term disturbances during such periods.

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APPROACHES TO UNDERSTANDING CHANGE Without additional substantive assumptions and/or normative commitments, it is difficult to generalize about directionality, relationships across levels, or different forms of change. Different kinds of guidance can be found in what Gilpin (1987: Chapter 2) terms the "three ideologies of political e c o n o m y " — e c o n o m i c liberalism, economic nationalism, and Marxism. Each of these major paradigmatic approaches to political economy comprises a reasonably coherent system of just such assumptions and commitments. Economic Liberalism For our purposes, the most important aspects of economic liberalism are its emphasis on the self-equilibrating tendencies of market systems and the belief that such systems are intrinsically harmonious. Absent the distorting effects of political intrusion into (what should be) economic decisionmaking, the maximizing responses of economic agents to price signals continuously drive market economies toward an equilibrium. The conception of economic change derived from this perspective is one of smooth, incremental, linear growth. While various shorter-term business cycles are recognized, the existence of longerterm Kondratieff cycles of fifty to sixty-year duration are "[delegated to the intellectual scrapheap by liberal economists" (Gilpin, 1987: 101). Markets are also viewed as positive-sum systems in which mutual gains produce an ultimate harmony of interests among participants. This assumption of harmonious relations, coupled with the idea of gradual progress, leads to the belief that market systems provide an inherently stable foundation for social and political evolution. The global market system provides an environment for nation-states which is at best supportive and beneficial, at worst neutral or benign. Markets are not, in the liberal view, a source of discontinuous, disruptive changes that spill over into the political sphere; conversely, market instabilities are often due to political factors such as wars or deliberate interventions. If there is any connection between market forces and political instability, it is not a necessary one. Moreover, it is an indirect connection, mediated by factors internal to individual countries, e.g., the failure of economic agents or their political surrogates to respond rationally to market signals. While most market signals reflect no more than short-term fluctuations, others indicate long-term, large-magnitude changes in relative prices and supply/demand conditions or, more broadly, changes in the structure of the world economy. But, as political scientists (e.g., Katzenstein, 1985: 22; Gilpin, 1987: 82) have often

Markets, Politics & Change

pointed out, liberal economics, with its emphasis on equilibrium and its method of comparative statistics, does not offer a plausible theory of economic change. The most likely sources of significant structural change, such as shifts in technology, production relations, political institutions, or the distribution of power, are treated as exogenous to economic processes and therefore are ignored, "black-boxed," or simply taken as given. The method of comparative statistics is adjusted to fit new equilibrium conditions, but cannot account for change from one set of conditions to another. In sum, economic liberalism does not provide a tenable theory of the causes—either economic or political—of economic change. And while the liberal denial that political instability is a necessary consequence of economic change is likely correct, it seems inescapable that structural changes in the world economy make the occurrence of political instability more probable than equilibrium. We do know that societies sometimes fail to respond to structural change, and that they often respond in ways that are economically ineffective and/or politically disastrous. But even if we assume with economic liberals that there exists in principle a rational response that would avert political disruption, we are still left with an empirical—albeit not deterministic—relationship to explain. Economic Nationalism This approach contains an assortment of ideas and policies—also labelled mercantilist, neomercantilist, or statist—that historically have stood in intellectual and practical opposition to economic liberalism. This opposition is not to the operation of markets per se, as market organization is accepted instrumentally in most circumstances as the best method of generating wealth. Rather, economic nationalists depart from the liberal insistence on economic decisionmaking as a separate sphere of human activity that should be conducted in isolation from political considerations. The pursuit of wealth is intrinsically related to the pursuit of power; national societies quite naturally pursue both; and, while they may face short-term tradeoffs, in the longer term these are mutually reinforcing and thus ultimately convergent objectives. Another significant departure from liberal thought is found in the economic nationalist's premise that the global economy is a source of continuous and discontinuous changes—in the short, medium, and long term—which exert profoundly destabilizing effects both within nation-states and on relations among them. Though not offering a causal explanation of economic change, economic nationalism is much more concerned than liberalism about its political consequences. Change can also flow in the other direction, as conscious policies and

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unintended political events shape distributive and other economic outcomes. In contrast, then, to the liberal's view of a beneficent international environment, economic nationalism depicts a zero-sum world which exhibits no inherent tendencies toward equilibrium or harmony. Inevitable changes in the structure of the world economy—and thus in the external circumstances faced by national societies—make it incumbent on the state to play a much more active role than liberals prescribe. And at times, perceived national interests should be assigned higher priority than the freedom of economic agents to respond to market forces according to an exclusively private calculus. Too often, of course, this form of reasoning has been manifest in reactive protectionism and other mercantilistic methods that delay adjustment and try to force costs onto other societies. Economic nationalism can also be expressed in more positive, less malevolent forms: states can attempt to "preempt the costs of change" (Katzenstein, 1985: 23) by continually transforming their national economies in adjustment to anticipated and still unfolding changes in their global environment. But, for reasons well-expressed by Krasner (1985:11), neither of these options is readily available for less developed countries: [T]he profound national weakness of most developing countries . . . stems from the inability to influence unilaterally or to adjust internally to the pressures of global markets. Larger industrial states are able to influence the international environment and can adjust internally. Smaller industrialized states have little influence over the global pattern of transactions, but their domestic political economies allow them to adjust. Small size and inflexible domestic structures make Third World states vulnerable: severe domestic political and economic dislocation can occur as a result of shocks and fluctuations.

The economic nationalist perspective on economic change is hence particularly germane to the concerns of this volume. Less developed countries, owing to their characteristic small size, poverty, and weak relative position, are more susceptible to external forces emanating from the global economy. And, lacking the apparatus of the wellformed, legitimized state, they are less able to respond to these forces by either forcing adjustments onto others or by implementing strategic adjustments internally.

Marxism Well-formed ideas about the relationship between economic and political change are deeply embedded in dialectical materialism, the philosophical and methodological foundation of Marxist thought.

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Dialectics sees change arising out of contradiction and conflict as the motor force of history. And materialism locates this change squarely in the realm of the production and distribution of wealth. The direction of causality is unambiguous: contradictions generated in the mode and relations of production (deep structure) determine changes in social and political structures. As is well known, Marx never systematically extended his theories of national capitalism to the international realm—a task assumed by Lenin and other subsequent Marxist theorists. Lenin's theory of imperialism aimed to demonstrate how industrial capitalism had managed to postpone crisis and collapse. Outward expansion in quest of raw materials, market space, and investment opportunities enabled the advanced countries of Europe to avoid the contradictions (overproduction, concentration of wealth, and falling rate of profit) and the class warfare generated by the capitalist mode of production. These developments did not eliminate the inevitability of capitalist crisis, but rather transferred it from the domestic to the international arena. In a finite world, the expansionary paths of different capitalist countries are bound to intersect and, Lenin argued, the points of intersection are the likely sites of interstate conflict. These conflictual tendencies of world capitalism are exacerbated by the dynamics of uneven development: differential growth across the major state actors destabilizes the international status quo and creates further incentives for violence by states seeking either to alter or to maintain it. While non-Marxists shy from dogmatic materialism, the general contention that one's position in relation to the means of production has fundamental political implications has been a corrective to orthodox liberalism's separation of the political and economic spheres. This essentially Marxist idea is preserved in contemporary theories of the global political economy, e.g., in the emphasis of Wallerstein's (1974, 1980) theory of the modern world system and in most versions of dependency theory on the importance of a state's position—center, periphery, semiperiphery—within a vertically integrated global division of labor. Those working within this paradigm have been inclined to deterministically attribute domestic political forms and characteristic international relations to position within the division of labor. But the holistic perspective they employ has redressed economic liberalism's atomistic focus, as well as its view of the division of labor as a derivative, descriptive concept which accounts for nothing other than a larger world product and mutual gain. The Leninist emphasis on uneven development also has gained wider currency and is now of central importance in economic nationalist thought, as well as in contemporary realist approaches to

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international politics. Though one may be skeptical about uneven development as a uniquely capitalist phenomenon—in this context it must be considered against the counterfactual alternative of even development—there is little doubt that capitalism's unleashing of technological change and productive forces generates wider national disparities than would otherwise obtain (though again we are in the realm of the counterfactual). The emphases on the division of labor and uneven development thus reflect strong Marxist influences on contemporary approaches to change in the global political economy, perhaps owing to the fact that their analytic use does not require wholesale conversion to Marxist orthodoxy. More problematic for the non-Marxist, however, has been the insistence that class struggle is the defining feature of capitalist social relations and that it serves as the major source of historical change. Consequently, the centrality of class struggle has not travelled quite so well—either from the domestic to the international arena for Marxists, or, more generally, from Marxist to other paradigms. Center and peripheral positions within the global division of labor are sometimes construed as collective analogues of bourgeoisie and proletariat, respectively. This construction may allow a superficial retention of Marxist terminology, but it is fraught with analytical and empirical problems and simply has not provided much by way of understanding. Even official Soviet doctrine, heretofore the last bastion of orthodox Marxism verities, recently seems to have abandoned insistence on class struggle as an indispensible cornerstone of Marxist theory and practice. THE CONTRIBUTIONS The three major approaches to political economy offer some definite ideas about change, but they are not so finely articulated as to allow the differences to be resolved via empirical test. Also, differences are most p r o n o u n c e d on matters of normative and intellectual commitment, which are not subject to disproof. And, as the previous discussion indicated, there are considerable areas of overlap and shared perspective. The original research findings reported in this volume advance the state of our knowledge with regard to both the broad issues we have raised and the more specific substantive questions they respectively address. We have arranged the chapters by substantive focus: Chapters 2-4 deal with different aspects of debt; Chapters 5 and 6 address direct foreign investment issues; and Chapters 7 and 8 are single-country case studies, which examine the

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interaction of systemic and national factors. Chapters 2 and 3 examine some of the political consequences of cyclical patterns in the long-term accumulation of international debt. Christian Suter and Ulrich Pfister continue the line of research reported in their landmark 1987 article, which demonstrated that since 1800 global debt cycles have been linked to Kondratieff long waves; that periods of insolvency, or debt crises, among debtor countries in the periphery of the world economy tend to occur during the downswing phase of these cycles; and that the international financial system has become cumulatively more resilient to debt crises. In Chapter 2 they extend their analysis to the interaction b e t w e e n the systemic p h e n o m e n a of cyclical debt crises and regime change among peripheral debtors over the last two centuries. Suter and Pfister develop an ideal-typical categorization of peripheral regimes, which are hypothesized to be linked in systematic fashion to global debt cycles. Different forms of state class-based regimes have declined in frequency and importance as a function of the increasing integration of peripheral areas into the capitalist world economy. Capitalist regimes based on export-oriented interests have been prevalent during upswing phases of the Kondratieff cycle, and generally have not accumulated large external debts. Populist regimes, which tend to appear toward the peak of the upswing phase, attempt to ameliorate by redistribution the social tensions caused by the incipient industrialization accomplished under capitalist regimes. Such strategies are dependent on large measures of external financing, the supply of which is relatively abundant in consequence of the stillunfolding world economic boom. Disarticulated regimes typically inherit the debt service crisis that emerges w h e n the spending propensities and social compact of populist regimes cannot be sustained during Kondratieff downturns; such regimes attempt to depoliticize internal conflicts, or resort to repression, in order to cope with budgetary and debt crises, and typically reach debt settlements. Disarticulated periods, marked by political instability and a sequence of weak governments with inchoate, vacillating strategies, reflect the inability to either resolve internal divisions or cope with debt service crises. The sequence of political regimes in Peru, Liberia, Argentina, and Turkey were judgmentally coded and analyzed against the background of global debt cycles. Suter and Pfister found that, with some exceptions, regimes in these four peripheral countries changed as hypothesized along phases of the long wave, and that each type of regime has displayed characteristic behavior toward external debt. This suggests a multilevel process: systemic forces shape political forms in

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peripheral debtors that, in turn, influence the international financial system. Systemic forces include the secular trends of deepening integration of the periphery into the global economy and the (more explictly political) increasing institutionalization by creditors of the debt regime; and cyclical fluctuations in economic activity, including the supply of international finance and the recurrence of debt crises. In Chapter 3, David Kowalewski's research design—a kind of pooled cross-section—addresses the same problem of generalizing about debt across sizable spans of space and time, and nicely complements Suter and Pfister's more detailed multiple case study approach. Kowalewski attributes global Kondratieff waves of alternating expansion and contraction to an anarchic structure of accumulation in which periods of excessive investor confidence are followed by periods of pessimism. The integration of core and periphery into a single division of labor ensures that these waves are global phenomena with important repercussions for peripheral countries. Kowalewski demonstrates that peripheral exports rise with upswings and fall precipitously with downswings in the global e c o n o m y . Peripheral demand for external finance is low in consequence of expanding exports, and supply is likewise low as core lenders concentrate on loans within the rapidly expanding core (this coincides with Suter and Pfister's finding of the prevalence, during upswings, of export-oriented capitalist regimes that are disinclined to accumulate debt). But as expansion peaks and begins to decline, investors become reluctant to continue investing in the now-saturated core economies, thus creating a supply side "push" to find alternative outlets for accumulated capital. A corresponding demand side "pull" results from the decline in peripheral export earnings as core markets contract (as demonstrated by Suter and Pfister, the redistributive strategies of populist regimes during this phase accentuate the pull). Innovative use of journalistic data on loans enables Kowalewski to show that (1) loan/debt waves have unfolded countercyclically to the Kondratieff growth waves; and (2) these loan waves have been followed by periods of insolvency and default (during which Suter and Pfister show that periods of disarticulated regimes are prevalent). Kowalewski also argues—again consistently with Suter and Pfister—that in the most recent Kondratieff wave creditors have institutionalized an "international creditor coalition" (ICC) comprised of transnational banking consortia, core governments, and international financial institutions. The ICC has attempted to immunize core creditors against the adverse effects of loan droughts and insolvency by renegotiating and rescheduling peripheral debts. These bargains, however, have required peripheral debtors to implement various

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austerity measures in order to reform their economies and correct balance-of-payment disequilibria. Finally, Kowalewski finds that the ICC-imposed "rescheduling-austerity wave" has produced significantly more economic protest within debtor countries than was the case during previous Kondratieff downswings. Robert Looney, in Chapter 4, examines another aspect of the most recent debt crisis: the relationship between arms imports and Third World debt. The "explosion of liquidity" in the international financial system that followed the OPEC oil price increases in 1973-1974, coupled with low real rates of interest, constituted a substantial supply side push to foreign lending. These systemic factors accentuated the cyclical dynamics discussed by Suter and Pfister and Kowalewski, with the result of severe debt-servicing problems in the 1980s. Another trend unfolding through the 1970s and 1980s has been dramatic increases in Third World arms imports. Are these two developments systematically connected, as some analysts suggest, or are they merely coincidental? If indeed loans have been utilized to purchase arms rather than to enhance productive capacity, then we also have a partial explanation of subsequent difficulties in servicing those loans. With a more limited and recent temporal scope than Chapters 2 and 3, Looney is able to employ much more sophisticated and precise methodological techniques. He first builds a rather fully specified multi-equation model of the macroeconomic determinants of external debt accumulated by 1982 by seventy-seven Third World countries. For the overall sample, Looney reports no significant relationship between arms imports and debt; over 70 percent of the variation in debt levels is attributable (positively) to GNP and (negatively) to levels of international reserves. Since the broad category "Third World" masks considerable heterogeneity, Looney proceeds to use factor analytic techniques to partition the sample into two groups: resource-constrained countries and those that are relatively unconstrained. The finding of no armsdebt link holds for the latter group, which consists of generally larger, wealthier, and less debt-reliant countries; they are apparently able to finance their arms imports with expanded government revenues. For the resource-constrained countries, however, debt levels are strongly determined by total imports (which skyrocketed for oil-importing Third World countries after the OPEC price rise), and arms imports are also a statistically significant determinant of debt. Lacking foreign exchange and robust economies, the constrained countries resort to borrowing to acquire military capabilities. The necessity of arms imports is of course another question. Assuming (somewhat arbitrarily) that Third World arms imports have

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been necessary to meet perceived security needs, the 1970s' systemic political and economic stimuli to lending affected Third World countries differently. But the difference hinged on the economic characteristics of the individual countries. An interesting next step would be to add to Looney's analysis consideration of the types of political regimes specified by Pfister and Suter; one would expect to find more populist and disarticulated regimes in the constrained than in the unconstrained category. The next two chapters shift our focus from debt to foreign investment. John Rothgeb also employs a cross-sectional design to examine the relationships among direct foreign investment, reform, repression, and political conflict in eighty-four less developed countries in the late 1960s and 1970s. The enormous growth in direct foreign investment, and the associated activities of multinational corporations since the 1950s is another economic trend characterizing the contemporary global political economy. A voluminous literature has developed concerning the economic, social, and political impacts of this investment on host Third World countries. In Chapter 5, Rothgeb addresses contending hypotheses about the domestic political effects of stocks and flows of foreign investment in the manufacturing and mining sectors. Marxist and dependency theorists adduce a variety of arguments suggesting that direct foreign investment fosters conditions leading to increased political conflict, while economic liberls argue that a multinational corporate presence tends to have a liberalizing influence on host countries. Rothgeb constructs a measure of accumulated stocks of foreign investment in 1967; flows, undifferentiated between manufacturing and mining, are estimated over four three-year periods between 1967 and 1978. Measures of political conflict, reform, and repression were constructed from the COPDAB domestic data file for the same threeyear periods. Simultaneous and lagged regression equations produced interesting results. Stocks of mining investments and flows are positively related to short-term, transitory increases in political conflict. Stocks of manufacturing investment are significantly associated, both in the short and longer term, with political reform (positively) and repression (negatively), and with lower levels of political conflict. However, the relationship between manufacturing stocks and conflict disappears when controls are entered for political reform. On the basis of this reform-mediated relationship between manufacturing investment and lower levels of political conflict, Rothgeb concludes that the trend of increased foreign investment has tended to have a liberalizing influence on host societies. Kenneth Rodman's examination of changes in the international

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regime governing raw material investments is supported by case studies of nationalization in Peru and Jamaica. The traditional concession regime, which prevailed until the late 1960s, afforded host Third World governments very little control over the terms of investment. Rodman argues that challenges to this regime stemmed from erosion of the cognitive and structural bases that undergirded it. The cognitive base consisted of liberal economic precepts emphasizing the virtues of maintaining an investment climate predicated on p r e s u m e d mutual gain and the international legal sanctity of contractual and property rights. The structural (or environmental) bases included U.S. hegemony to maintain the regime via manipulation of rewards and sanctions; oligopolistic concentration in raw materials industries, which facilitated coordination among a small number of vertically integrated (mostly U.S.) firms; and the informational and bargaining disadvantages of host governments vis-à-vis firms at earlier stages of the investment relationship. Less developed countries came to reject the liberal intellectual foundations of the regime as contrary to their sovereign interests, as illegitimate vestiges of a colonial past, and as imposed arrangements intended to preserve an asymmetrical status quo. This challenge to the cognitive base was concomitant with alterations in the structural base, or environmental conditions, underlying raw materials investments: declining U.S. hegemony; new, non-U.S. entrants into the market heightened competition and lessened collaboration in raw materials industries; and host governments moved down the learning curve, acquiring expertise and bargaining power. The case studies in Chapter 6, representative of a broader nationalization trend in the 1970s, detail Peru's efforts to assert national sovereignty over raw materials investments in petroleum and mining, and Jamaica's efforts in relation to bauxite. The outcome in both countries was a more flexible "quasi-regime," which affords host governments more latitude to nationalize without full compensation according to the terms of the old concessionary regime; and the principal firms, though less dominant, have retained profitable access to raw materials under the new arrangements. Yet (ironically) after successful modification of the more authoritative concessionary regime, Third World hosts now find themselves even more constrained than before by impersonal market forces. In Peru's case, the necessity of maintaining creditworthiness in international financial markets has precluded more strident assertion of national sovereignty in investment disputes. The Jamaican government is limited by the vertically integrated structure of the bauxite industry: with firms retaining control over downstream processing activities, as well as access to other

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sources of supply, the government's latitude in taxing bauxite extraction is ultimately bounded by the price mechanism and the firms' ability to redirect production and new investment elsewhere. In conclusion, it is fair to say that whereas economic nationalism defines the possibilities for exercising sovereign control, the market forces stressed by economic liberalism set the boundaries on such actions. The last two chapters are single-country case studies concerned with the broad nexus between global systemic and domestic factors. Kathleen Schwartzman's examination of the instability and eventual collapse of Portuguese democracy earlier in this century and Cal Clark's interpretation of the recent successes of Taiwan provide a striking contrast of outcomes produced by the interaction of systemic and national forces. Schwartzman's careful case study demonstrates the complexity of linkages between systemic factors—in this case structural position in the world economy—and domestic political outcomes. Her explanation of the demise of Portugal's first Republic in 1926 begins with consideration of the country's prototypical semiperipheral position in the world economy. Portugal maintained a sizable colonial empire, while itself simultaneously serving as the functional equivalent of a British colony. This dualistic status was manifest in a severely disarticulated economy consisting of at least three unintegrated sectors, or sub-economies: agro-exporting, export-oriented industries, and capital goods import substitution industries. These divisions translated into intranational conflict over access to labor and capital and, most importantly, control of government policy. The inability of the different factions of the bourgeoisie to reconcile their disparate interests and consolidate an effective social pact was more significant than traditional bourgeoisie-proletariat class conflict in bringing about what must be considered political hyperinstability: eight elections, nine parliaments, eight presidents, and forty-five different cabinets between 1910 and 1926. Absent a consensual social pact, the juridical and political aspects of democracy could not be sustained. Internal tensions and conflicts along multiple axes were exacerbated by the post-World War I economic crisis, and culminated in the 1926 military coup, which inaugurated nearly five decades of authoritarian rule. Cal Clark's chapter explains how and why Taiwan has been able to avoid the retarded economic development and political instability that are expected, from various theoretical perspectives, to result from extreme d e p e n d e n c y and severe external shocks. Despite the economic shock of the two oil price increases in the 1970s and the political shock of withdrawal of U.S. diplomatic recognition in 1979,

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Taiwan has maintained extraordinary rates of economic growth, has continued to successfully transform its economic structure, and has effected democratic reforms within a generally stable domestic polity. The rapid economic growth that Clark describes is certainly not typical of countries as militarily and economically dependent as Taiwan has been in the postwar period. And over this period, Taiwan has accomplished a sequence of deliberate structural transformations of its economy: extensive land reform, import-substitution industrialization, a shift to labor-intensive export industries, and, most recently, a shift to capital-intensive, high technology production. There is no shortage of theoretical reasons to expect both rapid growth and structural transformations to result in political instability. But Clark explains how Taiwan has absorbed and effectively dealt with the two major systemic shocks and instituted significant political reforms: widening of the leadership base and political participation, growing importance of the electoral mechanism, and strengthening of the indigenous Taiwanese majority. Clark attributes this remarkable record to a combination of conditions, including an unusual form of dependency based on U.S. willingness, for global strategic reasons, to heavily subsidize earlier stages of Taiwanese development; a strong state that has been able to formulate and implement coherent economic nationalist strategies; the positive impact on regime legitimacy of economic performance and the equitable distribution of its fruits; the much-vaunted Taiwanese entrepeneurial skills; and a variety of cultural factors. Because these conditions are rare even when taken singly, and unique in combination, Clark concludes that the Taiwanese experience is not a readily imitable model for other developing countries.

CONCLUSION

The chapters in this volume display a variety of methodological approaches to the question of change in the global political economy, with specific emphasis on how systemic factors influence and interact with domestic conditions in less developed countries. As a set, the chapters strongly support the contention that the system we term the global political economy generates a variety of disturbances and shocks, longer term trends, and cyclical fluctuations that influence these societies in profound ways. The Suter and Pfister and Kowalewski papers on global debt cycles illustrate how systemic phenomena can systematically affect the domestic economies and political regimes of debtor countries.

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The liberal belief in a beneficent international environment characterized by smooth, gradual processes of growth, change, and adjustment seems an unlikely and inaccurate premise for research. Yet we do not want to suggest that only destabilizing disturbances flow through system-to-unit linkages. Rothgeb's findings provide some confirmation of the claim that positive domestic political effects can issue from the operation of a liberal world economy. Notwithstanding its tendency to reify markets, one enduring value of economic liberalism is its insistence that the discipline imposed by market forces cannot be ignored or avoided indefinitely—a point nicely demonstrated in the Rodman chapter. It is also clear that systemic influences do not operate in the mechanical, deterministic fashion suggested by more extreme Marxist and dependency approaches. National societies, even poorer and weaker ones, are not helpless prey to overwhelming systemic forces. As is clear particularly in the Rodman and Clark papers, there is scope for national political agency to ameliorate, sidestep, and even to alter systemic constraints. But as shown in very different ways by Looney, Schwartzman, and Clark, the ability of individual countries to avoid deleterious systemic influences hinges on their particular political and economic circumstances. We are comfortable with the position, probably best reflected in economic nationalism, that takes systemic constraints and incentives as given and focuses on different national capacities to respond to them. To conclude, we would like to endorse the theoretical and methodological diversity represented by the contributions to this volume. There are a lot more questions in need of answers than can be addressed from any single theoretical or methodological standpoint. While the volume has certainly not exhausted the possibilities, we think the eclecticism it presents is a step in the right direction.

Christian Suter Ulrich Pfister

Global Debt Cycles and the Role of Political Regimes Global debt crises, such as the one of the 1980s, have occurred repeatedly in the past. Figure 2.1, at the end of Chapter 2, which plots the number of countries in default or subject to a rescheduling agreement since 1825, demonstrates that a wave of widespread debt service incapacity among sovereign borrowers recurs regularly every fifty to sixty years. A closer scrutiny of these figures suggests three systemic features of global debt crises (Pfister and Suter, 1987; Suter, 1989). First, they generally occur during a downswing phase of a Kondratieff cycle 1 (Table 2.1). Second, the countries affected by debt service incapacity belong primarily to the Third World. Third, the resilience of the international financial system against the outbreak of an open crisis has increased over time. Thus, global debt crises are not accidental events caused by policy errors or other fatal developments, but rather seem to have formed a systemic element of worldwide industrial capitalism since around 1825. How can these three regularities be explained? In an earlier work (Pfister and Suter, 1987), we proposed an approach that places international financial relations into the wider context of long cycles and trends within the industrial-capitalist world system. We related the cyclical occurrence of global debt crises to the role international financial flows play within the progression of a long wave of global growth. We argued that toward the end of the upswing in the core, production becomes increasingly standardized and geared to mass markets, wages rise and profit rates decline. As a consequence, the locational disadvantages of the periphery that prevent the settlement of the leading industries during the earlier stages of a long wave (low qualification of workers, modest infrastructure, and narrow markets) begin to lose their weight (cf. Vernon, 1966). Due to the shortage of 17

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capital in the periphery, however, production in the leading sectors requires the inflow of core capital. Hence, capital flows from the core into the periphery increase toward the end of the upswing of a long cycle. For two basic reasons, however, the investments undertaken with foreign financial capital very often do not bring forth the returns required for debt service. First, insofar as investments are geared to increased production for exports, expectations regarding future demand are usually overly optimistic in the concluding phases of a long wave that is characterized by slackening world demand. In fact, the decline or even collapse of world markets was often the direct trigger of debt service incapacity in many instances, historical and actual alike.2 Second, the legitimatory pressures the governments of Third World countries are exposed to because of their structural location within the world system renders them inclined to expenditures that enhance their legitimacy but do not generate adequate returns and that, at the same time, are not matched by a broadening of the tax base. Hence, budgetary deficits, which have to be palliated at least partially by external debts, appear. Since these financial resources do not create adequate new returns, debt-service obligations put increasing strains on the whole economy, eventually leading to a balance-of-payment crisis. It is the latter strand of the argument—which is much less well documented than the former—that this chapter explores in detail. Essentially, the argument rests on a multilevel conception of the world system. The issue is a global phenomenon—the periodic recurrence of general state insolvency—which we attempt to explain in part by processes operating on the lower level of individual Third World countries; namely, the interaction between political regimes and external debt. This basic argument presupposes a differentiation of the global mode of production according to systemic levels (Chase-Dunn, 1981). While the capitalist mode of production is global in character, its local or regional unfolding requires the presence of coercive state apparatuses that set the rules for surplus appropriation, sometimes even performing this appropriation themselves. In turn, the precise shape of a specific state reflects the interests and alliances of classes present. Thus, it can be argued that the way peripheries are related to the world system produces specific classes and alliances between them that effect a specific shape and dynamic of the state in the Third World. In addition, we will demonstrate that the operation of the Third World state has repercussions on processes operating on the level of the world system at large.

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This theoretical argument is elaborated against the background of a simple typology of political regimes in the next section of the chapter. The third section then presents some methodological considerations concerning the case study approach of our empirical analysis, and the fourth and primary section describes the interaction between the evolution of political regimes and external indebtedness in four countries (Peru, Liberia, Argentina, and Turkey). The final section systematically relates the studies to the hypotheses, and discusses their relevance to the understanding of cyclical debt crises. POLITICAL REGIMES AND THEIR INTERACTION WITH EXTERNAL DEBT: CONCEPTS AND HYPOTHESES This section presents a typology of Third World regimes, and then explores hypotheses concerning the impact of world-system dynamics on long-term sequences of political regimes and their interaction with foreign debt. We consider a political regime as the pact of dominance between the relevant classes or forces that defines the rules of surplus appropriation; that is, the precise shape of the state.3 As social forces that may form part of an alliance, the following main classes or factions can usually be identified in Third World economies: the state class; the bourgeoisie, divided into different factions according to their economic base (export production, industry, banking, and trade); and the urban petty bourgeois and labor classes. Peasants and rural laborers are rarely relevant politically. Depending on a society's specific political economy (which in turn is determined partly by its relation to and position within the capitalist world system) different constellations among these groups may emerge. In this chapter we differentiate among four idealized, typical political regimes: (1) those dominated by a state class, (2) capitalist regimes, (3) populist regimes, and (4) disarticulated regimes. Our short description of each regime type considers a regime's social base as well as its policies regarding economic development and external debt. State Class-Based Regimes This type of regime is based largely on a tributary mode of production. Surplus is not appropriated through the ownership of capital and the commodification of labor, but rather through taxes, levies, and tributes of all kinds excised from the individual producers by a state class—be it a feudal group or a group of warriors (Wolf, 1982: 79-88). Since 1800, three subforms of this regime type can be distinguished: (1) former

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world empires, (2) countries in which the ruling class is highly fragmented and a state is largely absent, and (3) postcolonial states in which a bureaucratic state class derives its income mainly from links to the world economy. World empires,4 Even in their decline, these regimes are characterized by a high autonomy vis-á-vis the capitalist world system in that a powerful cohesive ruling group within the state class controls both the sources of tributes and the level of commodification. This implies that this group is associated with a bureaucratic class that collects tributes as well as a class of merchants that engages in international trade. However, both classes are ideally kept in a subordinate position. With the decline of the ruling group's power, however, these associated classes may begin to emancipate themselves and unfold an autonomous economic and political dynamic. At the same time, foreign trade and capital may increasingly influence the level of commodification. Insofar as this is connected with a decline in tributary revenues, chronic budgetary deficits emerge that have to be palliated by rising levels of foreign debts. Regimes dominated by fragmented state classes. These regimes are usually based on poor tributary sources and characterized by strife over the command of those sources by dispersed groups. An example of this is the caudillaje system based on the hacienda economy in early postcolonial Latin America (Wolf and Hansen, 1967). Conversely, the low articulation of the capitalist sector hinders the emergence of politically relevant groups. Postcolonial state class-based regimes. In contrast to the above regimes, this regime type is dominated by bureaucracies able to establish tributary relationships based on integration into the world economy as peripheries. "Tributes" take the form of taxation of a tiny export sector, usually controlled by foreign enterprises, strongly dependent on the vagaries of world markets, employing little labor, and having few linkages with the domestic economy. Examples of this variant can be found in many mineral economies of the Third World. On the other hand, development aid—being, from the present perspective, a sort of tribute derived from the international inequality of wealth and development—forms an important source of income for the state classes of several very poor countries, notably in sub-Saharan Africa. Due to the low articulation of the domestic economy, few socially relevant groups are present besides the state class in all the subtypes mentioned above. Lines of conflict emerge primarily between rival

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factions pretending to dispose of strategies that benefit both their own members and the rest of the ruling class. Developmental values are relevant to these regimes insofar as they can be instrumentalized for creating planning agencies, new ministerial services, and so forth, which create additional sources of influence and income for the ruling group or factions (see notably Alavi, 1972; Saul, 1974; Elsenhans, 1981). Hence, external resources (development aid, credits accessed through rising creditworthiness due to export increases) will be used largely in a consumptive fashion.

Capitalist Regimes In the case of capitalist regimes, political power rests in the hands of the class disposing the means of production and deriving their incomes from them; the state class is largely irrelevant (Hischier and Heintz, 1982). In the context of peripheral economies, the factions based on export production (cash crops, meat, and minerals) and associated service activities (trade and banking) are usually the dominant elements of the bourgeoisie. 5 A political regime based on these factions is usually little interested in national industrial development; external financial capital is rarely relied on and then only to finance the export economy's infrastructure or to overcome temporary balance-ofpayment problems caused by slackening world demand. Difficulties for such regimes emerge only if successful expansion of the export economy has promoted the emergence of industries processing export commodities and substituting for imports destined for fulfilling basic needs of the working population of the export sector (textiles, basic chemicals). In this case, new urban groups emerge demanding inclusion into the political system.

Populist Regimes The main distinctive feature of populist regimes is that they are legitimized by strong support from the popular sector: the urban middle and lower classes or certain rural groups, mobilized by a charismatic, if not an authoritarian, political leader.6 The existence of these classes presupposes a certain development of a domestic capitalist sector with a considerable demand for labor. Hence, the economic base of a populist regime is often provided by light industry having an orientation toward raw-material processing and by importsubstituting industry. Due to the weakness or hostility of a local entrepreneurial class, the state is an important agent of development through the creation of infrastructure, social services, and perhaps even of state industries.

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Development policies are often intended to raise the living standards of the urban middle and lower classes and, through the state expenditures mentioned above, may assume a clientelist character. Since populist regimes find it difficult to broaden the tax base for rising state expenditures (usually because the propertied classes form the most important threat to the regime), they are dependent on a heavy influx of external resources. Since these are mostly spent in an unproductive fashion, debt-service incapacity may loom in the long run. Disarticulated Regimes The descriptions of both populist and capitalist regimes suggested the emergence of difficulties and conflicts, centered mainly around the integration of the middle and lower classes and the growth problems emanating from a populist development path. These conflicts may be without issue in the sense that they basically reflect the structural divisions within many peripheral economies. On the one hand, such a situation may give rise to what we call a disarticulated period, which is characterized by a rapid succession of weak administrations of contrasting orientation and strategies which they fail to realize in practice. On the other hand, a regime may emerge that tries to keep social conflict under control through a forced disarticulation or demobilization of political interests. Conversely, political issues are objectified and handed over to a cabinet of specialists or the state administration for resolution or palliation. Thus, such a regime will be inclined to take measures toward the stabilization of state budgets and the economic situation in general, including debt-service obligations. The social base of a disarticulated regime is beyond any link to productive relations. It consists mainly of the command over the means of repression by a faction of the state class or an alliance of factions of several classes, and the incapability of social forces to conclude alliances sufficiently broad to form a viable pact of dominance.7 Hypotheses How are the relationships among Kondratieff waves, political regimes, and global debt cycles to be conceived in terms of the above typology? We posit two general hypotheses: (A) That regime sequences in Third World countries are systematically linked to the evolution of long cycles of economic growth and stagnation, and that this entails a systematic shift of government behavior with respect to foreign debt; and (B) That trends within the world system crucially bear on the

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operation of the cyclical shift of political regimes. A. We distinguish between three phases of Kondratieff cycles that favor the emergence of a specific regime type and an associated stance toward foreign debt. 1. During the upswing phase, the periphery is integrated into a long wave primarily through trade. Growth in the core leads to a rising demand for raw commodity exports in the periphery (Rostow, 1978). This is the golden age for the bourgeoisie based on the production of export commodities; we expect a shift toward capitalist regimes based on export interests (type 2). Since the prices and volumes of exports rise, there is little reliance on foreign capital during this phase; when such a reliance occurs, it mainly serves to erect an infrastructure benefiting the export sector. 2. Toward the end of the upswing and around the peak of a long wave, new political regimes emerge that integrate a substantial section of the newly created, urban middle and lower classes. Since the traditional elites still retain a strong position, this regime will take the form of a populist alliance (type 3) rather than a capitalist regime based on industrial interests (cf. note 15) or a labor-based government. The following process gives rise to the structural base of a populist regime. Successful expansion of the export sector during the upswing phase of a long wave promotes industrial processing of export products as well as a partial import substitution of mass products consumed by the working population engaged in the export sector. Hence, new urban classes with specific political aspirations emerge. A populist regime promises to benefit the supporting groups through subsidies, social services, or a program of national industrialization through state industries that provide work opportunities. Since most of these expenditures are consumptive or unproductive in character, a greater flow of resources to the state is required. However, because elite interests are either an integral pillar of a populist alliance or its constant threat, attempts to broaden the tax base are typically frustrated under such a regime, leaving the option of rising external indebtedness as the sole refuge. Such behavior is supported by declines in profits and a weakening of competitive positions in the core, producing a supply of international financial capital that can be tapped by Third World governments. Hence, state activities such as those mentioned above can be pursued by deficit spending that is supported by floating debts over a considerable period. Since the expenditures undertaken by populist regimes do not generate the additional returns required for debt service, problems of debt-service incapacity will emerge in the

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long run. The situation may be aggravated by the slackening or collapse of export receipts during the crisis immediately following the peak of a long wave, hampering a country's creditworthiness and actual payment capacity. The consequent drop in the supply of credits not only places a country in a difficult balance-of-payment position, but it also undermines the political base of a populist regime through the sudden stop of subsidies and a forced contraction of the state apparatus due to the lack of financial means. Thus, the global crisis that marks the onset of the decline of a Kondratieff cycle often also means the failure and consequent disintegration of a populist regime. 3. Finally, the crisis and ensuing trough of a long wave translates into a similar lack of structuring power in many political systems of Third World countries. The failure of populist strategies and the weakness of the export sector due to the slump in worldwide demand mean that none of the regime patterns dominating the two previous stages can reassert themselves. Rather, we expect the prevalence of a disarticulated period that may crystallize into a disarticulated regime (type 4). In this case, the external position may be quickly stabilized and a debt settlement reached. If no disarticulated regime appears during this stage, however, no stabilization, internal or external, may occur, and a debt settlement will be reached only during the upswing of the next long wave by a regime based on export interests. The persistence of unfavorable international prospects may weaken the export sector to the point where a viable populist alliance may again be formed after a shorter or longer period of disarticulation. The lack of foreign resources implies that, compared to phase two, other strategies, and therefore somewhat different alliances, have to be chosen. We expect populist regimes to be more nationalistic and more geared to effective development than during the previous stage (cf. Germani's [1978: 96] concept of "national populism"). B. As for the impact of trends on this sequence of Third World regimes over a long wave, two additional hypotheses can be stated. 1. Obviously, a regime cycle can only be present where peripheries are well integrated into the capitalist world economy. At the extreme periphery, as in the case of declining world empires, state class-based regimes (type 1) may either prevail over the whole long wave, or capitalist regimes appearing during the upswing of a long wave will break down prematurely and be followed by a reversion to a state class-based regime. However, since an expansion and deepening of the international labor division is one of the key trends within the capitalist world system (Hopkins and Wallerstein, 1977), it can be presumed that the frequency of these cases declines over time. This hypothesis has implications for the structure of debt crises as

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they appear in Figure 2.1. It has been argued earlier that regimes based exclusively on state classes are prone to use state resources for their own consumption, and that they benefit from the improvement of their creditworthiness during upswing phases by tapping international financial resources for this purpose. Hence, it can be argued that debt accumulation and debt-service incapacity are less concentrated on particular phases of a long wave, as in the case of countries more deeply integrated into the capitalist world economy. As a consequence, the greater accentuation of peaks and troughs in debts cycles after the first Kondratieff cycle (Figure 2.1) may be the result of the decline in the relative frequency of state class-based regimes. 2. Since the onset of the industrial capitalist world system, particularly since World War II, international financial relations have undergone a process of institutionalization that has greatly enhanced the system's capacity to respond to debt-service problems and thus to avoid or delay an open debt crisis (Pfister and Suter, 1987). This has been possible with the help of mechanisms—notably standby agreements concluded with the International Monetary Fund (IMF)—which have increased the influence of creditors on the economic policy of debtor countries. It should be asked, then, whether this has produced a change in the evolution of political regimes in the Third World. In particular, has it favored the rapid emergence of disarticulated regimes during the 1970s and 1980s, as compared to the prevalence of disarticulated periods during previous cycles, and thus contributed to keeping the global debt crisis of the 1980s in check? METHODOLOGICAL CONSIDERATIONS The reader may have noted in the previous section the ideal-typical nature of our theoretical statements. We propose a set of four regimes in typical positions within the world system that follow each other in an ideal sequence over a typical long wave. This, of course, raises the methodological issue of how such a set of hypotheses should be tested empirically. Quite clearly, rigorous quantitative methods cannot be applied. Rather, we propose a set of historical case studies that serve less to illustrate an ideal-typical theoretical argument (as was Weber's approach) than to provide an exploratory empirical base that is impressionistically coded and analyzed from the perspective of our theoretical statements. Hence, we selected four countries that appear representative of the major forms of relationships periphery countries have had with the world system over the last two hundred years, which, according to our

