Neo-Liberal Democracy: A Contradiction in Terms

Democracy and economic liberalism are often sold as a two-for-one package deal to the world. The United States, as the core of neoliberal hegemonic power, has prominently stated in Chapter VI of its National Security Strategy (NSS) report (2002) its dedication to this ideal which states the following:

promoting free and fair trade has long been a bedrock tenet of American foreign policy. Greater economic freedom is ultimately inseparable from political liberty… history has judged the market economy as the single most effective economic system and the greatest antidote to poverty. To expand economic liberty and prosperity, the United States promotes free and fair trade, open markets, a stable financial system, the integration of the global economy, and secure, clean energy development (U.S. National Security Strategy Report, 2002).

However, more and more as the liberal economic system spreads and entrenches itself in the international system, we have seen a contraction of the power of democracy. There is a misconception being built that democracy cannot exist without a free market capitalist economy (although free market capitalism finds many friends in the least democratic countries). Many international institutions push these economic ideas on their members. Through international treaties and trade agreements, economic restraints are being placed on member states, without the consent of the people. This democratic deficit is concerning, and has been especially illuminated during the current economic crisis. It has led us to ask the question: has the hegemonic economic system diminished the space of popular democracy?

As ideologies spread from the national to the international, they begin to be institutionalized in treaties and regional organizations such as NATO. Membership in these institutions is used as an incentive to promote the growth of the hegemonic ideology. For example, the end of the Cold War left NATO with an identity crisis: its reason for existence-- to prevent the spread of Communism and the Soviet Union-- was gone after the Warsaw Pact dissolved in 1991. It is reasonable to think that NATO, now effectively irrelevant, would dissolve as its former adversary had done. Yet NATO was an institution that legitimized the hegemony, and thus disbandment was not the most favourable option: instead, a new path was necessary. The future for NATO was to be much different than its détente past. It would become not simply a defender of the hegemony, but, more importantly, a tool of its expansion.

A significantly weakened Russia left many countries wanting new direction and leadership. As Neo-Gramscianism asserts, the success of the hegemony is often seen as attractive to countries on the periphery, and they will attempt to emulate the hegemony. Eastern Europeans states desired stability, which they saw in the successful, prosperous West. In turn, the West wanted the support of the East. The Western Hegemony extended membership in its institutions - the OECD, OSCE, and NATO - to the former Eastern Bloc, but not without conditions. Accordingly, Eastern European countries pressed hard for free-market economies and more democratic freedoms. In her 2003 biographical book Madam Secretary, former US Secretary of State Madeline Albright described expansion as a logical choice: "After four decades of Communist subjugation, the nations of Central and East Europe were eager to join an enlarged NATO. I felt we should welcome them, because if they were denied NATO protection, they would be in political limbo and might well seek security through other means, resulting in unpredictable alliances, efforts at rearmament, and the possible use of force to settle disputes." Ideological institutions such as NATO solidify the influence of the hegemony, allowing its power to spread.

Ideology

Over the past thirty years neo-liberalism has been institutionalized on the state level in various countries such as the United States and the United Kingdom and transferred to the international arena via international institutions. Neo-liberalism is based on the ideas of classical liberalism, which are concerned with limiting the political powers of the state and promoting the ideals of the free market economic system. The separation of the public and private spheres was the ideological base from which Friedrich Hayek formed his ideas on economic liberalism and its compatibility with the ideas of individual liberty and the need to limit the powers of the state. Hayek was seeking to preserve what he saw as the power of the individual to produce, unhindered by the collective will of the state. He looked to limit the power of the state as did earlier classical liberal theorists such as Locke, Mill, and Bentham. Paradoxically, this need to free the individual from the influence of the state and to protect private interests required strong constitutional laws as well as the means to enforce them. In order for the free market to function properly, it requires a firm set of rules, as well as appropriate institutions to maintain and enforce them. However, these rules and regulatory institutions must exist only on a limited scale, so as not to impede the rights of private property. Due to the explosive global economic growth and rise of the multinational corporation after World War II, the idea of limiting state power in favour of private property rights grew in popularity among Western states. Yet today the rights of the individual to influence his or her government via the democratic process is being reduced and, in some cases, completely removed by these very institutions.