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hypotheses, is the main variable behind the formation and dynamic of political regimes. 1. Peru forms our base case of the average peripheral country. It was integrated into the world economy early through a primary commodity-producing export sector whose dynamic closely parallels global Kondratieff cycles. Periodically, it experienced limited national industrial development, and it was involved in all major debt cycles. Several other Latin American countries offer similar examples. 2. Liberia is taken as an example of the extreme periphery. Integrated into the world economy much later than Peru, its export sector remained weakly linked to the domestic economy; hence, its political evolution is characterized by continued dominance of the state class. Similar examples from the post-World War II period are the mining economies of Sierra Leone, Zaire, and Zambia. 3. Argentina represents an example of the upper end of the periphery. Integrated into the Atlantic economy after the middle of the nineteenth century through massive immigration and British capital, Argentina experienced a significant degree of upward mobility within the world economy, both in terms of income and with respect to its position within the international division of labor. In this respect, Argentina resembles other members of the Atlantic economy that were gradually integrated into the core such as Canada, Australia, New Zealand and, with certain qualifications, the United States. All these countries were heavy debtors during varying periods since the 1820s.8 4. Turkey (Ottoman Empire) presents the case of a world empire that was gradually dissolved and peripherized within the capitalist world economy since the seventeenth century. Turkey is one of the nation states that is emerging after its final dissolution in the early twentieth century. The gradual loss of control by the state class led to a specific dynamic with regard to external debt. Together with other remnants of former empires (northern Africa, China, and, with certain qualifications, Spain), the Ottoman Empire was a chronic and heavy debtor before World War I. CASE HISTORIES The case studies that follow are largely based on the existing literature; primary research was confined to a reconstruction of individual debt histories (for a full discussion of this material, see Suter, 1988). Due to space restrictions, the presentations necessarily remain very schematic. The core of each section is made up of graphs showing the evolution of export receipts, the amount of inflows and stocks of external debts,

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the occurrence of debt-service incapacities and settlements, and the evolution of political regimes. Export receipts are considered indicators of how long waves of global character are transmitted to the national level of a particular country; it is well known that export growth is an important determinant of income growth in the medium term (Kavoussi, 1984). Apart from commenting on the graphs, the text discusses problems in interpreting (or coding) regime changes, and tries to disentangle the causal relationships visible between economic development, regime change, and the evolution of external debt. The Base Cases Peru Long waves are clearly visible in the export receipts of Peru (Figure 2.2). Growth periods are circa 1845-1861, 1895-1920, and circa 19491964. These are followed by peak periods of stagnation in the years 1861-1878, 1920-1930 and 1964-1974, followed by short periods of rapid declines. In each case, expansion periods were marked by a capitalist regime based on export interests, while peak periods were marked by populist regimes in the latter two cycles (the regimes of the 1860s and 1870s will concern us below). Periods of crises and declines were characterized by disarticulated periods or regimes. Foreign debts were regularly incurred during the peak period by populist or state class-based regimes, debt-service incapacity rose during sharp downswings, and settlements were reached by disarticulated regimes toward the end of the stagnation period or by capitalist regimes at the beginning of the upswing. Thus, Peru conforms to the first of our two general hypotheses (Al-3) of a correspondence between long cycles of economic growth, political regimes, and external debt, as well to the hypothesis that these cycles have become more marked over time (Bl). But what about the badly documented first cycle? Its distinctive feature is the weak correspondence of that period with the hypothesized relationships. The debts incurred between 1822 and 1825 ($8.6 million) were directed toward an abortive attempt to construct a nation state within a world economy dominated by Great Britain. As in numerous other Latin American countries, the funds were chiefly spent on military equipment for the wars of liberation. Afterward, no state structures were in place to collect sufficient taxes for debt service (Berg and Weaver, 1978: 71). Rather, a reversion to subsistence production within the framework of the hacienda economy and a decline in silver production took place during this period. Thus, the country fell into default on its external obligations in 1825 and remained so until 1848. The caudillaje period of 1827 to 1845 saw a rapid succession of sixteen governments led by military entrepreneurs of petty-bourgeois origins that were supported by factions of the provincial-based landed

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aristocracy. The Indian Tribute (head tax) collected by local caudillos remained the main (and highly unstable) source of state income (Pike, 1967: 56-90; Gorman, 1979: 397f; Mathew, 1981: 247; and Friedman, 1984: 122). The onset of guano exploitation around 1840 marked a decisive turn in Peru's development. Initially organized predominantly by foreign enterprises, the extraction and exportation of guano was completely in the hands of the Peruvian merchant class by the early 1860s (Gorman, 1979: 400). Socially, the regime of Castilla (1845-1851 and 1855-1862) and his followers rested on a coalition of local merchants and businessmen principally engaged in the guano trade, the coastal plantation economy, and the expanding state bureaucracy (Friedman, 1984: 158). Taxes on rising export revenues resulted in a substantial expansion of and marked shift in the financial base of the state. By the early 1860s, guano revenues made up some 80 percent of state income, while the Indian Tribute had been abolished in 1854 (Berg and Weaver, 1978: 72). The new revenues made possible a settlement of external debts in 1849 and the raising of new loans used mainly to convert old ones. Since the early 1860s the stagnation of guano sales, caused by the progressive exhaustion of guano deposits and the introduction of artificial fertilizer, brought Peru's export-led development into difficulties. The war against Spain in 1866 severely disturbed public finances. The consequent weakening of the export-based bourgeoisie gave rise to a regime supported by the provincial elite and the newly emerged state bureaucracy (Balta, 1868-1872). The monopoly of guano sales was transferred to the French Dreyfus company, which offered favorable prices and credits to stabilize public finances (Pike, 1967: 124). Thus, between 1869 and 1872, Peru raised large foreign loans to finance an ambitious railway construction program. With the exception of the shorter coastal lines, however, these railways were not geared to the integration of existing centers of economic activity and therefore did not constitute a self-liquidating enterprise (Friedman, 1984: 175). In addition, a substantial part of the resources was siphoned off by corrupt state officials (Scheetz, 1986: 65). Obviously, the regime of Balta constituted a reversion to a state class-based regime. But why was there no shift to a populist regime, as we should expect based on the arguments put forward earlier? The extraction of guano needed little labor, which was provided mainly by immigrant Chinese who did not become part of the local society. Therefore, the guano sector did not promote the emergence of a working class that might have formed the structural base of a populist regime.

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The low effectiveness of Balta's policies contributed to the short life of his regime. However, the government of Manuel Pardo (18721876), leader of the Civilista party, failed to reestablish a new version of a capitalist regime based on export interests (Pike, 1967: 128). Several measures to counteract the budgetary strains in a situation of stagnating export revenues and rising debt-service obligations led to a series of military uprisings. By the mid-1870s, the central authorities had largely lost control. From then on, the situation deteriorated rapidly; in 1876, default was declared on all external obligations, and the disastrous Pacific War against Chile (1879-1883) dealt the final blow to Peru's guano economy. The period between the mid-1870s and 1895 can be classified as a disarticulated period, culminating in the regime of General Caceres (1884-1890), which tried to reconstruct an export-based economy through technical measures. Some degree of financial health was restored. In order to attract new foreign capital, a settlement was r e a c h e d with international creditors. The Grace contract (1889) canceled the claims of the foreign bondholders in exchange for control over the national railway system and what was left of the guano industry. However, the basis of this early adjustment policy eroded rapidly during the international crisis of the early 1890s, which brought about a sharp recession and rendered foreign investment unattractive. Only 1885 to 1890 saw the rise of a new development model (Thorp and Bertram, 1978: Chapter 3): on the one hand, new export sectors, which were mostly in domestic hands (sugar, wool, rubber, and copper) emerged. On the other hand, several factors—not the least being the labor intensity of the new export sectors—favored the development of the import-substituting industries that remained, however, fueled and controlled by the export-oriented oligarchy. On the political level, these developments are reflected in the emergence of a capitalist regime that was based on export interests. A coalition ascended to power that consisted of the coastal export-oriented oligarchy, the elite of the sierra, and the local merchant and financial bourgeoisie organized mostly in the Civilista party (Basurco, 1985: 42). During the 1910s and 1920s, a considerable denationalization of Peru's economy set in. In most cases, large foreign firms bought u p existing (and profitable) Peruvian enterprises at very favorable prices for the previous owners (Thorp and Bertram, 1978: Chapter 6.2). The consequent weakening of the domestic bourgeoisie, together with the considerable size of the new urban groups, led to an increase of p o p u l i s t pressures, giving rise to the p r o t o p o p u l i s t regime of Billinghurst (1912-1914) and the full-fledged populist alliance under the oncenio of Leguia (1919-1930).

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Supported by the middle classes (including the industrial bourgeoisie) and labor and student movements (at least in the beginning), Leguia was strongly opposed by the export-oriented oligarchy and the landed aristocracy of the sierra (Klaren, 1973: 44; Berg and Weaver, 1978: 78). In order to raise the living standards and employment opportunities of the urban groups, Leguia expanded the state apparatus and increased government spending for infrastructure and public utilities. The financial resources were provided by external borrowing and increased taxation, mainly of the agricultural export oligarchy. In addition, national industries were supported by protectionist trade policies (Basurco, 1985: 59). Apart from the low productivity of public-sector investments, Peru suffered from waste and considerable corruption in the use of foreign funds (Thorp and Londono, 1984). Hence, the financial situation worsened rapidly. New loans had to be contracted in 1927/28 just to honor past liabilities. At the same time, the regime grew more repressive and began to lose its former mass support. The final blow came from the collapse of world trade after 1929, which hit export receipts badly. The inability to raise further loans destroyed the regime's last support and finally resulted in a military coup. Shortly after, the country defaulted on all its external debts. The period between 1930 and 1945, particularly after Cerro's presidency (1931-33), can easily be called a disarticulated period in the sense that the overall level of conflict was high and administrations followed each other quickly, sometimes changing their orientation while still in power (Goldberg, 1983: Chapters 3 and 4). The fact that, unlike the cases of Argentina (see below), Brazil, or Mexico, no shift to a populist regime occurred in Peru during this period can be explained by the comparatively quick restoration of a certain export dynamic (cf. Figure 2.2a and Thorp and Bertram, 1978: I47ff.). With the export boom from the late 1940s onward, a shift toward a capitalist regime occurred (administrations of Odria, 1948-1956; Pardo, 1956-1962). Legislation favoring the establishment of (mostly foreign) mining and industrial enterprises was promulgated, and a settlement with external borrowers was reached between 1951 and 1953 (Thorp and Bertram, 1978: Chapter 10.1; Goldberg, 1983: Chapters 5 and 6). A parallel industrial expansion occurred from the late 1950s onwards (Thorp and Bertram, 1978: Chapter 13.2). Beginning as a vertical integration of export enterprises, import substitution of durable consumer goods grew in importance during the 1960s. However, most of the gains from economic growth during this period went to capital; wages scarcely increased in real terms (Weeks, 1985: Chapter 7). Hence, political pressures toward a redistributive populist policy

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grew. Under the Belaunde administration (1963-1968), the rising demands of the popular sector were met by an expansion of government spending, mostly on unproductive current expenditure benefiting the urban labor aristocracy and petty bourgeoisie (Kuczynski, 1977; Webb, 1977: Chapter 6). Deficits were financed largely through inflationary measures and external borrowing. The failure to tap new fiscal resources fueled a political and economic crisis that culminated in the overthrow of Belaunde and a balance-ofpayment crisis that lead to two multilateral debt reschedulings in 1968. In contrast to Belaunde, Velasco's populist military regime (19681975) was based on the support of the urban and rural working classes. It pursued an internally oriented state-capitalist development path with massive nationalizations and attempts at a redistributive income policy. Until about 1974, this development effort was fairly successful. Later on, however, the intersectoral imbalances associated with the unplanned way import substitution was pursued began to make themselves felt in rising balance-of-payments deficits, which were exacerbated by external events—with depressive effects on export revenues. 9 These difficulties had to be met by a new increase in foreign debt. The serious balance-of-payment difficulties that have emerged since 1975 have led to rapid political disarticulation. Velasco was replaced by Morales Bermudes (1975-1980) as head of the military government, who, in a conflictive process, restored debt-service capability in the short run (Stallings, 1979). In the long run, however, problems persisted. This may have promoted the renewed emergence of a nationalist populist regime (Garcia, since 1985), which declared partial default in 1985 by limiting debt service to 10 percent of export revenues.

A State Class-Based Regime at the Extreme Periphery: Liberia Proclaimed an independent republic in 1847, Liberia has been ruled for most of its history by descendants of repatriated American slaves and Africans liberated from slave vessels. This group formed a state class that was constituted of rival factions. Until 1869, the country was ruled exclusively by the Republican party, which represented the interests of the mulattoes. From 1884 to 1980, the True Whig party, supported by the descendants of immigrant blacks, prevailed. Until the early twentieth century, relationships with the world economy were weak. Successive administrations pursued a "closed door" policy, consisting of only partially successful attempts to control the trade between the hinterland and the outside world. During this period, Liberia was ruled by a precapitalist tributary (vaguely state

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class-based) regime predicated on the control and exploitation of trade routes, as well as the taxation of the subsistence sector (Van der Kraaij, 1983: Chapter 2). Foreign debts were incurred, along with attempts to open u p the Liberian economy, as long as creditworthiness based on current export receipts permitted (Figure 2.3). Hence, before the rapid rise of rubber exports in the late 1930s and iron exports since the 1950s, the inflow of foreign credit was modest and confined to periods of general international overlending (1869-1871, 1907-1912), each followed bylong periods of debt-service incapacity. Since the definitive integration of the country into the world economy in the late 1940s, international indebtedness increased rapidly. Thus, Liberia's debt history is much less determined by regime shifts than is that of Peru. Rather, the picture is determined by the continual eagerness of a state class-based regime to raise credits whenever international conditions and the production of raw materials permit. A first abortive attempt to broaden the base of Liberia's economy with foreign capital occurred under President Roy's administration (1869-1872). Two loans (amounting to a modest £100,000) w e r e contracted and used to purchase weapons and cover general budget deficits (Kappel, 1982: 171; Van der Kraaij, 1983: 13, 240. However, Roy was s o o n deposed, partly on the pretext of the scandalous conditions of the second loan, and the debt was repudiated in 1874. A second attempt to open Liberia to the world economy occurred during the Barcley administration (1904-1912), which intended to m o b i l i z e i n t e r n a t i o n a l t r a d e a n d capital for the c o n t r o l a n d development of the hinterland. On the other hand, the provision of credits was an integral part of the strategy of international interests to penetrate Liberia. In exchange for a loan granted in 1907, the Britisho w n e d Liberian D e v e l o p m e n t C o m p a n y was g r a n t e d e x t e n s i v e privileges in mining, rubber exports, and the erection of infrastructure. The loan was spent on the consolidation of internal debts on the one hand, while on the other, it went toward infrastructure that fell into decay very quickly (Van der Kraaij, 1983: 33-35). Both attempts to integrate into the world economy had serious consequences. Prolonged default on the loans contracted between 1869 and 1871 led to repeated attempts by European powers to erect a protectorate over Liberia (Van der Kraaij, 1983: 27-29). The failure to ensure the productive use of the 1906 loan, on the other hand, made it necessary to contract a second loan in 1912 to convert all previous loans. In connection with that loan, international creditors set u p a committee to directly supervise tax and duty collection in order to secure the loan and to reorganize Liberian finances (Kappel, 1982: 293;

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Van der Kraaij, 1983: 38). Because of losses in export revenues during World War I and its aftermath, Liberia was in default or arrears during s e v e r a l y e a r s b e t w e e n 1914 a n d 1923, w h e n an a r r a n g e m e n t concerning future debt service was reached. Although the financial situation improved thereafter, all debts were converted by a Firestone-owned financial agency into a new credit in 1926 and 1927. This transaction was part of a contract with Firestone that granted the latter concessions for the operation of r u b b e r plantations and the construction of related infrastructure. Firestone's objectives behind the debt conversion were seen as the elimination of its rivals from Liberia (who were paid out with the new credit) and the acquisition of a certain control over Liberian economic policy (Van der Kraaij, 1980: 203-205). In the long run, the strong development of the rubber sector under the aegis of Firestone led to the formation of a new state class whose economic base rested primarily on rubber exports. Between 1951 and 1955, 31 percent of the government revenues stemmed from taxes paid by Firestone. Elements of the state class entered into direct production as Firestone provided technical assistance to Liberian planters since the 1930s (Van der Kraaij, 1980: 224-241). Virtually no linkages developed between the rubber sector and the domestic economy. All equipment was imported, and the raw rubber exported. The absence of domestic capitalist development is reflected in the high percentage of the wageearning labor force that Firestone employed—roughly two-thirds in 1950 (Clower, et al., 1966: 259). An important mineral sector, which rested in foreign hands was developed during the 1950s. It rapidly exceeded the rubber sector in importance and led to a dramatic increase in both exports (Figure 2.3a) and government revenues—the latter grew from $4 million in 1950 to $67 million in 1970 (Hinzen, 1980; Van der Kraaij, 1980: 224). These new resources were used by the regime of Tubman (19441971) to broaden the regime's base within the state class (Liebenow, 1969). In addition, Liberia's rising creditworthiness was employed to tap international financial resources. Compared to its size, the country recorded extremely high levels of external borrowing between 1955 and 1963, and U.S. development aid amounted to about one-third of the state revenues during the early 1960s (Clower, et al., 1966: 361). The credits were predominantly used to construct roads and public buildings and to cover general budget deficits. Substantial amounts were used consumptively for prestige projects and wasted in Liberian government administration. Thus, government expenditures served the consumptive interests of the state class rather than the initiation of an autonomous development process (Clower, et al., 1966; Dalton and

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Walters, 1969). The unproductive use of foreign debts explains to a substantial degree the emergence of a serious financial crisis in 1963. Liberia's export-based economy was hit hard by worldwide stagflation from 1974 onward (Figure 2.3). A turn toward the development of domestic resources was attempted with the formulation of a National Socio-Economic Development Plan (19761980). Financed largely with foreign debt, the plan was badly conceived, and most of the funds were again channeled into largely unproductive projects (Hinzen, 1980). As a result, debt-service problems emerged and led to regular reschedulings since 1980. In addition, the failure of this developmentalist effort led to rising opposition against President Tolbert (who was in power between 1971 and 1980) by the more articulate urban groups (students and workers). Riots against price increases finally led to a military coup by junior officers. Initially based on hitherto marginal groups of the state class, S. K. Doe's government rapidly lost the support of these forces and increasingly relied on repression, suggesting a shift toward a disarticulated regime (Kappel, 1982).

Glory and Demise of a Member of the Atlantic Economy: Argentina As Figure 2.4 suggests, there are very few elements in Argentina's history that conform to the model we have put forward. Only during the latter part of the third Kondratieff cycle do we note the expected shift from the capitalist regime based on the export interests of the Partito Autonomista Nacional (PAN) to the "radical populism" (Rock, 1975) of the Yrigoyen era (which heavily rested on externally financed deficit spending) after the onset of the Great Depression to the disarticulated period of the Concordancia (cf. point 3 below). There are three key elements in Argentina's history that, in our view, make for the specific course of interaction between general economic development, political structures, and external debt. First, state building during the postindependence decades was more effective than in the Andean countries. The country never reverted to a subsistence economy to the same degree, and caudillism always played a much weaker role (see point 1 below). Second, Argentina was successfully integrated into the Atlantic economy after the middle of the nineteenth century. In three successive Kuznets cycles, the country experienced a rapid economic development that was based on the production and processing of agricultural products destined for exports and supported by massive inflows of capital and people from Europe (point 2 below). With the demise of the Atlantic economy after the first third of the twentieth century, a period of economic stagnation ensued

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that was only temporarily overcome by the import-substituting development policies pursued since the 1930s. This situation was reflected in a political stalemate and chronic balance-of-payment difficulties since 1955 (point 4 below). The following elaborates on these main features of Argentine history. 1. A first attempt to construct a modern economy was undertaken under Rivadavia's administration (1821-1828). His regime was based on the commercial and administrative elites of Buenos Aires, who attempted to reassert their dominance over the former viceroyalty through a promotion of immigration, free trade, foreign investment, and centralized state structures (Friedman, 1984: 179-183). Political turmoil and the war against Brazil (1925-1928) largely frustrated these endeavors. A loan of one million pounds was floated in 1824; initially destined for infrastructure works, it was used largely to purchase military equipment (Peters, 1934), and became nonperforming in 1828 due to a decline in hide exports and political disturbances linked to the fall of Rivadavia. The failure of the urban elites to assert themselves was accompanied by a ruralization of the bases of political power (Halperin-Donghi, 1975: 377-382). Initially, de Rosas (who was in power between 1829 and 1851) was the man of the rural elite of Buenos Aires. However, de Rosas was able to win the support of other groups as well, notably the vagrant gauchos (herdsmen) and, at least temporarily, the agricultural and industrial interests of the capital and the interior provinces. The main focus of the regime lay on the expansion of land resources, the control of the Indians, and the development of local commerce. Little effort was made to open the country to the world economy (the loan of 1824 remained in default until 1857). Thus, the regime of de Rosas already contained some vague elements of a broad populist alliance committed to a national path of development (Lynch, 1979: 2f; Bushnell, 1983: 4; Friedman, 1984: 183-188). A definitive breakthrough toward a capitalist nation state was achieved under Mitre's regime (1862-1868), in whose government reformist intellectuals played a leading part (Rock, 1985: Chapter 4). Central institutions, such as the national treasury, customs office, judiciary, and the army, were all created under Mitre or his immediate followers. Two pillars guaranteed the stability of the regime. First, provincial caudillos were held in check by the dispensation of subsidies to the provinces. The construction of unprofitable stateowned railways into the interior between 1862 and 1880 served similar purposes and necessitated the contraction of sizable international debts. Second, the strengthening of the state apparatus was made

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possible by the rapid expansion of tax receipts from the external sector, development of which was greatly favored by the protection the regime was able to extend to land-holding classes in the areas bordering the Indian territories. 2. Figure 2.4a shows that with its integration into the Atlantic economy, Argentina experienced three cycles of rapid export growth and capital flows between I860 and 1914 that were supplemented by similar waves of immigration (Cairncross, 1953; Thomas, 1954; Ford, 1971). The bulk of external debts assisted foreign private capital in the fields of infrastructure investment (mainly railways) and thus promoted a rapid expansion and intensification of the Argentine export economy. Until World War I, the initially dominant production of hides, salted meat and wool was gradually supplemented by wheat, corn, linseed, and frozen and chilled beef. Along with this shift, industries emerged partly geared to processing exported raw materials (the meat industry is an outstanding example), partly directed toward the production of simple consumer goods (Ferns, I960; Randall, 1978: l l 6 f f , 128ff; Rostow, 1978). With the exception of the early 1890s, why was there no complete default on Argentina's external loans during its "membership" in the Atlantic economy? First, public investment, at least before the Radical period (1916-30, see below), supported the successful expansion of an export-led economy. Sufficient taxes thus were usually available to service external obligations. Second, the development of the export sector augmented a local financial sector whose resources could be tapped by the state. A substantial part of the growing infrastructure of Buenos Aires was financed locally (Piatt, 1986); during the 1930s, a high and rising share of the state's debt service went to domestic creditors (Alhadeff, 1986: 102f.). Hence, the impacts of international developments were probably buffered in part by the availability of domestic finance. Third, the presence of a well-functioning state machinery meant that qualified technocrats were available to introduce effective stabilization measures during the 1930s (Alhadeff, 1986). 3. The rapid expansion of the export sector led to the demise of caudillism and a greater institutionalization of political power. By 1874, political control rested firmly with the cattle-raising oligarchy of Buenos Aires which was allied with the elites of the interior provinces. Their institution to control the access to power was the PAN (Remmer, 1984: 27-31). However, with Argentina's development, new urban social groups with political aspirations emerged (professionals, state bureaucrats, and industrial workers). Their integration into the political system was achieved by the radicals who, in the Unión Cívica Radical (UCR), formed an alliance between factions of the landowning

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oligarchy and the urban middle classes (Rock, 1975). When their charismatic leader Yrigoyen came to power (in the years 1916-1922 and 1928-1930), he pursued a clear populist policy in favor of the urban middle classes. However, the still-powerful oligarchy (Smith, 1969) remained very reluctant to provide the financial means for the support of its opponent's social base (i.e., introduction of direct taxes). Instead, the government had to resort to heavy borrowing to achieve its political objectives; the entire radical period is marked by a substantial expansion of state debt (Remmer, 1984: 137). As with Leguia's regime, worldwide recession after 1929, through its impact on state incomes and expenditure, led to a rapid erosion of Yrigoyen's popular base and his overthrow by a military coup. The following period of the Concordancia (governments of Justo, Ortiz, and Castillo, between the years 1931 and 1943) was characterized by a marked political disarticulation. It represented a narrow coalition of conservatives, independent socialists, and antipersonalist radicals, lacked mass support, and was accompanied by a decline in public political activity (Smith, 1969: 25, 188-195; Rock, 1985: 218). 4. After 1935, depressed exports, some stabilization measures introduced after 1930, and war-caused shortages of supplies encouraged a gradual import-substituting industrialization (Rock, 1985). Economic nationalism grew. Soon after the coup of 1943, the nationalist faction within the military seized power and opened the way for Perón (1946-1955). The backbone of his populist regime was formed by the urban working classes, which had experienced a drastic expansion since the onset of import-substituting industrialization a decade earlier. In addition, Perón won the support of entrepreneurs in import-substituting industries, segments of the urban middle classes, and the army. His government strongly promoted the deepening of import substitution through the production of capital goods, partly by state industries with rather limited productivity (Randall, 1978: 138ff). The industrial labor force further benefited from a liberal wage policy. At least in the beginning, this internally oriented development strategy was successful. Rising export receipts during World War II and its aftermath contributed to an accumulation of central bank reserves and the reduction of external debts, with a redirection of agrarian incomes to the state taking place (Wynia, 1978: 49). However, after the easy stage of import substitution had been completed, chronic growth problems arose as a result of the inefficiencies associated with this policy (Randall, 1978: 145ff.). The difficulties were exacerbated by a decline in receipts from primary commodity exports after 1948 and the failure to adapt to technological change in the agrarian sector (Rostow, 1978: 473). After 1949, economic stagnation began to prevail,

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provoking a gradual erosion of Perón's power base and leading to a military coup in 1955. The period between 1955 and 1983 can b e characterized as a disarticulated period. None of the relevant social forces was able to gain a dominant position, and coalitions proved rather fragile. The resulting political instability is documented by the sixteen different governments that were in power and eight unsuccessful military coups that t o o k p l a c e b e t w e e n 1 9 5 5 and 1983 ( R o c k , 1 9 8 5 : 3 3 3 f f . ) . Accordingly, the structural weaknesses o f the country's e c o n o m y inherited from the Perón era persisted. On the side of external finance, this situation manifested itself in a series of four reschedulings between 1955 and 1965, a continuous rise of foreign debt from the early 1970s onward, and persistent balance-of-payments difficulties since 1981. Only the Ongania administration (1966-1970), which tried to establish a disarticulated regime proper, is distinguished from the rest. Political parties were banned, and a team of technocrats was entrusted with putting in place a stabilization policy and laying the foundations for an outward-oriented development policy. As a result, the external situation, as well as the domestic economy, improved remarkably between 1966 and 1969. The other clearly disarticulated regime, under Videla and his followers (which lasted from 1976 to 1983), carried out an unsuccessful policy of trade liberalization which led to a rapid rise in external debts without enlarging domestic productive capacity (Diamond and Naszewski, 1985). Thus, with the demise of the Atlantic economy and the shift to import-substituting industrialization, Argentina lost the growth engine that lay at the heart of its earlier prosperity: a thriving export-oriented agricultural sector. The ensuing structural stalemate, both political and e c o n o m i c , has manifested itself in chronic b a l a n c e - o f - p a y m e n t s problems since the completion of the easy stages of import substitution of the early 1950s.

From World Empire to Periphery: The Ottoman Empire and Turkey The evolution of export receipts, external obligations, and political regimes as depicted in Figure 2.5 reflect Turkey's transition from a declining world empire to a peripheral position within the capitalist world system. During the first stage (until World War I), Turkey contracted huge external debts whenever funds were available—that is, around the peak of Kondratieff cycles II and III (1860s and early 1870s, and before World War I, respectively). This reflects the perennial financial needs of a traditional state class that has lost control over its tributary resources. The period between World War I and about 1950

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can be considered a second, transitory phase that was devoted to state and nation building by a new state class. Links with the world economy temporarily declined, as evidenced by the evolution of exports and external debts, the latter of which remained nonperforming during a significant part of the period. Since about 1950, a development is visible that conforms with the expected pattern. On the side of political regimes, a shift from capitalist export-oriented to populist and then disarticulated regimes is visible. Capital inflows are concentrated in the period of populist regimes in the 1970s. Serious balance-of-payment difficulties emerge toward the end of the populist phase, whereas ensuing disarticulated regimes turned to stabilization measures, leading to at least temporary improvement of the external situation. The following discussion provides a more detailed picture of the structural features of these three stages. 1. Initially, the administrative machinery of the Ottoman state not only absorbed the economic surplus of the empire, but it also controlled it. Production and trade were strongly regulated and supervised by state action. The accumulation of capital outside the state was thus largely prevented. The loss of this control in the seventeenth century led to a decline in state revenues and the gradual disintegration of the Ottoman Empire. At the same time, the rising military technology of Western Europe spurred increasing military outlays and thus contributed further to the incidence of chronic budget deficits (Lewis, 1961; Inalcik, 1970; Islamoglu and Keyder, 1977). The reforms initiated at the beginning of the era of Tanzimat (reorganization, 1839-1876) were designed to reverse this trend. A liberal trade regime was put in place, and European financiers were allowed to perform banking operations (Issawi, 1980: 75, 275). As Figure 2.5a shows, foreign funds began to play an increasingly larger role during this period, particularly after 1865. However, all loans but one (used for railway construction) were spent consumptively, either on military operations, the covering of budget deficits, or for refunding and refinancing purposes (Suvla, 1966: lOOff). The enormous debt accumulation by contemporary standards ended in 1875 when the government had to declare default. The settlement of 1881 resulted in the establishment of foreign financial control under the so-called Public Debt Administration. As agent of the interests of the principal European powers, it acted as an intermediary between foreign banks and concessionaires and the Ottoman government. As such, it provided the base for a second wave of external borrowing between 1886 and 1914. As before, most of the funds were channeled into unproductive uses (Suvla, 1966: 104ff.; Pamuk, 1987). The circumstances of this second phase suggest that the

40

Christian Suter & Ulrich Pfister

O t t o m a n Empire h a d m u c h more t h a n its slow-growing e x p o r t revenues to offer as security to European lenders. The huge internal market and the empire's strategic location assured that funds were granted whenever available internationally. 2. With their successful revolt in 1909, the reformist factions within the state bureaucracy, the so-called Young Turks, assumed more power than the ruler's group itself. As such, it cleared the ground for Atatiirk and his Republican People's party (in office between 1923 and 1950). Thus, even after the foundation of the Turkish republic, the military and civilian bureaucracy retained their dominant positions within the state. This is documented by the large number of officials (43 to 54 percent) in the National Assembly between 1920 and 1943 (Ozbudun, 1981: 85). During the 1920s, the Turkish economy was characterized by a liberal trade regime, free capital movement, and the absence of a central bank (Keyder, 1981). Pressure from foreign interests (loss of national tariff autonomy as a result of the Lausanne treaty) and the commercial bourgeoisie that had emerged since the era of the Young Turks w e r e the m a i n f o r c e s b e h i n d this trend. T h e e c o n o m i c depression of the 1930s, however, with its marked decline in exports and r e n e w e d debt-servicing difficulties, caused a w e a k e n i n g of outward-oriented forces and laid the base for a statist strategy of import-substituting industrialization. In fact, the 1930s and 1940s saw the erection of numerous state enterprises in light industries (Walstedt, 1980; Birtek, 1985). 3. The development strategy of Atatiirk and his followers promoted t h e g r o w t h of a c o m m e r c i a l a n d i n d u s t r i a l m i d d l e class that increasingly demanded a limitation of state interventionism (Lewis, 1961). O n the other h a n d , its strategic position m a d e Turkey a candidate for U.S. assistance. The growing articulation of social groups outside the state class and the increasing integration into the world system led to a gradual decline of statism in the post-World War II years. With Menderes' Democratic party (1950-1960), an alliance of landlords and the commercial bourgeoisie came to power (Berberoglu, 1982: 54). A gradual opening toward the world economy followed, supported by a rapid growth in export receipts. A liberal foreign investment code was adopted, and substantial foreign assistance was granted. However, the influx of foreign direct investment remained relatively modest, and export revenues faltered after the Korean war b o o m . Rising i n d e b t e d n e s s a n d increasing b a l a n c e - o f - p a y m e n t pressures contributed to the loss of the regime's support. In 1959, foreign debt had to b e restructured, and in I960 Menderes was

Global Debt Cycles & Political Regimes

41

overthrown by a military coup. After several unstable coalition governments, a new capitalist regime was formed under the leadership of Demirel (1965-1971). It combined different factions of the bourgeoisie (commercial capital, small manufacturers, and big industrialists) and was supported by the agricultural elite (Keyder, 1979: 31). As a consequence of the strong representation of industrial interests, the regime again favored an import-substituting development strategy that produced fairly high growth rates in the short run (Rostow, 1978: 476). However, returns on investments in state enterprises were rather low, and most industries remained dependent on continued protection while retaining a high import propensity (Walstedt, 1980; Martner, 1982). Combined with a low e x p o r t potential, these factors resulted in an increasing dependence on remittances from emigrated workers and on foreign debts. These structural weaknesses lay at the heart of the breakdown of Turkey's development model in the late 1970s. The completion of the easier stages of import substitution (around 1970) and the growing political articulation of the working class (organized in the People's Republican party, trade unions, and the communist labor parties) led to an erosion of Demirel's political base. The period between 1971 and 1980 was marked by pervasive political instability; 1971 and 1972 saw a military regime, and a rapid sequence of thirteen weak coalition governments followed between 1973 and 1979 (Berberoglu, 1982: 108). Attempts by several governments to gain legitimatory support through populist policies largely failed (Acikalin, 1983: 211). The stimulation of consumption through inflationary financial policies and rising external indebtedness only aggravated the country's external imbalances. Between 1977 and 1983, five reschedulings w e r e concluded, documenting Turkey's virtual insolvency. In fact, none of the populist-oriented administrations of the late 1970s was able to introduce effective stabilization measures as demanded by the IMF and foreign creditors. When radical measures were finally taken under the last Demirel government, with Ozal as minister of economic affairs, social conflict became so intense that the military stepped in. Initially under strong support by the repressive power of the army, Ozal's disarticulated regime carried out liberal reforms that largely dismantled the inherited structure based on statism and import substitution (Acikalin, 1983: 231ff.). While this policy resulted in a successful stabilization of Turkey's external situation, it is presently unclear whether the regime will find legitimate bases of power in the long run. Since World War II, Turkey in principle experienced a sequence of political regimes, which corresponds to the

42

Christian Suter & Ulrich Pfister

pattern expected; the same is true for the behavior of regimes with regard to foreign debt. However, the correspondence is not very strong. Regimes were often short-lived and unstable, and external debts already were of certain importance since the late 1950s. In our view, two factors explain this: First, the statist past made certain that social forces outside the state class were relatively weakly articulated throughout the period, thus finding it difficult to assert themselves. Second, Turkey's strategic location supported the inflow of official aid during a period when international financial flows from private sources were only of minor size. CONCLUDING DISCUSSION What do the four case studies teach us about the role that political regimes of the periphery play in global cycles of debt accumulation and crisis? To facilitate a final assessment of this question, Table 2.2 presents a summary of the information provided by the case studies (Figures 2.2 through 2.5). All political regimes have been coded according to our typology, the phase in the long wave, and their relationship to foreign debt. This summary discussion will focus first on the cyclical sequence of regimes and their relation to external debt as postulated in hypotheses A1 through A3. Second, we will turn to exceptions, modifications and additions to this model. Third, trends (or developments reaching beyond cycles), as well as their implications for the operation of debt cycles, will be considered (hypotheses B1 and B2). 1. As postulated in the theoretical section, there clearly emerges a shift in political regimes over the course of a long wave. Leaving aside the state class-based regimes (to be discussed later), the upswing of a long wave is marked by the prevalence of capitalist regimes based on export-oriented interests, relying only rarely on external financial flows. Toward the end of the upswing, populist regimes begin to prevail. The majority of these regimes relies on a policy of deficit spending, mostly for redistributive or consumptive purposes; in fewer cases (notably in Peru under Velasco's administration between 1968 and 1975 and in Turkey), deficit spending is used as an abortive attempt at import substitution. The path of debt accumulation pursued by populist regimes often leads to serious debt-servicing problems. The crisis of a long wave is marked by a transition to a disarticulated period or regime, which is sometimes followed by a populist regime. In most instances, debt settlements are reached by disarticulated regimes. Only when such a regime does not appear during the trough period (such as

Global Debt Cycles & Political Regimes

43

in Peru in the first and the third Kondratieff) are settlements concluded during the upswing phase by capitalist regimes based on export interests. This cyclical shift in the structure of political regimes in the Third World and its effect on global debt crises has a clear multilevel component. On the one hand, the emergence of capitalist regimes based on export interests occurs against the background of a vigorous expansion of exports caused by the rise in international demand for raw commodities typical of the upswing of a long wave. The same is true for the increased supply of international finance toward the end of the upswing, an increase which provides the resource base for many populist regimes. On the other hand, regimes based on export interests often laid the base for industrialization through the processing of exported raw materials or the local production of simple industrial goods consumed by workers engaged in the export sector (examples are Peru and Argentina in the third Kondratieff cycles). This in turn promoted the expansion of large urban middle and working classes demanding participation in the political system and providing mass legitimacy for later populist regimes. Conversely, disarticulated regimes or periods usually developed out of a situation in which a populist regime had failed because its spending practices, usually supported by rising international indebtedness, proved unsustainable in the long run. Thus, the emergence of widespread debt-servicing difficulties toward the end of a long wave is in part the product of processes taking place on national levels interacting with processes operating on the global level of the world system. It may be noted that systematic cross-sectional research concerning the present long wave tends to support our conclusions regarding the role of political regimes in debt cycles. From the 1960s to the 1970s, a shift from capitalist to populist and state class-based regimes has been observed. Among the two latter types, external debt vis-à-vis bank creditors was negatively related to economic growth during the second half of the 1970s (Hischier and Heintz, 1982; Pfister and Suter, 1986). 2. An important addition to this model concerns the presence of a number of state class-based regimes around the peak of a long wave. In several instances where the upswing was weak or marked by internal conflicts, so that no sizable group based on the production of exports emerged (notably Liberia in the second and fourth and Argentina in the first and second Kondratieffs), or where export-led growth failed prematurely (e.g., Peru in the second Kondratieff), the expansion of the international supply of financial capital during the peak period was used by a state class to broaden its social base by grand social and economic projects. Developmentalism (occuring in

44

Christian Suter & Ulrich Pfister

Liberia since 1975) or a handing-over of the export economy to international financiers who are connected with raising international finance for railway construction to broaden the capitalist sector (Peru during 1868 and 1872), illustrate the scope of these projects. However, due to the weakness of the development prospects of the countries in question and the innate tendencies of state classes toward selfprivileging, all these projects failed. This development path, which may be characteristic of the extreme periphery or the periphery during the early stages of the industrial-capitalist world system (cf. the timings of the populist regimes in the phase around the peak of a long wave) should be added as an important variant to the above model. The most notable exception to our model is Argentina. All but one of the regimes lying outside the expected patterns are from this country, and the regimes conforming to the expected pattern sometimes behave differently than predicted (notably the regimes of Videla through Alfonsin). We explain this pattern with Argentina's integration into the Atlantic economy after about 1850 and the dissolution of this subregion of the world system after the 1930s. As a consequence, Argentina remained virtually unaffected by the debt crises of the 1870s and 1930s, but it experienced virtually permanent balance-of-payment difficulties thereafter. 3. The most notable trends visible in Table 2.2 concern the declining relevance of state class-based regimes and the growing relevance of disarticulated regimes. a. State class-based regimes. In the theoretical section, it was anticipated that a weaker cyclical dynamic would prevail in a number of countries where capitalist interests are weakly articulated (due either to a predominance of precapitalist structures in a former world empire or the weak integration of extreme peripheries into the world economy). At the same time, it was argued that the importance of such cases would decline over time due to the expansion of the industrialcapitalist world system (hypothesis Bl). This hypothesis is supported by the debt history of Liberia and less so by that of the Ottoman Empire. The state class-based regime of Liberia raised external funds whenever its creditworthiness permitted. Thus, before the development of a sizable export sector in the late 1920s, lending was very modest and debt-servicing problems set in long before the world economy entered into a downswing (cf. particularly the period between 1907 and 1927). By contrast, financial means were readily available since the late 1940s. b. Emergence of disarticulated regimes. With the exception of the Caceres regime in Peru (1884-1890), all disarticulated regimes fall into the third and fourth Kondratieff cycles. In light of the finding that a

Global Debt Cycles & Political Regimes

45

debt settlement was usually reached by such regimes, the question arises whether this shift is associated with a change in the way global debt crises are handled. In fact, the weak, state class-based regimes of Latin America during the first half of the nineteenth century, as well as those of Liberia, were slow or unable to reach a settlement with their debtors. As for former world empires, such as the Ottoman Empire, a debt settlement occurred more quickly since it was linked to regime change in the guise of partial colonialization. Thus, it can be argued that the emergence of disarticulated regimes promotes relatively rapid debt settlements as well as safeguarding the formal independence of a country. On an aggregate level, this trend may explain the greater accentuation of debt cycles after the first Kondratieff wave (hypothesis Bl). In contrast to hypothesis B2, no effect of the increased institutionalization of creditor behavior on the emergence of disarticulated regimes or periods is visible in the evidence presented in Table 2.2. Five of the seven entries in the crisis/trough phase follow populist regimes and therefore reflect primarily the contradictions of economic and social development in prior cycle phases. However, future studies using a broader empirical base and finer distinctions between regimes may reach different conclusions. In sum, this chapter has presented evidence that shows that regimes in the periphery change systematically over the course of a long wave of global growth and stagnation, and they differ systematically with respect to their behavior toward external debt. Thus, the cyclical accumulation of foreign debts and global debt crises can be explained in part by multilevel processes (that is, global processes that integrate the periphery into the world system) and consequent national political processes with their own dynamic, which in turn are highly relevant to the international financial system. At the same time, secular shifts with respect to the periphery's position within the industrial capitalist world system also explain some trends with regard to the structure of international financial crises. NOTES 1. Our conception of Kondratieff cycles is that of long waves of growth and stagnation in global physical product with a cycle length of forty-five to sixty years (see Van Duijn, 1983, for evidence). As used here, the term does not refer to price cycles (Rostow, 1978). The discussion in this chapter is based mainly on innovation theories of long waves (Mensch, 1979); but it also embodies some elements of capital-accumulation theories (Mandel, 1980;

46

Christian Suter & Ulrich Pfister

Pfister and Suter, 1987, for a broader discussion). 2. For systematic cross-sectional evidence, see Eichengreen and Portes (1986) for the 1930s, and Cline (1984: Appendix A), among others, for the 1980s. Both studies demonstrate a negative effect of export receipts on the probability of debt-service incapacity. 3. Cardoso (1979: 38-40) defines the state in the way we define a political regime, and considers a regime what we would call a specific administration or government. Our approach has the advantage of permitting the distinction between the institutional aspects of the state and the pact of dominance proper; it enables us to consider possible interactions and divergences between the two. Hence, we consider the concept of neocorporatism that pervades much of recent writing on Latin America and Africa (see notably Stepan, 1978; Nyang'oro and Shaw, 1987) to bear mainly on the state or on how regimes structure the institutions of dominance. 4. For the distinction between world empires and world economies, see Wallerstein (1974). 5. On the other hand, the national industrial elite is usually too weak to dominate a regime. In a few instances, however, it succeeds in forming an alliance with the state class. Turkey during the 1960s (see below), post-1964 Brazil, and Korea after I960 may be included in this category. 6. Compare the definition of populist regimes given by Hischier and Heintz (1982), the "incorporating populist-authoritarian regime" as discussed by O'Donnell (1973), and the "inclusive corporatism" of Stepan (1978: Chapter 3). Of course, the concrete outlook of a populist regime will vary according to the precise nature of mass support. Compare the typology offered by Hischier and Heintz or the distinction between liberal and national populism drawn by Germani (1978: 96). 7. Compare this with the recent writing on Latin American authoritarianism: "bureaucratic authoritarianism" introduced by O'Donnell (1973), "exclusionary corporatism" by Stepan (1978), or, more generally, Collier (1979). 8. A rapid overview of the debt history of the major borrowers can be derived from Tables 2 and 4 in Suter (1989). 9. This explanation is advocated by Schydlowsky and Wicht (in McClintock and Lowenthal, 1983: Chapter 4), which is also supported by Uriarte (1986). Cline (1981) suggests an alternative explanation centered on excess demand.

Global Debt Cycles & Political Regimes

47

Figure 2.1 Global Debt Crises: Number of Countries in Default (1825-1985, solid line) and Subject to Multilateral Reschedulings (1956-1986, dotted line)

Sources: Suter (1988), Coiporation of Foreign Bondholders (Annual Reports 18731985).

Table 2.1

Kondratieff Cycles and Global Debt Crises

Kondratieff Cycle No:

I

II

III

IV

Upswing

1782--1825

1845--1872

1892--1913 1920--1929

1948-1973

Downswing

1825--1845

1872--1892

1929-•1948

1973-...

Global Debt Crisis

1828--1841

1876-1882

1932-•1945

1982-...

Sources: Kondratieff cycles of physical product: van Duijn (1983); debt crises: Figure 1.

Christian Suter & Ulrich Pfister

48

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§ ë < £ 1 ç 2 e ¡ oJù • g S u y—. g on o m i u . n '—* a S ov S 1—1 ON I H S i » 0 0 Ol N r Since our interest lies in economic inability rather than an unwillingness to repay, cases of outright political repudiations of debt (e.g., Mexico in 1867) were excluded. The study's focus on the connections between loans and debt problems meant that financial crises arising from core indemnities (e.g., Boxer Rebellion in China) were also omitted.

78

David

Table 3.1

Kowalewski

T-Tests for Kondiatieffs in Periphery Exports (

Significance3

N

Africa Downswings with Upswingsb

7.61

.0000

42

Upswings with Downswingsc

6.18

.0000

32

Total

74

Asia Downswings with Upswings

3.94

.0005

21

Upswings with Downswings

5.83

.0000

24

Total

45

Latin America Downswings with Upswings

6.18

.0000

41

Upswings with Downswings

4.44

.0000

37

Total

78

Periphery Downswings with Upswings

10.18

.0000

104

Upswings with Downswings

9.21

.0000

93

Total

197

Comparisons of all the K-l through K-4 upswings with downswings proved impossible due to missing data, currency changes, or substantial data-base changes in terms of territory included or goods/services exported. In some cases of currency changes within a phase, the first part of a series, if long enough, was compared with the previous phase and the second paît with the subsequent phase. In cases of missing data for only a few years within a series, figures were extrapolated from data for previous and subsequent years. a. One-tailed test. b. Slopes of all downswings compared with those of all subsequent upswings. c. Slopes of all upswings compared with those of all subsequent downswings.

Structural-Cyclical Perspective

Table 3.2

79

Loan and Debt-Problem Waves Lcansb

N

0.0 0.0

2 22

5.9 2.1

11 11

5.9 6.2

5 11

1.6 5.1

9 20

9.8 3.5

9 20

15.8 6.5

8 9

9.2 25.2

8 9

7.4 14.1

10 28

10.6 11.6

10 28

33.7 10.9

9 7

19.0 41.6

9 7

3.9 0.9

12 18

13.2 7.6

12 18

7.1 17.3

7 11 194

8.5 25.0

7 11 164

Debt Problem9 a 'k

N

K-l Upswing Recovery (1782-1792) Prosperity (1793-1814) Downswing Recession (1815-1825) Depression (1826-1836) K-2 Upswing Recovery (1837-1845) Prosperity (1846-1865) Downswing Recession (1866-1873) Depression (1874-1882) K-3 Upswing Recovery (1883-1892) Prosperity (1893-1920) Downswing Recession (1921-1929) Depression (1930-1936) K-4 Upswing Recovery (1937-1948) Prosperity (1949-1966) Downswing Recession (1967-1973) Depression (1974-1984) Total

F for loans = 27.56; Significance = .0000 F for debt problems = 11.1; Significance = .0000 a Because of the poor reporting of debt problems during the late eighteenth and early nineteenth centuries, this series was initiated in 1821. ^The cyclical component appears to far outweigh any year-to-year trend in the two series with respect to accounting for loans and debt problems over time. The Rs-squared for the trends of the two series show that only 13 and 8 percent of the variation in the proportion of periphery countries securing loans and experiencing debt problems between 1791 or 1821 and 1984 could possibly be explained by raw growth in loans or debt problems. It was also suspected that reporting bias might distort results. Reportage may have been significantly poorer in the nineteenth than twentieth century. However, correlating the number of column-inches per year of the London Times and New York Times with the two series generates Rs-squared of only 3 and 8 percent

80

David Kowalewski

Table 33

Theme Cycles in Great Britain and the United States Mean Percent of Countries Receiving Loans

Period Theme® Parochial Progressive International Conservative Total F = 11.8; Significance = .0000 a

3.1 5.3 12.2 10.8

N 45 52 52 45 194

Since Weber (1981) only periodized his cycles with single years in which the valuesyndrome was dominant (e.g., 1803, 1816, and 1829), the distances between peak years were bifurcated and periods with peak years as midpoints (e.g., 1810-1822) were calculated. Parochial years = 1791-1796, 1836-1848, 1888-1900, 1941-1953 Progressive = 1797-1809, 1849-1861, 1901-1913, 1954-1966 International = 1810-1822, 1862-1875, 1914-1926, 1967-1978 Conservative = 1823-1835, 1876-1887, 1927-1940, 1979-1984.

Structural-Cyclical Perspective

Figure 3.1 Kondratieffs in Periphery Exports

Africa

K-2-U

K-4-U

K"3"U

/

K-2-D

* K-3-D

Asia

81

v

A /

K-2 Upswing Through K-4 Upswing (1837-1966) Sources: Mitchell (1982, 1983). In each figure, the five points for the vertical axis represent the means of the regional or peripheral mean-standardized regression coefficients for each phase from K-2 upswing through K-4 upswing. The Mitchell data ended in 1975; IMF export data were consulted but ruled out for inclusion because currency compatability necessaiy for adequate phase-comparisons characterized only six countries. Thus, statistics for the K-4 downswing were not computed. For phase dates, see Table 3.2. The horizontal lines through the vertical axes represent the means of all upswings and downswings combined.

84

David Kowalewski

Data Appendix, Loans and Debt Problems

Nation

Brazil Argentina Mexico Turkey Chile Peru China Colombia Dominican Republic Philippines Uruguay Cuba Egypt Bolivia Ecudaor Guatemala Panama Venezuela Costa Rica Haiti Honduras Nicaragua El Salvador India Iran Jamaica Koiea Paraguay Algeria Liberia Morocco Thailand Afghanistan Ethiopia

Loan Percent3

Rank

28 25 25 24 23 15 14 14 9 9 9 8 8 7 7 7 6 6 4 3 3 3 3 2 2 2 2 2 1 1 1 1 0 0

1 2 2 4 5 6 7 7 9 9 9 12 12 14 14 14 17 17 19 20 20 20 20 24 24 24 24 24 29 29 29 29 33 33

Debt Problem Percent1

29 23 45 18 25 31 14 24 16 3 12 18 20 19 14 12 10 15 17 9 10 10 9 9 1 6 3 4 1 3 2 0 0 0

Rank

3 6 1 9 4 2 14 5 12 26 16 9 7 8 14 16 18 13 11 21 18 18 21 21 31 24 26 25 30 26 29 32 32 32

Shown here is the percent of years in which the nation was reported to have secured a private core loan or experienced a debt problem. a. For loans, 1791-1984 (N=194 years); for debt problems, 1821-1984 (N=164 years). To check for the possibility of reporting bias, both loan and debt-problem countiyscores were correlated with possible sources of systematic overreporting and underreporting: demographic size (1980 population) and distance from the headquarters of the two global media sources (miles from London and New York). In none of the six correlations, however, was more than 14 percent of the variation among the countries explained by these potential sources of error.

Robert E. Looney

4

The Impact of Arms Imports and Economic Environments on Third World Debt As is well known, the recycling of the flood of petro dollars that followed the 1973 increases in oil prices resulted in large amounts of money being lent by Western banking syndicates to the Third World in anticipation of relatively high rates of return. In retrospect, it is clear that while some of the money was used to finance development projects that presumably would generate sufficient income to repay the loans, much of it was used for increased consumption and capital flight. There is also the suspicion among many observers that a considerable amount of this funding was used to finance arms imports (Tullberg, 1986: 26l). Support for this position is largely based on two similar trends that developed in the 1970s and early 1980s. More specifically, government and government-guaranteed debts of the nonoil developing countries grew from U.S. $130 billion in 1973 to U.S. $729 billion in 1984, accounting for 85 percent of the external debts of developing countries. The value of arms transferred to nonoil developing countries more than doubled in real terms between 1972 and 1982; the share of total world arms transfers increased from 31 percent to 41 percent in the same period (Tullberg, 1986: 262). Analysts stressing the link between arms imports and Third World debt note that the existence of these two patterns are more than just a coincidence. Further substantiation of the link between arms transfers and public external debt is found in the fact that arms purchases grew in importance during the 1970s as the two major arms donors (the U.S. and the Soviet Union) switched their policy from one of gifts to one of sales (Tullberg, 1986: 262). Despite the rather logical assertion that considerable amounts of Third World indebtedness have stemmed from arms imports, little 85

86

Robert E. Looney

empirical testing of the link between arms imports and the Third World's debt has been done. Nor has there been any empirical work to determine whether the link between arms imports and external debt is universal throughout the Third World or is confined to a smaller subgroup of Third World countries. The purpose of this chapter is to develop a simple model of Third World debt and use it to examine the issues raised above.

METHODOLOGY Brzoska (1983) provides what is to date the only attempt to estimate the extent to which arms imports have been responsible for the acceleration in Third World debt (see related works: Terhal, 1982; Alexander, et al., 1981). His estimates are, however, indirect, using an opportunity cost assessment of the impact on Third World debt created by arms imports. Brzoska estimates that had the Third World countries that were importing debt capital in 1979 not also imported arms in 1979, the net transfers of debt could have been anywhere from 20 to 30 percent lower. The opportunity cost burden of accumulated debt over time is estimated by Brzoska to be about 20 percent of the total Third World debt for 1979. For 1979, the interest in amortization of the old debt added u p to more than twice the cost of new-weapons imports for credit-importing countries, according to Brzoska's estimates. Weapons purchased with scarce foreign exchange have an obvious allocation cost in terms of reduced resources available for the import of intermediate imports and investment goods essential for self-sustaining growth. Clearly, however, whether or not Third World countries have reduced their borrowing proportionally to the amount spent on arms imports is quite conjectural. In fact, Sjaastad (1983) has convincingly shown that, given the generally negative rates of interest prevailing throughout most of the 1970s, Third World countries had an incentive to borrow as much as banks were willing to lend. The great build-up of private international lending that occurred during the 1970s and early 1980s, which was closely related to (if not a consequence of) the oil price increases, produced a virtual explosion of liquidity in the international commercial banks. Perhaps because of unanticipated inflation, and in part due to the OPEC surpluses following the oil price increases of 1973 and 1974, real rates of interest on dollar-dominated external debt were very low. In fact, such rates were frequently negative, giving the developing countries a rather strong incentive to incur that debt. When real rates of interest are

Arms Imports & Third World Debt

87

negative (and expected to remain so), it is clearly impossible to have "too much" external debt. While Brzoska has made a convincing argument as to the potential reduction in Third World debt that a moratorium on arms transfers may have produced, it is by no means obvious that Third World debt would have been lower in the absence of arms imports. What follows is an attempt to extend Brzoska's analysis by examining the more direct linkages between arms imports and Third World debt. For this purpose, a formal model indicating the equilibrium level of external debt has been developed. 1 This equilibrium level is solved for by a "reduced form" equation derived from a set of relationships that account for the major supply-anddemand determinants of external debt.

MODEL FORMULATION

The sample used in this analysis consisted of seventy-seven developing countries for which the requisite data could be obtained.2 External debt is defined as public external debt owed to nonresidents, repayable in foreign currency and having a maturity of more than one year. In selecting variables responsible for the volume of public external debt accumulated by 1982, it is reasonable to assume that a country's size will have a direct relationship to the amount of external indebtedness and the individual country's capacity to service this debt. Clearly, a large country (as measured by GNP) will have more financial and commercial relations with the rest of the world economy and therefore will be more likely to accumulate a larger debt volume than a smaller country. At the same time, due to the diversity of output and the resource base, the debt-servicing capacity of a large country is apt to be greater than that of a small country (and, consequently, a larger external debt can be accumulated). In general, we postulate that the larger the LDC (less developed country) economy, as measured by a country's GNP, the greater its demand for external indebtedness. A country's external debt should, in general, be related to its general volume of merchandise imports. For LDCs, the volume of merchandise imports often tends to have a direct relationship to the country's GNP, thus providing an additional source of demand for debt. Since in a growing economy a share of imports will have to be financed, a country's indebtedness will be higher as total imports increase. An LDC with a greater export volume will be able to service a larger amount of foreign debt. As is well known, export volume is

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often used by lending institutions as a key indicator of debt-service capacity. For practical purposes, it is safe to assume that the willingness of lenders to supply debt varies directly with a country's exports. This relationship is particularly important as it relates directly to the country's export financing. For most developing countries, export financing is done in foreign currency since most of the exports are denominated in foreign currency as well. In short, w e would expect a positive relationship between country debt and the volume of merchandise exports. An LDC's overall current account deficit (or surplus) provides the most direct impact on external debt, since obviously the size of the deficit is made possible by external financing. Clearly, the larger the current account deficit, the larger the overall external public debt. International reserve holdings may be another important factor that affects the volume of a country's external debt. Here the relationship is likely to be more complex. Logically, as a country's reserves increase, its ability to service a g r o w i n g external debt and, hence, its creditworthiness should also increase. On the other hand, everything else being equal, one might expect that the larger a country's external revenues, the less pressing the need for additional debt to finance imports. Therefore, possession of a larger volume of international reserves may result in larger or smaller volumes of external debt. Three types of governmental expenditures 3 —arms imports, health, and education—are introduced as independent variables in the demand for external debt. For political or social reasons, these expenditures have a high import component and therefore may be major elements in accounting for the volume of external public debt over and above the other demand variables noted above. Clearly, because of the high correlation between the independent variables defined above, it is not possible to determine through regression analysis the percent of LDC public external debt stemming from military expenditures. Given this constraint, the analysis below attempts to answer the question of whether military expenditures (after controlling for GDP, imports, and reserves) have significantly contributed to LDC external indebtedness and, if so, what type of environments have been most conducive to external borrowing for the purpose of increasing military expenditures. The next step in the analysis is to isolate the main supply-anddemand influences on Third World indebtedness by deriving a reduced form equation that is capable of measuring the influence of all independent variables simultaneously. In the specification here, the GNP was assumed to be the most significant factor affecting the demand for external debt (see Heller and

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Frankel, 1982). This was followed in relative importance by total imports (TI); the current account balance (BI); and the individual public sector expenditures, comprised of arms imports (AI), health (SH), and education (SE). The main variables assumed to affect the supply of external loans were those reflective of the borrowing country's ability to service debt. Gross International Reserves (GIRB) and exports (TE) were assumed to be the indicators most international lenders considered as indicative of a country's borrowing capacity. Notationally: a) Total debt (PDB) supply = fl (reserves, exports), and b) Total debt (PDB) demand = f2 (GNP, imports, current account balance, military expenditures, education expenditures, and health expenditures) c) Total debt (supply) = total debt (demand) Dividing equations (a) and (b) by the equilibrium level of total debt as specified in equation (c), we obtain equation (d): d) fl/'(total debt) = f2/(total debt), or, expressing equation (d) implicitly, we can write: e) x l (fl/total debt, f2/total debt), = 0, or 0 x2 (total debt, GDP, imports, reserves, military expenditures, educational expenditures, health expenditures, exports, current account balance, and imports) = 0, or g) PDB = f3 (GNP(+), TI (+), GIRB (-), AI (+), SE (+), SH (+), TE(+), BI (+)] = 0 This reduced form equation (g) with expected signs was used for the estimations performed below. FINDINGS Total Sample As expected, the regression results4 indicate (see Table 4.1) the relative importance of gross national product and international reserves in affecting the level of Third World debt. These two variables have the expected sign and account for slightly over 70 percent of the observed level of debt (Equation 1, Table 4.1). The negative sign on international reserves (GIRB) indicates that countries with high reserves tend to receive less external funds. This suggests that a country in a relatively comfortable financial position, as evidenced by high reserve holdings, is less likely to incur external indebtedness. On the other hand, imports (11), the balance of payments deficit

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(BI), and arms imports (AI), all appear to have had an insignificant impact on Third World debt.

Analysis of Subgroupings To test the general validity of this conclusion, our sample of developing countries was divided into two subgroupings through factor and discriminant analysis. Several studies (Frederiksen and Looney, 1982, 1983, 1985a, 1985b; Looney and Frederiksen, 1986a) have indicated that developing countries lack homogeneity with regard to resource availabilities (largely savings and foreign exchange). In turn, the relative degree of resource availability affects the impact that defense expenditures have on economic growth—positive in countries with relatively abundant resources, and negative in those countries experiencing relative scarcities. In light of the above-cited results, it makes sense to split the sample of developing countries into groups based on some measure of resource constraint. Presumably, those countries that have either more domestic resources (savings and investment) or more access to foreign capital (everything else being equal, such as gross national product) will be able to support a higher level of defense expenditures. On the other hand, those countries having a lower level of domestic resources or less access to international capital will not have as high a level of defense expenditures (everything else being equal). Given the necessity to separate our sample of countries into subgroupings, the question remains as to the best operational method to accomplish this task. Frederiksen's and Looney's analysis, summarized above, indicated that a fruitful method of dividing countries for an analysis of arms imports is on the basis of their relative resource constraints. A number of variables reflect relative resource scarcity in developing countries. These include measures of savings, investment, capital flow, debt servicing, exports, and imports. The statistical problem is that many of these measures are highly correlated with each other and, as such, are redundant in providing information as to resource scarcity. One solution to this problem is to simply pick several variables— savings and exports, for example—and create two groups of countries: one with high savings and exports (an unconstrained group) and the other with low savings and exports (the relatively constrained group). This procedure suffers from the fact that the selection of variables is somewhat arbitrary. More importantly, since some countries are likely to have low rates of savings and high exports, or vice versa, they thus will be difficult to classify.

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In order to make the following analysis as objective as possible, a large number of variables reflective of resource scarcity was selected as an initial data set. These independent variables were then factoranalyzed. The advantage of factor analysis is that by determining the common variance among the independent variables, the researcher can objectively reduce the number of variables to be retained for further analysis. From a total of thirty-four variables, the factor analysis5 produced seven major independent measures of resource scarcity. The variables most representative of each trend were: 1. Gross Inflow of Public Loans/Exports in 1982 2. Total Public External Debt in 1982 3. Gross International Reserves in 1982 4. Public External Debt as a percent of GDP in 1982 5. Growth in Imports between 1970 and 1982 6. External Debt Service as a percent of GDP in 1982 7. Public External Debt as a percent of GDP in 1970 The next step in creating subgroupings of countries based on their relative resource scarcity was to utilize the seven variables above as discriminating variables in a discriminant analysis. 6 Using these variables, the discriminant analysis split the countries into two groupings based on their relative attainment of each of the seven variables (i.e., the countries were profiled into two composite groups [Table 4.2] based on their relative resource abundance as reflected in the seven measures of scarcity). In general, Group I countries seem to be the poorer, less economically dynamic nations, this group being heavily weighted with African and poorer Latin American countries. The Group II countries consist of several major oil exporters and several of the more dynamic newly industrialized nations, such as Mexico, Greece, India, Korea, Spain, Algeria, and Malaysia. Further insight into the two groups can be gained by examining the means of the variables used in the discriminant analysis (Table 4.3): 1. Group I countries resorted to a much higher (3.6 times) inflow of external public loans in 1982 relative to their exports that year. 2. On the other hand, the overall level of total public external debt in 1982 averaged nearly 4.5 times as much for Group II countries than for Group I countries. 3. The level of international reserves is also much higher for Group II countries—nearly ten times as much as the average for Group I countries.

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4. With regard to shares of debt in gross domestic product, h o w e v e r , G r o u p I countries h a v e m u c h higher levels of attainment, averaging nearly twice as m u c h as G r o u p II countries in both 1970 and 1982. The debt-service ratio to exports is correspondingly higher for Group I countries. 5. The rate of growth of imports was nearly ten times higher over the 1970-1982 period for Group II countries. In terms of profiles, therefore, Group II countries are considerably larger, more affluent, and less reliant on external debt as a percentage of gross domestic product. They tend to spend relatively large amounts on military activities, b u t n o t n e c e s s a r i l y significantly g r e a t e r percentages of their overall budgets. Given the contrasting economic environments between the two types of countries, it is logical to expect that the determinants of external debt varied considerably between the groups. When analyzed separately, the constrained and unconstrained countries produce sharply differing pictures of the contributions of arms imports toward Third World debt (Table 4.4). For the constrained countries, GNP and GIRB account for slightly over 50 percent of the fluctuation in external debt. However, adding imports, or TI (Equation 3, Table 4.4), to the regression equation causes reserves sign to change from positive to negative. So strong are total imports in contributing to this group's debt that GNP becomes insignificant in the regression equation. A similar result is obtained by including BI, the balance of payments (exports-imports), to the regression equation. Of i m p o r t a n c e for the p r e s e n t s t u d y is the high statistical significance of arms imports in contributing to the regression equation after controling for either imports (Equation 5, Table 4.4) or the balance of payments (Equation 6, Table 4.4). Apparently, these countries are constrained in the sense that they rely on public external borrowing as a major source of foreign exchange. The low growth in imports for this g r o u p as a whole suggests that foreign exchange may b e rationed to one extent or another with governments not able to rely on taxes from exports to fund the bulk of their expenditures. In this environment, increased public external debt may be the only way to maintain or increase arms imports available to the governments. The high statistical significance of imports in the debt regression is consistent with this interpretation, as is the low degree of significance of GNP in the regression equations. Unconstrained countries, however, show no statistically significant relationship (Equation 11, Table 4.4) b e t w e e n arms imports and external public debt. The positive sign on the balance of payments may indicate that, in

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general, this group of countries has not been reliant on public external debt for financing the bulk of their imports. On fact, the fast rate of growth of their imports—9.5 percent per annum over the 1970-1982 period—may have been financed largely out of export earnings.) The relatively low debt-service ratios for this group of countries indicates that, in general, they are relatively resource unconstrained and that increased arms imports have in large part been funded out of expanded government revenues rather than external indebtedness. To sum up, the use of public external indebtedness to finance arms imports does not appear to be universal among developing countries. In fact, it is possible that a large group of relatively debt-free (debt as a percent of GDP) resource unconstrained countries has contained military expenditures within the limits imposed by selffinancing rather than risk jeopardizing overall creditworthiness. On the other hand, the bulk of debt accumulated by the resourceconstrained group of LDCs has stemmed from arms imports and, presumably, military expenditures. Apparently, the perceived need to expand defense expenditures by this group in regard to foreign exchange shortages has resulted in relatively high levels of external indebtedness, measured either as a percent of exports or imports for the group as a whole. It should be stressed that these results were obtained by regression arms imports in 1981 on the total outstanding public external debt as of 1982. Clearly, the accumulated debt in 1982 would be only partially affected by whatever component was accrued to finance arms imports in the previous year. Additional regressions were run, using the average level of military exports for the period 1972-1982 on the accumulated debt in 1982. The results of these regressions produced the same general picture as those presented above. These results are difficult to verify, however, since all the countries in the sample did not have observations for all the years under examination. Another test of the hypothesis that public external borrowing has played a significant role in financing Third World arms imports for a large group of Third World countries involves examining the actual determinants of arms imports. Logically, arms imports should be related to the overall level of military expenditures (ME) and/or the general level of central government expenditures (GEC). Whether a country is an arms producer7 should affect arms imports. For example, one might expect Third World countries capable of producing at least one major weapons system to have a different level of technical and industrial capabilities than countries without an indigenous arms industry.

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Furthermore, the linkages between military expenditures and the economy, together with the import component of military equipment associated with a given level of military expenditures, should be considerably different for arms and nonarms producers. The ability of a Third World country to produce its own arms is dependent on the following components (Peleg, 1980): 1. Financial resources 2. Level of industrial development 3. Scientific and educational potential 4. Organizational and political abilities Limited economic and financial resources explain, at least partially, the difficulties of Third World countries in developing an independent weapons industry. The development of an arms industry, especially a totally independent one, requires very large amounts of financial resources. These are often beyond the abilities of most Third World states. It is well known that even some of the advanced industrial nations (such as Great Britain and France) have been compelled to cancel military production plans due to financial difficulties. In short, we might expect that countries with relatively abundant sources of foreign exchange and domestic savings capable of being appropriated by governments are likely to be the arms producers. In general, we would imagine the nonarms producers to be much more reliant on imports of military equipment to meet a given level of defense expenditures. Given the high cost of sophisticated imported arms, we would expect a high proportion of such expenditures to be financed by external debt (everything else being equal). To the extent that Third World countries produce their own weapons systems, we would expect a looser relationship to exist between arms imports and overall public external indebtedness (i.e., equipment can be obtained from local sources in addition to imports, with added domestic inputs occurring when the country's creditworthiness might be placed in jeopardy by additional external borrowing to finance arms acquisitions). Since data on the actual value of arms output in Third World countries is not available, the effect of arms production on arms imports was estimated by creating a dummy variable (PRODUCE), with values of 0 for the countries not having an indigenous arms industry and 1 for those possessing such an industry. The expected sign of this variable is negative in the regression equation; everything else being equal, indigenous arms production should reduce the need for imported arms. An examination of the means of various indicators of economic

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performance, external debt, and structural composition of arms and nonarms producers (Table 4.5), indicates that the arms producers can be characterized as possessing much higher levels of domestic savings, less export instability, superior export performance, higher external debt, but a much lower debt burden (as a percentage of GDP) and higher capital inflows than the nonarms-producing countries. In fact, by using discriminant analysis, Looney and Frederiksen (1986b) indicated that a nearly perfect classification of Latin American arms producers and nonarms producers could be made using only debt and import/export indicators as discriminating variables. That study also demonstrated that military and size variables were not capable of discriminating between arms producers and nonarms producers. Interestingly enough, debt and external variables and their relative magnitudes were nearly identical to those used to discriminate between the constrained and unconstrained countries above, with producers in general profiling in a manner similar to constrained countries. In short, we should expect a much closer link to exist between constrained countries and arms imports and military expenditures than that existing for the unconstrained countries. Two control variables, arms imports in the previous year (AI80) and GNP, were also introduced into the regression equation. Each has an expected positive sign. The external financing variables chosen to reflect the external debt associated with the financing of arms imports was the World Bank's figure on external borrowing commitments contracted in 1981. As its name indicates, this figure represents the new external debt contracted the same year that arms deliveries were made. To summarize, arms imports (AI) are hypothesized to be a function of the following: (AI) = f (ME(+), PBCB(+), PRODUCEQ, GEC(+), AI80(+), GNP(+)) All the variables except arms imports in 1980 (AI80) are for the year 1981. The results obtained (see Table 4.6) support the general picture discussed above. In particular: 1. Public borrowing commitments are positive and significant in affecting arms imports in the constrained countries, but not in the unconstrained countries. 2. Indigenous arms production appears to reduce arms imports in the constrained countries, with perhaps a similar (but marginal) effect in the unconstrained countries. 3. As anticipated, the link between military expenditures and arms imports is much stronger for the unconstrained group of countries.

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In general, therefore, it appears that a relatively large group of Third World countries has had a significant volume of arms imports financed by external credits, while a smaller but still significant group of Third World countries has, because of a relative abundance of foreign exchange earnings, managed to finance arms imports without a significant resort to increased external indebtedness. Clearly, there are other subgroupings of developing countries that might just as logically have resorted to external financing of arms imports. A classification related to the constrained and unconstrained groups examined above would be the mineral-oil and nonmineral-oil exporters. Mineral-oil countries are classified as those LDCs having mineral and/or oil comprising at least 40 percent of their merchandise exports (see Nankani, 1979). Regressions with these subgroups (see Table 4.7) provided similar, though not statistically significant, results as those obtained above for the constrained and unconstrained groups. Other possible subgroupings of developing countries include: (1) High income (over $1,000 per capita) and low income (under $1,000 per capita); (2) Those countries with military governments (Sivard, 1983), presumably more willing to borrow for increased arms imports; and (3) civilian regimes, presumably less willing to contract external debt for arms imports. None of these subgroupings revealed statistically significant results (Table 4.7). CONCLUSIONS The main question posed at the beginning of this chapter was whether or not arms imports have contributed to Third World public external debt. In general, the results presented above indicate that the answer is no; however, for certain LDCs, it is likely that a high percentage of the external public debt accumulated by 1982 was the result of expanded arms imports in the 1970s and early 1980s. What is the best characterization of LDCs that have relied on public external indebtedness to finance arms imports? Based on the regression results, it appears that the resource-constrained LDCs best characterize Third World countries whose external public debt has been used in large part to fund increased military spending. This fact, together with the general "unproductive" nature of military expenditures, makes it unlikely that this group of countries as a whole will be in a position to significantly expand military expenditures. At best, these countries will be lucky to be able to service their existing public debt.

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NOTES 1. The model is based on that developed by Heller and Frenkel (1982). 2. Economic and debt variables were taken from the World Bank (1984a). Military expenditure data was taken from the U.S. Arms Control and Disarmament Agency (1984). 3- Government expenditures are taken from Sivard (1983). 4. As can be inferred from the degrees of freedom, the results reported here are for smaller samples of countries than previously reported due to the elimination of countries with missing values. 5- The complete results of the factor analysis can be obtained from the author upon request. 6. See SAS Institute (1982) for a description of the program. The sample countries were initially assigned an arbitrary 1 or 0 so that placement could be made into two groups. A three-group division of countries did not produce a clear split between the means of the groups, i.e., there was not a high probability of correct placement for each country in one of these groups. 7. For purposes of classification, military producers are defined as those countries currently producing at least one major weapons system (Neuman, 1984).

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Table 4.1

Impact of Arms Imparts on Third World Public External Debt (Standardized Estimates) Independent Variable

Equation GNP

GIRB

(1) PED

-0.37 (-5.28) -0.45 (-4.94) -0.33 (3.06) -0.52 (-4.90) -0.47 (-5.14) -0.56 (-5.18)

(2) (3) (4) (5) (6)

0.97 (13.79) 0.86 (8.43) 0.95 (12.37) 0.88 (8.56) 1.09 (11.31) 0.56 (2.47)

H

0.17 (1.34) 0.16 (1.30) 0.25 (2.33) 0.16 (1.22)

BI

AI

Statistics SH

SE

R2

F

DF

0.711 97.17 81 -0.06 (-0.68)

0.715 60.30 75 0.11 (1.28) 0.03 -0.41 (0.39) (-5.25) 0.06 (0.67)

Notes: See text for definition of symbols: PED R2 F DF ()

= = = = =

0.711 58.21 74 0.722 46.03 75 0.39 (1.60)

0.800 56.11 75 0.733 37.90 74

public external debt correlation coefficient F statistics degree of freedom t statistic

Arms Imports & Third World Debt

Table 4.2

99

Discriminant Analysis Total Sample Countries Based on Economic Factor Analysis High Loadings Group II

GroupI

Country 1. Israel 2. Honduras 3. Cameroon 4. Sudan 5. Costa Rica 6. Bolivia 7. Somalia 8. Tunisia 9. Morocco 10. Guatemala 11. Malawi 12. El Salvador 13. Mali 14. Pakistan 15. Paraguay 16. Ecuador 17. Dominican Republic 18. Liberia 19. Ivoiy Coast 20. Mauritania 21. Sierra Leone 22. Panama 23. Chile 24. Chad 25. Uruguay 26. Tanzania 27. Uganda 28. Ethiopia 29. Central African Republic 30. Ghana 31. Buima 32. Sri Lanka 33. Jamaica 34. Trinidad 35. Zambia 36. Peni 37. Zimbabwe 38. Kenya

Probability of Correct Placement 59.34 83.48 60.73 66.47 92.64 86.27 86.46 68.31 73.06 54.91 91.40 65.90 97.12 86.98 60.02 56.61 74.12 94.77 84.42 96.04 86.05 94.37 70.09 87.18 67.87 79.87 38.76 70.24 76.89 78.72 82.91 75.39 90.66 77.62 95.88 71.67 85.68 86.61

Country 1. Greece 2. India 3. Nigeria 4. Indonesia 5. Egypt 6. Korea 7. Rwanda 8. Turkey 9. Spain 10. Venezuela 11. Mexico 12. Brazil 13. Algeria 14. Philippines 15. Libya 16. Colombia 17. Thailand 18. Malaysia 19. Argentina 20. Saudi Arabia 21. Kuwait 22. Syria 23.Jordan

Probability of Correct Placement 57.78 84.91 89.07 90.67 68.20 89.95 69.08 66.95 51.89 80.26 99.69 99.02 76.44 55.78 75.69 54.63 60.95 65.16 66.09 94.65 81.31 63.95 50.81

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Table 4 3

Looney

Structural and Performance Differences Between Group I and Group II Countries (Means)

Total Symbol

Group Variable

Export-External Variables TB Share of fuels, minerals in merchandise exports, 1982 H Export instability, 1968-1971 ZGB Growth in imports, 1970-1982 EGB Growth in exports, 1970-1982 BGA Growth in exports, 1960-1970 EB Share of exports in GDP, 1982 CM Current account balance, 1970 CAB Current account balance, 1982 OPCEB Share of other primary commodities in exports, 1982 IMPEB Share of food imports in merchandise imports. 1982 External PDA PDB PDPA PDEB DSEA DSEB BCffiE

Group Sample

I

II

32.4 9.1 4.0 1.8 8.0 25.2 -119.1 -382.7

23.4 -66.9 -507.7

43.6 10.8 9.5 3.9 10.1 28.3 -208.6 -178.2

44.3

55.5

27.0

14.4

15.1

13.3

412.6 2716.2 19.5 44.1 7.7 15.5

1278.4 1178.9 10.3 19.3 8.8 12.5

0.7

0.3

Debt Variables External public debt, 1970 735.5 External public debt, 1982 6098.5 External public debt as % GDP, 1970 16.1 External public debt as % GDP, 1982 34.8 External public debt as % exports, 1970 8.1 External public debt as % exports, 1982 14.4 Gross inflow of public external debt as % exports. 1982 0.6

25.2 8.1 0.7 0.4 —

Fiscal-Savings Variables AS Average national savings, 1970-1981 MS Average marginal national survey, 1970-1981 RICRYB Government revenues as % GDP, 1982 GETYB Government expenditures as % GDP, 1982 GPD Government deficits as % of GDP, 1982

17.1 12.6 20.9 26.3 -5.0

11.9 4.3 20.0 26.8 -6.2

25.8 26.3 22.8 25.4 -2.9

Composition of AB Share of IB Share of MB Share of SB Share of

23.4 30.8 14.1 45.8

27.5 25.6 13.0 46.9

16.5 39.4 15.9 44.0

4.4 20.3 5.9 22.0 3.8 298.3 2699.8 2.8

3.6 19.9 3.1 19.4 4.8 113.5 654.9 2.4

5.6 21.0 10.5 26.3 2.3 600.7 6138.8 3.5

GDP agriculture in GDP, 1982 industry in GDP, 1982 manufacturers in GDP, 1982 services in GDP, 1982

Performance Variables GDPGB Growth in GDP, 1970-1982 IMFB Inflation, 1970-1982 GDIGB Growth investment, 1978-1982 GDIB Share of investment in GDP, 1982 ICOR Investment capital output ratio, 1968-1973 GIRA Gross international reserves, 1970 GIRB Gross international reserves, 1982 AGB Growth in agriculture, 1970-1982

Arms Imports & Third World Debt

Table 4.4

Impact of Anns Imports on Third World Public External Debt in Resource Constrained and Unconstrained Countries (Standardized Estimates) Independent Variable

Equation

GNP GIRB

Constrained

H

BI

Statistics

AI

SH

SE

1?