The rise of these regulatory institutions was made possible when Hayek found his ideological soul mates in the likes of Milton Friedman, George Stigler, and other faculty members in the influential Chicago School of Economics, all of whom were avid proponents of laissez-faire free market economics. In 1947 Hayek, together with other like-minded economists and scholars, founded the Mont Pelerin Society in an effort to promote their ideas of a laissez-faire economic system. Then, in 1949, Hayek left Europe to become a faculty member of the Chicago school.

Over the years the Chicago school has gained a great deal of prestige and influence, boasting numerous Nobel Prize winners and John Bates Clark Medallists in economics. Milton Friedman became its most influential member due to his work on monetary policy, A Monetary History of the United States (1963), in which he argues against governmental intervention in the economy and in favour of a free market system. The ideas from the Chicago School became widely accepted over the years, influencing governmental officials, academics, and private capital. The Chicago School's ideas laid the ground work for major policy changes-- domestically and internationally-- through their adoption of a narrow set of economic policies endorsed by Washington D.C. based domestic and international institutions such as The World Bank, IMF, and U.S. governmental agencies. This group of ideas and institutions, collectively called The Washington Consensus, have served as the ideological linchpin in the substantiation of neo-liberalism, with the international financial institutions (IFIs) serving as dissemination platforms.

Institutions

In the 1980s, the Thatcher government and the Reagan administration ushered in a new neoliberal era, promoting lower taxes, fewer government services, economic deregulation, and support of multinational companies. In addition, the Washington Consensus had been espoused by the IMF and the World Bank as the preferred route to economic development for all countries. At the start of this movement, the aim of its supporters was, first, to promote these policies to both developed and developing countries as a way to open up new markets. However, that emphasis was soon changed in the 1990s. Stephen Gill, a professor of political science at York University in Toronto and a noted neo-Gramscian author, contends in his 1990 work, American Hegemony and the Trilateral Commission, that the supporters of neo-liberalism shifted their focus from the opening of markets, to "global economic governance," an approach that endeavoured to reshape the state in a manner that would provide a more favourable political environment to private capital. Moreover, Gill sees this shift as a means to legally codify neo-liberalism on a global scale via a method he terms new constitutionalism. The thrust of this new constitutionalism, he argues, is to prevent specific economic issues from being challenged by broad popular opposition, both within nations and by local authorities and interest groups. This effort, spearheaded by international institutional structures such as the OECD, and the WTO, codifies institutions' decisions into international agreements. This effectively insulates the decision from public discussion or opposition as it removes them from the public sphere to the technocratic one.

So how does new constitutionalism relate to the extension of capitalist markets and free enterprise? From the viewpoint of the owners of capital, its freedoms - for example the freedom to acquire, exchange or move property rights, require not only constitutional guarantees against expropriation, but also the imposition, internally and externally, of binding constraints on states' macroeconomic, trade, investment and industrial policies.

The goal of the new constitutionalism referenced above is to codify into law neoliberal rules so the state becomes subject to market disciplines. Gill refers to this as disciplinary neo-liberalism, where "public policy has been redefined in such a way that governments seek to prove their credibility" by inspiring investors' confidence in their respective countries via the consistency of their economic policies to the neoliberal system . The WTO, created in 1995 during the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) trade talks, stands as the international body pushing the new constitutionalism of neoliberal policies. Today, "the WTO is a powerful global bureaucracy where unelected trade bureaucrats are empowered to decide the fate of democratically-achieved laws". The WTO has the capability to make local and national governments change their laws to adhere to WTO rules on international trade. In 1996, following a claim levied on the U.S. for unfair trade rules by the Venezuelan oil company regarding the passing of the Clean Air Act to regulate gasoline, the Clinton administration was forced to change the law or face $150 million in trade sanctions every year. The surrender of state interests to the will of private capital has been numerous and the following examples, outlined below, further exemplify this new reality.