F

0.438

28.05

37

0.514

18.54

37

0.826

52.10

36

0.746

31.35

35

0.48 (4.04)

0.885

61.33

36

0.64 (4.66)

0.851

44.16

35

0.909

62.19

36

0.885

47.65

36

0.738

15.98

20

0.797

22.34

20

0.739

11.32

20

0.34 (2.34)

(2)

0.45 (3.09)

(3)

0.06 -0.30 (0.54) (-2.49) 0.22 (1.87)

1.10 (7.78)

0.12 (1.00)

-0.63 (-5.45)

(5)

0.12 -0.28 (1.38) (-2.76)

(6)

0.25 -0.08 (2.63) (-0.80)

(7)

-0.26 0.11 (1.37) (-2.80)

0.91 (5.10)

0.44 -0.31 (4.19) (-2.91)

0.12 -0.27 (1.37) (-2.32)

0.58 (2.44)

0.47 (3.77)

(8)

Unconstrained (9)

(10)

(11)

DF~

Countries

(l)PED 0.66 (5.30)

(4)

101

0.62 (3.78) -0.20 (-1.57)

0.04 (0.26)

Countries

0.87 -0.50 (4.67) (-3.26)

-0.05 (-0.21)

0.90 -0.97 (7.73) (-4.26)

0.49 (2.25)

0.88 -0.53 -0.04 (4.46) (-2.67) (-0.19)

0.03 (0.19)

Notes: See text for definition of symbols:

PED & F DF ()

= = = = =

public external debt correlation coefficient F statistics degree of freedom t statistic

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Table 4.5

Symbol

Structural, Performance, and Defense Expenditure Differences in Third World Military and Nonmilitaiy Producers (Means)

Variable

NonArms Producers Producers

Externar 'Balance of Payments RBB -5.1 Resource balance, 1982 5.4 ZGA Growth in imports, 1960-1970 ZGB 5.7 Growth in imports, 1970-1982 EGA Growth in exports, 1960-1970 5.7 5.0 EGB Growth in exports, 1970-1982 CAA Current account balance, 1982 -353.5 CAB Current account balance, 1982 -2964.8 External Debt 1670.7 PDA External public debt, 1970 PDB External public debt, 1982 13299.1 PDP External public debt % GDP, 1970 15.5 PDPB External public debt % GDP, 1980 26.9 PBCB Public external borrowing commitments, 1982 3798.7 Public external borrowing PBCBE 1.0 commitments ECNIB Net inflow of publicly guaranteed external capital 1582.2 Fiscal Savings AS Average national savings, 1970-1981 20.2 MS Average marginal savings, 1970-1981 19.7 PCB Government consumption % GDP, 1982 — GDIB Gross domestic investment % GDP, 1982 14.0 Comsumption of GDP AB Share of agriculture in GDP, 1982 17.4 MB Share of manufacturing in GDP, 1982 18.8 EB Share of exports in GDP, 1982 30.0 Defense Expenditures ME Military expenditures, 1981 1863.7 AF Aimed Forces, 1981 240.7 MEY Military expenditure share of GDP, 1981 4.0 MEP Military expenditure per capita 112.1 Performance Variables EI Export instability index, 1967-1971 8.6 GDPGA Growth in GDP, 1960-1970 5.8 GDPGB Growth in GDP, 1970-1980 5.5 Gross international reserves, 1970 536.4 Gross international reserves, 1982 3869.9 Per capita. income 1862.3 Size Variables Area 1280.2 Gross Domestic Product, 1982 59203.2 Population, 1982 73.2

Total Sample

-12.2 6.0 3.8 9.6 -0.3 -22.0 837.8

-10.2 5.8 4.3 8.5 1.1 -127.7 -340.5

240.2 1941.3 39.9 4.7

620.5 4960.5 33.3 37.8

377.0

510.3

0.5

0.7

173.2

547.7

15.4 9.9

16.7 12.5

—

—

17.2

16.2

28.1 10.8 26.7

25.1 13.1 27.6

1013.1 71.1 5.8 158.4

1247.0 116.5 5.4 145.7

10.8 5.4 3.9 141.9 1495.6 1886.6

10.2 5.5 4.3 253.2 2148.5 1879.9

502.8 10387.5 11.3

695.0 23981.8 26.6

Arms Imports & Third World Debt

Table 4.6

Factors Affecting Third World Arms Imports in Constrained and Unconstrained Countries (Standardized Estimates) Independent Variable

Equation

103

ME

PBCB

Constrained Countries 0.13 (1) 0.93 (15.55) (2.13) (2) 0.75 0.16 (3.51) (7.19) (3) 0.67 0.12 (10.10) (2.72) (4) 0.70 0.14 (10.78) (3.19)

PRODUCE

-0.11 (-2.18) -0.10 (-2.77) -0.10 (-2.75) -0.08 (-2.07)

GEC

-0.18 (1.73)

Unconstrained Countries (5) 0.50 -0.28 -0.34 (3.08) (-2.08) (1.69) (6) 0.27 -0.11 -0.11 (-1.22) (3.12) (-1.33) (7) 0.24 -0.15 -0.12 (2.12) (-1.08) (-1.23)

Statistics AI80

() =

R

F

DF

0.948 190.03

34

0.974 275.18 0.30 (5.26) 0.974 266.10 0.30 -0.08 (5.43) (-197) 0.977 234.77

33

0.72 (7.25) 0.71 (7.05)

Notes: See text for definition of symbols: R^ = F = DF =

GNP

2

33 33

0.551

6.96

20

0.895 0.06 (0.36) 0.896

34.17

20

25.86

20

correlation coefficient F statistics degree of freedom t statistic

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Robert E. Looney

Table 4.7

Impact of Anns Imports on Third World Public Debt: Alternative Country Groupings (Standardized Estimates) Independent Variable

Equation

GNP

Non-Mineral (l)PED

(2)

(3)

GIRB

H

Statistics

BI

AI

F

DF

Oil Countries

0.77 (6.47)

-0.36 (-2.87)

0.87 (8.41)

-0.18 (-1.10)

0.70 (5.67)

-0.22 (1.58)

0.22 (1.48)

0.18 (2.01)

0.682

25.77

52

0.12 (0.79)

0.22 (2.22)

0.673

24.13

51

0.31 (1.88)

0.25 (2.65)

0.705

21.97

51

0.17 (133)

0.888

35.94

22

-0.69 (-2.98)

0.01 (0.04)

0.907

43.65

22

-0.74 (-3.87)

0.11 (1.22)

0.941

54.10

22

0.18 (1.08)

0.03 (0.16)

0.695

21.68

42

0.14 (0.78)

0.06 (0.46)

0.724

18.37

32

0.37 (5.59)

-0.06 (-1.12)

0.958

189.04

37

0.01 (0.02)

0.12 (0.70)

0.586

11.72

37

0.39 (2.44)

Mineral Oil Countries (4)

0.53 (6.67)

-0.44 (-2.88)

(5)

1.03 (12.00)

0.08 (0.32)

1.52 (8.88)

0.34 (1.44)

(6)

Low-Income (7)

(8)

-0.06 (-0.36)

Countries

0.84 (5.62)

-0.55 (-3.45)

Military

Governments

(9)

0.68 (11-13)

Civilian (10)

-0.70 (-3.14)

Countries

0.70 (4.29)

High-Income

-0.64 (-2.15)

-0.03 (-0.59)

Governments 0.92 (4.84)

-0.60 (-2.79)

Notes: See text for definition of symbols: PED R2 F DF 0

= = = =

public external debt correlation coefficient F statistics degree of freedom t statistic

John M. Rothgeb Jr.

Direct Foreign Investment, Repression, Reform, and Political Conflict in Third World States Foreign economic influences often are depicted as having a profound effect u p o n the political and social conditions of less-developed countries, and as creating circumstances that strongly affect the degree to which political conflict occurs. Many scholars regard the direct foreign investment of multinational corporations as among the most powerful of these influences. 1 While there is general agreement that multinational corporations are important actors in local politics in host states, one finds that there is little consensus in the international political economy literature as to the precise nature of the role that foreign firms play. Depending upon the source one consults, foreign corporations may be described either as creating a climate in which political conflict increases in frequency or as producing a situation in which domestic tensions decrease and the probability of conflict is reduced. For the most part, the crux of the dispute concerning the role of foreign investments centers around how theorists view the interplay b e t w e e n the vast capabilities and influence the corporation is presumed to have and the assumption made by many scholars that the political processes in host countries greatly affect the corporation's ability to do business profitably. Most scholars regard multinational corporations as having vast resource bases, possessing great influence (intended or otherwise) in poor countries. One also finds widespread agreement both a m o n g those w h o are very critical of foreign investments and those w h o are more supportive that certain domestic environments are perceived by corporate officials as more conducive to doing business than others. Key areas of disagreement emerge regarding the type of political atmosphere preferred by multinational firms and whether the corporation uses its capabilities and influence to 105

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mold the domestic environment to suit its tastes. As Leonard (1980: 455) and Caves (1982: 252) note, the result of this disagreement has been an extensive debate and much conjecture—with little systematic empirical research—about the political role played by foreign investments in underdeveloped countries. The purpose of this chapter is to explore systematically the effects of direct foreign investments upon political conflict in Third World states. Political conflict is defined as overt public action by nongovernmental actors that protests governmental policy and is designed to induce a change either in the policy or in the composition of the government. As shall be described below, foreign investments are discussed in the literature as having many effects (both direct and indirect) upon political conflict resulting from the impact of a large foreign corporate presence on local social conditions and the host government's inclination to use repression and/or enact reform programs to benefit the people. In addition, the effects of foreign investments are treated by many analysts as varying according to the sector in which the investment is located,2 and according to whether one examines stocks or flows of foreign investments.3 An attempt shall be made in this chapter to investigate carefully the specific mechanisms (both direct and indirect) that link foreign investments (both stocks and flows) to political conflict. FOREIGN INVESTMENT AND POIHICAL CONFLICT Foreign Investment as a Malevolent Influence The starting point for the present analysis is the consideration of the views found in the international political economy literature. As mentioned above, the views found in the literature range from those that are highly critical of the role of foreign investments to those that are more favorable. One set of critical views focuses upon the absolute size of the foreign presence. It is based upon the assumption that foreign firms perceive social stability as essential for protecting their property and that they use the strength derived from a large p r e s e n c e in underdeveloped countries to mold the domestic environment to suit their preferences. The corporation is depicted as promoting stability by cooperating closely with the local governmental elite, which the foreign firm assists in maintaining its dominant social position in e x c h a n g e for the creation of domestic social circumstances guaranteeing easy profits. As Baran (1957: 195) states, the result of this association "is a political and social coalition of wealthy compradors,

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powerful monopolists, and large landowners dedicated to the defense of the existing feudal-mercantile order." Within this context, the regime becomes dependent upon the foreign firm (Bodenheimer, 1971: 174) and is "largely incapable of independent action or initiative" (Magdoff and Sweezy, 1971: 111). Richardson (1978: 7-8) observes that many authors believe the collaboration between foreigners and the local elite has severe detrimental effects upon the host society as a whole. Three basic political consequences are discussed as resulting from such a situation. The first is that the local governmental elite has little incentive to institute social reforms because its position of social dominance is guaranteed by the foreign firm (Brundenius, 1972: 200; Magdoff, 1976: 216-217; Rubinson, 1977: 8-9). As a result, the dependent regime does not need to open the political process to allow greater participation by nonelite segments of society. "Peasants and workers are largely excluded from the political arena," according to Magdoff and Sweezy (1971: 112). In addition, its overly close relationship with foreigners leaves the regime "void of any legitimacy as a ruling class" (Pinelo, 1973: x). The second political consequence is a product of this lack of legitimacy, for the regime is forced to rely upon repression to hold on to power. As Baran (1957: 195) argues, "this regime has no real political basis in city or village, lives in continual fear of the starving and restive popular masses, and relies for its stability on Praetorian guards of relatively well kept mercenaries." Bodenheimer (1971: 178) agrees, stating that "dependent or comprador governments, subservient to foreign interests, are forced to employ overt oppression." The final political consequence is a higher level of political conflict. Such conflict is seen as the end result of the lack of social reform and overreliance on repression. This disinterest in reform and the increased use of repression is regarded by many analysts as especially prevalent when foreign investments center upon the manufacturing sector. Evans (1979) explains that the reason for this is that manufacturing investments are perceived by host governmental officials as creating the opportunity for rapid growth in the local economy by providing entrepreneurial talent, capital, and technology. Securing these valued corporate contributions, however, is perceived locally as requiring the guaranteed protection of corporate assets and the creation of the proper climate for doing business (Fagen, 1978: 292-295; Cardoso and Faletto, 1979: 163-164; Sunkel, 1979: 223). In addition, the taste of potential economic success that accompanies foreign manufacturing investments creates a local emphasis on progress.

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Within the context of pursuing progress, speed and efficiency become paramount concerns, for there is a desire to move ahead as rapidly as possible. The result is a hard attitude toward extending political participation and inaugurating reform. Opening the political process and instituting reforms require the allocation of resources. Such expenditures would detract from the vast resources required for quick development. Moreover, wider political participation is described as being perceived locally as inefficient, for it involves the use of valuable resources to allow nonspecialists to take part in making key social and economic decisions. Hence, nonelite political participation and social reforms are opposed, and repression is used to maintain order (Fagen, 1978: 292-295; Evans, 1979: 29-31; Leonard, 1980: 40046l). The result of these attitudes is increased political protest. Another set of critical views concentrates on the host government's reaction to an increasingly higher level of foreign participation in the host economy. A rapidly expanding foreign presence (due to higher flows) is described as creating the specter of foreign domination. Such domination threatens the host government's independence of action, which Krasner (1981: 121) and Dolan, Tomlin, von Riekhoff, and Molot (1982: 391-392) discuss as being important to local officials. Cardoso and Faletto (1979: 165) and Duvall and Freeman (1981: 113) maintain that the government responds to this situation by expanding its role in society, thereby seeking to counterbalance the role played by foreigners. The expansion of governmental activities finds its expression as the state takes on the role of entrepreneur (Duvall and Freeman, 1983: 533). As an entrepreneur, the state becomes increasingly businessoriented and concerned with the single-minded pursuit of growth and development. The upshot is a government that focuses too much on counterbalancing, becoming divorced from the people. This leads to a failure to ensure that the benefits of development reach the masses through the promotion of reforms, a failure that increases the probability of political protest and conflict (Cardoso and Faletto, 1979: 166-170; Duvall and Freeman, 1981: 109). In addition to forcing the state to act as an entrepreneur, an expanding foreign presence leads to conflict because it affects local social-class relations. Jackson, Russett, Snidal, and Sylvan (1978: 633) state that this leads to the "increasing cultural dependence of the regime on the capitalist center [which] will weaken the traditional class base of the state." Foreign investors are depicted as introducing foreign values and culture that are accepted by the local elite as superior to indigenous customs (Cardoso and Faletto, 1979: xvi; Sunkel, 1979: 223; Mahler, 1981: 272). Chief among these values are an attachment to the

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pursuit of progress and a consumer orientation (Barnet and Muller, 1974: 172-178; Muller, 1976: 260; Mahler, 1981: 272). Acceptance of these foreign values and the pursuit of conspicuous consumption create an ever-wider gulf between the rulers and the ruled (Leonard, 1980: 464; Mahler, 1981: 272). The result is an increasing marginalization of the masses, who are not participants in the new consumer society (Jackson, et al., 1978: 631; Bornschier and Ballmer-Cao, 1979: 631). Frustration and resentment build among the people, and political protest is the end product (Jackson, et al., 1978: 634).

Foreign Investment as a Liberalizing Influence Theorists w h o take a more sympathetic v i e w of multinational corporations have different conceptions regarding the relationships between foreign investments, reforms, repression, and political conflict. Scholars from this group build their analysis on the assumption that foreign investors seek to fit unobtrusively into the social and political environment found in Third World states and do not use their capabilities to mold the domestic arena. Vernon (1976: 47-48) argues that the internationally oriented strategies of multinational corporations dictate that they f o r g o too close a political involvement in any particular host state lest it restrict their ability to attain key corporate objectives. Indeed, a firm's foreign origins cause it sufficient suspicion so that it is forced to avoid becoming too involved in local politics because such participation might hamper its ability to do business (Frank, 1980: 41). Of course, foreign firms are inevitably drawn into local political and social issues, but most authors from this school of thought regard such activities as minimal. It is within this context that foreign investments are discussed in terms of their effect on local political and social processes. A n important impact on the local scene is regarded as resulting from the increase in resources that comes from corporate activities. Reuber (1973: 218) states that in underdeveloped countries, the inflow of capital from abroad constitutes a substantial addition to society's overall resource availability, allowing the government to increase its implementation of reforms. Vernon (1976: 51-52) and Frank (1980: 30) see a similar effect, maintaining that foreign investment stimulates the sort of economic activity that leads to an expanding pool of resources that may be used by the government. Liberal theorists do not deny that foreign influences encourage consumption by the elite, but they argue that the result is not a grossly distorted class structure and a refusal to institute social reform (Vernon, 1972: 181-185; 1977: 53). Instead, they see a trickle-down effect

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wherein corporate activities and increases in investments lead to an expansion of resources that results in new social programs (Reuber, 1973: 37, 218; Frank, 1980: 31). Foreign investment also is regarded as providing technology that allows for the more efficient use of local resources and a greater ability to promote reform (Gilpin, 1975: 58). While foreign investment is seen as disruptive to the host society, it is not for the reasons discussed above, since multinational firms are not regarded as having a dampening effect on political participation or the legitimacy of the host government. Increases in political conflict are treated as products of such direct effects as the introduction of new values that undermine local culture and traditions and the clashes b e t w e e n foreign investors and some members of the local elite (Leonard, 1980: 46l). Staley (1979: 198-199) states that less-developed countries often have a difficult time assimilating the value structures and business methods associated with foreign investments. This especially may be true w h e n the investment occurs in the more modern sectors of the host economy, such as manufacturing. Vernon (1977: 53-54) and Rothgeb (1984a: 12-13) note that the advertising associated with investments in manufacturing fosters new conceptions of social relations. Richardson (1978: 4) sees foreign manufacturing firms as introducing a consumption orientation to societies in which most of the people cannot afford such a life-style. In each case, a higher probability of dissatisfaction and conflict is created. Friction between foreign investors and the local elite also emanates f r o m the r e s e n t m e n t that local nationalists, intellectuals, and b u s i n e s s m e n feel toward what they see as foreign exploitation (Vernon, 1971: 197; Moran, 1978: 93-94). Moran (1974: 10, 180) maintains that such conflict will focus especially on mining firms, which are seen locally as particularly exploitative. As Sklar (1975: 176) notes, extraction enterprises contribute to domestic political tensions b e c a u s e they increasingly are p e r c e i v e d as p r o v i d i n g m e a g e r compensation for the removal of valuable local resources. Thus, mining investments foster friction and increase the likelihood of political conflict in the host country.

SUMMARY AND PREVIOUS EMPIRICAL RESEARCH The above arguments represent a diverse set of views regarding the relationship between foreign investments and political conflict in underdeveloped host countries. One finds basic agreement that foreign investments directly increase the probability of conflict through the introduction of alien values; these values create friction between the

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more privileged and the less-well-off segments of the local population. This direct effect is seen as being most closely associated with investments in the manufacturing sector and with high flows of foreign investments. One also finds that foreign investments are depicted as affecting political conflict indirectly via a prior impact u p o n the host government's implementation of reform and its use of repression. Analysts differ considerably, however, in their assessment of how foreign investments affect reform and repression. Some theorists view foreign presence as malevolent, seeing it as creating governments that are overly reliant upon foreigners, refuse to implement reforms, and are quick to resort to repression. Investments in the manufacturing sector and high flows are treated as particularly likely to lead to these circumstances because they create an emphasis on progress and counterbalancing. Political conflict is described as the end product of this sort of situation. Other theorists see foreign investments as having a more liberal effect that results from the increased resource availability stemming from a larger foreign presence. More resources are regarded as laying the foundation for more reforms, translating into a more satisfied population that is less likely to engage in political protests. Foreign investments in manufacturing and higher flows make especially important contributions to the enhancement of local resources. Investments in resource extraction, however, are discussed as being associated with more conflict because they are viewed locally as exploitative. Considering the extensive discussion of the relationship between foreign investment and political conflict that is found in the literature, it is somewhat surprising that few analysts have conducted systematic empirical investigations of the relationships between these variables. Previous systematic research on the role of foreign investment in underdeveloped countries has tended to center around the effects of such investments on economic growth. Examinations of the social effects of foreign investments generally have focused on social distribution and inequality rather than political conflict and governmental policy. Bornschier, Chase-Dunn, and Rubinson (1978: 653-670) and Bornschier and Chase-Dunn (1985: 69-71, 117-130) provide excellent summaries of these studies, and, there is no need to repeat that exercise here. Among the work to date, only a few studies have investigated the effects of a multinational corporate presence u p o n the host government. Rubinson (1977: 20) found no relationship between the income foreign investors earn from their holdings and governmental

112

John M. Rothgeb, Jr.

strength, and Mahler (1981: 288) found a positive relationship between stocks of investment in mining and the direct taxes collected by the government. Only Rothgeb (1987a) has examined the effects of foreign investment on political conflict, finding that higher stocks are associated with more conflict. This study, however, failed to compare the effects of stocks and flows of foreign investments; it did not seek to determine whether foreign investments affect political conflict indirectly by way of prior relationships with reform and repression. There is therefore a basic need for a systematic analysis of the effects of foreign investment on political conflict. Such an investigation follows. THE RESEARCH DESIGN A cross-national design was employed in this research. Data was gathered for eighty-four countries classified by the World Bank (1976, 1980, 1983) as underdeveloped. Problems of data availability precluded the analysis of a larger sample of states. 4 States classified by the Organization for Economic Cooperation and Development (OECD) as offshore banking centers or by the World Bank as capital exporters were not included in the sample. Offshore banking centers were omitted because the offshore activities greatly inflate foreign investment scores (Rothgeb, 1984b: 1,066). The exclusion of capital exporting states is suggested by Jackman (1982: 192).5 (The nations included in the data set are listed in Data Appendix 5.1.) The dependent variable is political conflict (see the definition as discussed in the early pages of this chapter). Data from the Conflict and Peace Data Bank (COPDAB) domestic scale was used to measure political conflict.6 COPDAB contains events data for a sample of 135 countries for the years 1948 to 1978 (see Azar, 1980: 142-152; 1982: 3036). The domestic file codes the political and social behavior found within the countries in the data set on a scale that seeks to capture the degree and type of cooperation and conflict displayed. Value 10 on this scale represents acts of political conflict, including such things as public demonstrations against governmental policy, politically inspired strikes, calls for the resignation of governmental officials, widespread criticism of government policies, and the distribution of antigovernment propaganda. Such behavior corresponds well to political conflict as it is conceptualized in the above discussion. The political conflict (abbreviated PolCon) scores were computed as the total number of domestic events coded 10 divided by the total number of events that were coded for each COPDAB state. Separate

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scores were computed for each of the time periods examined (see below). Proportions were used for the political conflict scores (and for the reform and repression scores discussed below) because, as Hoggard notes (1974: 355-359), the failure to do so leads to situations whereby states with large total numbers of events (which may be a function of the news sources used to compile the data base) have high scores, even though only a small percentage of their total events may be of any particular type. Rothgeb (1982-1983: 48) recommends the use of proportions as a means to address this problem. 7 Political conflict was conceptualized as a function of stocks and flows of foreign investment, domestic political reform, and governmental political repression. In addition, the total population, which served as a control for the size of the host country, was included in the analysis.8 Data was gathered for the stock of foreign investment in the manufacturing and mining sectors. Stocks were measured as the total value in U.S. dollars of the holdings of non-nationals in each of these sectors, divided by the gross domestic product (GDP) from the manufacturing and mining sectors.9 This weighting procedure is widely used by other researchers (see Jackman, 1982: 187-188; Rothgeb, 1984b: 1087; 1984-1985: 12). The sources used to obtain the data for stock of foreign investment and all other variables used in this analysis are in Data Appendix 5.2. Data pertaining specifically to the flows of foreign investment was not available. Consequently, the operationalization of flows was based on the change over time in the value of stocks of foreign investment. This measurement procedure is frequently used by other scholars (see Bornschier, Chase-Dunn, and Rubinson, 1978; Dolan and Tomlin, 1980; Bornschier, 1981; Jackman, 1982; Bornschier and Chase-Dunn, 1985; Rothgeb, 1986b). Because sectoral breakdowns for stocks were available for only one year (1967), the measure of flows was based upon changes in total investment. As suggested by Jackman (1980: 606; 1982: 188), flows were calculated by using the continuous growth formula discussed by Taylor and Hudson (1972: 286): Growth (in flows) = Ln ((Vtn / Vtl) / n) where Ln = natural logarithm Vtn = the value of the variable (in this case, total stocks of foreign investment) in the last year of the time period Vtl = the value of the variable (total stocks of foreign investment) in the first year of the time period n = the number of years between tl and tn. Domestic reform and governmental repression were measured by

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John M. Rothgeb, Jr.

using the COPDAB domestic scale. Political reform was operationalized as the proportion of total events for each country that were coded as 2. Value 2 on the COPDAB domestic scale represents governmental actions to promote political rights and equality, including extending the constitutional rights of citizens, reforming the judicial system, increasing the availability of public education, and instituting free elections. Political repression was measured as the proportion of total events for each country that were coded as 11. A value of 11 on the COPDAB scale represents governmental restrictions on political and social freedom, represented by such things as the imposition of a curfew, restrictions on travel and internal movement, the establishment of censorship, the abolition of civil and political rights, and charging the political opposition to the government with treason. In each case, these values on the COPDAB scale correspond to the conceptions of political reform and repression found in the discussions in the literature. Standard multiple regression analysis was used to examine the relationships among foreign investment, political reform, political repression, and political conflict. The use of this technique allows one to investigate the effect of the independent variable on the dependent variable while statistically controlling for other variables (Lewis-Beck, 1980: 49-51). Scatterplots of the bivariate relationships between the independent and dependent variables were examined to check for nonlinear associations. No apparent patterns were found. 10 A check for outliers was performed with the use of Cook's D. The country with the highest Cook value in each regression equation was omitted from the analysis.11 As suggested by Lewis-Beck (1980: 60), the independent and control variables were regressed on one another to check for multicollinearity. Relationships were found between some of the variables—in particular, stocks of foreign investment in manufacturing were significantly related (p< .05) to flows, reform, and repression. In order to determine whether these relationships affected the reported results, separate regression equations were used to examine the individual effects of each of these variables on the dependent variable. In each case, the results from using these separate equations closely conformed to the reported findings. Testing for the direct effects of stocks and flows of foreign investment upon political conflict involved the use of the following regression equation: 1. PolCon = a + blStock + b2Flow + b3Pop + e When manufacturing investments were examined, the Stock term in the above equation was the measure for manufacturing stocks.

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When mining investments were investigated, the measure for mining stocks was included instead. Investigating the indirect effects of stocks and flows upon political conflict required the use of several sets of regression equations (see Nie, Hull, Jenkins, Steinbrenner, and Bent, 1975: 386-387; Asher, 1976: 11-20). The first analyzed the separate effects of reform and repression upon political conflict: 2. PolCon = a + blReform + b2Pop + e 3. PolCon = a + blRepress + b2Pop + e The second examined the effects of stocks and flows upon reform and repression: 4. Reform = a + blStock + b2Flow + b3Pop + e 5. Repress = a + blStock + b2Flow + b3Pop + e Finally, the effects of stocks and flows upon political conflict were investigated while controlling separately for reform and repression: 6. PolCon = a + blStock + b2Flow + b3Reform + b4Pop + e 7. PolCon = a + blStock + b2Flow + b3Repress + b4Pop + e As was the case with the first equation, the above equations were analyzed separately to examine the effects of stocks of foreign investment in mining and manufacturing. Both synchronic and time-lagged analysis were employed to test for the short and long-term effects of foreign investment, reform, and repression on political conflict. Synchronic analysis, in which the independent and dependent variables are measured at the same point in time, allows for the testing of immediate relationships. Time lags allow the examination of the longer-term associations between the variables. Time-lagging is accomplished by measuring the independent variables for one period and the dependent variable for a subsequent point(s) in time. As McGowan (1975: 66) notes, such analysis is useful for ascertaining causal direction since causes must precede effects. Time lags of three, six, and nine years were investigated to determine the effects of foreign investment and total population (the control variable) on political conflict in periods beginning three, six, and nine years after foreign investment was measured. The lagging for reform and repression was done somewhat differently. For these variables, the impact on political conflict was treated as cumulative. The effect was conceptualized as a product of immediate reforms (or acts of repression) plus past reforms (or repressive acts), which presumably contribute to the overall social atmosphere found in any particular society.

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The periods examined were 1967-1969, 1970-1972, 1973-1975, and 1976-1978.12 The synchronic analysis involved measuring all the variables for the 1967-1969 period. Stock of foreign investment and total population were measured for 1967. Reform, repression, and political conflict were measured for 1967-1969. Flows were measured for 1967-1971 (the closest approximation to 1967-1969 for which data was available). For the time-lagged analysis, the measures of stocks, flows, and total population were the same as for the synchronic analysis. Political conflict was measured for 1970-1972 (a three-year lag), 1973-1975 (a six-year lag), and 1976-1978 (a nine-year lag). The cumulative measures of reform and repression, involved data for 1967-1972 for the three-year lag, 1967-1975 for the six-year .lag, and 1967-1978 for the nine-year lag.

RESULTS The first set of results pertains to the direct effects of foreign investment u p o n political conflict, political reform, and political repression. These findings are reported in Tables 5.1 through 5.3. Table 5.1 reveals that the effects of foreign investment upon political conflict appear to vary according to whether one considers stock or flows and the sectoral location of the investments. Stocks in manufacturing are associated with less conflict, while flows and stocks in mining are related to higher levels of conflict. Both effects occur immediately, although flows are weakly related to more conflict after six years. The relationships between foreign investments and political reform are found in Table 5.2. Here one finds a relatively strong positive immediate association between stocks in manufacturing and reform. A h i g h e r stock of m a n u f a c t u r i n g investments is related to the inauguration of more political reforms. Although its strength fades somewhat, this relationship continues for nearly a decade (the end of the six-year lag period). In addition to the manufacturing results, one finds a w e a k immediate negative association b e t w e e n mining investments and political reform. Flows of foreign investment appear to be unrelated to the implementation of political reforms. Table 5.3 reports the findings pertaining to the associations between foreign investments and political repression. The strongest relationships are f o u n d b e t w e e n stocks in m a n u f a c t u r i n g and repression. Higher levels of manufacturing investments are associated immediately a n d over time with fewer repressive acts by th'e government. Early on, this relationship is relatively weak. Over time, however, the strength of the relationship builds. This finding,

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juxtaposed with that for reform, suggests that a large foreign manufacturing presence has a liberalizing influence upon the host government, providing it with the resources to implement reforms and reducing its inclination with time to use repressive policies. Flows of foreign investment also are weakly associated with less repression. This relationship only appears after three years and is most evident only when stocks in manufacturing are in the regression equation with flows. This finding implies that flows have their greatest effect in situations in which stocks in the manufacturing sector are high. Mining investments are not related to repression. The next set of findings relates to the effects of political repression and political reform on political conflict (see Table 5.4). No relationship was found between repression and political conflict. Higher levels of political reform, however, were related consistently over time to lower incidents of political conflict. The positive association between stocks of foreign investment in manufacturing and political reform found in Table 5.2 and the negative relationship found here between reform and conflict points to a possible indirect negative effect by manufacturing investments on conflict by way of the prior effect on reform. This shall be explored in more detail below. Results indicate that political repression of the sort examined herein is neither sufficiently severe to reduce the incidence of conflict nor provocative enough to incite trouble. At the same time, the extension of political reforms appears to diminish the incentive to engage in political protest. This implies that much of the protest one finds is geared toward acquiring political rights of one sort or another. Future research should examine in greater detail the precise relationship between varying degrees of severity in repression and political conflict; it also should focus more exactly on the nature of the association between differing types of reform and the resort to political protest. The effects of foreign investments upon political conflict while controlling for political reform are found in Table 5.5. These results show that the relationship between manufacturing investments and political conflict are wholly indirect, occurring as a product of the relationship between manufacturing investments and reform. When political reform is in the regression equation, the negative synchronic relationship between manufacturing investments and political conflict disappears. At the same time, the negative relationship between reform and conflict found in Table 5.4 is virtually unaffected by the inclusion of manufacturing investments in the regression analysis. The tendency to associate mining investments and flows with more conflict, however, largely is unaffected when reform is included in the analysis.

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The final group of findings are for the impact of foreign investment on political conflict while controlling for repression. The results in Table 5.6 show that a control for repression has little effect upon the general pattern of the associations between stocks and flows of foreign investment and political conflict. Manufacturing investments are negatively associated with conflict early on, while mining investments and flows are positively associated. The only variations from the results in Table 5.1, where there was no control for repression, are the slightly stronger three-year-lag results for manufacturing investments and the slightly weaker six-year-lag results in the manufacturing equations for flows. Repression remains unrelated to conflict when it is analyzed with foreign investments.

SUMMARY AND CONCLUSIONS The foregoing analysis tends to support the views of scholars who argue that foreign investments have a liberalizing effect upon Third World societies. Higher stocks of manufacturing investments were related to the increase in the implementation of political reform, the decrease in political repression, and less political conflict by way of their prior effect u p o n political reform. Higher flows of foreign investments do seem to introduce foreign values that disrupt the social circumstances in poorer countries. This disruption, however, appears to be relatively short-lived and is not accompanied by the refusal to extend reforms and increased repression that many critics of foreign investments describe. Indeed, there is some evidence that flows reduce the resort to repressive tactics when they are accompanied by a high stock of investment in manufacturing. Finally, mining investments are associated with more political protest early on but are unrelated to governmental grants of reform or acts of repression. These findings imply that investments in resource extraction are politically controversial but the effects are ephemeral. Beyond this, investments in this sector appear to have a very limited effect upon the host country. This result parallels closely Rothgeb's (1984-1985) analysis that indicates these types of investments have very little effect on underdeveloped countries, and the work by Pinelo (1973: 12-13), Vernon (1977: 49), and Mahler (1981: 273), who wrote that mining investments center in foreign enclaves that have few local contacts but that are the center of resentment. These results have two basic implications, the first involving the development in Third World states. In general, foreign investments do not appear to drain resources from the pursuit of economic growth and

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development by creating extensive conflict that the government must spend considerable time and money resolving. This especially is true when the foreign investments are in the manufacturing sector. Higher inflows and mining investments are related to more conflict early on. In the c a s e o f flows, h o w e v e r , this p r o b l e m is o f f s e t b y t h e contribution that flows make to economic growth (see Bornschier, 1981; Bornschier and Chase-Dunn, 1985; Dolan and Tomlin, 1980; Jackman, 1982; Rothgeb, 1984-1985). The second implication is that foreign investments, particularly those in manufacturing, appear to foster a greater respect for human rights by the host government. One might speculate this is so because s u c h i n v e s t m e n t s t e n d to i n t e g r a t e the h o s t c o u n t r y into the international arena. Such an integration leads to greater awareness of international standards and creates a greater desire for conformity so that a government's domestic behavior will not become a barrier to the expansion of international contacts and opportunities. In considering these conclusions, a note of caution should b e stressed. The above results are general patterns that should not b e mistaken for uniformly applicable rules. Considerable research must still b e done. In particular, attempts should be made to determine whether some types of states are more or less prone to follow these patterns. In addition, it would b e useful to explore the relationship between foreign investment and more severe forms of conflict and governmental instability. For now, however, one may conclude that the findings from this research indicate that foreign investments in manufacturing have a generally liberalizing effect upon underdeveloped host countries. NOTES 1. Direct foreign investments are-defined as those in which a foreignbased corporation retains significant managerial control over the facilities and resources acquired as a result of an inflow of capital from abroad. 2. In particular, most analysts distinguish between investments in the manufacturing and mining (resource extraction) sectors. 3- Stocks are defined as the total value of the holdings of foreign investors in the host state. Flows are the value of new capital introduced into a country during a specific period of time. Bornschier, Chase-Dunn, and Rubinson (1978: 653-670), Bornschier (1981: 381-382), and Bornschier and Chase-Dunn (1985: 80-82) discuss the differences between stocks and flows and describe the relationship each has with economic growth. 4. The author is aware of the problems discussed by Mahler (1980, 5-13) regarding the use of cross-national designs but agrees with the conclusion that such research provides valuable insight into the relationships investigated. It

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should be noted that the actual sample size of each statistical test is less than eighty-four due to missing data for some countries in the data set. The SPSSX (1983) package was used to conduct the analysis. A "Select IP1 command was used to sort out only cases for which there were complete data. The problem of missing data tends to affect states from all geographical regions of the Third World and therefore should not introduce undue bias into the results. Lists of the specific countries included in each statistical test are available from the author upon request. 5. Capital-exporting underdeveloped states are defined as those in which the outflow to other countries of direct and portfolio investments made by nationals exceeds the inflow from other countries of such investments made by non-nationals. Such countries are excluded from the analysis because their capital needs, and hence their relationships to multinational corporations, may be expected to vary substantially from underdeveloped countries in which the inflow exceeds the outflow. Rothgeb (1987a) notes that the reliance upon capital from abroad is one of the fundamentally most important factors involved in determining how underdeveloped host societies are affected by foreign investments. Given this situation, it appeared advisable to exclude capital exporting countries from the analysis. 6. COPDAB was selected in preference to other events data sets for four reasons: (1) its sample of states has the greatest overlap with those for which foreign investment data was available, (2) it is based upon the use of multiple news sources (seventy in all), (3) the time periods covered were well suited to the present needs, and (4) the COPDAB domestic scale was extremely useful for the operationalizations needed herein. Excellent discussions of the use of events data are available from Burgess and Lawton (1975) and Kegley (1975). 7. It has been brought to the author's attention that a weighting procedure of the sort used herein creates the possibility of inflated scores for countries having very few total events. This problem was investigated very carefully. One technique employed for examining the problem was to conduct a T-test comparing the average weighted score for each time period for groups of countries with a total number of events falling above and below the mean number of total events. If inflated scores due to low total numbers of events are a problem, then countries with fewer events should have significantly higher scores. In no case was this true. A T-test also was conducted for each time period for countries with total events falling above and below the median number of events. Again, countries with fewer events did not have higher scores. A final test was conducted using a Wilcoxon two-sample test to examine the rank ordering of the twenty highest weighted scores for each time period. If low total numbers of events create a problem, then countries with total numbers of events that are below the mean (or median) should cluster in this top group of scores. In no case was there any evidence of this. In light of the results of these tests, it seems reasonable to conclude that the use of weighted scores does not lead to difficulties. 8. In any analysis of this sort, many variables must be considered as possible controls. The specific variable selected herein does not exhaust the possibilities. Total population was selected because it is discussed in the

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literature as affecting the role played by foreign investment in underdeveloped countries (Jackman, 1982: 188). Total population was logarithmically transformed because it is skewed. 9. Constant 1970 U.S. dollars were used in calculating all monetary values used in this analysis. The sources used to obtain the data reported monetary values in U.S. dollars; thus, there was no need to convert local currency to dollars. When monetary values were not reported in 1970 dollars, the deflator for GDP provided by the World Bank (1976, 1980, 1983) was used. 10. The reader should realize that this does not imply that all relationships followed absolutely linear patterns. Instead, it means that no clear nonlinear patterns were found to warrant data transformations. 11. In no regression equation did more than one country in the sample have a Cook value that was significant at the p < .05 level. The results based on samples that included outliers are available from the author upon request. 12. Data for the sectoral location of stock of foreign investment only is available for 1967. Hence, it is not possible at present to investigate the effects of foreign investment in the more recent or the more distant past. It should be noted that the political and social behavior measures were based upon threeyear averages, when possible, because figures for single years often reflect idiosyncracies (Weisskopf, 1972: 29).

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Table 5.1 Time Lag

Foreign Investment and Political Conflict Stock

Flow

Population

R2

N

Manufacturing Investments No Lag Three-Year Six-Year Nine-Year

-.28 b -.21 -.16 -.20

,28b .19 .24» .13

-.03 .11 .20 .20

.11 .06 .12 .08

54 55 54 54

.25 .03 .09 .05

52 53 52 52

Mining Investments No Lag Three-Year Six-Year Nine-Year

.48c .13 .03 .14

,25b .18 .26" .12

.20 .21 .25" .29"

Beta weights are reported. R is adjusted for the number of independent variables in the equation and for the sample size. a. p < .10 b. p < .05 c. p < .001

Table 5.2 Time Lag

Foreign Investment and Reform Stock

Flow

Population

R2

N

.15 .14 .11 .08

54 55 54 54

.10 .11 .06 .03

52 53 52 52

Manufacturing Investments No Lag Three-Year Six-Year Nine-Year

.37® ,31b .25a .21

-.08 .04 .04 .02

-.15 -.24" -.25* -,24 a

Mining Investments No Lag Three-Year Six-Year Nine-Year

-.26® -.21 -.06 -.09

-.08 .04 .03 .03

-36b -,43 e -36b -.32 b

Beta weights are reported. R 2 is adjusted for the number of independent variables in the equation and sample size. a. p < .10 b. p < .05 c. p < .01

Foreign Investment in Third World States

Table 5.3 Time Lag

123

Foreign Investment and Repression Stock

Flow

Population

R?

N

.02 .18 .15 .20

54 55 54 54

-.04 .11 .06 .07

52 53 52 52

Manufacturing Investments No Lag Three-Year Six-Year Nine-Year

-.28" -29b -.32 b -.36«

-.08 -.21" -.24" -.25»

-.01 ,28b .20 .20

Mining Investments No Lag Three-Year Six-Year Nine-Year

-.12 -.15 -.06 -.10

-.06 -.19 -.22 -.23®

-.02 •29b .26a .25»

Beta weights are reported. R? is adjusted for the number of independent variables in the equation and for the sample size. a. p < .10 b. p < .05 c. p < .01

Table 5.4 Time Lag No Lag Three-Year

Political Reform, Political Repression, and Political Conflict Repress -.08

Population

-,35 e

.07 -.01

-.03 .09

57

.21 .15

.02 .06

57

-.23" -.36 e

.27a .13

.04 .14

56

-34b

.15 .10

.03 .11

57

.03

Six-Year

-.16

Nine-Year

.17

R*

N

Reform

Beta weights are reported. R 2 is adjusted for the number of independent variables in the equation and sample size. a. p < .10 b. p < .05 c. p < .01

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Table 5.5 Time Lag

Foreign Investment, Political Reform, and Political Conflict Stock

Flow

Reform

R2

N

-.07 .05 .11 .12

.16 .10 .22 .15

54 55 54 54

.08 .06 .11 .17

.33 .11 .21 .14

52 53 52 52

Population

Manufacturing Investments No Lag Three-Year Six-Year Nine-Year

-.17 -.13 -.07 -.13

,25 s .20 ,26 b .13

-.29 b -.26® -,37 e -.31 b

Mining Investments No Lag Three-Year Six-Year Nine-Year

.40e .06 .00 .11

.22a .19 ,27 b .13

-33b -33b -38b -35b

Beta weights are reported. R^ is adjusted for the number of independent variables in the equation and sample size. a. p < .10 b. p < .05 c. p < .01

Table 5.6 Time Lag

Foreign Investment, Political Repression, and Political Conflict Stock

Flow

Reform

Population

R2

N

Manufacturing Investments No Lag Three-Year Six-Year Nine-Year

-.32 b -.24» -.21 -.14

.26a .17 .21 .17

-.16 -.13 -.16 .18

-.03 .14 .23® .16

.12 .06 .12 .08

54 55 54 54

.20 .21 .27" .22

.23 .01 .08 .09

52 53 52 52

Mining Investments No Lag Three-Year Six-Year Nine-Year

.48d .13 .02 .16

.25» .18 .24a .18

-.01 -.02 -.09 •26 a

Beta weights are reported. R^ is adjusted for the number of independent variables in the equation and sample size. a. p < .10 b. p < .05 c. p < .001

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Data Appendix 5.1 Countries in the Data Set Afghanistan Algeria Angola Argentina Bangladesh Benin Bolivia Brazil Buikina Faso Burma Burundi Cambodia Cameroon Central African Republic Chad Chile Colombia Costa Rica Dominican Republic Ecuador Egypt

El Salvador Ethiopia Ghana Greece Guatemala Guinea Haiti Honduras Hong Kong India Indonesia Iran Iraq Ireland Ivory Coast Jamaica Jordan Kenya Laos Lebanon Madagascar

Malawi Malaysia Mali Mauritania Mexico Mongolia Morocco Mozambique Nicaragua Niger Nigeria North Yemen Pakistan Papua New Guinea Paraguay Pera Philippines Portugal Rwanda Senegal Sierra Leone

Singapore Somalia South Korea South Yemen Spain Sri Lanka Sudan Syria Tanzania Thailand Togo Trinidad Tunisia Tuikey Uganda Uruguay Venezuela Yugoslavia Zaire Zambia Zimbabwe

Data Appendix 5.2 Data Sources Variable

Indicator

Source

Stock of Foreign Investment in Mining and Manufacturing

Measured in $ U.S. for 1967

1

Total Stock of Foreign Investment

Measured in $ U.S. for 1967 and 1971

1

Domestic Political Conflict, Reform, and Repression

Measured for 1967-1969, 1970-1972, 1973-1975, and 1976-1978

2

Total GDP in Mining and Manufacturing

Measured in $ U.S. for 1967

3

Total Population

Measured at midyear for 1967, 1970, 1973, and 1976

4

1: OECD: Stock of Private Direct Investment by DAC Countries in Developing Countries, Update. Paris: OECD, microfiche, no date. 2: Conflict and Peace Data Bank Domestic Scale 3: UN: Yearbook of National Accounts Statistics, Vol. II, various years. 4: UN: Demographic Yearbook, various years.

Kenneth A. Rodman

6

Markets, Sovereignty, and International Regime Change: Constraints on Nationalization Strategies in Peru and Jamaica In their call for a New International Economic Order, developing countries demanded a revision of the liberal rules and institutions that governed the world economy since World War II. Prominent among their demands was the doctrine of Permanent Sovereignty over Natural Resources, which asserted their sovereign right to nationalize or redefine the terms of raw material investments within their boundaries u n i m p e d e d by international obligations. OPEC's s u c c e s s in restructuring the international petroleum industry became the paradigm for other LDC hosts to assume sovereign control over natural wealth. The ability of developing nations to act on this doctrine stands out as one of the most visible arenas of change in North-South economic relations. Under the traditional system, foreign firms owned and marketed a resource under concession arrangements which left little control, if any, in the hands o f the host. The sanctity of these arrangements was legitimized by international law and enforced by corporate bargaining power and parent-state pressures. In recent years, however, Third World hosts were able to overturn these arrangements with less vulnerability to retaliation. As one business historian noted, "By 1970, it was clear that the survival of all American enterprise would be on terms set by the host government" (Wilkins, 1974: 363). Yet by the 1980s, it was clear that the terms set by hosts confronted new limits imposed by the international economic system. This was because LDCs have pursued nationalization within the context of a dependent, rather than a self-reliant, development model. To capture export markets, LDCs depended on resources provided by foreign economic actors, namely technology and market access from multinational corporations (MNCs) and capital from the international financial community. These actors will only provide these services if 127

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there is a g o o d chance for profitable operations. As a result, most LDCs h a v e o f f e r e d s o m e c o m p e n s a t i o n and an o n g o i n g contractual relationship with the former owner guaranteeing access to crude oil and mineral ores for its downstream operations. The real bargaining has taken place over the terms of that access. In this, LDCs have been less constrained by direct coercion than b y the more impersonal requirements of international capital and commodity markets. The first part of this chapter will examine the evolution of the international "regime" 1 governing the protection of raw material investments—that is, the changing norms and practices to which states adhered, above and beyond the legal principles they espoused. The analysis will ask why the rules of the concession system were relatively well obeyed until the late 1960s and successfully challenged thereafter. It will also examine the factors that sustain current arrangements and set limits on the exercise of economic sovereignty by LDCs. T w o case studies are examined in the second part of this chapter: ( 1 ) Peru's restructuring of extractive operations between 1968 and 1976; and (2) Jamaica's 51 percent takeover of the bauxite mines and the imposition of a 700-percent tax increase on foreign aluminum companies. The t w o cases illustrate regime change because both countries successfully challenged concession arrangements despite the opposition of the U.S. government and the established industries. Both also tested the outer boundaries of permissible behavior and w e r e forced to retreat to positions more congenial to MNCs: Peru, because of its need to maintain creditworthiness in the eyes of the international financial community and Jamaica, because of market structure in the international aluminum industry. These cases therefore provide insight into the role of commodity and capital markets in maintaining order within the international political economy.

REGIME DYNAMICS The Bases of the Traditional Concession Regime Regime analysis has been one means used by scholars to analyze the degree to which world politics is characterized by rules and norms rather than pure anarchy. The dominant explanatory model is the theory of hegemonic stability, which attributes order to the relative capabilities of states to establish and maintain rules and norms ( r e g i m e s ) regulating b e h a v i o r in the international system. In a hegemonic system, the dominant power provides the public g o o d of a strong regime because it identifies its interests with the system it manages and can shape and dominate its environment. The devolution

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toward a more polycentric order presages regime erosion since the former hegemon is less able to vouchsafe the system by sanction, bribe, or sacrifice (Keohane, 1980). While the hegemonic stability model has been faulted for its statecentric bias (Lipson, 1985: 146), it does highlight the key role the U.S. government played in sustaining the concession system. The central norm of that regime was the traditional international law principle of Pacta Sunt Servanda, which held that the terms of a contract between an alien and a sovereign are binding throughout its life and any infringement is subject to international law. The sovereign right of a nation to expropriate foreign property under the principle of eminent domain was conceded. For that right to be exercised legally, however, it had to be (1) nondiscriminatory; (2) pursued for a public purpose; and (3) a c c o m p a n i e d by "prompt, adequate, and effective" compensation (White, 1961: 12-17). U.S. statecraft, in effect, sought to extend the U.S. Constitution's Fifth Amendment protection of property to the rest of the world. The ability of the United States to sustain these regime norms depended upon a number of cognitive and structural bases (Aggarwal, 1985: 19). The former refer to beliefs derived from neoclassical economics, the economic lessons of the 1930s, and Lockean precepts about private property. They equate the regime with the provision of a public good and identify concrete U.S. national interests with its defense. Their purpose was to legitimize regime norms to U.S. decisionmakers and the larger world community. The latter refers to the structure of power and interest in the international system that sustains a particular type of order. The cognitive bases can be spelled out in the following three-part syllogism. First, as with free trade, there was a "harmony of interest" between the relatively unbridled activities of MNCs and the economic interests of all parties. Second, expropriation and other state interference with alien property rights were likened to the "beggar-thyneighbor" policies of the 1930s because they would deter the flow of foreign capital to the Third World. Third, the global rule of law—in this case, the sanctity of contracts—was equated with the provision of a public good. Stable expectations in contractual and property rights would create a climate in which firms could make investment decisions on the basis of economic criteria without fear of political risk. The resultant stimulus to investment would increase corporate profits, spur LDC economic development, and promote U.S. economic and diplomatic objectives.2 The structural bases of the regime relate to the underlying configurations of power and interest that enforce its rules. The

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hegemonic model points to the preponderant position of the United States, with a concentration of relevant economic resources—aid, credits, and markets—to punish or deter violations. Among the means available were formal sanctions, such as the Hickenlooper Amendment, which Congress enacted to mandate the cessation of aid to any country that seized U.S. property and did not take appropriate steps toward paying "full" compensation within six months. That legislation, however, was only invoked twice (Ceylon in 1963 and Ethiopia in 1979) because decisionmakers feared that overtly engaging Third World nationalism would make target compliance less likely. Informal sanctions, such as delaying new aid authorizations, deferring the consideration of multilateral development bank (MDB) loans, or quietly impeding access to credits and markets were used or threatened more frequently. The strategy was one of regime maintenance—i.e., preventing a precedent in defiance of U.S. standards that might encourage other economic nationalists (Lipson, 1985: 203215). Yet analysis of environmental factors can be broadened to include factors other than U.S. hegemony. First, the bargaining relationship between firm and host during the early phases of a concession severely limited the host's ability to renegotiate. Given the high fixed cost and uncertainty of exploration, large MNCs had considerable advantages due to their access to capital, markets, and technology, and their ability lo compensate for risk through exploration in several countries. LDCs were obliged to offer highly favorable terms or forgo development. Even when production was in place, the host's options were limited by its complete dependence upon the firm's technology and specialized information to develop and market its resources (Cobbe, 1979: 12). Second, corporate bargaining power was accentuated by the concentration of a small number of large, vertically integrated (mostly U.S.) firms in most extractive industries. Corporate cohesion facilitated the maintenance of the concession regime through its bargaining power vis-a-vis a large number of uncoordinated host countries (Smith & Wells, 1975: 9). In instances of more serious threats, such as nationalization, industries could impose discipline to implement effective economic sanctions. The oil company boycott of Iran for its 1951 nationalization of the Anglo-Iranian Oil Company provides the most dramatic example of this capacity (Turner, 1983: 72). Sources of Regime Change Until the late 1960s, the combination of U.S. economic dominance and corporate bargaining power provided a strong regime. There were few

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challenges and, except for those in communist countries, they were fully compensated or overturned. By the mid-1970s, however, Third World hosts successfully challenged concession arrangements and asserted sovereign control over natural resource stakes within their boundaries. Yet the end result was a loosening rather than the elimination of a regime protecting overseas resource investments. What emerged was a more flexible "quasi-regime," where the modal outcome was nationalization or its functional equivalent in exchange for something less than "full" compensation. The dispossessed owner generally maintained an ongoing contractual relationship which provided technology and managerial services in exchange for a fee and access to primary products for downstream operations. Regime change can be explained by the increased dissonance between the concession system and changes in the cognitive and structural bases which had undergirded it. Pressures for change were brought about by the Third World's rejection of regime norms and changes in the number, interests, and capabilities of the relevant actors in resource investment relationships. First, LDCs rejected the liberal premises underlying the regime. Most perceived a conflict between their interests and those of the MNC on both historical and structural grounds: historical, in that many of the concessions were by-products of colonialism, gunboat diplomacy, or nominally independent local elites; structural, in that the objectives of the MNC, which are globally oriented, often diverged from the aims of the host country, which are nationally oriented (Krasner, 1985: 179). Since MNCs were political (power-maximizing), as well as economic (profit-maximizing) actors, their superior bargaining power would often tilt an agreement to their predominant, if not exclusive, advantage. From this perspective, state intervention was not a malign or irrational force, but a source of countervailing power to rectify an existing imbalance and redirect the benefits. LDCs therefore saw a regime that insulated property rights from sovereign control as one that ignored the degree to which alien property rights have been a constraint on national autonomy. While insuring a stability of expectations for the firm, it often produced instability for the host by subordinating national planning for the life of a contract to the global objectives of an integrated multinational network. If maintaining such an order provided a collective good, it was one that was consumed asymmetrically. It produced not a "negotiated regime" where states agree to mutual restraint to achieve certain collective aims, but an "imposed regime" designed to coercively rationalize an unequal status quo (Young, 1984: 100).

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LDCs consequently rejected the legitimacy of the traditional system. They sponsored regime alternatives—the Calvo Doctrine in Latin America and Permanent Sovereignty over Natural Resources in the United Nations. Both took the issue of nationalization out of the realm of international law and placed it u n d e r the exclusive competence of the host country (Hart, 1983: 33). Central to these schemes was the assertion that a state's sovereign right to promote the general welfare took precedence over the acquired rights of foreign investors. The question of compensation was subject only to the national laws of the host state, not international law. Diplomatic protection and international arbitration were condemned as offensive to national sovereignty. Second, changes in the regime's structural bases enabled LDCs to supplement rhetoric with action. The hegemonic model would attribute change to a "general waning of American power at the global level" (Krasner, 1978: 219). The United States no longer possessed a concentration of issue-relevant resources to enforce traditional property rules. While this model accurately depicts the direction of change, it neglects the role of nonstate actors and transnational processes; it thus offers only a partial explanation of regime decay. Moreover, it has difficulty in accounting for the degree of order that has persisted in a post-hegemonic system (Lipson, 1985: 191). A less state-centric model provides a more complete picture. Such a model points to the rise of an informal transnational coalition of actors (i.e., the LDC state, new entrants, medium powers, and the international financial community) in triggering regime change. The perceived interests of these actors were either supported by contractual flexibility or threatened by the consequences of economic reprisal. Their self-interested actions also subverted the traditional bases of the concession regime and co-produced a n e w equilibrium that contributed to some level of order after the demise of the hegemonic coalition, which had previously policed the rules. The first relevant group was the LDC state. Through the "obsolescing bargain" process, LDCs have increased their leverage visà-vis MNCs as the latter were committed to a large fixed investment and the former gained expertise with respect to the technology and economics of the industry (Vernon, 1972: 46-59). While the state has generally increased its latitude, it still needs to foster the participation of other key actors, particularly multinational firms and private commercial banks. Nationalization strategies are still tied to export performance, which, in turn, is dependent upon services and factors of production provided by these actors. As Krasner (1985: 178) notes, LDCs can assert formal sovereignty and set the terms of entry and

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operation, but they "cannot compel multinationals to invest . . . or prevent their exit." This need to attract private capital sets limits on how far LDCs can push their advantage. A second group that benefited from and contributed to regime change was the large number of new entrants (European, Japanese, and "independent" U.S. firms) in most extractive industries (Lipson, 1985: 111). Established firms equated their interests with the traditional system because of their extensive global stakes. With less at stake worldwide, the newcomers preferred entry-gaining accommodation to symbolic sacrifice. They were consequently more willing to break ranks with the major companies, sign contracts with expropriators, and accept novel terms, such as joint ventures and nonequity arrangements. The heightened rivalry among MNCs better positioned LDCs to challenge the regime because it o p e n e d u p more bargaining alternatives and decreased the coherence of private economic sanctions. The established firms held out longer, but ultimately recognized the untenability of traditional strategies. Lipson (1985: 162) notes that they were trapped in a kind of Prisoner's Dilemma; as some firms broke ranks and adapted profitably to the new conditions, the probability of successful enforcement diminished. Compromise became increasingly compelling for individual firms in order to prevent loss of position relative to others, even though this weakened the system as a whole. Capitulation, moreover, was not a complete loss because the firms were able to maintain access through an ongoing relationship. This represented a reversal of the role host and firm had historically played. In the past, LDC hosts were trapped in a dilemma because of uncertainty regarding their endowments and their fragmentation vis-á-vis a cohesive industry. Each had to offer lucrative terms or the firms would go elsewhere. As uncertainty was dispelled and new competitors emerged, LDCs were able to confront the industry with a comparable "dilemma." By exploiting the individual firm's short-term incentive to break ranks and the industry's inability to maintain discipline, LDCs were able to increase revenue and control. LDCs, however, still face dilemmas of collective action. Their inability to translate formal sovereignty into control over prices demonstrates the problem of coordination. OPEC stood out as an exception for a decade, but even its power has attenuated in recent years (Levy, 1982: 126). Lack of coordination also means that limits are set by decentralized sanctions. If, for example, a host country goes too far, even the most venturesome firms could no longer consider it an acceptable site to purchase primary production or proffer new investments. As a result, restraints were imposed not by public reprisal

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or private boycotts, but by the more impersonal requirements of a market system (Lipson, 1985: 189). These diffuse pressures have been effective because state-owned enterprises still depend upon MNCs for technology and market access. First, if LDCs push their advantage too far, they might lose access to the technologies necessary to maintain long-term competitiveness or develop resources expeditiously. Second, if barriers to entry in extraction are low, exclusion of the MNC may lead to a loss of market share. State companies may end up selling a highly elastic good in a competitive market to a more concentrated industry whose interest is to buy commodities as cheaply as possible. If LDCs try to push too far on price increases or terms of operation, MNCs can divert purchasing and new investment into more congenial areas. These producers will be transformed into suppliers of last resort "with nothing but a spillover market to sell to" (Moran, 1978: 100). The structure of global commodity markets can prevent LDCs from translating formal sovereignty into real economic clout. The medium powers—Western Europe and Japan—comprised another group whose capabilities increased and whose interests diverged from the traditional system. As these countries recovered economically, they provided alternative sources of aid, credits, and markets, thereby rendering unilateral U.S. sanctions less effective. They were also less inclined to follow the U.S. lead because they were more vulnerable to near-term supply disruptions than was the United States. Hence, during the OPEC price and participation demands in the early 1970s, the Europeans and the Japanese were more willing to compromise with traditional principles to assure stable energy supplies (Hart, 1983: 127). Also, as latecomers to overseas investment after World War II, their priority was investment promotion rather than investment protection. They were consequently reluctant to go along with the United States on bilateral and multilateral sanctions because the loosening of regime rules enabled their firms to enhance their position vis-à-vis the dominant U.S. MNCs (Lipson, 1985: 163-166). Multilateral lending institutions and private commercial banks provided another basis for the quasi-regime. In the past, international financial institutions (IFIs), such as the World Bank and the IMF, used their extensive resources to "deter expropriations or insure prompt settlements" (Lipson, 1985: 168). But, in the mid-1970s, as private commercial banks replaced public institutions as the primary source of payments financing and liquidity, capital transfers were less susceptible to direct political manipulation by the U.S. government (Cohen, 1986: 73). With the resultant increase in bank exposure, traditional policies of

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e c o n o m i c reprisal o n l y l e d to p r o l o n g e d c o n f r o n t a t i o n s that complicated the problems of debt servicing. The international financial community did not want to impede repayment over an issue that did not threaten fundamental corporate interests. Severe financial sanctions w e r e therefore reserved only for challenges more critical to the coherence of international finance, such as default or unilateral debt repudiation (Lipson, 1985: 168-178). At the same time, the international financial community still assists in setting the outer parameters o f the q u a s i - r e g i m e . With the nationalization of MNCs, state companies have become increasingly dependent upon private capital markets to finance exploration and production. This, in turn, has contributed to i n d e b t e d n e s s and supervision by the international financial community. The IMF and World Bank condition lending on the maintenance of a political climate attractive to foreign investment even though this is no longer rigidly equated with traditional property norms. LDCs must s h o w s o m e p r u d e n c e in p a y i n g c o m p e n s a t i o n and e n s u r i n g an o n g o i n g relationship or risk the drying up of future loans and credits (Shafer, 1983: 106). 5 T h e self-interested behavior of these actors undermined the concession regime and prepared the foundations for a new kind of order. While the debate at the United Nations between advocates of Permanent Sovereignty and contractual sanctity was theoretically unbridgeable, there was considerable disparity between principles and behavior. MNCs and parent states eventually reconciled themselves to the termination of concession arrangements in exchange for something less than full-market value. LDCs invariably paid some compensation and allowed companies to stay on as service contractors (Rogers, 1978). T h e s e c h a n g e s also induced a U.S. government retreat from traditional regime maintenance policies. During the early 1970s, the United States was initially divided in its response as various agencies underwent differential learning curves as regime change impinged on their bureaucratic missions. The U.S. Treasury, troubled by the effect of regime erosion on the U.S. economy, argued for a more consistently punitive policy (Einhorn, 1974: 89-96). The U.S. Department of State, on the other hand, favored a strategy of pragmatic accommodation that one memorandum referred to as a "laissez-faire" approach: • Investors can and do treat "political risk" like any other business risk and seek a high enough rate of return to offset the risk or try to obscure the foreign image of the investment through joint ventures.

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• Expropriating governments can and do assume the risk of decreasing capital flows which may be caused by some expropriations^ • The private market, particulary the banking sector, can and often does exert sufficient leverage [to assure some compensation or acceptable terms for ongoing relations] (US Treasury, 1975: 4).

This strategy did not just reflect the regional bureaus' preference for smoothing over bilateral relations. Specialized agencies responsible for investment promotion and security of supply also supported it because: (1) a continued corporate presence was still possible after nationalization, and (2) national economic security was less threatened by nationalization than by market scarcities. Since the United States lost its previous leverage to maintain the system, rearguard battles over traditional ownership rights threatened both aims by poisoning the investment climate and disrupting short-term supply. While initial policies generally reflected the Treasury's preference, it soon became evident that changes in the international system rendered concrete activist proposals impractical. As shown in both the Peruvian and Jamaican cases, policy ultimately conformed to State's preference for the "laissez-faire" approach as the United States facilitated accommodation to regime change and encouraged market forces to lessen the impact of such change on corporate viability and national economic security. CASE STUDIES Peruvian Nationalization Strategies (1968-1976) The Peruvian experiment (1968-1976) in asserting greater sovereign control over natural resources demonstrates both the possibilities and limits of economic nationalism under the quasi-regime. Despite informal U.S. government economic pressures, Peru was not coerced to conform to traditional norms in nationalization disputes or retreat from its plans to redefine concession arrangements. Peru's ability to raise capital from sources not directly susceptible to U.S. government control, particularly from private banks, increased its maneuverability. The indebtedness incurred in the process, however, imposed new constraints on Peru's ability to bargain with MNCs in the mid-1970s. The aims of the Velasco government toward foreign resource investments were twofold. First, the government sought to rectify the historic abuses of foreign firms whose behavior was seen as an affront to Peruvian nationalism. The most dramatic example was the nationalization of the International Petroleum Company (IPC), a wholly owned subsidiary of Standard Oil of New Jersey, for its association with dollar diplomacy and its privileged status, which included

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ownership of the subsoil and a nominal rate of taxation. While Peru accepted a theoretical obligation to pay compensation, this was more than offset by counterclaims for "illegal enrichment" dating back to 1922 (Einhorn, 1974: 12-13). Second, Peru sought to end traditional concession agreements, increasing state ownership of resource extraction while continuing to attract foreign capital on a contractual basis. In petroleum, the Hydrocarbons Law of November 1968 prohibited new concessions in exploration, refining, and domestic marketing. MNCs could only explore for and exploit oil under service contracts and productionsharing accords with the state oil company, Petroperu. The Mining Law of April 1970 gave the state mining company, Mineroperu, an exclusive right to refine copper and market all minerals. MNCs operated under five-year contracts under which the state had the right to set exploration and development schedules and take control of the resources when the contracts expired. This restructuring was pursued within the context of an aggressive export-promotion strategy (Hunt, 1975). The response of the overseas corporate community was mixed. Standard Oil of New Jersey demanded full compensation for IPC and forceful diplomatic assistance to prevent a precedent that might undermine its more important holdings elsewhere (Lipson, 1985: 215n). Yet most firms opposed a punitive policy. While many were uncomfortable with the Peruvian government's rhetoric and increased role in the economy, most feared that political fallout from sanctions would undermine local business or profitable adaptations. If disputes arose, the firms believed that they could more profitably fend for themselves through low-key nonconfrontational negotiations (Einhorn, 1974: 70-76). The U.S. government response was to defer formal sanctions and adopt a strategy of "nonovert pressure." Toward this end, the United States (1) held up new aid authorizations without cutting aid already in the pipeline; (2) denied Eximbank loans to firms doing business with Peru; (3) dissuaded private bank lending; and (4) delayed consideration of loans from the Inter-American Development Bank (IDB) and the World Bank. The aim was to get Peru to comply with regime rules, while avoiding a confrontation by engaging Peruvian nationalism. The pressure was briefly relaxed in 1970, but was intensified and made more public in 1971 as the Treasury Department assumed a stronger bureaucratic role (Einhorn, 1974: 60-66). Despite the pressure, the United States was unsuccessful in compelling Peru to bend in its treatment of IPC. In part, this was due to the intense nationalism surrounding the case in Peru and to the tempered nature of sanctions. But U.S. capabilities were also reduced

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by MNCs and private commerical banks whose self-interested behavior worked to blunt coercive strategies. First, the corporate response to Velasco's policies was ambivalent. Many manufacturing and mining firms reduced new investments or planned to abandon operations due to the cost and risk of the new rules. Continued investment by others, however, weakened the effectiveness of public pressures. In manufacturing, some firms, particularly European ones, responded favorably to liberal tax, local content, and remittance regulations. In mining, several companies were very interested in Peru's resource potential and adapted to more flexible arrangements. In oil, Occidental Petroleum was the first c o m p a n y to license with Petroperu for Andean and offshore exploration. After it struck oil on its first five drillings, eighteen other foreign oil companies quickly signed similar contracts (Hunt, 1975: 335). Second, and most important, private commercial banks, impressed by Peru's resource abundance and conservative fiscal policies, helped finance many of these ventures. Barbara Stallings (1979: 234) found that Peru was able to raise $877 million on the Eurocurrency market from 1972 to 1973 and maintain a "healthy" economy in terms of traditional economic indicators, such as growth in GNP and wages and low inflation and unemployment. The use of private commercial lending enabled Peru to circumvent U.S. pressures, initially increasing its maneuverability in challenging the old system. Yet, debt dependence, combined with adverse market conditions, imposed new constraints. In both the IPC case and the subsequent Marcona nationalization (1975), the Peruvian government denied any obligation to pay compensation and rejected U.S. government intercession. In the end, however, it was forced to compromise because the resolution of those disputes was tied to Peru's image of creditworthiness in the international financial community. The Greene Settlement (February 19, 1974) was the means by which the United States and Peru resolved all outstanding nationalization claims, including IPC. The compensation package included a $76 million lump sum, of which $23.1 million went to IPC. The legal "sleight of hand" through which Peru agreed to the "unacceptable" involved two steps: (1) the exclusion of the IPC case from negotiations in deference to Peru's claim that the case was already settled; and (2) exclusive U.S. responsibility to disburse the funds "without any responsibilities arising therefrom on the part of the Government of Peru." Peru protested the action as a "distortion of the spirit and letter of the agreement," but it was well aware of American intentions. Official outrage was the means by which Peru could save

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face while adapting to economic realities (Gantz: 1976: 393-397).4 The settlement represented an accommodation to the new order by both the United States and Peru. For the latter, economic conditions necessitated an acceptance of U.S. involvement, despite the Calvo Doctrine, and payment of some compensation, despite IPC's history. Following the settlement, Peru was once again eligible for U.S. economic assistance. It subsequently received $55 million in Eximbank financing and $175 million in private credits for the South Peru Copper Company's (SPCC) Cuajone copper project, as well as new loans from the IDB and World Bank. The move away from a principled opposition to compensation came from an awareness of the limits placed on nationalization by the need for foreign capital (Sigmund, 1980: 206). For the U.S., the Greene settlement also represented a retreat from principle. The State Department tried to underplay the precedentsetting nature of the accord, claiming that it was a "special case" (Gantz, 1976: 398). But how faithful could the policy have been to the deterrence of expropriation if the only way to get Peru to pay was through a legal fiction that allowed it to deny it was doing so? In reality, the policy reflected an accommodation to regime change and a recognition that enforcement of traditional principles was too costly in terms of short-run political and economic objectives. A comparable outcome emerged after the nationalization of Marcona's iron mines and facilities on July 24, 1975. The takeover was accompanied by charges of failure to maintain reserves, tax evasion, and noncompliance with contractual obligations. The charges were used to deny liability for compensation (Fitzgerald, 1979: 241). The action against Marcona was poorly timed because it coincided with debt-rescheduling negotations to deal with serious balance-ofpayments deficits. By 1975, the strategy of increasing flexibility through heavy borrowing ran into serious difficulties as a result of a number of factors. OPEC's success increased Peru's energy import bill, though this was cushioned by the fact that much of Peru's supplies came from domestic sources. Oil production, however, was far less than had been anticipated. More debilitating were OPEC's indirect effects. By increasing inflation in the West, Peru's import bill soared by 250 percent from 1973 to 1975. The ensuing global recession reversed a brief commodity boom, decreasing the price of the minerals on which Peru depended for most of its export revenues (Stallings, 1983: 163). The banks, fearful of their overexposure, were negotiating a stabilization program to shore up Peru's payments position. A new investment dispute, with unresolved questions about compensation and Peru's ability to move the iron, complicated the process of debt servicing (Stallings, 1979: 238). As a result of the economic crisis,

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Velasco was deposed by the armed forces on August 30 and replaced by the more "moderate" government of Francisco Morales Bermudez. Initial negotiations between Peru and Marcona ended in an impasse, primarily over the terms of compensation. The company's claim was a market value of $230 million, while Peru considered a book value of $9 million to be appropriate. In the meantime, Peru's financial dilemma was compounded by its inability to move its ore. With a depressed market for iron, Marcona successfully deterred potential buyers with the threat of lawsuits. The cost to Peru was estimated at $8 to $10 million a month in foreign exchange (Gantz, 1977: 479). In October 1975, both the Morales government and Marcona solicited U.S. government intercession to break the impasse. The United States accepted the invitation and sent a delegation to supervise negotiations. The delegation immediately took the unprecedented step of commissioning an independent assessment of the various claims and counterclaims at the Stanford Research Institute. Marcona's real worth was estimated to be within be between $55 and $65 million. The objective, one State Department lawyer wrote, was to "reason not only with the government, but with the American company" to get "Marcona to take realistic positions during negotiations" (Gantz, 1977: 490). This was a far cry from the IPC case, when State uncritically accepted parent company data as its only source of information (Goodwin, 1969: 96)! To ease Peru's financial bind, the United States sponsored an interim accord in December 1975 that allowed Peru to use Marcona's ships to transport iron from its nationalized concession (Gantz, 1977: 485). The aim was not to make an example out of Peru until it rescinded its policy, but to smooth the devolution to state control. Along these lines, U.S. officials understood that Peru's financial situation made "prompt, adequate, and effective" compensation impossible. An alternative means of valuation was proposed: "net book value plus an ongoing relationship." They accepted this scheme as a bridge between book value, which they considered inadequate, and fair market value, which was not feasible (Gantz, 1977: 483). On September 22, 1976, the parties reached a $61.4 million settlement that was a combination of cash and a long-term sales contract. A promissory note of $37 million was paid to the company, which was financed by a loan from a U.S. banking group to minimize the drain on Peru's payments position. The remainder was paid through discounts to Marcona for the price it paid in its sales contract for iron ore (Gantz, 1977: 487). Like the Greene settlement, the Marcona accord was a pragmatic

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adjustment of principle to the parameters of the quasi-regime. Despite the Calvo Doctrine's pronouncement that nationalization was the exclusive domain of local courts, Peru not only accepted, but w e l c o m e d U.S. diplomatic intercession. Its n e e d to maintain creditworthiness to the international financial community—through welcoming foreign investments, earning foreign exchange through mineral exports, and remaining eligible for U.S. aid—promoted this compromise with principle (Guasti, 1983: 190). Dependence on continued investments and credits placed limits on the exercise of economic sovereignty. Yet the United States did not exploit Peru's vulnerability to reaffirm traditional property norms. In fact, it went to great lengths to avoid confrontation, acting more as a mediator than a surrogate of Marcona. Traditional principles took a backseat to "a potentially profitable relationship between the company and Peru in the export of iron ore" (Rogers, 1978: 7). This accommodation to state control can be understood in terms of regime change and the evolution of perceived threats to U.S. national economic security. In the past, corporate ownership had been conceptually linked to security of supply, but by 1975, it was clear that resource availability was less threatened by state ownership than by market scarcities. At the same time, as LDCs financed their surging oil bills through private capital markets, debt replaced nationalization as the primary concern. The precedent of a Peruvian default was weighted more heavily than the precedent of an inadequately compensated expropriation. Hence, adaptation to regime change in the area of natural resource investments was seen as necessary to effectively manage potential stresses in regimes governing international finance.

The Jamaican Bauxite Initiative Jamaica's attempt to restructure its bauxite concessions is a prototype of how the structure of commodity markets constrains the exercise of economic sovereignty within the quasi-regime. Initially, Jamaica earned a windfall. The aluminum MNCs had to adapt because of corporate dependence upon Jamaican ores and the limits of U.S. government and private leverage. In the long run, however, the bauxite levy was pushed down, not by direct coercion, but by market forces that made it unsustainable. Jamaica's challenge to the bauxite concessions in early 1974 was precipitated by its dire need for foreign exchange after the quadrupling of oil prices. The bauxite mines were owned by six vertically integrated MNCs, which controlled all three phases of production—

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mining bauxite, refining bauxite into alumina, and smelting alumina into aluminum. Like most raw materials, the price of aluminum ingot and fabricated aluminum products was high relative to that of bauxite ore. This worked to the disadvantage of Third World producers, such as Jamaica, which had difficulty moving downstream given the energyintensive process by which alumina is converted into aluminum (Girvan, 1976: 102-104). Working further to Jamaica's disadvantage was the fact that most bauxite moved through intrafirm trade rather than an open competitive market. To keep payments low, MNCs shipped ores roughly at cost to feed downstream operations regardless of market conditions. One result was that as aluminum prices increased with inflation in the early 1970s, Jamaican bauxite revenues actually decreased (Rodrik, 1982: 195). Prime Minister Manley sought to overcome these disadvantages through a tax scheme that would establish a 7.5 percent levy (to be increased to 8.5 percent in 1976) based on the price of aluminum ingot in the United States. Declaring that the changed circumstances of the energy crisis outweighed the sanctity of contract, he persuaded the Jamaican parliament to accept what amounted to a 700 percent tax increase on the companies (Thomas, 1987: 151). The aluminum companies protested the levy which, they claimed, would make Jamaican bauxite uncompetitive. It would also set a precedent that would jeopardize their holdings elsewhere. Led by Alcoa, they contended the levy was a breach of contractual terms prohibiting tax increases without mutual consent. The companies eventually agreed to pay the first installment of the levy, but only after invoking a clause in their contracts allowing them to challenge the legality of the tax at the World Bank's International Center for the Settlement of Investment Disputes, or ICSID (Girvan, 1976: 139). Although Jamaica was a party to the ICSID convention, Manley denied its jurisdiction in this instance because a tax increase was not an expropriation, and U.N. resolutions declared that natural resource issues were under the exclusive competence of the host state. In addition, he expressed an intent to move forward in placing all bauxite lands and surface rights in state hands and obtaining a majority (51 percent) share in the companies' assets. In September 1974, Jamaica began negotiations with each company (Manley, 1983: 97-104). Jamaica's challenge came on the heels of the first meeting of the International Bauxite Association (IBA). Like OPEC, the IBA sought to maximize national ownership and harmonize pricing policies to increase the value added of production for its members. Following the Jamaican action, the dominoes began to fall. Other Caribbean producers—Guyana, Haiti, the Dominican Republic, and

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Surinam—passed parallel tax formulas. Guyana went Jamaica one better in its 100 percent takeover of Reynolds, its only remaining bauxite company (Girvan, 1976: 140). To some observers, the history of the oil negotiations between 1970 and 1973 appeared to be repeating itself (Bergsten, 1976). Fearing such an outcome, the U.S. government protested the bauxite levy as inflationary. It also saw Jamaica's denial of ICSID jurisdiction as a serious challenge to traditional regime rules regarding arbitration. As a result, the United States responded to industry requests for diplomatic and economic pressure. While it did not invoke formal sanctions, in June 1974, it held up all new aid to exert pressure on Jamaica to accept arbitration or rescind the tax. In July, the United States delayed an already authorized $9.1 million rural education loan and tied the disbursement of future loans to the outcome of the bauxite negotiations. The loan was not released until February 1977, after Jamaica settled with the last U.S. company, Alcoa. Until mid-1975, the United States also used its influence to defer consideration of IDB loans to Jamaica (CIEP, 1974). Aid curtailments, however, were insufficient to coerce a favorable settlement. Bilateral economic assistance was cut from $9.9 million in 1974 to $0.6 million in 1975 and $0.8 million in 1976, mostly in P.L. 480 funds. IDB lending, which amounted to $22.9 million in 1974, was put on the "back burner." World Bank lending, in contrast, was increased from $20.5 million to $26 million over the same period. Aid from Canada and the Netherlands also increased (AID, 1977: 205). The net loss in external public assistance was more than offset by Jamaica's ability to raise $88 million in commitments in 1975 from the Eurocurrency market, and the dramatic increase in bauxite revenues that soared from $25 million to $181 million from 1974 to 1975 (Thomas, 1987: 162; Stephens and Stephens, 1985: 53). Nor did aid curtailments dissuade corporate adaptation. With the exception of Alcoa, the aluminum companies made a weak show of resistance before adapting to Jamaica's terms. On November 20, 1974, Kaiser accepted a book-value compensation of $15 million in exchange for 51 percent of its assets and the company's withdrawal of its ICSID claim. The company continued to manage the mining areas it ceded under contract and was assured access to reserves for thirty years. Reynolds and the smaller producers accepted similar deals by April 1975 (.Wall Street Journal, 1974: 10). Kaiser and Reynolds settled early because they were dependent on Jamaica for roughly 60 to 70 percent of the ores used in their U.S. smelters. Uninterrupted access was their overriding consideration. Alcoa, with only 15 percent of its bauxite in Jamaica, held out longer.