NAFTA-Chapter 11: Investors vs. States

In 1994 the United States, Canada, and Mexico signed the North American Free Trade Agreement (NAFTA), greatly reducing the numerous trade barriers that existed between the three countries. The signing of NAFTA sparked a great deal of dispute between free trade supporters and critics. Critics of NAFTA were characterized as protectionists with outdated ideas on trade, while supporters made vague arguments to the benefits the countries would enjoy under the agreement. In accordance with its promotion as a trade agreement, NAFTA was instrumental in "establishing rights for foreign investors to acquire, own and operate broad categories of NAFTA-defined 'investments' within NAFTA nations". Moreover, under Chapter 11's "investor-state" rules, these new privileges of ownership by foreign investors came with unprecedented rights "to sue governments directly whenever they feel their "rights" have been violated by a particular government measure" (Corporate Watch, http://www.corpwatch.org/article.php?id=652). The most controversial section of Chapter 11 is Article 1110: Expropriation and Compensation, which states the following:

1. No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment ("expropriation"), except:
(a) for a public purpose;
(b) on a non-discriminatory basis;
(c) in accordance with due process of law and Article 1105(1); and
(d) on payment of compensation in accordance with paragraphs 2 through 6.

These rights have provided to private capital the ability to challenge any government rule or law that they deem to be in violation of their investment rights under NAFTA. Private capital is able to challenge all public mandates and be compensated with tax dollars for their losses. These challenges are held in tribunals at the International Centre for the Settlement of Investment Disputes (ICSID), under the authority of the World Bank or at the United Nations Commission on International Trade Law (UNCITRAL). These institutions conduct these cases on a confidential basis and they are not subject to appeals in national courts or to public scrutiny (Public Citizens Global Trade Watch, 2005: xvi). An example of the reach these new rules provide to private capital with regards to state power is seen in Canada's efforts in 1998 to regulate its health and environmental concerns against the objections of Ethyl Corporation a U.S. based firm.

Virginia-based Ethyl Corporation threatened to sue Canada for banning MMT, a gasoline additive long suspected of being a neuro-toxin and which Canadian auto makers complained damaged catalytic converters designed to reduce polluting emissions from car exhausts. (MMT is banned in Europe, California and several other U.S. states.) When tribunal hearings indicated Canada was about to lose the case, the federal government settled out of court by paying Ethyl $20 million, removing the ban and issuing a public apology to Ethyl for implying its product was hazardous (Corporate Watch, http://www.corpwatch.org/article.php?id=652).

Ethyl Corp's case against Canada represents one of numerous cases brought by private capital against the government signatories of NAFTA. In 2005, Public Citizens Global Trade Watch, a private watch group in Washington D.C., published one of the only existing comprehensive analyses of the effects NAFTA has on the public sphere. They documented the numerous cases brought by private capital against the signatories of NAFTA and their impact on the respective countries.

Public Citizens Global Trade Watch's Summary of NAFTA Chapter 11 Investor-State Cases & Claims: February 2005
Corporation or Investor Number of Cases Damages Sought or Received: $U.S. Notes
Total Claims Filed Against All 3 NAFTA Parties: 42 Cases $28 billion This amount excludes case where there has been a final award, and includes the Baird and Sun Belt claims, which are disproportionately high. Without Baird and Sun Belt, total claims against all three NAFTA parties is $5 billion.
Total Cases Current in Active Arbitration: 11 Cases 7 against the United States, 1 against Canada, 3 against Mexico
Dismissed Cases (Won by NAFTA governments): 6 Cases Loewen, Mondev, ADF, Azinian, Waste Management, GAMI
Cases Won by Investors: 5 Cases $35 million awarded Ethyl, S.D. Myers, Pope & Talbot, Metalclad, Karpa (Feldman)