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A larger and more diversified firm, it took more seriously the precedent-setting implications of Manley's actions. Finally, in January 1976, it also agreed to negotiate on the basis of terms accepted by the other companies. On October 6, it reached a settlement ceding a smaller amount of equity in its bauxite operations in exchange for minority stake in its alumina refinery (Business Latin America, 1976: 344). The companies acceded to Manley's tax and equity schemes because they lacked the leverage to directly overturn them. First, the degree of market concentration possessed by the six major firms had decreased. With the emergence of new entrants, Japanese buying groups, and state-owned enterprises, their share of worldwide aluminum-smelting capacity had fallen from 85 percent in 1956 to 57.5 percent in 1975 (Rodrik, 1982: 196). Direct coercion was less likely to work because Jamaica could now find customers for its bauxite outside the traditional multinational network. Second, the companies had become increasingly dependent on access to Jamaican ores. They had sunk more than $800 million in Jamaica and were not keen on walking away from it. Moreover, each alumina refinery was geared to process a single type of ore. To turn elsewhere would have required expensive technological modifications. In the short run, the firms were tied to their traditional suppliers (Fried, 1976: 644). Accommodation also served the overriding interest of the vertically integrated extractive firm: guaranteed access to primary product. A Kaiser spokesman noted that spinning off ownership might actually stabilize supply by "giving Jamaica a stronger self-interest in the success of the operations" {Wall Street Journal, 1974: 10). In addition, coming from an oligopolistic industry, the companies were able to pass on the tax increases to the consumers. The short-run incentives strongly favored accommodation. In the long run, the companies possessed a number of advantages. In aluminum, the main barrier to entry lies not in extraction, but in processing ores into alumina and aluminum. It is difficult for energypoor LDCs, like Jamaica, to move into these areas because of the huge amounts of cheap hydroelectric power that is required. In such conditions, LDCs that push nationalization or price-indexing schemes too far will find themselves transformed into "suppliers of last resort" (Moran, 1978: 100). This is precisely what happened as aluminum companies redirected new production and investment away from the high tax areas of the Caribbean (Rodrik, 1982: 205). Corporate strategies were also abetted by the fact that other IBA members were willing to "cheat" on the Caribbean. Australia did not

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impose any new levy. Guinea and Brazil were just emerging as major producers and were in desperate need of foreign exchange to finance their soaring import bills. Underselling the Caribbean afforded them the opportunity to break into Jamaica's market share. As one Alcoa official noted, "the divergent internal political and economic needs of each country have kept the IBA from becoming a pricing body" (Regan, 1978: 32). They also protected the aluminum companies from escalating revenue demands on the part of producers. U.S. State Department officials entrusted with the issue understood corporate strategies. They realized that the aid curtailment could not deter the companies from adapting, as Treasury had hoped. However, the levy would be "unsustainable over the long-term because of the availability of bauxite worldwide, the availability of close substitutes, and development of new technologies" (Enders, 1974: 180). In effect, the United States would pay a short-term price and use the interim to encourage corporate diversification into alternative sources. Having concluded that the traditional regime was not sustainable, officials chose, on the one hand, to assure short-term supply by accepting the inevitable and, on the other hand, to stimulate market forces to mitigate long-term consequences for the U.S. economy. As one radical critic noted, the United States "could count on the forces of the international marketplace . . . to put a damper on radical trends" (Girvan, 1976: 149). This was precisely what happened as market conditions eventually compelled Manley to reduce the tax rate, though not the method of valuation. In 1975, Jamaican bauxite production fell by 25 percent, and alumina by 21 percent, as the companies cut back on additional investment and production in Jamaica and turned to areas with more favorable tax laws. As the market tightened (global production decreased by 4.6 percent), Jamaica bore the brunt of market fluctuation. The cutbacks, however, had little initial impact because, with the higher tax rate, Jamaican revenues increased more than sevenfold from 1974 to 1975 (Boulton, 1981: 86). This windfall enabled Jamaica to successfully weather the first set of oil "shocks" in the mid1970s. The negative trend, however, persisted throughout the late 1970s, even as the demand for bauxite picked up. Between 1975 and 1979, while worldwide bauxite output increased 19 percent, Jamaican production only increased marginally. Jamaica's share of global production decreased from 19.6 percent in 1974 to 13.1 percent in 1979. The main beneficiaries of this drop-off were Australia, Brazil, and Guinea. From 1974 to 1979, Jamaica's share of global alumina production fell from 10.1 percent to 6.6 percent. In the same period,

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Australia's share increased from 17.2 percent to 23.9 percent. A similar pattern is discernible in the structure of bauxite and alumina exports into the U.S. market. From 1974 to 1979, Jamaica's share, of the U.S. bauxite market decreased from 54.2 percent to 46.9 percent, while Guinea's share increased from 8.7 percent to 28.4 percent. Over the same period, Jamaica's share of the U.S. alumina market decreased from 24.9 percent to 15.3 percent, while Australia's share increased from 57.8 percent to 76.6 percent (U.S. Interior Department, 1980: 178179; 1981: 118-123). Jamaica was not completely cut off. Its annual bauxite and alumina revenues stabilized around $150 to $200 million, but at a time when the price of aluminum was increasing. These earnings were insufficient to cover a spiraling import bill for food and energy, and Jamaica fell more heavily into debt. The situation worsened in 1979 with the second round of oil price increases and an IMF-mandated devaluation (Boulton, 1981: 85). In order to regain Jamaica's market share, Manley was compelled to revise the tax formula downward to a level that would create an incentive for increased production and investment. While maintaining the nominal levy, Jamaica devised an incentive scheme of rate reductions from 25 to 50% depending on the quantity produced. In 1980, the industry responded favorably to the new scheme. Bauxite and alumina exports reached their highest levels since the period before the levy (Stephens & Stephens, 1985: 58). With the election of the more conservative Seaga government in 1981, the Reagan administration moved to shore up the Jamaican economy with largescale purchases of bauxite for domestic stockpiles. The retreat from earlier policies, however, preceded Manley's electoral defeat. CONCLUSION Lindblom (1977) distinguishes between social organization through authority and government and social organization through exchange and markets. In the former, a centralized authority controls the allocation of resources to directly preserve the "rules of the game." In the latter, order is maintained by more diffuse and anonymous transactions between buyers and sellers. International regimes protecting overseas resource investments have evolved from a more authoritative system to a more market-based one. 5 While the international system lacks a supranational authority, the concession regime was maintained by a hegemonic coalition that assumed some of the functions of one. Through the concentration of

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relevant economic resources in the U.S. government and a small number of established firms, challenges to the system could be contained by public aid cutbacks or private economic pressures. By the early 1970s, however, these actors could no longer play this role. The obsolescing bargain process, combined with the decentralization of public and private economic resources, better positioned LDCs to challenge traditional principles of compensation, compulsory arbitration, and diplomatic protection. In both Peru and Jamaica, the U.S. government and the established firms (Exxon in Peru, Alcoa in Jamaica) employed economic pressures on behalf of traditional property rules. Yet the self-interested actions of other corporate actors—extractive firms in maintaining access of primary product (SPCC and Occidental in Peru, Reynolds and Kaiser in Jamaica) and banks in lending w h e r e the risks a p p e a r e d justified—thwarted a direct strategy of resistance. This, combined with OPEC's success, demonstrated the limits of the dominant actors' ability to preserve traditional arrangements. While LDC sovereignty was no longer subject to authoritative constraints from concentrated public and private economic resources, it still faced constraints from the social organization of exchange through capital and commodity markets. While LDCs used new entrants and commercial bank lending to liberate themselves from the traditional system, these new relationships imposed new boundaries on state action. In a market system, Lindblom (1977: 45) notes "one responds only if the proffered benefits are attractive." To attract key actors, LDCs had to accept some limits on their sovereign discretion or risk a negative response. Markets thereby serve as powerful ordering principles by making certain sovereign actions costly. The two cases examined above demonstrate how the structure of commodity markets and international finance work to preserve order within this more-decentralized quasi-regime. Peru was compelled to deal "pragmatically" with Marcona because of the difficulty of moving iron ore in a glutted market and its need to maintain creditworthiness to private commercial lenders. Jamaica earned an initial windfall as a result of the 1974 bauxite levy, but it steadily lost its share of the market b e c a u s e low barriers to entry in extraction enabled multinational aluminum companies to shift new investment and production to less expensive producers. O n e of the main factors magnifying the constraints on nationalization strategies was the OPEC price increases. This is ironic because OPEC was strongly supported by the Third World as a means of reducing stratification in the global economy. Its ability to assert sovereignty over natural resources and dramatically increase prices

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made it a model for emulation. By revealing the disunity of the North, it spurred other challenges to liberal e c o n o m i c regimes through nationalization and cartelization. It would also b e used to place pressure on the North to be more forthcoming in concessions to the New International Economic Order (Krasner, 1985: 104-110). However, OPEC's price increases also placed pressures on the South that weakened resource nationalization strategies. First, they precipitated a serious recession in the North, the primary market for LDC commodity exports. After an initial commodity boom, this deflated demand for raw materials and pushed prices down. In the tighter market of the early 1970s, sellers had considerable bargaining power; this power evaporated as supply exceeded demand. As exporters tried to challenge the existing system, they found themselves losing market access. The difficulty Peru and Jamaica had in moving iron and bauxite ores provides a case in point. Second, the quadrupling of energy prices imposed severe payment difficulties on oil-importing LDCs. For example, Peru was relatively successful in its initial economic strategies, due in part to access to private capital markets. However, the quadrupling o f oil prices imposed enormous déficits that could only be financed through much heavier borrowing. By 1975, Peru had difficulty servicing its debt. The conditions imposed by the banks and the IMF not only limited fiscal and monetary policies, but they also constrained bargaining with foreign resource firms. As one study of the Peruvian experiment concluded, Velasco's nationalization policies "aimed to reduce the influence of international corporations in the e c o n o m y [but] only succeeded in changing which international corporate groups would have the most influence" (Guasti, 1983: 181). In sum, OPEC's success produced the opposite result of what it had promised. Rather than d e c r e a s e stratification in the world economy, it increased it. By increasing indebtedness, it limited hostcountry bargaining power vis-à-vis MNCs, banks, and consumers. By triggering a recession in the West, it decreased demand in commodity markets and pushed down prices. While OPEC may have shown the Third World the way, its unequivocal success in the 1970s made even modest replications almost impossible.

NOTES 1. Krasner (1984: 2) defines an international regime as "those principles, norms, rules, and decision-making procedures around which actors' expectations converge in a given area of international relations." 2. For representative examples of how the liberal world view influenced

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U.S. support for traditional international law positions, see Becker (1959), Schwebel (1959), and Smith (1976). 3. These constraints have been compounded by the onset of the debt crisis and the contraction of private commercial lending. The ability of LDCs to continue borrowing has consequently become increasingly dependent upon favorable policies by the U.S. government and the IMF, increasing the ability of those institutions to implement linkage strategies (Cohen, 1986: 68-73). While such policies are no longer linked to the preservation of traditional concession arrangements, they serve as an added deterrent to further contractual abrogations. 4. This was confirmed by almost every interview I conducted at the Department of State. 5. Krasner (1985) makes a similar distinction between authoritative and market-based regimes, but such an analysis uses this typology vis-à-vis the allocation of resources within North-South regimes rather than using it to distinguish between means by which regimes are enforced.

Kathleen C. Schwartzman

7

The Economic Origins of Political Instability: Why the Portuguese Bourgeoisie Abandoned Its First Republic

Processes at the level of the world economy can translate into unstable political regimes at the level of nation-states. This chapter examines one specific case of this phenomenon, interprets that case, and offers several propositions regarding democratic instability. While such political outcomes as the collapse of democratic regimes are clearly the product of political processes, they may also be rooted in economic processes that can be identified at the world economic level. Changes in the world economy resonate within nationstates in obvious, and sometimes not so obvious, ways. There are catastrophic waves of wars, depressions, or even great spurts of growth that affect all nations to the extent that they participate in the world economy. In addition, a nation's placement in the world economy and economic ties within that economy may determine the relative strength of some classes and the weakness of others. Particular placement in the world economy also poses exigencies which, albeit external to the nation-state itself, must be confronted with the organizational resources of the nation-state. In 1910, the Portuguese monarchy was overthrown as the result of a relatively bloodless revolution. However, the aspirations of the republican forces were not converted into a stable and long-lasting democracy. The First Portuguese Republic was beset with instability; on May 28, 1926, sixteen years after its formation it was overthrown by a military coup. "While there is a plethora of literature dealing with the preconditions of democracy and rise of authoritarian regimes, there is little work that attempts to link such political transformations to the world system. It may seem like quite a leap to suggest that a country's placement in the world system leads to transformations in the form of its state. It has been suggested, on the one hand, that the years 151

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between the two world wars posed problems (the combination of war and depression) to which many nation-states reacted by increasing the interventionist powers of their executives (Wallerstein, 1979a). In such a scheme (and solely on the dimension of state intervention), the New Deal becomes an attenuated version of German National Socialism. On the other hand, it has been suggested that there is an affinity between location in the world system and the type of state a nation has (Wallerstein, 1974). These analyses offer macroeconomic explanations for macropolitical processes, but leave us guessing as to the intervening causal mechanisms. The case of Portugal has something to offer those of us who want to uncover the social processes underlying the alleged relationship between macroeconomic forces and macropolitical transformations. This chapter will demonstrate the links between two major variables: semiperipheral location in the world system [see Appendix, 7 for a discussion of zones] and democratic instability. Because the study is limited to one case, it cannot be used to reject other theories. However, the analysis is useful for the elaboration and/or modification of what others may have noted at a comparative level. Thus, following Lijphart's (1971: 692) strategy of a hypothesis-generating case study, the chapter includes several propositions that are testable with other cases. This study attributes the instability of the Portuguese democratic regime and its subsequent collapse in 1926 to the irreconcilable conflicts within the bourgeoisie. 1 These conflicts are linked in two ways to Portugal's location in the world system. First, the bourgeoisie's inability to arrive at a mutually agreed upon social pact and their willingness to abandon the First Republic is explained in terms of Portugal's disarticulated economy at the turn of the century. The state of that economy is attributed to Portugal's semiperipheral position in the world economy. Second, the postwar crisis, external to Portugal in origin, had consequences for the Portuguese economy and ways in which the crisis was mediated through the socioeconomic configuration just described. The specific purpose of this chapter is to explain the instability and collapse of the Portuguese democratic regime. The general question as to how location in the world economy can affect the nature of political regimes is formed into the research question: Why did the Portuguese bourgeoisie abandon its democratic regime? The first part of this chapter consists of a brief discussion of the nature of democratic regimes—what democracy is and how we know when one is unstable. A brief description is then provided of the regime's instability from 1910 to 1926, followed by a description of the ways in which important economic actors reacted to the democratic regime. Next, the chapter

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describes Portugal's location in the world system at the turn of the century and its implications for the domestic economy. This is followed by an analysis of the cabinets and political coalitions of the republic, which form the observable link between interaction in the world system and regime survivability. Conclusions and propositions are offered at the end.

DEMOCRATIC REGIMES The republic collapsed, but precisely what is it that collapsed? Democracy, a multifaceted phenomenon, is most commonly seen to reside in a cluster of freedoms—freedom of speech, the press, and religion. At the juridical level, democracy consists of the division of state p o w e r into a number of branches and a set of democratic procedures. Individuals are placed into offices through an electoral mechanism activated by political parties. These political parties are also the formal link b e t w e e n the will of individual citizens and the representative government. In contrast to other regimes, democracy is characterized by the generally unrestricted way in which political parties organize, articulate, represent, and act upon the aggregated will of the citizens. 2 These dimensions distinguish democracy from other such regime types as monarchy and dictatorship and ensure that "no one can intervene to reverse outcomes of the formal democratic process" (Przeworski, 1983: 3). In addition to these dimensions, democracy is a social compromise among classes with inherently conflicting interests (Przeworski, 1980). While any organization of the state and concomitant state policies constitute an expression of a specific class compromise (Przeworski and Wallerstein, 1982: 18), democracy specifically represents a class compromise between owners and working classes. 3 A social pact or social compromise is the mechanism that can mitigate otherwise disruptive social consequences of an asymmetric distribution of economic and political power for these two classes. One can extend the theory to the case of a social pact or social compromise among the fractions of the bourgeoisie. Thus, elections can also mitigate the disruptive social consequences of intrabourgeois conflicts over power. For the losers in both cases (in both the vertical and horizontal pacts), the democratic state offers the possibility that in some future election, they might be winners. While these dimensions of democracy are important, they may not possess equal salience. Indeed, I would argue the existence of a hierarchy. The juridical and political components depend upon the

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maintenance of a social compromise. Consequently, the collapse of the juridical form (military intervention in the case of Portugal) implies the previous disaggregation of the political organization, which reflects, in turn, the absence of a social compromise (be it unconsolidated or broken). Thus it is unlikely that all three components would simultaneously collapse. It is more likely that the political dimension, the web of political parties in institutions, will survive for some time after the social compromise dissolves. Likewise, it is likely that the juridical structure will outlast the disarticulated political organization. This last step is consistent with the Linz and Stepan (1978) analysis, which refers to political instability prior to breakdown. A democracy with democratic institutions but without a social pact is not viable (as is the case wherein a democracy is composed of a social pact but has no corresponding institutions). A stable democracy, then, is one in which all three dimensions are present. Attention here is given to the question of the social pact. Social compromises are not given—they need to be constructed. They require organizations or institutions in which that construction can take place. Conflict of interests may well exist between members of society, such as between workers and capitalists or among capitalists themselves. If one of the latter group is able to generalize its own interests as the interests of the nation and to have the fulfillment of that group's goals simultaneously fulfill the goals of other groups, then that group is said to be hegemonic. Thus, a hegemonic group is the basis upon which social compromises are framed and upon which democratic stability is built and maintained. Much work has been done on the pact or compromise between the working classes and the owning classes, but little has been done on the pact among the owning classes themselves. Even less research has been done on the conjuncture of the two. The following analysis of the First Portuguese Republic is undertaken with this latter perspective in mind. THE PORTUGUESE DEMOCRATIC COLLAPSE In 1926, a successful military coup replaced the First Portuguese Republic with a military dictatorship, which was shortly substituted by a civilian authoritarian rule that lasted until the 1974 revolution. The breakdown of that democratic regime was neither spontaneous nor sudden. The democratic collapse was previewed by the increasing instability of the institutional structures. The final collapse of the regime in 1926 punctuated an ongoing political crisis.

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T h e political history o f that r e p u b l i c is filled with military interventions, suspension of the constitution, and civilian eruptions. Instability was, in fact, a prevailing characteristic o f the republic. Instability invaded the very institutions of the state and permeated the system of political representation. In the case of the state, instability took the following form: the electorate (redefined three times) went to the polls eight times (instead of the six constitutionally scheduled o n e s ) to elect eight o f the nine parliaments that chose its seven presidents. Of those seven presidents and an additional self-appointed o n e , o n l y o n e c o m p l e t e d his s c h e d u l e d term o f o f f i c e . T h e s e presidents, in turn, appointed forty-five different cabinets. Instability in the system of political representation was also evident in several ways. For example, there was an increasing fractionalization of old political parties and a proliferation of new ones. A united republican party gave way first to three parties, then six, and finally more than seven parties. Close to thirty parties, including nonrepublican parties, appeared on the political stage during a sixteen-year period. These two principal manifestations o f political instability were punctuated with annual monarchist uprisings, civilian riots, and military pronouncements. This study focuses on institutional instability as manifested in cabinet turnovers. Table 7.1 summarizes some specific facts about that instability. Not only do these statistics reflect a high level of instability, but they also show that a cabinet's duration decreased as the republic aged. Further, these statistics show that while the parliament played a predominant and constant role in overthrowing cabinets, the role of the military in terminating cabinets increased. This unplanned political turnover was not an agreed upon power-sharing among factions.

Complaints Against Governmental Instability Organized representatives of the economic groups complained bitterly about the destructive effect of cabinet instability. As early as 1915, only five years after the installation of the democratic regime, the Lisbon commercial association, ACL (Associacao Commercial de Lisboa), complained that governmental instability prejudiced the e c o n o m y (ACL, 1915: 354). They reiterated the theme in 1919: Due to governmental instability, there have only been inefficient measures regarding the financial equilibrium [and] because of the instability of the government, 1919 was an absolutely unproductive year as far as the national interests were concerned (ACL, 1919: 28-30). In its 1920 to 1921 report, the ACL wrote that a conscious policy of economic renovation could not take place with a rapid succession of

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governments and pulverization of political forces. How national interests were jeopardized was noted in ACL's 1923 report: Efforts of the 1923 directorate of the commercial association of Lisbon were next to null because of the major indifference evidenced in official spheres to complaints from this economic interest group. Due to ministerial instability, the association lost much time in conferences with ministers and when it would return to see the results of the studies promised, it would find a new cabinet in the chair (ACL, 1923: 25).

In 1924, the Oporto Industrial Association (Alp), echoed the same sentiment: "Powers lack continuity of action indispensable to a persistent and lasting work, one ministry following upon the heels of another" (Alp, 1924: 314). Even the British Chamber of Commerce in Portugal (BCCP) complained in 1923 that trade suffered from shifts in government (BCCP, 1924: 86). These complaints were continuously sounded during the last ten years of the republic, suggesting that the concern was not exaggerated. It is clear that the economic associations thought that instability affected conditions of economic activity in a way they found undesirable. These business groups complained that "business as usual" was jeopardized because it required policies that could never result from such short-lived cabinets. The evidence suggests that many saw the issue of instability independent of policy direction. If government turnover and subsequent manipulation of the exchange rates resulted in real remuneration for export products vacillating wildly from week to week (or from month to month), producers would hesitate to produce, being uncertain what profit, if any, could be made. Likewise, capitalists might be hesitant to borrow funds with highly unstable interest rates, which were also attributable to government instability.

COMPLAINTS ABOUT DEMOCRATIC REPRESENTATION For some, criticisms of the inconvenience or potential danger of party politics masqueraded for more fundamental objections; these objections were not of the way in which the system functioned, but of the system itself. Not everyone was convinced that the democratic system of representation produced the best policies. Most of the opinions reported below reflect a desire by individual groups to make the state less autonomous—that is, to acquire control of at least part of the state. Unsuccessful in promoting their own interests as national

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interests through the democratic system, they preferred the right of representation by allocating representatives to interest groups. Some business leaders contended that the solution to the political crisis was to dismantle the system of representation in which political parties mediated between popular will and the government. The Industrial Association of Oporto thought that popular suffrage only put stupid men in office (Alp, 1915: 164) and that once in, they only represented the masses not the "conservative classes" [sic] (Alp, 1918: 1:2). Having a parliament responsive to an electorate meant that the parliament passed laws that were prejudicial to national interests (Alp, 1915: 161) and that the government in general made too many decisions without consulting the economic groups (ACL, 1918: 67). The division of power between legislative and executive branches was considered inefficient because the branches were engaged in an adversary relationship and neither w a s capable of useful w o r k (Baptista, C.1916: 28). "For fourteen years there has been a divorce b e t w e e n the state and the producing classes which an angry and chaotic legislature has made worse" ( A l p , 1924: 8:313-314). O n e republican politician, a member of the parliamentary opposition w h o had led one cabinet and been minister of finance in another, judged the parliamentary system incapable of resolving problems in times of crisis. W h i l e he thought the system was an adequate machine in normal periods, under periods of perturbation it lacked the adaptive capacity to produce legislation commensurate with the social and political changes of the nation (Leal, c.1926: 145). T h e s e complaints w e r e precursors to a call f o r corporatist representation. The discourse was initiated as early as 1915 by the Oporto Industrial Association, which suggested corporate modifications to the democratic system. Persons who act individually remain divorced from public powers. To avoid this danger individuals must act as associations, gremios, and under cover of law transmit to the state their complaints on public questions. Association of classes . . . [is] the social organization through which the state recognizes individuals (Alp, 1915: 66). The Lisbon commercial association and the retailers association, along with the federation of farm unions in central Portugal, agreed upon the need to have their own representatives in the senate (ACL, 1920: 7:6). The appointment of ministers on the basis of corporate representation and technical expertise was demanded with equal persistence. Writers for the trade journals advocated technically competent ministers w h o were politically neutral but understood the needs of the sector in which they were to administer (Alp, 1924: 7:36; ACL, 1924: 49). Like others, they proposed a parliamentary b o d y

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composed of representatives of economic groupings rather than citizen constituencies. In fact, after the 1918 corporatist experiment, a protocorporatist parliament was always on the bourgeoisie's agenda. Such complaints could have been levied against particular democratic rulers for their unsupportive philosophy or hostile legislation. However, the publications of the association of farmers (ACAP) revealed their objections not to politicians themselves, but to democracy in general. Nuno Gusmao was one intellectual who linked the forms of the state with tight labor control in the countryside. His thoughts were often reported in the ACAP's Boletim. In a 1920 conference, he laid the salvation of the nation on the shoulders of syndicalism and cooperativism, and the demise of the nation on constitutionalism, with its antiscientific and antinatural emphasis on individuals (ACAP, 1920: 297). In addition, editors of that association journal wrote that if they were not successful in getting representatives of agriculture in parliament, they should push for the constitutionally permitted dissolution of parliament (1920: 202). In 1924, the agricultural association supported the position that the "producers" in Portugal must try to put their own representatives in parliament and take care to see that the delegates were representatives of the corporate interests, not of political parties (ACAP, 1924: 315). In a public meeting that year, one associate was heckled for advocating working within the parties of the democratic regime (ACAP, 1924: 306). There appears to have been a strong antidemocratic sentiment among the landholders represented by the ACAP. COMPLAINTS ABOUT REPUBLICAN POLICIES It has been shown that there was dissatisfaction among some groups in Portuguese society about the instability of the republic and the efficacy of democratic rule. Perhaps these were little more than rhetorical masks for an anti-working-class sentiment on the part of rural landholders and industrial capitalists. The landed aristocracy constituted the greatest reservoir of antirepublican sentiment. Its control of the rural labor force became problematic because of changes on two fronts: general economic growth, particularly the rise of industry, and political transformations under the democratic regime. Because of these intrusions into their economic organization, landholders placed considerable blame on the policies of the democratic regime. Industrial owners also opposed the labor policies of the republic. The democratic republic brought the freedom to organize, vote, and

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strike to the working classes. Throughout the republic, the workers struck, protested, and rioted for a larger share of the national income. Workers' militancy was high almost virtually from the beginning of the republic. Between 1910 and 1914, 257 strikes were recorded, and a general strike was called in 1912 (Oliveira, 1974: 256) that led to a state of emergency. Lisbon was placed under military rule for one month, thousands were arrested, and union headquarters were closed. The working class took a new place in the national political scene in 1917 with the founding of the General Confederation of Portuguese Workers, or CGTP (Medeiros, 1978: 10). In some circumstances, worker protests were successful, while in others the workers actually lost political rights and power (strikes were prohibited and they lost their franchise and the right to organize). In the House of Representatives, Deputy C. Leal declared "the hour is grave for the bourgeois state—it will win or go to the morgue" (.Portugal, April 30, 1920: 22). The speaker was criticizing Prime Minister D. Pereira of the twenty-second cabinet for his lenient treatment of railway strikers. Such condescension, the speaker claimed, was increasingly responsible for the ruin of industry. The major economic associations remonstrated against the intense level of civil unrest. In March 1922 and November 1925, the headquarters of AIP was the target of bomb attacks. The association attributed responsibility to the working classes, which, they said, were infiltrated by riffraff. The ACL wrote that the productive forces of today live in a regime of terror. The attempted assassination two days ago against the industrialist Correia da Silva is only another sign. There is a group of trouble makers in Lisbon and the continuation of such a situation is impossible. It is impossible to direct any company under such circumstances (ACL,

1924: 39). The antidemocratic sentiments of capitalists and rural landlords give the false image that the First Portuguese Republic was a workercontrolled state. The republic was not, however, dominated by workers against landholders and industrialists; even elements of the working classes opposed the democratic regime. Unions and working-class organizations opposed those cabinets that had repressed workers; after opposing multiple cabinets, some consented to the military overthrow because they hoped it would result in terminating the abuses of the Democratic party. It had been Democratic party cabinets that had used the national guard against strikers, closed union halls from time to time, and forcibly placed some striking workers on the front of moving trains during a railroad strike to save the still-in-service trains from violent sabotage by strikers. Postal and telegraph employees were also

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bitter toward the Democrats for their treatment of state employees, who went through a seventy-day strike without pay. Bitterness on the part of state employees made them willing participants in the military coup against the regime. They sent telegrams announcing bogus adherences to the coup, while detouring other telegrams addressed to the last Democratic prime minister. This confusion contributed to the swift success of the uncontested coup (Paxeco, 1937: 219). THE RESEARCH QUESTION

The above discussion, including quotations selected from a larger body of similar material, confirms that instability existed, the regime suffered a legitimacy crisis, and there was a common perception that a profound political crisis existed. There is little doubt that the bourgeoisie abdicated to the military dictatorship; some even courted, advocated, and subsidized the 1926 coup. The Lisbon Commercial Association was the first association to voice its collaboration with the "patriotic goals" of the army (ACL, 1926: 38). ACL wrote that given daily aggravations, disorder, and the necessity of some administrative change, it was not surprising to see a national movement like the one occurring on May 28, or to see the army take it upon itself to renew public administration. In its journal, O Trabalho Nacional, the Oporto Industrial Association recorded that the army's intervention was received warmly and that the association was absolutely confident in the military's ability to steer the nation (Alp, 1927: 813). Alp spoke for other economic associations of Oporto (commerce, industry, wine producers—eleven in all) when it saluted the new president, expressing satisfaction with his success in establishing tranquillity (Alp, 1927: 814). There are two problems with terminating the discussion here. First, the mere desire to overthrow democracy is insufficient to explain its collapse. While several groups held the democratic state to be illegitimate, it is still necessary to explain how their desires were translated into a transformation of the state, why that transformation took place when it did, and why an authoritarian regime succeeded the democratic one. Second, a fundamental contradiction arises from the above descriptions. In the first section, we saw that more than half of the cabinets fell because of conflict with the parliament. If we add those cabinet terminations due to intracabinet conflicts, we have to conclude that over 70 percent of the cabinets fell to conflicts among the political

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representatives of the upper classes. In the second section, we saw testimony that different fractions of the bourgeoisie complained about the instability. Thus, we are left with the irony that the bourgeoisie complained about a governmental instability that was, in fact, its own doing. It is necessary to explain not just the democratic collapse, but also the role of intrabourgeois conflict in that collapse. Why was there such conflict among those political representatives within the state organization? Why did the democratic state, which has served so many capitalist countries, become troublesome for the Portuguese? The answer to these questions has two components: a structural one and a conjunctural one. While the structural constraints to democratic stability are explored here, it is not meant to predict deterministically a specific political outcome. That outcome is certainly the p r o d u c t of conjunctural factors and the domestic political conditions by which the structural constraints materialize.

STRUCTURAL PROPENSITIES TO COLLAPSE This section contains a summary of the structural argument. Here world system terminology is used as a shorthand description of zones in the world economy and the interrelationships between those zones. In such terminology, based on Wallerstein (1974), the semiperiphery of the global political e c o n o m y i n c l u d e s states with various u n c o o r d i n a t e d or u n i n t e g r a t e d f o r m s of a p p r o p r i a t i n g a n d accumulating capital. In other words, there is overall an even mix of commodity chains (Wallerstein in Arrighi, 1985: 34). The semiperiphery is an agro-exporter, industrial producer, and exploiter of other peripheral countries. Many semiperiphery economies have more integral linkages with other countries than among sectors within their o w n e c o n o m i e s . Leontief (1966) describes such e c o n o m i e s as "disarticulated." At the turn of the century, Portugal was semiperipheral due to its intermediate position in the international division of labor; it was dependent upon England in a quasicolonial fashion while dominant over its own colonial empire. Although no longer the glorious empire of the sixteenth century, Portugal still held nine colonies, including the two African territories of Angola and Mozambique. In 1910, the m o v e m e n t of merchandise back and forth b e t w e e n continental Portugal and the colonies accounted for 20 percent of all Portuguese commercial movement; four p e r c e n t of Portugal's imports for consumption originated with the colonies, and 18 percent of Portugal's exports were destined for its colonies.

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While Portugal's overall commercial receipts from its colonials were modest, colonial trade was predominant in some commodities. Sugar and coffee ranked high among Portuguese imports from the colonies. Among exports, thread, fabrics, table and port wines, agricultural and industrial instruments, and some manufactured goods ranked high. Furthermore, several domestic products could be called colonial products: 93 percent of the shoes, 99 percent of the cotton textiles, and 93 percent of the tobacco exported from Portugal went to the colonies. Portugal was a metropole with administrative and financial institutions befitting a colonial empire. Following the logic of the semiperiphery, Portugal had another economic orientation: its extensive, almost colonial, linkages with England. That the age-old "mutual binding" of Portugal and England had always been asymmetric is no surprise. In 1910, Portuguese dependency was visible in the nature of trade relationships between the two countries, in England's involvement in Portugal's external debt, and its capital penetration of Portuguese companies; and in England's penetration of the Portuguese colonies. Twenty-five percent of all Portuguese commercial movement was with England. England was by far Portugal's most active trading partner, followed by Germany (13 percent). English predominance among Portuguese imports was evident in fibers and textiles, industrial equipment, raw materials for industry, and manufactured goods. These items were also predominant among English reexports to the Portuguese colonies, where England captured 85.5 percent of the reexported value. The United Kingdom bought about two-thirds of the exported Portuguese wine and about three-fourths of the figs, almonds, and carob beans (BCCP, 1925: 12). While the 1910 import-export trade ratio for all Portuguese commercial movement was 1.51, it was 9.94 for commercial movement with England, reflecting the disproportionate size of the import bill compared to the export earnings from England. Furthermore, the English merchant fleet handled more tonnage in Portuguese ports than any other fleet, including that of Portugal (Comercio e Navegacao, 1910). Portugal's semiperipheral status (simultaneous ties with England and its own colonies) imparted a specific character to Portugal. The economy at the turn of the century was so disarticulated that one could say that there were at least four economies within the nation-state. First, Portugal had an agro-exporting economy, and many of the factors of production were isolated from the rest of the economy. In 1910, 84 percent of the exports consisted of live animals, raw materials, and foodstuffs; these activities were relatively isolated from other economic activities. The capital stock was endogenous: farmers made few

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purchases from other parts of the economy. The methods used to cultivate the land were primitive, and most farms were too poor to buy farm implements (U.S. Department of Commerce and Labor, 1911: 43). Much of the production was self-reproducing; fruit, cork, and grapes, for example, were harvested from year to year without annual plantings. The labor force was isolated from the money economy, and many workers were not monetarily remunerated for their work, meeting their rental payments with the agro-export crop. On the other hand, there were rural workers who received a wage but who supplemented their daily necessities with small plots. Finally, the intended market of the production was the export market, and it was on that market, not the domestic one, that prices were determined. A second economy was composed of export-led industries. This economy was also isolated from many other economic activities. Here a majority of the industrial inputs (cotton, machinery, and energy) were imported, and the labor force was only partially proletarianized. In the principal industry of this economy, textiles, the product was destined for the colonies. Some workers received a wage, while others worked in a still-functioning cottage industry. Many of the wage earners were women and children who themselves lived on subsistence plots. Wages, then, provided part of subsistence but certainly not all of it. A third economy was the growing capital goods importsubstitution economy. Goods included in this economy were chemicals and metallurgy. Many of the inputs came from within Portugal. Without a doubt, the intended market was the home market, and these industries operated with full-time wage labor. These were importsubstitution industries that could not compete abroad (or at home for that matter) with comparable foreign products; only with the help of protectionist legislation did such products manage to capture and supply the local market. A fourth economy was the production of cereals for domestic consumption. Located mainly in the south of Portugal, it was not completely separate from the other sectors, particularly the agro-export sector. Cork, for example, was an agro-export item that was grown on the same land that produced wheat for domestic consumption. CONFLICT AS POLITICAL DISUNITY

The relative isolation of these economies did not mean that a "live and let live" arrangement existed. The joint habitation of these economies within the same nation-state meant that they competed for capital, labor and, most of all, favorable government policies. Economic

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conflict was carried to the level of cabinet disputes. The First Republic was a period of intense conflict over the question of precisely which economic project should shape Portuguese society. Concretely, the conflict revolved around such issues as taxation, tariffs, and labor policies. There was a myriad of skirmishes at those points where the economies might, in principle, have been articulated. This was particularly evident between ancillary producers of partially worked raw materials and raw-material producers. The Caime Pulp Company wanted the freedom to export its paper pulp rather than being forced to sell it to the local newspaper industry which, it claimed, preferred fibers that were longer than the short fibers of the pine and eucalyptus trees (AIP, 1926). The textile industry contested the development of the iron-and-steel industry in Portugal, preferring to purchase its machinery abroad (Alp, 1916: 366). The wool textile industry preferred foreign to local raw wool, claiming that the local wool was dirty and of low quality (Mendes, 1979: 42). Fish canners preferred foreign olive oil to the more expensive and abundantly produced domestic oil, claiming the latter was dirty, while millers preferred foreign wheat, contending that the national wheat was only good for noodles (ACAP, 1912: 148). The metallurgy industry complained that the state bought railroad bridges from foreign producers at costs higher than the domestic equivalents (AIP, 1926: 39). The hotel industry—to the detriment of the national furniture industry—fought for tax exemptions on imported furniture (ACL, 1908: 102). When domestic wheat production was inadequate and it was necessary to import wheat, foreign wheat sat in harbors (sometimes the Lisbon harbor), ready for purchase before word of a demand for imported wheat even arrived in Africa (Lima, 1925: 49). While some portions of the bourgeoisie supported an eight-hour workday, others protested that a poor country like Portugal could not afford to pay for three eight-hour shifts instead of two twelve-hour ones (Alp, 1926: 604). Conflicts about capital took the form of disputes over new tax structures in which each respective economy lobbied for the maximum taxation of the other "economies." The antipathy that domestic farmers had for industrial and commercial activities, for example, was expressed in the northern newspaper O Diario do Norte. The value of the land and years of work can easily be destroyed in one moment of nature, whereas industry and commerce with relatively little capital and work can make a fortune. The farmer does it only very slowly and with much more risk (ACAP, 1913: 81).

The capitalists of the various economic fractions fought against economic integration, preferring disarticulation instead. With disparate

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and often nonreconcilable interests, these groups found it difficult to reach agreements. These conflicts took place not so much in the marketplace, but within the democratic institutions. It was within these institutions that policies were made that determined the direction and degree of economic development. This is what converts political conflict into political disunity. Each policy or cluster of policies had its respective beneficiaries and victims. Naturally, coalitions formed to control the cabinets and make mutually beneficial policies opposing unfavorable ones. The political conflict can be seen between fractions of capital and between capital and workers. These dimensions are represented by Figure 7.1, which plots the intracapitalist pact on the horizontal axis, and the capitalist-worker pact on the vertical. Cabinets varied tremendously in their willingness and ability to reconcile all interests and, consequently, in their ability to stay in office. Regarding the pact between capitalists and workers, a number of cabinets pursued what could be called redistributive and expansionary policies. To achieve greater redistribution, they advocated a number of social-welfare policies, such as land reform and price stabilization of wage goods (primarily foodstuffs), sometimes through subsidies, unlimited imports or restricted exports, and labor policies that favored workers. They implemented a number of fiscally and monetarily inflationary policies, such as expanding the money supply to pay both the state deficit and the foreign debt. Under such cabinets, the state played an important role in the economy. An expanded and well-paid civil service was maintained, as was a state-run shipping enterprise (TME), an explosives factory, and a metallurgy shop. Some of these cabinets also restructured cabinet positions to include a ministry of labor and a minister of public provisions. While most of these cabinets were terminated by parliamentary opposition, several of them were ended by military interventions. On the other end of the worker-owner continuum of social compromise were cabinets that excluded or repressed the working classes politically, pushing down their real wages. These cabinets held policies toward workers that were both economically and politically exclusionary. Several cabinets went on the offensive against anarchosyndicalism, closing union headquarters and disenfranchising workers by establishing a corporatelike legislature that offered state-sanctioned (and controlled) representation to workers. For the most part, these cabinets were also highly committed to domestic agricultural interests and were thus on the "no-pact" end of the intrabourgeois dimension. The state intervened in a different way under these cabinets: it created a ministry of agriculture, established credits for agriculture and

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promoted the development of the fertilizer industry, and allowed price increases for agricultural products. Two of these cabinets were removed from office by popular uprisings. In addition to the cabinets that represented agricultural interests, there were others that promoted industrial interests and still others that constructed a compromise between industry and agriculture. Those favoring industrial interests were terminated most often by parliamentary opposition. The cabinets that had combined representatives from both agriculture and industry are interesting for the fact that they were brought down most often by the resignations of its members due to conflict within the cabinet itself rather than as a result of civilian uprisings, military intervention, or parliamentary opposition. All of the above-mentioned cabinets were penetrated by economic interests, and the blatantness of that penetration (of their nonhegemonic rule) was precisely what mobilized opposition against them. Without a fundamental social pact among the bourgeoisie, any economic policy represented in those cabinets was subject to immediate opposition. As a result, the urban working classes swung from one side to another—being incorporated into or being mobilized against one cabinet or another. If industry attempted to forge a social compromise with the workers as a way to establish dominance over society as a whole (and over agriculture in particular), the political representatives of agriculture moved to terminate the cabinet with a parliamentary veto or military force. When the representatives of farm interests were in political power and turned policy decisions in their own favor, the opposition responded with parliamentary vetoes and civilian uprisings. A majority of the republican cabinets vacillated between these extremes. Thus, the republic was filled with military coups, civilian uprisings, and high cabinet turnover. Such instability is the domestic manifestation of Portugal's location in the world system in two ways. First, placement in the world system determined the economic viability of the respective groups involved (such as the decline of the agroexport project). Second, the coalitions varied in the efficacy with which they could address the dual problem of long-term development and short-term crisis resolution (postwar economic crisis and foreign debt). Their efficacy was determined by their ability to generate policies mutually satisfying to the constituent forces of each political coalition and to maintain legislative and popular support. Without the short-term crisis that hit all of Europe, the democracy, albeit unstable, might have survived the structural conflicts. With the crisis, it was nearly impossible for any one group to address the overall developmental problem, the short-term economic crisis (production, debt, inflation,

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and poor foreign exchange), and to do so with democratic support. There seemed to be few democratically viable solutions. On one hand, cabinets representing capitalist interests, particularly large landholders, tried to do what no cabinet relying on the consent of the majority could have done. O n the other hand, cabinets representing the interests of workers tried to do what no cabinets depending on the cooperation of capitalists could have done. They had b e e n unable to create the fundamental pacts necessary for democracy, and the breakdown of democracy was on its way. So, when General Gomes gave a radio address to the nation on May 28, 1926, declaring himself in open rebellion to the political order, the march on Lisbon began. While the landed aristocracy and the developmentally oriented industrialists were parties to such instability, the political turmoil was heightened by the fact that neither alone was able to fashion a national program or to assert (democratically) their preferred economic project over the others. In conclusion, it was neither the landed aristocracy nor a developmentally oriented industrial faction of the bourgeoisie that produced an interventionist state. Nor did the instability stem from personality conflicts or the bad will of its leaders. To sum up, the collapse was the extension of the political instability of the republican institutions. That instability, in turn, was the political manifestation of the inability to consolidate a social pact among the members of the bourgeoisie. This difficulty was derived from the economic conflicts among groups that were attached to different parts of the disarticulated economy. Finally, the economy became disarticulated by virtue of Portugal's semiperipheral location in the world economy.

IMPLICATIONS This discussion raises the question, should we expect democratic regimes in other semiperipheral nations to be more unstable than authoritarian ones? Certainly, conflict is no stranger to authoritarian regimes, both civilian and military. One empirical fact, however, is suggestive: the authoritarian state that followed the democratic collapse in Portugal, the Estado Novo, lasted almost fifty years. Its stability was due in part to the substitution of force for legitimacy, a facility that any nondemocratic regime has at its disposal. More importantly, it put together the domestic agricultural and industrial projects in a joint rule that farmers and industrialists had been unable to achieve under the democratic regime (this included some modest industrial development with a strong protection for domestic wheat). Thus, the structural

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constraints that limited the democratic republic did not similarly limit the authoritarian regime. This was due largely to the dual agenda of the democratic state: to devise a hegemonic social pact and to do so while ruling democratically. The foregoing has been a telescoped discussion of one case and has not attempted to explain general regime change in the semiperiphery. Nor is any claim made to have accounted for all the factors influencing regime change in Portugal. To more fully understand the political transition in Portugal from a republic to the authoritarian new state (Estado Novo), additional elements must be considered. These would include the post-World War I economic crisis and its impact on Portugal, the transformation of civil-military relations during the period of the republic, and willingness of the military to intervene and to hold onto the state. The selection of the structural propensities to instability has been chosen for this chapter for two reasons: it is (in my view) the principal component of the explanation for the Portuguese case, and it suggests some testable hypotheses about structural obstacles to democratic stability. The use of world system terminology in general, and the conceptual and operational referents for the semiperiphery in particular, allows us to think about similarities between very diverse cases. The concept of semiperiphery may describe Poulantzas' (1974) "weak link in the imperialist chain," his characterization of Germany and Italy. A cursory examination of the constituent elements of the weak link shows that it shares some elements with the semiperiperhal status described in the appendix to this chapter. Our understanding of Latin American regimes may also benefit from comparison with such a general rubric. While the debate flourished about w h e t h e r bureaucratic-authoritarian regimes were the product of exhausted import substitution, deepening export-oriented growth, or the need for orthodox economic policies (Collier, 1979), a preliminary consideration of the semiperipherality of these countries might contribute further to our understanding of the obstacles to democratic stability. The Portuguese case suggests that certain economic arrangements pose structural barriers to the consolidation of intrabourgeois pacts and thus promote higher levels of democratic instability. To the extent that semiperipheral economies are more disarticulated than either core or peripheral ones, and that disarticulated economies pose these structural barriers, semiperipheral states may always encounter greater challenges to democratic stability.

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NOTES 1. Here, the term bourgeoisie includes all fractions of the capitalist class—industrialists, large landholders, and merchants. Intrabourgeois conflict refers to the conflict not only among these groups, but urithin each of them as well. For example, we can see conflict between the agricultural producers for export and those who produce for the domestic market. Industrialists may be similarly divided between those who produce for export and those who produce for the domestic market. 2. Schmitter (1978) has shown that authoritarian regimes can have as many or more elections than democratic ones not just because of the existence of political parties or elections, but rather because of the ability of political forces to freely constitute themselves as political parties and freely participate in the electoral system. 3. The unit of analysis (or arena) in which this compromise could take place is not directly specified in Przeworski's work. He presents an abstract model that is somewhat ambiguous regarding the location of compromise. However, one rarely gets the sense that he is addressing the politics of production or the social compromise at the level of the firm. Rather, it appears that the unit of analysis is the society itself. In discussions of redemocratization (Przeworski, 1983: 7, 9, 24; and O'Donnell, Schmitter, and Whitehead, 1986: 4763), the unit of analysis is society. While Przeworski argues that redemocratization cannot be the result of specific substantive compromises (that the tax rate will be 53 percent, for example), the agreement on democratic institutional procedures does rest on top a social pact (that the tax rate will not be 100 percent). Such a fundamental social pact or compromise will not be at the individual or firm level; rather, it is at the societal level. Democracy, he argues, "continues to be rare and unstable: rare because it requires a compromise, unstable because it is based upon one" (Przeworski, 1983: 24).

APPENDIX In the world-system approach of sociology, countries are said to have different locations in the contemporary global economic system depending on their function within that system. Conceptually, the world system is divided into three locations or zones: the core, the semiperiphery, and the periphery. A review of world system literature suggests that researchers use at least three different approaches to conceptualize zones. This is particularly obvious in the different conceptual approaches used to define the semiperiphery. These definitions include the hiatus between the ideal types of core and periphery and the observed cases; the transition from periphery to core (or vice versa); and a phenomenon sui generis. In the third conceptualization, semiperipheral countries are those occupying a contradictory place in the global division of labor, a place that results from the joining, within the same nation-state, of two prominent types

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of economic relations—dominant ones and dependent ones. In the world division of labor, some countries predominate in the production and export of raw materials, while others predominate in the production and export of finished goods. Semiperipheral countries are those with a more even mix of these two sets. Stated in another way, semiperipheral countries behave like a metropole in some commercial exchanges and like a colony in others. Portugal reflects an extreme version of such a conceptualization in that it had its own colonies while being dependent on England. While other semiperipheral countries might not have such an extreme configuration, they should reflect a similar process. Mexico, for example, imports trucks and truck parts from the United States while exporting those items to less-developed Centeral American countries. The functional role in the global division of labor of countries that exchange in this fashion is different from those with a heavier emphasis on the export of raw materials or having an emphasis on exporting finished goods. This definition excludes political dimensions sometimes included in semiperipheral definitions (such as the strength of the state) not only because the association of state types and world-system location is not empirically verifiable (Skocpol, 1977), but also because it embeds in the definition precisely what could be studied—namely, the world distribution of the forms of the state. Aymard (in Arrighi, 1985: 40) argues that "the concept of semiperiphery remains a prisoner of the ambiguity of its usage," and this is no less true of the measurement problem. Whereas it may be easy to place Japan or the United States in the core and Honduras or Angola in the periphery, the placement in the middle—the semiperiphery—is a bit more troublesome. Is the United States slipping from the core, or has it already dropped into the semiperiphery? Is Chirot (1977) correct when he argues that the post-War II distinction between periphery and semiperiphery has disappeared? Snyder and Kick (1979) offer a particularly sophisticated approach to the operationalization of zones in the world system. Using the block-model analysis of White, Boorman, and Breiger (1976), they create a hierarchy of nations (circa 1965) and find that zonal location is associated with economic growth. Unfortunately, a more general application of this operationalization is precluded by its very sophistication. Nemeth and Smith (1985) offer the alternative of a one-dimensional economic model. They utilize only import data (which they believe is more accurate than export data) and reconstruct a hierarchy of the world economy based upon commodity flows. An earlier measure, the GNP, was offered by Evans. He claims that this "[S]cale is a crude stand-in . . . [and] the classification [of countries which it produces] . . . fits quite nicely with intuitive notions of center, periphery and semiperiphery" (Evans, 1979: 292). This scale departs from the original conception of zones in the world economy, namely different systems of labor control and production, and instead treats countries on a single continuum as having more or less of some quantity. The measurement question is not unlike the conceptualization problem, having been approached in several ways and often signifying different phenomena. One ideal measure would be to capture the dynamic suggested in

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the last conceptualization offered. Another ideal measure would allow historical and comparative measurements (as would GNP), but would also reveal the internal transformations that take place. An additional ideal measure might take the form of detailed commodity production, such as Evans (1979) has done for Brazil, Mexico, and Nigeria. The final choice of a measure, it seems, requires a trade-off between conceptualization and operationalization: an easy measurement, such as GNP, is far from the original conceptualization. The measure advocated by this author maps countries into structural positions in the world economy, depending on patterns of commodity trade, as does the measure set forth by Nemeth and Smith. I believe the TCI (trade composition index) to be a good analytical tool for mapping the major zones of the world system and for assigning countries to zones. This TCI index (Galtung, 1971) weighs the contributions from imported and exported raw materials and processed goods, and it gives a summary statistic that ranges from -.1 to +1. The TCI scores for Portugal are within the +.2 to -.2 range. This adherence to the zero-line appears to be more characteristic of semiperipheral countries. Portugal's TCI is significantly different across the three political regimes—monarchy, republic and Estado Novo (Schwartzman, 1988: 168-169). The TCI is also correlated with other measures of dependency, such as the number of trading partners and product concentration.

Figure 7.1 Placement of some governments along the two dimensions: the bouigeoisbourgeois pact and the bourgeois-working class pact WC-Brg Pact

Govs: 14, 22, 25 (military intervenes)

Brg-Brg

Brg-Brg

Pact

No Pact Govs: 28, 33, 34 (cabinet resignations) Govs. 15, 26, 38 (mass uprisings) Monarchy pre-1910 fall

Monarchy Estado Novo No Pact WC-Brg

Table 7.1

Cabinet Profile: 1910-1926 1910-1915

Number of Cabinets Average Duration in Days Average Cabinet Fractionalization1

1916-1920

1921-1926

Total

12 164

16 111

17 113

45 126

.56

.47

.42

.47

Cabinet Type Single Party Concentration Military Extra Party Coalition

36% 18% 9% 9% 27%

12% 6% 12%

59%

69%

41%

Reason for Cabinet Termination b Popular Uprising Military Coup Parliament Cabinet

9% 9% 54% 27%

12% 12% 50% 12%

12% 18% 53% 18%

—

— — —

a This measure is adapted from Douglas Rae, The Political Consequences of Electoral Laws (1967). It measures the level of paity fractionalization within cabinets, where a value of 0 was assigned to cabinets in which all members were from one party. A value of 1 represented cabinets in which each member was from a different party. b One cabinet resigned when its prime minister died and has been omitted from this summary.

Cai Clark

External Shocks and Instability in Taiwan: The Dog That Didn't Bark A singular disadvantage of less-developed countries is their vulnerability to a wide variety of external shocks. Such shocks include radical swings in world markets affecting the prices of their major exports or imports, control of their domestic e c o n o m i e s by multinational corporations, enforced austerity policies by external actors stemming from the debt crisis, and direct political manipulation and penetration. Thus, there has been wide acceptance of the notion that external penetration and shocks retard economic development and stimulate political instability in the Third World. The Republic of China (ROC) on Taiwan would seemingly constitute an important exception to this general pattern because it has had an impressive record of rapid economic growth, structural transformation, and political stability since the late 1940s. As a result, substantial external economic and political shocks during the 1970s (such as the two explosive increases in oil prices and diplomatic derecognition by the United States) did not lead to political instability and had only short-term negative effects on the economy. Taiwan therefore evidently represents a case of "the dog that didn't bark" in terms of the normal linkage between external shocks and domestic instability in developing countries. This chapter considers why Taiwan has remained remarkably stable in the face of extensive external shocks. The first section briefly reviews economic and political development in the ROC, while the second presents two case studies of Taiwan's successful response to external shocks, one economic and one political. The analytic conclusion advances the argument that the special configuration of Taiwan's external dependency provides the basic reason for the absence of canine noise from that quarter. 173

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THE TAIWAN SUCCESS STORY As noted above, the ROC can be considered a successful example of development for several reasons. This section briefly summarizes two fundamental dimensions: economic growth and political change and development. Taiwan's record in each of these areas can be considered quite good and at variance with the conditions that normally prevail in dependent economies and societies. This strong record of development, then, may well have provided the basis for the country's successful response to external shocks and challenges. Economic Growth The Republic of China's record in the economic realm since the early 1950s has been phenomenal by almost any standard as indicated by the data in Table 8.1. For the past thirty-five years, real GNP growth has averaged approximately 9 percent, one of the highest in the world, demonstrating sustained development. Income per capita rose twentyfold, from $200 in 1952 to over $4,000 in 1987, as the economy was transformed from a dominantly agricultural to a dominantly industrial one. The export-led nature of the ROC's development after the early 1960s is also quite clear as exports have constituted almost half of the GNP and been overwhelmingly industrial in composition since the early 1970s. This surge in exports was accompanied by a dramatic change in the nation's balance of trade to the current huge (and, for U.S. trade, politically embarrassing) surplus; in early 1987, the ROC had the world's largest per-capita foreign reserves. Furthermore, once growth began to accelerate in the 1960s, the savings and investment rates became extremely high, averaging about 30 percent of the GDP during the 1970s and 1980s. This allowed massive capital accumulation without much foreign borrowing or deficit spending by the government (Copper, 1987b; Galenson, 1979a; Ho, 1978; Kuo, 1983; Kuo et al., 1981; Lin, 1973). In addition, rapid growth and economic transformation in Taiwan differed from many other developing societies in that it was not accompanied by growing inequality, and it improved the quality of life for most of the population. The ratio of the income of the richest fifth of the population to the poorest fifth dropped dramatically from 20.5 in 1953 to 11.6 in 1961 and to 4.3 in 1968—a level almost as low as that found in advanced industrial societies. Much of the initial rapid drop in income inequality can be attributed to the effects of land reform. After the mid-1960s, the rapid growth of export-oriented industries created nearly full employment that resulted in rising real wages for unskilled and semiskilled labor. Finally, the considerable rise in daily protein

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consumption per capita (e.g., from 58 grams in 1962 to 74 in 1973) provides another indicator of growth in the quality of life for the population as a whole (Fei et al., 1979; Galenson, 1979b; Wu, 1981). While the ROC has the reputation of b e i n g a capitalist or freemarket showplace (Balassa, 1981; Gilder, 1981; Olson, 1982), its rapid growth has been closely associated with four major structural transformations of the economy: land reform; import substitution; trade liberalization; and capital-intensive industrialization. These were the results of explicit state policy and guidance, suggesting that the economy really represents an example of state-centered growth (Clark, 1987; Cumings, 1984; Haggard, 1986). The radical land reform program of the early 1950s stimulated increased output u s e d to finance industrialization; the program also greatly altered the economic, political, and social relations in the countryside (Gallin, 1966; Yang, 1970). The land reform was quickly followed by an import-substitution industrialization program based on strong protectionist controls (Lin, 1973: Chapter 4; Ranis, 1979). Import substitution produced a spurt of light industrial growth, but the domestic market was becoming saturated by the early 1960s. The ROC then made the fateful decision to radically change its economic strategy to liberalize trade and emphasize labor-intensive export industries (Gold, 1986: Chapter 6; Ho, 1978: Chapter 10; Lin, 1973: Chapters 5 to 7; Ranis, 1979; Scott, 1979). This new strategy proved extremely successful. Real GNP grew at an annual rate of 11 percent between 1963 and 1973; the period from the early 1960s to the early 1970s saw major improvements in most of the indicators shown in Table 8.1. By the mid-1970s, however, rising labor costs and growing international protectionism were beginning to undermine Taiwan's position. Thus, a new strategy of promoting capital-intensive and hightechnology industries began to emerge (Gold, 1986: Chapters 7 and 8; Simon, 1986; Wu, 1985).

Political Development Political d e v e l o p m e n t is a m u c h more n e b u l o u s c o n c e p t than economic development since it is much harder to define in either an empirical or normative sense. Still, notwithstanding the Western bias, many analysts seemingly agree that two of the principal dimensions of political development are democratization, or expanding popular participation in government, and institutionalization, or a government's ability to implement its policies effectively (Almond and Powell, 1984; Palmer, 1985; Pye, 1966). The ROC is usually seen as an authoritarian regime in which a low level of democratization contributes to a high level of institutionalization or policy effectiveness (Amsden, 1985;

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Cumings, 1984), following the precepts that many see in the work of Samuel Huntington (1968) on political development and decay. However, the reality of the Taiwan case appears more complex. In particular, three major dimensions of political reform or democratization may be discerned. First, the nature of the regime itself has changed significantly with the broadening of the top policymakers in terms of skills and political orientations. Second, the importance of elections, especially for national offices, has grown. There have been corresponding increases in electoral competition, freedom of speech, and the responsiveness of the ruling Kuomintang (KMT) party to popular forces. Third (and as a result of these two trends), the economic and political status and power of the native Taiwanese majority have expanded considerably over time. While changes along each of these dimensions can be considered analytically distinct, they are strongly interconnected in practice and account for much of the increased institutionalization and effectiveness of the KMT regime on Taiwan. The Chiang Kai-shek government that came to Taiwan in 1949 after losing the Chinese civil war was overwhelmingly military in nature and essentially imposed rule by mainlander officials over islander natives. The regime's decision to rectify its mistakes on the mainland by pushing rapid economic development and appealing to the bulk of the population soon changed its basic composition. The emphasis on development necessitated bringing economic technocrats into the highest levels of government; they then played the central role in making the controversial decision to switch to export-led growth in the early 1960s (Gold, 1986: Chapter 5). This structural shift helped set in motion substantial political change. Economic success increased the power of the technocrats within the regime and created a business elite of native Taiwanese entrepreneurs who dominated the private sector and formed (in ethnic terms) a balancing elite to the still mainlanderdominated government. Over the longer term, economic modernization almost certainly contributed to the country's political liberalization. There has clearly been a significant democratization in Taiwan in the form of a muchenhanced role of elections. In the 1950s and 1960s, elections were primarily confined to local bodies because the government's claim to rule all of China precluded national elections in communist-held territory. By the 1980s, however, elections to national bodies became more prominent and competitive. In addition, previous restrictions on freedom of speech were relaxed; increased institutionalization of the political opposition was allowed. This trend culminated in 1987 with the abolition of martial law, which had prohibited the formation of

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new political parties (opposition candidates ran as independents). As a result, "electoral politicians" in both the KMT and the opposition have become much more prominent and powerful, as well as being much more critical and outspoken on many political issues. These politicians have created a n e w elite sector with strong personal interest in commitment to further liberalization (Chang, 1986; Chou and Nathan, 1987; Copper, 1979 and 1987a; Domes, 1981; Lerman, 1978; Winckler, 1984). These various economic and political trends have also combined to increase Taiwanese representation in political leadership positions. Islanders now dominate the lower and middle levels of the party and government, winning almost all the elective legislative posts. They are gradually gaining entrance to the top policymaking positions in what appears to be a deliberate policy initiated by President Chiang Chingkuo (Chiang Kai-shek's son) in the mid-1970s. Most spectacularly, a Taiwanese, Dr. Lee Teng-hui, succeeded to the presidency u p o n Chiang's death in January 1988, although he clearly will be forced to share power much more than his predecessor (Chang, 1986; Copper, 1987a; Free China Journal, 1988).

THE ROC'S RESPONSE TO EXTERNAL SHOCKS Taiwan's record of strong economic growth and political stability sketched above clearly indicates that it has been able to respond effectively to external shocks and to avoid the political and economic instability that such shocks usually transmit to developing countries. This section considers two case studies of Taiwan's response to extreme external shocks, one in the economic realm and one in the political realm. The economic crisis was the oil price explosion of 1973 and 1974; the political one was the decision by the United States to recognize the People's Republic of China (PRC) at the expense of formal relations with the ROC in 1979. Both situations held potentially devastating consequences for Taiwan. Yet, within a few years of each crisis, the nation appeared fully recovered and set to move upward and onward.

RESPONSE TO THE OIL PRICE SURGE The Arab oil embargo and accompanying escalation of energy prices shook the economies of most countries in both the developed and developing world. Taiwan certainly appeared to be a prime candidate

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for economic devastation. It imports almost all of its energy products. Moreover, as a highly trade-dependent economy, it is very vulnerable to global inflation and instability in international markets for its manufactured products. On the other hand, the ROC's economy was seemingly quite strong as the result of its switch to export-led growth in the mid-1960s. From 1964 to 1973, exports skyrocketed at an average of 23 percent per year in real (i.e., inflation-adjusted) terms, stimulating a very high real GNP growth of 11 percent annually and real industrial production growth of 19 percent a year. As a result, manufacturing replaced agriculture as the island's dominant economic activity (see Table 8.1). The domestic savings rate also became extremely high, surpassing 30 percent in the early 1970s and providing a strong basis for future investment and economic growth. Thus, while the nature of the ROC's economy made it quite vulnerable to such external shocks as escalating oil prices, the domestic economy in 1973 appeared strong enough to absorb some of these disruptive pressures if the government could devise and implement a coherent strategy for managing the crisis. Data to assess the extent of the crisis and the regime's response are presented in Table 8.2. A variety of economic and social indicators are included. The table covers six years—1972 and 1973, which represent the zenith of Taiwan's first export-led surge; 1974 and 1975, which were the height of the crisis; and 1976 and 1977, which indicate the rapid recovery of Taiwan's economy. Three different types of data series are presented: annual growth rates (e.g., real percentage growth of GNP or exports); ratios (e.g., the percentage of GNP constituted by savings or the budget balance's percentage of government revenues); and absolute figures (e.g., daily calories consumed per capita). Table 8.2 certainly demonstrates that the surge in oil prices sent major shock-waves through Taiwan's economy. As would be expected, the oil-price explosion created massive inflationary pressures. Both wholesale and consumer prices, which had increased by under 5 percent a year for the preceding decade, leaped to almost 30 percent average inflation for 1973 and 1974, with 1974 seeing increases in the 40- to 50-percent range. There was more behind Taiwan's inflation than just the OPEC revolution, however, since prices began to rise considerably in mid-1973, well before the Arab oil embargo (see Table 8.3). Thus, analysis of input-output tables indicates that oil price increases per se accounted for slightly over half of these jumps in the price indices (Kuo, 1983: Chapters 9 and 10). Ironically, the nation's trade success contributed significantly to the inflation problem. The large trade surpluses that Taiwan began to accumulate in the early

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1970s stimulated a rapid expansion of the money supply, which rose by 30 percent in 1971 and 1972 and 50 percent in 1973 after much more moderate increases of 15 percent annually during the 1960s. Thus, considerable inflationary pressure was transmitted (Kuo, 1983: Chapter 9; Shive, 1985). Global and local inflation put an immediate damper on Taiwan's export performance, which had been outstanding in the early 1970s (e.g., exports, had grown by 30 percent annually between 1970 and 1973; by the end of this period, Taiwan was running a very healthy trade surplus equal to 15 percent of exports). First, the global economic crisis was quickly transferred to the ROC's externally oriented and dependent economy. Exports declined in real terms by over 6 percent per year in 1974 and 1975 as the proportion of GNP being exported fell from 42 percent to 35 percent between 1973 and 1975. Furthermore, foreign investment, which (while erratic) had averaged increases of 20 percent over the previous decade, fell precipitously by 40 percent annually in these two years. Second, the import bill of energy-dependent Taiwan skyrocketed by 38 percent in real terms in 1974, creating a trade deficit equal to almost a quarter of the ROC's exports. Poor performance in foreign trade, in turn, had a major adverse impact on the domestic economy, as would certainly be expected in a country that exports 40 to 50 percent of its domestic product. Real industrial production fell by 4.5 percent in 1974; Taiwan's GNP growth dropped to a minuscule 1.1 percent that year after the effects of inflation were controlled. Even agricultural production showed some slippage, falling from 2.5 percent to 0.5 percent growth between 19721973 and 1974-1975. Economic distress was reflected in a significant cutback in domestic savings as well. Real savings, which had grown by 20 percent a year in the early 1970s, fell by 7.5 percent in 1974 and 11.4 percent in 1975. Total private investment remained buoyant in 1974 (i.e., it grew by 29 percent versus 38 percent in 1973) as businessmen evidently tried to reinvest their profits to stay ahead of inflation. The effects of the deteriorating economy caught u p with private sector investment in 1975 as it plummeted 44.5 percent in that year and led to an overall drop of 14.5 percent in gross domestic capital formation. Not surprisingly, rapidly deteriorating economic performance hurt the popular standard of living as well. The growth rate in the number of jobs, which had expanded by 6 percent between 1972 and 1973, fell to 3 percent in 1974 and 0.6 percent in 1975 as unemployment almost doubled from 1.3 percent in 1973 to 2.4 percent two years later. The increases in the number of workers covered by labor insurance, which

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provides one indicator of welfare for the mass population, fell dramatically from 11 percent in 1972 and 21 percent in 1973 to 4.4 percent in 1974. The economic slowdown affected wages as well. Real monthly wages in the manufacturing sector, which had grown by 4 percent in 1972, only increased 1 percent the next year and then fell sharply by 9 percent in 1974. Falling income would be expected to hurt the quality of life for the average citizen. While there were only very slight absolute dips in the standard of living as measured by calorie and protein consumption, long-term trends of increasing food quality and consumption were clearly interrupted. There was a larger blip in the trend for households to spend smaller proportions of their income on food (which dropped sharply from 48 percent in 1966 to 35 percent in 1980). Spending on food actually increased from 41 percent to 44 percent of family budgets between 1973 and 1974, implying a significant drop in discretionary income. Unlike many developing countries, however, the poor did not have to bear a disproportionate share of the ill effects of the economic crisis since Taiwan's low ratio of the richest to the poorest (fifths of the population) actually decreased further from 4.5 to 4.2 between 1972 and 1976. This externally induced economic crisis produced a strong challenge to the ROC, and the government responded quickly, and actively to control it. In particular, four principal components of Taiwan's successful response can be delineated: (1) applying conservative fiscal measures to counter inflation, (2) managing inflationary pressures and psychology through a one-time major price increase, (3) using government spending and investment to reinvigorate the economy, and (4) enhancing international export competitiveness to stimulate another economic growth spurt. The ROC government has always been highly sensitive to inflation. The hyperinflation of the late 1940s was seen as a major factor underlying the disintegration of the Nationalist regime in the Chinese civil war. Consequently, once the government was reestablished in Taipei, it moved aggressively to implement a stringent and highly successful stabilization program that included controlling money supply and credit availability, instituting a high interest rate policy, and maintaining a positive budget balance. This ushered in two decades of price stability during which the government continued a general policy of fiscal conservatism and significant controls over credit and finance (Kuo, 1983; Chapter 13; Lundberg, 1979). Thus, the government's first reaction to the oil price explosion was to institute stabilization measures to dampen inflation. As in the 1950s, a major component of the stabilization program was a sharp increase

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in interest rates. After more moderate increases in interest rates proved ineffective, the "Stabilization Measures" of January 1974 imposed radical jumps averaging 33 percent for deposit rates and 25 percent for loan rates, with greater rises for short-term rates (Kuo, 1983: Chapter 10). This interest-rate policy proved successful in its aim to discourage spending and promote saving. Bank deposits, which had declined by 2 percent in current NT (New Taiwan) dollars between September 1973 and January 1984, grew by 3 percent a month for the remainder of 1984 (see Table 8.3). The rate of increase in loans to private corporations measured in constant 1981 dollars tumbled precipitously from 30 percent in 1973 to 10 percent in 1974 (see Table 8.2). The state also used fiscal policy to dampen the inflationary pressures set off by the OPEC revolution, as demonstrated by the data in Table 8.3. Real government expenditures that had grown by 9.5 percent in 1972 and 1973 were cut by 14.8 percent in 1974 as government spending fell from 23 percent to 18 percent of the GNP. This created a significant surplus in the government budget, which rose as a proportion of total revenues from 4 percent in 1972 to 11 percent in 1973. It reached a high of 22 percent in 1974. Thus, fiscal policy was clearly used in a deflationary manner. The government also tried to control inflation by managing price increases through the monopolies exercised b y government corporations, such as the China Petroleum Corporation (CPC) and the Taiwan Power Company. Initially, the highly profitable CPC tried to absorb the escalating oil prices; when this proved impractical, the ROC opted for a one-shot major price increase. Thus, the "stabilization measures" enacted in January 1974 included price hikes of 88 percent for oil products and 79 percent for electricity (Kuo, 1983: Chapter 10). The government also moved quickly to control the inflationary pressures of the rapidly expanding money supply by cutting its growth rate sharply from 50 percent in 1972 to 10.5 percent in 1973. These measures, along with the eventual stabilization of global energy prices, proved highly successful in bringing inflation under control in Taiwan. While wholesale prices had increased by about 4 percent a month for the second half of 1973, leaping almost 13 percent for January and February 1974 (see Table 8.3), from March on they actually fell slightly each month of that year. They then dropped another 5 percent in 1975. Increases in consumer prices were somewhat higher, but they also were clearly under control by the end of 1974. The regime's response to the economic crisis went far beyond conservative stabilization policies, though. As detailed above, the inflationary surge had undermined the ROC's growth, investment, and

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export competitiveness. Taiwan thus faced the problems of inflation and recession simultaneously in a stagflation for which traditional Keynesian countercyclical remedies are insufficient. The government instead composed a sophisticated policy package that coupled its deflationary measures with targeted economic stimuli. The early 1970s had seen the beginning of the "ten major development projects" in heavy industry and infrastructure. Thus, their augmentation in the mid1970s served several important purposes—providing a countercyclical stimulus to the economy, helping the structural transformation away from labor intensive industry, and overcoming transportation and supply bottlenecks. In addition, significant cuts were enacted in 1974 in income and commodity taxes and in customs duties to provide an economic stimulus (Galenson, 1979a; Kuo, 1983). In 1974, Taiwan simultaneously applied both the brake of fiscal conservatism and the accelerator of greatly increased public investment, mostly by state corporations. State investment, which had grown by 10 percent annually in 1972 and 1973, was increased by 50 percent in real terms to offset drops in foreign investment and growing pressures on the private sector. In part, this was paid for by a reorientation in financial policy as a 34-percent increase in bank loans to public corporations occurred in 1974 (compared to 6 to 7 percent in the previous two years). Because private investment was still expanding (as noted above), this only resulted in a modest increase of 35 to 38 percent in the public share of GDCF. By 1975, the economic situation had changed considerably. Inflation had clearly been tamed, but the effects of the crisis were still quite evident in sluggish growth and export performance and a disastrous 44 percent drop in private investment. The government responded by removing the fiscal brake but kept the investment accelerator pushed down. Government spending shot up by 37 percent in real terms, returning to its precrisis level of 23 percent of GNP as the 1974 budgetary surplus of 22 percent of total revenues dropped to under 6 percent. The investment stimulus continued as well. Real estate investment grew by 23 percent; bank loans to public corporations jumped 42.5 percent, almost twice the rate for private loans. Coupled with the precipitous drop in private investment, the state's share of gross domestic capital formation rose to 57.7 percent, indicating that the state had assumed a major role in supporting future economic growth on the island. Simply acting to reinvigorate the economy, of course, is not enough for a country so export-dependent as Taiwan. If investment, production, and growth were to rebound, external markets had to be found. The tremendous drop in the ROC's trade performance during

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1974 and 1975 certainly reflected disruptions in global demand stemming from the oil price explosion, but it was also caused to a significant extent by a marked decline in the competitiveness of Taiwan's exports. The government's very successful stabilization and stimulation program, though, might have been expected to improve the competitive position of Taiwan's products in international trade. Shirley Kuo (1983: 206-208) has devised a measure of export competitiveness based on relative prices and foreign exchange rates between the ROC and its trade partners which she terms the real effective exchange rate (REER). This index is based on a norm of 100 for the year 1980 when Taiwan was again feeling the effects of an oil price surge and a large accumulated trade balance. Increases in this index thus indicate decreased trade competitiveness since this means that the prices of Taiwan's goods are rising in foreign markets and, conversely, decreases demonstrate increased competitiveness. The movement of this index between 1972 and 1977 is reported in Table 8.4, along with several other indicators of trade performance that are repeated from Table 8.2 for comparative purposes. Clearly, export competitiveness had a large impact on trade performance (although it was not the only factor at work); just as clearly, the ROC's strong anti-inflation policies had a major positive impact on the nation's ability to compete in the international marketplace. Rising inflation in 1973 and 1974 strongly undercut Taiwan's international economic position as the REER index for exports leaped by an astounding 30 percent from 86.3 in 1972 to 112.7 in 1974, leading to the very marked decline in trade performance discussed earlier. The ROC's ability to move decisively and effectively against inflation, however, meant that the country's prices stabilized more quickly than had those of Taiwan's trade partners. The competitiveness of Taiwan's exports were thereby greatly increased as the REER index dropped sharply in 1975 to 99.6, and more slowly over the next two years to 93.4 in 1977—approximately what it had been in 1973. Trade performance improved accordingly, but in a slightly different pattern. Despite Taiwan's improved competitiveness in 1975, exports actually did worse than in the preceding year, falling by 8 percent in real terms as opposed to 5 percent in 1974, reflecting both the uncertain international market and a time lag before price changes effect trade. However, real imports were cut by nearly 17 percent, greatly reducing the trade deficit. That deficit, expressed as a proportion of exports, was halved from 24 percent to 12 percent. Taiwan's major improvement in export competitiveness and stabilizing world markets came together in 1976 to create a remarkable trade resurgence. Exports shot up 46 percent in real terms, over twice the

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increase in imports, thereby restoring a healthy trade balance and moving up to 44.5 percent of GNP. Trade expansion was much more moderate in 1977 (e.g., real exports rose 7.7 percent) but certainly respectable and sufficient to maintain balanced economic growth (see below). These changes in Taiwan's export competitiveness were also reflected somewhat in the changes in the country's composition of trade, which is depicted in Table 8.4. Taiwan's traditional major export partners in the United States and Japan suffered the most in the downturn of the mid-1970s as both countries dropped significantly in their share of total exports, indicating a special loss of competitiveness in these markets (also note that Taiwan broke into the lucrative markets in the oil-producing countries). In contrast, the United States took the preponderant share of Taiwan's expanding exports in 1976 and 1977, while trade with Japan stayed stable in percentage terms and trade with other developing countries in Asia suffered the most. This implies that Taiwan's increased competitiveness was greatest in goods sold to the developed countries, as well as indicating the declining economic position of the United States vis-à-vis Japan. In terms of the commodity composition of exports, the ROC's export decline in 1974 and 1975 was most pronounced in the traditional textile, clothing, and footwear industries (indicating special problems in labor-intensive production) and the emerging electronics sector. Heavy industries, such as iron and steel and industrial machinery, actually increased their share slightly while still remaining fairly unimportant in the overall export structure. In contrast, electronics led the export recovery, while the position of the traditional light industries began to slip, reflecting the country's strategy of emphasizing more capital and technology-intensive production. The changes in the import mix were fairly predictable. Rising energy prices created a fourfold increase in minerals' percentage of total imports (from 4 percent to 17 percent between 1973 and 1976). The economic crisis of 1974 and 1975 was accompanied by a significant drop in the percentage of electronics imports, probably reflecting decreased consumer purchases. Finally, the regime's support of investment in heavy industry and infrastructure brought a substantial increase in the importation of industrial and transportation machinery during the period 1974 to 1976. The recovery of foreign trade, in turn, stimulated a new spurt of economic growth, which is shown by the data in Table 8.2. Real GNP growth shot up to the "double digits" of 13.5 percent in 1976 and 10 percent in 1977; real industrial production increased even faster. Even agricultural production jumped by 10 percent in 1976 and 4 percent in

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1977. Savings and investment responded to the new growth spurt as well. Real savings jumped by 37 percent in 1976 and again surpassed 30 percent of GNP. Private investment increased by 26 percent and foreign capital inflows by 13 percent as well. As a result, total employment grew at 4 percent and the coverage of labor insurance at 10 percent for each of these two years; the unemployment rate fell below 2 percent again. More spectacularly, real wages in manufacturing averaged increases of 13 percent from 1975 to 1977—by far the largest three-year spurt in the history of Taiwan. Finally, the various indicators of the popular standard of living resumed their upward trends. In response to the revived economy and growing private investment, the government cut back its own stimulative activities and policies. The growth rate in real government expenditures was cut in half from the high of 37 percent in 1975; its share of GNP stabilized at 23 to 25 percent. The cutbacks in state investment and bank loans to public corporations were even more pronounced as the regime seemed willing to allow the private sector to reassert economic predominance. In sum, the strong external economic shock resulting from the OPEC revolution had only a fleeting impact upon the Republic of China, unlike the more devastating consequences it had for many countries in the developed world—and most especially—on the developing world. This occurred partly because Taiwan already had created a strong and expanding economic base that was able to absorb the shock. Considerable credit must be given to the Chiang Kai-shek government, though, for responding with a sophisticated and subtle program. Even before the debate on stagflation had commenced, the regime successfully blended deflationary and stimulative policies while fine-tuning the degree of government activities to rapidly changing macroeconomic conditions. Response to Derecognition by the United States Because both the Republic of China and the People's Republic of China claim to be the sole legitimate government for all China, diplomatic ties have assumed a unique role in Taiwan's well-being. Initially, when the United States declared that it would not intervene in the Chinese civil war, it appeared only a matter of time before the PRC would conquer Taiwan. However, U.S. policy underwent a drastic revision after the communist invasion of South Korea in June 1950. The Seventh Fleet was imposed between Taiwan and the Chinese mainland; Taipei continued to receive U.S. recognition as the sole government of China; and a mutual defense treaty was signed in 1954.