Coercion

Although rare, coercion within the core of the hegemony becomes necessary for either the preservation or the expansion of power. Over the last several years, the European Union has been obsessively pushing for a Constitution that would grant the institution even greater power over its 27 member-states. The EU, which is often criticized for its undemocratic nature, has seen its desire for expanded powers outright rejected in both 2005 and 2008. In 2005, the EU Constitution was going to be held to referenda in 11 countries. However, only four were held after humiliating defeats in France and the Netherlands defeated it. After the first rejection, the EU repackaged the Constitution as the Lisbon Treaty and member-states began to push it through their own ratification processes. However, Ireland was constitutionally obliged to put the Lisbon Treaty to a referendum, where it was soundly rejected. Instead of listening to the Irish people's "no", the Irish Taoiseach, under pressure from the bigger EU countries, is now holding another referendum this September. As Steve McGiffen described it in an article in the Morning Star, "You might compare the Taoiseach's position to that of a minor gang leader required to explain to a mafia boss why takings are down from his protection rackets". The fact that the EU has refused to accept the democratic process of referendums simply accentuates the institution's near anti-democratic nature.

One of the more alarming changes from the Constitution to the Lisbon Treaty is the expansion of the European Central Bank's independence from democratic legitimacy-- independence from both the people and the people's own elected representatives. As the Financial Times reported in 2007, this change came after the bank's president, Jean-Claude Trichet, expressed his concern that, "as an EU institution, the central bank would be bound by the same code that applies to the Commission and other bodies - namely to co-operate with each other and to pursue a set of common European values. The fear is this subtle change might encourage EU leaders to put greater pressure on the ECB to pursue policies aimed at driving growth and job creation" (Financial Times, 2007). The fact that Trichet is worried about EU leaders endorsing a non-neoliberal economic policy is itself a reason for concern, especially as he plays for more independence. This can be explained by the idea of new constitutionalism.

The advent of new constitutionalism can be seen as a form of coercion, used by the hegemony to further its hold over the international system when consent cannot be secured. Using new constitutionalism to remove important economic decisions from the public sphere is a direct attempt to circumvent the public will, when that will does not serve the goals of the hegemony. This fear of the democratic process was well articulated by Samuel P. Huntington, (Professor of Government at Harvard University,) in a report written for the pro-neoliberal group, The Trilateral Commission, titled The Crisis of Democracy (1975).

The vulnerability of democratic government in the United States thus comes not primarily from external threats, though such threats are real, nor from internal subversion from the left or the right, although both possibilities could exist, but rather from the internal dynamics of democracy itself in a highly educated, mobilized and participant society.

Huntington was echoing the sentiments of the members of the commission and those of the ruling constituency who feared the rise of global populist demands that presented an obstacle to an open free-market international system. It is this fear of the mobilized populace that has driven the need for the supporters of neoliberal hegemony to remove key policy decisions out of the realm of the democratic process. Today, no institutions serve this purpose better than independent central banks in the various western countries. The supporters of independent central banks argue that the key role of these banks is to manage monetary policy. The goals of a central bank are to control the money supply of a given country, protect the stability of the currency, and set official interest rates. To successfully perform these economic functions, banks must be sufficiently insulated from the political process. At issue is that each of the major functions performed by a central bank affects every individual, institution, corporation, etc., in a country, regarding almost all vital activities, from purchasing property to financing major projects. No matter the economic philosophy, the very idea that an institution whose consequences reach every member of society, should be governed by non-elected technocrats isolated from the will of the people via the democratic process is counter to the core idea of a representative democracy.

The authenticity of the democratic process has deteriorated, due to the new constitutionalism of major economic policies that is being conducted under neo-liberalism. This action has marginalized the efforts of individuals and civil society groups to influence economic policy via the political process. This runs counter to the apparent transfer of power from authoritarian elites to the people via the spread of parliamentary institutions. As initially posited, democracy and economic liberalism are often sold as a two-for-one package deal. Yet in its current form, economic liberalism is perpetuating an inherently undemocratic hegemonic structure through an institutional and coercive manner that not even an authoritarian government could duplicate.

Patrick Clairzier was born in Port au Prince, Haiti and grew up in Boston, Massachusetts. He worked in the financial services industry until switching course in his late thirties. He has recently attained a Master's in international relations from the American Graduate School of International Relations and Diplomacy in Paris, as has Joseph Beaudreau, who is from Oregon. Both authors completed a second masters' program in strategic negotiations at the Universite de Paris, as well as interning at the United Nations Environmental Programme.