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Consequently, the ROC represented China in the United Nations and other international bodies; it retained diplomatic recognition by most other noncommunist nations. By the 1960s, however, the ROC's international status was coming under increasing pressure; by the mid-1960s, Taipei's lead over Beijing in bilateral recognitions had fallen to 60-50, including the major loss of diplomatic relations with France in 1964. The rapprochement between the United States and the PRC, which culminated in the Shanghai Communiqué of 1972 proved devastating to Taiwan's international status. The United States ended its opposition to seating the PRC in the United Nations in 1971. The 1970s then witnessed a continuing degradation of the ROC's diplomatic status as it gradually lost its place in most international organizations and as the n u m b e r of nations g r a n t i n g d i p l o m a t i c r e c o g n i t i o n fell to the l o w t w e n t i e s . Very significantly, Japan switched diplomatic ties from Taipei to Beijing in 1972 but maintained a system of informal relations with Taiwan that would serve as a model to the United States later in the decade. While the United States continued diplomatic recognition of the ROC, it established informal relations with Beijing that could be considered the equivalent of diplomatic recognition and served as the harbinger of things to come (Clough, 1978). These pressures on Taiwan's international status were also linked to domestic opposition to the KMT regime. Until the 1970s, opposition was most intense among Taiwanese nationalists w h o resented being ruled by the mainlander-dominated government. When Taiwan had r e v e r t e d to China at the e n d of World War II, it w a s initially administered by a military commander, Ch'en Yi, whose corrupt and brutal policies led to a Taiwanese uprising that was bloodily repressed. While Ch'en was quickly replaced by a more conciliatory figure and later publicly executed, a legacy of distrust and alienation had been created that culminated in the founding of an externally based Taiwan Independence Movement (TIM). On the other hand, the land-reform program and the later industrialization drive primarily benefitted islander peasants and entrepreneurs; since the early 1950s, the Taiwanese d o m i n a t e d local politics and the lower levels of the Kuomintang Party. The ROC's declining international position in the late 1960s and early 1970s h a d two s o m e w h a t countervailing effects on regimeopposition relations. First, increasing diplomatic pressure led to a withering of the TIM's appeal because both mainlanders and islanders were united in their fear of the imposition of rule by communist China. Second, a more "within system" opposition became prominent and vocal in the 1970s. It began early in that decade with a nationalist

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upsurge among students and intellectuals that was ostensibly directed, at least initially, at external "enemies." It clearly included criticism of the government for its diplomatic setbacks, though, and soon became centered on calls for political liberalization and democratization. The KMT responded with a combination of tolerance for increasing freedom of speech, repressive actions against its most outspoken critics, and political liberalization in regard to increasing the power of liberal technocrats, giving islanders more positions of power, and expanding the role of elections. During the 1970s, the regime seemingly became more liberal and less coercive, although the progress was far from linear (Clough, 1978: Chapter 2; Copper, 1979; Domes, 1981; Walker, 1973). Both the international and domestic status quos were severely challenged by the dramatic announcement of the Carter administration on December 15, 1978, that it was establishing full diplomatic relations with the People's Republic of China on January 1, 1979. Doing so entailed breaking relations with Taipei and abrogating the mutual defense treaty between the United States and the ROC. Clearly, there was substantial fear that the withdrawal of support by Taiwan's principal political and military patron could lead to an end for the island's independence and prosperity. For example, a demonstration against the U.S. delegation that was sent in late December 1978 to discuss the "new" relations that would exist between the United States and Taiwan turned quite ugly and violent, demonstrating the depth of popular fears 0acobs, 1980). Thus, the Republic of China was faced with a political crisis on both the domestic and international fronts that seemingly rivaled the economic threat of 1974 and 1975. A most pressing question obviously was to whom Taiwan could turn for the provision of its security needs in deterring the PRC. Rumor suggests that some discussion may have occurred at the very highest levels concerning turning to the Soviet Union for support. However, Sino-Soviet rapprochement, the Kuomintang's staunchly anticommunist ideology, and adverse reaction to derecognizing the ROC in the United States all combined to make such a potentially radical realignment impractical and unnecessary. Most fortunately for Taiwan, Carter's China policy stirred up strong domestic opposition (several important U.S. politicians who were critical of the KMT and sympathetic to the TIM opposed the president's plan). Consequently, Congress passed, and President Carter signed (perhaps somewhat reluctantly), the Taiwan Relations Act (TRA) in April 1979. The TRA established informal mechanisms based on Japan's relationship with the ROC dealing with the maintenance of government-to-government ties between the United States and ROC,

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albeit by another name, through the American Institute in Taiwan and the Coordination Council for North American Affairs. The United States also stated that it supported the continued autonomy of Taiwan and that it would continue to supply appropriate defensive weaponry to the ROC (a policy that has periodically continued to create disputes between Washington, Taipei, and Beijing). Thus, largely as a result of pressure from supporters in the United States, Taiwan's immediate security problems were brought under control; the political and military situation in the Taiwan Strait remained stable (Bellows, 1987; Gregor and Chiang, 1984: Chapter 6; Hickey, 1986; Lasater, 1982; Snyder et al., 1980). Taiwan was also faced with the dilemma of how to respond to what might be called mainland China's "peace offensive" in the early 1980s. The PRC issued a series of public proposals for negotiations leading to closer contacts and ultimately to a reunification in which Taiwan would receive almost complete economic, political, and even military autonomy. Although the PRC never renounced the use of force with complete unambiguity, it indicated that only extreme circumstances (e.g., Taiwan's acquisition of nuclear weapons, declaration of independence, or alignment with the Soviet Union) would make it change its "peaceful" policy. The ROC government viewed the Chinese communist proposals with extreme suspicion for several reasons—it would clearly be negotiating its own surrender from a position of weakness; previous agreements with the communists in the 1930s and 1940s had not prevented a vicious civil war; and just as importantly (if not more so) any attempt to talk with mainlander communists could push islander nationalists toward open insurrection. Thus, the government announced a "Three No" policy for dealing with the People's Republic (no contacts, negotiations, or compromises) that is only gradually being softened in the late 1980s (Bellows, 1987; Copper, 1981; Gregor and Chiang, 1984: Chapter 6; Shaw, 1985). While this policy has been criticized, with some justification, for being overly ostrich-like, it did seemingly provide the best method for protecting national autonomy and domestic stability in the early and mid-1980s. In contrast, the Republic of China proved quite innovative in responding to its virtual diplomatic isolation, having retained formal relations with only about twenty nations. First, it established institutions to carry on relations with the United States and Japan that paralleled normal diplomatic structures as these two important partners clearly switched to a "two China" policy, despite their official pronouncements to the contrary. Second, Taiwan was able to upgrade commercial, cultural, and educational ties with many other nations into quasidiplomatic relations. In the aftermath of the passage of the Taiwan

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Relations Act, for example, quite a few countries that recognized the PRC (including France, Japan, Singapore, and West Germany) moved to e x p a n d and u p g r a d e their ties with the ROC, using the U.S. precedent to shield themselves from Chinese retaliation. Third, Taiwan has used its extensive international economic contacts to fortify its international status. For example, its recent successful solicitation of foreign investment fits in well with its structural transformation to hightechnology industry (Simon, 1986; Wu, 1985) but also cements the c o u n t r y m o r e firmly in a w e b of i n t e r n a t i o n a l e c o n o m i c interdependence and helps create interest group support in such countries as the United States (Bellows, 1987; Copper, 1981; Jacobs, 1980; Shaw, 1985). Thus, the diplomatic disaster of December 1978 may actually have helped the Republic of China overcome the growing diplomatic isolation that its more p o w e r f u l rival to claiming the governance of China had succeeded in imposing u p o n it during the 1970s. The regime had to make more definitive choices in domestic policies since the external challenge exacerbated growing internal tensions. In particular, the late 1970s h a d witnessed increasing demands for further liberalization and more open conflict within the ranks of the KMT. The diplomatic crisis of 1979 then stimulated the advocacy of a newer version of Taiwanese nationalism which, while it challenged the regime less directly than the TIM, still called (at least implicitly) for Taiwan to declare its independence and go its separate way from China, thereby threatening the basic legitimizing motif of the Kuomintang. The government then faced a major dilemma. The gradual reforms of the 1970s were clearly insufficient; the dangerous international system made the preservation of internal unity essential at a time when the centrifugal force of Taiwanese nationalism was growing. Thus, greater concessions could undermine the regime, while a coercive c r a c k d o w n could irreparably f r a g m e n t the polity. Initially, the government moved in a hard-line direction. The elections scheduled for the end of December 1978 were postponed. Tensions between the regime and the political opposition intensified during the next year and culminated in December 1979 when violence erupted during a large demonstration led by the Formosa G r o u p in Kaohsiung. Several leading o p p o s i t i o n figures w e r e arrested and given long prison sentences (incidently, opinion polls suggested that this crackdown was quite popular with the general public). Just when it appeared that political reaction had set in, however, the regime launched another round of liberalization in the hope of unifying the country at a time of international crisis. This time, the

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reforms focused on expanding electoral democracy. The election was rescheduled for December 1980, and the scope of the elections expanded significantly to form what some observers called "Taiwan's first national election." While not allowed under the terms of martial law to establish a new party, opponents of the KMT formed a quasiofficial organization called the tangwei (meaning those outside the party). They were able to campaign fairly freely and effectively, although some tacit limitations on freedom of speech and issues that could be raised clearly existed (Copper, 1979 and 1981; Domes, 1981; Jacobs, 1980; Winckler, 1984). This set off the significant liberalization that has occurred during the 1980s (Chou and Nathan, 1987; Copper, 1987a; Pye, 1986). While it is probably too early to make a definitive judgment about the success or even the irreversibility of these political reforms, they do appear to have increased the legitimacy of the regime and stability of the polity while supporting an expanding amount of routine political conflict. In sum, the political shock of derecognition by the United States created a crisis of potentially equal magnitude to the economic turbulence of the mid-1970s. In foreign affairs, the ROC took a fairly reactive and incremental stance; fortunately for Taiwan, the international system stabilized quickly. In domestic affairs, the regime was forced to make a harder choice between coercion and reform. Ultimately, it picked the latter alternative, which proved successful for maintaining domestic political stability. Just as a strong economic base provided the base for escaping the ill effects of the oil price explosion, a fairly stable society and legitimate regime were central to the rapid amelioration of this political crisis. THE PUZZLE OF STABILITY IN A DEPENDENT SOCIETY

This chapter has argued that the Republic of Taiwan can be considered "a dog that didn't bark" because considerable external shocks have precipitated neither economic nor political instability. Two case studies were examined at some length; in each one, Taiwan effectively responded to the external pressure. It was successful in these cases because it had a strong and diversified economy, a government capable of designing and implementing a sophisticated economic policy and willing to grant significant political concessions, and a society that is fairly stable and supportive of an authoritarian government. Such conditions are rare in dependent developing societies, suggesting the need to explore the basic nature of Taiwan's dependency conditions and their impact upon political and economic stability.

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Taiwan has certainly been highly dependent in an economic sense. In particular, four different stages or types of external dependency can be discerned: (1) the colonial period of Japanese rule from 1895 to 1945; (2) extreme political and military dependency upon the United States during the 1950s and 1960s; (3) the substantial role that multinational corporations have played in the economy since the late 1960s; and (4) a heavy and increasing dependence upon foreign markets, especially U.S. ones. Such dependency in developing countries has been associated with economic and political weakness and with "underdevelopment" by a variety of theoretical perspectives (Bornschier and Chase-Dunn, 1985; Cardoso and Faletto, 1979; Hirschman, 1945; Prebisch, 1950). Thus, it should be instructive to inquire as to why and how Taiwan has been economically dependent, as well as stable and dynamic (see also, Clark, 1987). Japanese colonialism was certainly exploitative and repressive in terms of the transfer of resources out of Taiwan and the exclusion of islanders from positions of business and political leadership. The need of the Japanese metropole for Taiwan to serve as a "rice basket," however, led to substantial investment in agriculture and infrastructure, some land reform, and the creation of geographically dispersed light industry—all of which laid the base for Taiwan's rapid growth after World War II (Ho, 1978: Chapters 3 to 6 and 1979; Lin, 1973: Chapter 2). In addition, the Japanese occupation meant that there were no strong social or economic elites to challenge the leading role of the Kuomintang. The very strong and autonomous state that thus emerged has been given a good deal of credit for the island's economic success in that it could implement the land-reform and export-liberalization programs, unlike its earlier experience on the mainland (Amsden, 1979; Bobrow and Chan, 1986; Cumings, 1984; Gold, 1986; Haggard, 1986). Taiwan's political and military dependence upon the United States in the postwar era was also apparently advantageous. U.S. policymakers viewed the ROC in the context of the Cold War rather than as a playground for U.S. corporations. Following the logic that superpowers are willing to subsidize strategically important countries (Clark and Bahry, 1983; Richardson, 1978), the United States extended massive economic aid that proved vital in revitalizing the economy in the 1950s. The United States also used its political leverage to promote generally progressive change (e.g., land reform, increasing power for technocrats in the government, and trade liberalization), unlike its influence in many other developing areas (Cumings, 1984; Gold, 1986; Jacoby, 1966). Furthermore, the United States had a strong interest in supporting, rather than undercutting, a strong state in its political client; in fact, the ROC government has proved adept at claiming weakness in order to wrench more support and concessions from its patron (Chan, 1988).

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Multinational corporations did not have much of a presence in Taiwan before the mid-1960s because of the government's import substitution protectionism and the unattractiveness of a highly vulnerable location. After the liberalization of the 1960s, foreign investment rose rapidly, peaking at about 10 percent of GDCF (up to 50 percent in some key export sectors, such as electronics) in the early 1970s. However, because MNCs did not arrive until domestic industrialization was well underway, they have not influenced the economy to the extent common in many Third World countries. Government regulation, moreover, has seemed successful in limiting foreign investment to appropriate sectors, creating linkages with the domestic economy and promoting technology transfer (Gold, 1986; Haggard and Cheng, 1987; Kuo et al., 1981; Ranis, 1979). Finally, Taiwan has exhibited increasing dependence upon international markets—in particular those of the United States. For example, Taiwan's export-oriented growth strategy caused exports as a proportion of GNP to jump from 11 percent in 1962 to 42 percent in 1973, and then to 55 percent in 1986 (see Table 8.1); trade with the United States rose from 16 percent of total exports in 1963 to 37 percent in 1973, and to 48 percent in 1986 (Council for Economic Planning and Development, 1987: 222). This external market dependence has proved very profitable for Taiwan—at least so far—as demonstrated by trade and economic growth statistics. This success obviously stems from the country's ability to find a niche of comparative advantage in the global division of labor. Less widely recognized, but quite important, though, has been the ROC's ability to conduct successful trade negotiations, especially with the United States, in an international economy where "free trade" is increasingly much more of a slogan than a reality (Chan, 1987; Yoffie, 1983). The Republic of China's economic success, despite its pronounced dependency, can thus be explained by two general sets of factors. First, the structure of its dependency has been different from that of most other developing societies and has produced several positive economic effects. Second, behavioral factors in regard to regime strategy (and power to implement the strategy) and Taiwanese entrepreneurial skills explain why the ROC has been able to take advantage of its structural opportunities, indicating the need to consider cultural and political factors in the East Asian development model (Fei, forthcoming; Hofheinz and Calder, 1982; Pye, 1985; Wong, 1986; Wu, 1985: Chapter 7). This also suggests several reasons why Taiwan's experience probably is not a "model" readily transferable to other developing societies. The successful development program rests on structural and cultural factors that do not exist elsewhere; there is

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certainly a limit on the number of countries that can occupy the international economic niche that Taiwan has found. Moreover, Taiwan's current political economy faces three important threats that suggest a growing vulnerability to its dependency situation. First, its place in the international product cycle is being squeezed by other low-cost producers on one side and by advanced industrial countries trying to retain their comparative advantage in leading technologies on the other. Second, the declining economic hegemony of the United States has created a much different trade orientation in the last few years (Destler, 1986) which, when coupled with SinoAmerican rapprochement, suggests that it may start using its considerable leverage against Taiwan much more effectively. Finally, the political liberalization of the last fifteen years, which appears essential to maintaining regime legitimacy and economic stability (Clark, forthcoming), will almost inevitably lead to increased power for what Mancur Olson (1982) has called "distributional coalitions" that force a government to adopt inefficient economic policies. Thus, while Taiwan has been "a dog that didn't bark" so far, its silence is not guaranteed for the indefinite future.

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Table 8.1

Indicators of Economic Development in the ROC 1952

GNP per capita® 195 Agricultural Production/NDP (%) 36 Manufacturing Production/NDP (%) 11 Savings/NDP (%) 5 Gross Domestic Capital Formation/NDP (%) 15 Exports/GNP (%) 9 Industrial Exports/Total Exports (%) 8 Unemployment Rate (%) 4.4 Income Ratiob 20.5 Daily Protein Consumption (grams) 49

1958

1962

170 31 16 5

161 29 17 8

17 9 14 3.8 —

57

18 11 51 4.1 11.6 58

1968 302 22 24 20 25 19 68 1.7 4.3 65

1973 695 14 36 35 29 42 85 1.3 4.4 74

1978 1986 1628 11 34 35 29 48 89 1.7 4.2 77

3742 7 39 36 17 55 94 2.6 4.5 84

a

In current U.S. dollars. The stagnation of GNP per capita in U.S. dollar terms between the early 1950s and mid-1960s is partially the result of a rapidly deteriorating NT/U.S.$ ratio. Since then, the exchange rate remained fairly constant until 1987 when the New Taiwan dollar appreciated by 25 percent. b Ratio of the income of the richest fifth to the poorest fifth of the population. For this series, the time points are 1953, 1961, 1968, 1974, 1978, and 1985. Source: Taiwan Statistical Data Book, 1987. Taipei: Council for Economic Planning and Development, 1987.

External Shocks & Instability

Table 8.2

in Taiwan

195

Economic and Social Indicators, 1972-1977 1972

1973

1974

1975

1976 1977

Inflation (%) Wholesale Price Growth Consumer Price Growth Money Supply Growth

4.4 3.0 34.1

22.9 8.2 50.4

40.6 47.5 10.5

-5.1 5.2 28.8

2.8 2.5 25.1

2.8 7.0 33.6

Economic Growth (%) Real GNP Growth Real Industrial Growth Real Agricultural Growth

13.3 21.2 2.2

12.8 16.2 2.7

1.1 -4.5 1.9

4.3 9.5 -1.2

13.5 23.3 10.0

10.1 13.3 4.1

Foreign Trade (%) Real Export Growth Real Import Growth Exports/GNP Imports/GNP Trade Balance/Exports

37.0 28.8 38.0 32.1 15.7

24.3 25.3 41.9 35.6 15.0

-5.3 38.3 39.2 48.7 -24.2

-7.8 -16.6 34.7 39.0 -12.4

45.8 21.0 44.5 41.5 6.7

7.7 5.2 43.6 39.7 8.8

26.2

21.7

-7.5

-11.4

37.2

11.3

11.9 12.7 -26.6

20.5 38.0 63.0

33.9 29.2 -42.7

-14.5 -44.4 -39.0

16.1 26.3 13.5

3.6 6.8 8.8

19.7 32.1 25.8

30.3 34.6 29.3

9.9 31.7 39.5

24.2 26.9 30.6

2.1 32.5 30.8

4.2 32.9 28.4

Government Role (%) Real Government Expenditure Growth Real State Investment Growth Real Bank Loans to Public Sector Growth Government Expenditurcs/GNP Budget Balance/Government Revenues

9.7 7.8 6.3 22.2 4.1

9.2 12.9 7.0 23.0 10.9

-14.8 49.9 34.3 18.2 22.4

37.4 23.0 42.5 23.0 5.6

12.4 5.7 8.8 23.6 9.7

20.6 -3.7 12.6 25.6 0.7

Employment (%) Total Employment Growth Labor Insurance Coverage Growth Unemployment Rate Real Manufacturing Wage Growth

4.4 11.0 1.4 4.2

7.7 20.7 1.3 1.1

3.0 4.4 1.5 -9.0

0.6 8.6 2.4 11.3

2.7 10.4 1.7 15.0

5.5 9.1 1.9 12.4

2738 74.6

2754 73.7

2780 74.2

2721 74.7

Savings and Investment (%) Real Savings Growth Real Gross Domestic Capital Formation Growth Real Private Investment Growth Real Foreign Investment Growth Real Bank Loans to Private Sector Growth Savings/GNP Gross Domestic Capital Formation/GDP

Standard of Living Daily Calorie Consumption Daily Protein Consumption (grams) Food Expenditures/Total Household Expenditures (%) Income Ratio2 a

42.0 4.49

41.3 —

44.3 4.37

44.2 —

2770 2805 76.6 75.9 42.1 4.18

41.1 —

Ratio of the income of the richest fifth to the poorest fifth of the population. Source: Taiwan Statistical Data Book, 1987. Taipei: Council for Economic Planning and Development, 1987.

196

Cai Clark

Table 8 3

Monthly Changes in Bank Deposits and Wholesale Prices (in current NTS) Bank Deposits (%)

Wholesale Prices (%)

1973 May June July August September October November December

3.2 2.3 2.1 3.0 0.8 -0.4 -0.2 0.4

0.9 2.0 3.1 4.5 4.6 4.3 2.8 4.6

1974 Januaiy February March April May June July August September October November December

-1.6 1.6 3.2 3.2 3.2 3.9 3.6 4.0 3.2 3.0 1.8 3.5

12.9 12.9 -1.8 -3.0 -1.8 -1.1 -0.9 -0.1 -0.9 -1.4 -1.5 -0.1

Source: Shirley W.Y. Kuo. The Taiwan Economy in Transition. Westview Press. 1983.

Boulder, Colo.:

External Shocks & Instability in Taiwan

Table 8.4

197

ROC Export Performance 1972

1973

1974

1975

1976

1977

Export Competitiveness Export Real Effective Exchange Rate8 Real Export Growth (%) Real Import Growth (%) Expoits/GNP (%) Trade Balance/Exports (%)

86.3 37.0 28.8 38.0 15.7

94.1 24.3 25.3 41.9 15.0

112.7 99.6 -5.3 -7.8 38.3 -16.6 39.2 34.7 -24.2 -114

97.8 45.8 21.0 44.5 6.7

93.4 7.7 5.2 43.6 8.8

Export Markets (%) United States Japan Asian Developing States*3 Developed States^ Oil Producers'5

41.9 12.6 16.8 17.1 2.2

37.4 18.3 16.1 17.5 1.7

36.1 15.0 16.6 20.6 2.2

34.3 13.1 19.0 20.4 4.4

37.2 13.4 16.3 18.5 3.6

38.8 12.0 15.6 17.8 4.6

Export Goods (%) Food Products Textiles, Clothing, Footwear Electronic Equipment and Machinery Iron, Steel, and Metal Products Industrial Machinery

15.5 33.1 15.7 4.8 3.2

14.4 33.4 16.6 3.5 3.2

14.8 31.9 16.4 4.7 4.5

15.4 34.8 13.2 4.8 4.2

11.7 34.8 14.6 4.4 4.0

12.5 30.6 15.0 4.6 4.1

8.3 10.5 9.4 14.6

4.2 10.9 9.9 16.0

13.1 10.7 10.7 10.6

13.6 11.6 9.2 9.3

17.2 11.5 9.1 11.1

18.7 10.6 9.9 11.1

18.0

16.9

21.9

22.5

19.5

15.8

Import Goods (%) Minerals Chemicals Iron, Steel, and Metal Products Electronic Equipment and Machinery Industrial and Transportation Machinery

"Based on an index of 1980 value = 100. b Asian developing countries include Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea, and Thailand. Developed market economies include Australia, Belgium, Canada, France, Italy, Netherlands, Sweden, the United Kingdom, and West Germany. Oil producers include Iran, Kuwait, Nigeria, and Saudi Arabia. Sources: Monthly Statistics of Exports and Imports, The Republic of China, June 1986. Taipei: Department of Statistics, Ministry of Finance, 1986; Taiwan Statistical Data Book, 1987. Taipei: Council for Economic Planning and Development, 1987; Shirley W.Y. Kuo. The Taiwan Economy in Transition. Boulder, Colo.: Westview Press, 1983.

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Index

ACL. See Associa? ao Commercial de Lisboa Afghanistan, 81, 125 Africa, 46, 64-65, 78, 82, 91, 164; northern, 26; sub-Saharan, 20 AIP. See Oporto Industrial Association Alcoa, 142, 143, 145 Alfonsin, Raul, 44, 48 Algeria, 81, 91, 99, 125 Aluminum, 128, 141-142, 144, 146 Anglo Iranian Oil Company, 130 Angola, 125, l6l, 170 Argentina, 9, 19, 26, 30, 34 38, 43, 44, 48, 49,52,54,74,81 99,125 Arms, 11,12, 85, b6, 88, 90, 92, 93, 96, 103 Asia, 1, 64-65, 78, 82, 184 Associafao Commercial de Lisboa (ACL), 155-157, 159-160, 164 Atatürk, 40, 48, 53 Australia, 26, 144, 146, 197 Balance of payments, 24, 35, 38, 44, 76, 89, 92, 102, 139; crisis of, 31 Balassa, B., 175 Balta, José, 28, 29, 48, 50 Bangladesh, 125 Baran, Paul, 106, 107 Barcley Administration, 32, 48, 51 Bauxite, 13, 128, 141, 148 BCCP. See British Chamber of Commerce in Portugal Belaünde, F., 31, 48, 50 Belgium, 68, 197 Bermudez, Morales, 31, 49, 50, 140

Billinghurst, Guillermo, 29, 48, 50 Bodenheimer, S., 107 Bolivia, 74, 81, 99, 125 Bornschier, V., 65, 109, 111, 113, 119, 191 Bourgeoisie, 21, 23, 152, 153, 161, 164, 167,169,171 Brazil, 30, 35, 46, 48, 81, 99, 125, 144, 145, 171 Bretton Woods Conference, 69 British. See United Kingdom British Chamber of Commerce in Portugal (BCCP), 156, 162 Buenos Aires, 35, 36 Bureaucracy: state, 28 Burma, 99,125 Burundi, 125 Cabinet: Portugal, 155, 157, 160, 164, 167, 171 Cáceres, General, 29, 44, 49, 50 Calvo Doctrine, 132, 139 Cambodia, 125 Cameroon, 99, 125 Canada, 26, 143, 197 Capital, 18, 20, 23, 30, 34, 39, 40, 61, 63, 90, 95, 107, 112, 119, 120, 128, 129, 133, 136, 147, l6l, 164; flight, 57, 58; foreign, 29, 36, 137, 139 Capitalism, 7, 8, 17 Cardoso, F., 46, 107, 108, 191 Castilla, Ramón, 28, 48, 50 Caudillaje system, 20, 27, 35, 48, 50 Central African Republic, 99, 125

221

222

Index

Ceylon, 130 CGTP. See General Confederation of Portuguese Workers Chad, 99, 125 Chase-Dunn, C., 18, 111, 113, 119, 191 Chiang Kai Shek, 176, 185 Chile, 29, 74, 81, 99, 125 China, 26, 28, 76, 77, 81 (see also PRC) Civilista party, 29, 48, 50 Classes: lower, 21, 23; middle, 21, 23; upper, 161; urban, 21, 23; urban middle, 36, 37, 43 Cline, W.R., 46, 69, 71 Cohen, B.J., 58, 76, 134, 149 Collier, D., 46, 168 Colombia, 81, 99, 125 Concordancia, 34, 37, 49, 52 Conflict: political, 105, 106, 109-118, 122125, 165 Conflict and Peace Data Bank (COPDAB), 12, 112, 114, 120 Congress, U.S., 130, 187 COPDAB. See Conflict and Peace Data Bank Copper, J. F., 174, 177, 187-190 Corporation of Foreign Bondholders, 54 Costa Rica, 58, 81, 99, 125 Credit: foreign, 32 Crisis: balance of payments, 18; global debt, 17, 43, 45, 47, 57, 59 Cuba, 74-76, 81 Cyclical: downturn, 3; debt crisis, 19; shift, 23 Debt(s), 10-11, 18-19, 22, 24, 50, 58, 60, 62, 64-65, 70-72, 74, 76-77, 79, 81, 84-86, 88, 93, 95, 97, 104, 135, 141, 146, 149, 162; cycles, 9, 15, 17, 22, 43; external, 19, 26-28, 30, 34, 36, 38-39, 42, 45, 51-53, 69,. 87-88, 91-92, 94, 96, 98, 100-102; foreign, 20, 23, 27, 31-32, 34, 40, 42, 45, 165-166; internal, 32; international, 1, 9, 35; reschedulings, 31; service, 17, 18, 25, 29, 31, 34, 88-90; state, 37 Debtor: countries, 1, 25; European, 68 Defaults, 57, 59, 64, 68 Deficits, 18, 33, 39, 58, 75 Depression, 34, 60, 65, 67, 69, 73 Destier, I.M., 193 Diaz Alejandro, C., 63, 69, 75 Disarticulated period, 29, 37, 38 Distribution: of wealth, 7; of power, 5

Doe, S.K., 34, 49, 51 Dominican Republic, 81, 99, 125, 142 East European, 59 Economic systems: global, 169; newly industrialized, 1; market, 4 Economy, 18; Atlantic, 34, 36, 44; coastal plantation, 28; global, 3, 10, 161; liberal world, 15; world, 20, 24-26 Ecuador, 74, 81, 99, 125 Egypt, 57, 81, 99, 125 El Salvador, 58, 81, 99, 125 Empires, 20 England. See United Kingdom Estado Novo, 167-168, 171 Ethiopia, 81, 99, 125, 130 Europe, 1, 7, 32, 34, 166 European, 39, 133-134, 138 Evans, P., 107-108, 171 Faletto, E., 107-108, 191 Financial system, 9-10 Fishlow, A., 67-69, 74-75 France, 68, 94, 186, 189, 197 Frank, A.G., 109-110 French Dreyfus Company, 28 Galtung, J., 171 Garcia, Alan, 31, 48 GDP. See Gross Domestic Product General Confederation of Portuguese Workers (CGTP), 159 Germany, 68, 162, 168; West, 189, 197 Ghana, 99, 125 Gilpin, R., 4, 110 Girvan, N., 71,142-143, 145 GNP. See Gross National Product Goldstein, J., 74 Great Britain. See United Kingdom Greece, 91, 99, 125 Gross Domestic Product (GDP), 88, 91-94, 98, 100, 113, 121, 125 Gross International Reserves, 89, 91-92, 104 Gross National Product (GNP), 11, 87-88, 90, 92, 94, 100, 102-104, 138, 171, 174175, 178-179, 182, 184-185, 192, 194-195, 197 Growth, 4 Guatemala, 81, 99, 125 Guinea, 125, 144-146 Guyana, 142

Index

Hacienda economy, 20, TI Haggard, S., 175, 191-192 Haiti, 81, 125, 142 Hart, J.A., 132, 134 Hegemony, 12-13, 69 Hickenlooper Ammendment, 130 Honduras, 58, 81, 99, 125, 170 Hong Kong, 125, 197 IBA. See International Bauxite Association ICC. See International Creditor Coalition IDB. See Inter-American Development Bank IFIs. See International Financial Institutions IMF. See International Monetary Fund India, 81, 91, 99, 125 Indian head tax, 28; Indian territories, 36 Indonesia, 99, 125, 197 Inter-American Development Bank (IDB), 137, 139,143 International Bauxite Association (IBA), 142, 145 International Creditor Coalition (ICC), 1011, 60, 64, 70-73 International Financial Institutions (IFIs), 134 International financial system, 1, 11, 17 International Monetary Fund (IMF), 25, 41, 54-55, 57, 59, 70-71, 74, 82, 134-135, 146, 148-149 Investments, 18; foreign, 105-106, 109, 111-112, 114-119, 121-125, 141; manufacturing, 115, 117-119, 122-125 Iran, 81, 125, 130, 197 Iraq, 125 Ireland, 125 Iron, 32, 140-141, 148 Israel, 99 Italy, 168, 197 Ivory Coast, 99, 125 Jackman, R.W., 112-113, 119, 121 Jamaica, 12-13, 58, 81, 99, 125, 128, 136, 141-148 Japan, 1, 133-134, 144, 170, 184, 186, 188189, 191 Jordan, 99, 125 Katzenstein, P., 4, 6 Kenya, 99, 125 Keohane, R.O., 2, 129

223

Kindleberger, C., 68, 73-74 KMT. See Kuomintang Kondratieff, 42, 60, 63-67, 70-72, 75, 76, 78-79, 82; cycles, 4, 23-24, 26, 34, 38, 4345, 47, 49; waves, 9-10, 22, 25, 45, 49, 6062, 73-74 Korea, 46, 81, 91, 99; South, 125, 185, 197 Korean war, 40 Krasner, S., 6, 108, 131-132, 148-149 Kuomintang (KMT), 176-177, 186-187, 189191 Kuwait, 9, 197 Kuznets wave (cycles), 34, 74 Labor, 21, 61, 163; division of, 7-8, 10 Laos, 125 Latin America, 26-27, 45-46, 64-65, 69, 78, 82, 91, 95, 132 LDCs. See Less Developed Countries Lebanon, 125 Leguia, Augusto, 37, 48, 50 Less developed countries (LDCs), 2, 3, 6, 13, 15, 87-88, 93, 96, 127-135, 141, 144, 147-149, 173 Liberalism, economic, 4-5, 7 Liberia, 9, 19, 26, 31-34, 43-45, 48-49, 51, 54, 81, 99 Libya, 99 Upson, 129-130, 132-135, 137 Lisbon, 159, 164, 167 Loans, 30, 32, 36, 62-77, 79-81, 83, 91, 130, 137, 140, 182 Long waves, 27, 42-44; also s e e Kondratieff: long wave Madagascar, 125 Magdoff, H., 107 Mahler, V., 108-109, 112, 118-119 Malawi, 99, 125 Malaysia, 91, 99, 125, 197 Mali, 99, 125 Manley, R., 142, 144, 146 Manufacturing, 12-13 Marcona, 138-141, 147 Market(s), 6, 63, 127-128, 135, 141, 147, 148, 163, 183, 190; eurocurrency, 58, 138, 143; internal, 40; international financial, 13, 70; system, 134; world, 18, 173 Marxism, 4, 6, 7, 8 Materialism, 6 Mauritania, 99, 125 MDB. See Multilateral Development Bank

224

Index

Mercantilist. See Nationalism Mexico, 30, 58, 77, 81, 91, 99, 125,170-171 Mineral, 20, 33, 104, 128, 184 Mining, 12-13, 110, 112, 115, 117, 122-125, 139, 143 Mitre, Bartolomé, 35, 48, 52 MNC. See Multinational Corporation Modelski, G., 60 Mongolia, 125 Moran, T., 110, 134, 144 Morocco, 81, 99,125 Mozambique, 125, l 6 l Multilateral Development Bank (MDB), 130 Multinational Corporation (MNC), 105, 109, 111, 120, 127, 134-136, 141-142, 148, 173, 191-192 Nationalism, 4-6, 15 Netherlands, 68, 143, 197 Neomercantilist. See Nationalism New International Economic Order (NIEO), 127, 148 New Zealand, 26 Nicaragua, 58, 81, 125 NIEO. See New International Economic Order Niger, 125 Nigeria, 99, 125, 171, 197 North Yemen, 125 O'Donnell, G., 46,169 Odria, Manuel, 30, 48, 50 OECD. See Organization for Economic Cooperation and Development Olson, M., 193 Ongania, Juan C., 29, 30, 38, 49, 52 OPEC. See Organization of Petroleum Exporting Countries Oporto Industrial Association (AIP), 156157,159-160, 164 Organazation for Economic Cooperation and Development (OECD), 71, 112 Organization of Petroleum Exporting Countries (OPEC), 11, 58, 86, 127, 133134, 139,142, 147, 178, 181, 185 Ottoman Empire. See Turkey Pakistan, 99, 125 PAN. See Partilo Autonomista National Panama, 74, 81, 99 Papua New Guinea, 125

Paraguay, 81, 99, 125 Pardo, Manuel, 29-30, 49 Paris Club, 70-71 Partito Autonomista National (PAN), 34, 36, 48, 52 People's Republic of China (PRC), 177, 185-188 Period: disarticulated, 22 Perón, Juan, 37-38, 4 8 4 9 , 52 Peru, 9, 12-13, 19, 26-30, 32, 42-44, 48-50, 54, 81, 99, 125,128, 136-141, 147-148 Philippines, 58, 81, 99, 125, 197 Platt, D.C.M., 36, 75 Political economy: global, 7-8, 15; international, 2 Portugal, 14, 125, 151-171 PRC. See People's Republic of China Prebisch, R., 191 Production, 7, 19, 23; capitalist mode of, 18; means of, 21; relations, 5 Przeworski, A., 153,169 Pye, L., 175, 190, 192 Raw materials: industries, 12-13 Real effective exchange rate, 183 Reform, 105, 109, 114-116, 124 Regime(s), 2, 68, 129-133, 135, 137, 139, 146, 149; authoritarian, 168-169; capitalist, 9-10, 19, 21-24, 27, 29-30, 41-43, 48, 5053; democratic, 151-155, 167, 169; concession, 12; debt, 10; disarticulated, 9, 19, 22, 38-39, 41, 44, 50-53, 161, 164; international, 12, 128; liberal trade, 1, 40; political, 17-19, 22-23, 26-27, 41, 43, 48, 50-53, 151; populist, 9-10, 19, 21-24, 2728, 30-31, 37, 39, 42-44, 46, 48, 50-53; state class-based, 9, 20, 24-25, 27-28, 3132, 43-44, 48, 50-53 Repression, 105-107, 109, 111, 114-118, 123-125 Republic of China (ROC). See Taiwan Reserves: international, 11 Resources: financial, 18; foreign, 24; international financial, 25 Revolution, 57 Richardson, N., 107, 110, 191 Rights, 12 ROC. See Taiwan Rostow, W.W., 23, 36-37, 41, 45 Rubinson, R., 107, 111, 113, 119 Rwanda, 99, 125

Index

Saudi Arabia, 99, 197 Seiber, M., 68, 70, 74, 76 Senegal, 125 Sierra Leone, 26, 99, 125 Singapore, 125, 189, 197 Skocpol, T., 170 Somalia, 125 South Yemen, 125 Soviet Union, 85, 187-188 Spain, 26, 28, 91, 99, 125 Sri Lanka, 99, 125 Stallings, B., 31, 138-139 State insolvency, 18 States: industrial, 6; postcolonial, 20 Statist. See Nationalism Stepan, A., 46, 154 Structures: intranational, 59; transnational, 59-60 Sudan, 99, 125 Sunkel, O., 107-108 Surinam, 142 Sweden, 197 Switzerland, 68 Syria, 99, 125 Taiwan (Republic of China, ROC), 13-15, 173-197 Taiwan Independence Movement (TIM), 186-187, 189 Taiwan Relations Act (TRA). 187 Tanzania, 99, 125 Tanzimat, 39, 48, 53 Technology, 5 Thailand, 81, 99, 125, 197 Third World, 6, 11-13, 17-20, 23-25, 43, 85, 93-94, 96, 109, 118, 120, 127, 129-131, 142, 147-148, 173, 192; debt, 86-88, 90, 92, 98,101-106 TIM. See Taiwan Independence Movement TNC. See Transnational Corporation Togo, 125 TRA. See Taiwan Relations Act Trade unions, 41 Transnational Corporation (TNC). 58-59 Trinidad, 99, 125 True Whig Party, 31, 48, 51

225

Tunisia, 99,125 Turkey, 9, 19, 26, 38-42, 44-46, 48-49, 53, 54, 81, 99, 125 UCR. See Unión Cívica Radical Uganda, 99, 125 Unión Cívica Radical (UCR), 36 United Kingdom, 27, 54, 66, 68, 70, 74, 76, 80, 94,161-162,170,197 United Nations, 132, 135, 186 United States, 26, 40, 66, 68, 70, 74, 80, 85, 128-130, 132-137, 139-143, 145-148, 170, 173-174, 177, 184, 186-193; economy, 1 Uruguay, 81, 99, 125 Velasco, Juan, 31, 42, 48, 50, 136, 138-139, 148 Venezuela, 58, 81, 99, 125 Vernon, R., 17, 109-110, 118, 132 Videla, Jorge, 38, 44, 49, 52 Wages, 30, 180 Wallerstein, I.M., 7, 24, 46, 59, 74, 152-153, 161

Weber, R., 25, 66, 80 Winkler, M., 57, 63, 68-69, 74, 76 Wheat, 36 Wool, 29 World Bank, 54 , 62, 70-71, 95, 97, 112, 121, 134-135, 137,139, 143 World system: capitalist, 19, 38, 44, 76; industrial capitalist, 17 World War I, 33, 38; pre-, 26, 36, 38; post-, 168 World War II, 37, 186; pre-, 60; post-, 25, 40-41, 127, 170, 190 Wynne, W.H., 54, 57, 76 Young Turks, 40, 48, 53 Yrigoyen, Hipólito, 34, 37, 48, 52 Yugoslavia, 125 Zaire, 26, 125 Zambia, 26, 99, 125 Zimbabwe, 99, 125

About the Book

International Political Economy Yearbook, Volume 4 In the liberal view, political adjustments should be made in response to exogenous changes in market forces. Marxists assume that politics are determined by the exigencies of the capatalist mode of production. For mercantalists, economic arrangements should be and, more often than not, are altered to serve political interests. The original research in this volume shows that it is not so easy to distinguish what is politics and what is economics, let alone to determine causal direction between political and economic change. Concentrating on change as it affects societies on the periphery of the world system, the authors examine forces in the international environment of those societies and in domestic regimes. They offer, as well, alternative approaches to the study of change: historical/structural, cross-sectional data analytic, and case studies. The principal topics addressed are debt, in both historical and contemporary perspective; regime change, both international and domestic; and direct foreign investment.

227