Rogue Nation: American Unilateralism and the Failure of Good Intentions (2003) (8 page)

It actually worked, but not fast enough. By the spring of 1998, the hemorrhaging had been largely staunched in Asia, but Russia, which had been on the edge for some time, now defaulted on its government bonds. This sent a chill through world credit markets that virtually froze lending to countries such as Brazil and Argentina, and even financial markets in the United States were feeling the effects. One group in particular was badly squeezed – Long Term Capital Management (LTCM), a hedge fund based in Westport, Connecticut. This was one of those outfits tailored just for the very rich. It would take your money only if you agreed to put up a minimum of $10 million and keep it there for three years. In return for that commitment, the fund promised to make at least 15 to 20 percent a year by investing in very complex ways that you didn’t want to know about, not because there was anything wrong with them, but just because you really wouldn’t understand. If you were looking for gnomes, you couldn’t have done better than these guys – a group of Wall Street high rollers leavened with two Nobel Prize-winning economists.

Actually, underneath the complexity, the basic idea was relatively simple. Over time, the interest rates on similar kinds of bonds tend to be similar. It would be surprising if things were otherwise. In the short term, however, for all kinds of extraneous reasons, such rates can diverge. So if you invest when they diverge and bet on convergence over time, you are almost sure to win. That’s what LTCM was doing. There are two keys. One is leverage: The spreads or profit margins on these bond investments are extremely narrow, so to make money you have to buy a lot of them, preferably with borrowed money. The other key is probability, which is where the mathematicians come in. You need to have a pretty good idea of how long it will take for the divergences to converge, because if it is longer than you expect, you can lose a lot of money really fast. LTCM had the best mathematicians and the best computer models, and it borrowed the most money and bet it all. For a while the scheme worked as it was supposed to. In three years, LTCM earned an average 34 percent annually for its investors while making its partners among the richest people in the world.
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By the spring of 1998, investors were begging to put more money into the fund and the fund doubled its bet with a total of over $1 trillion of leveraged funds. But there was a problem. The world was acting funny. All the assumptions on which the computer model was based were proving wrong. Convergence wasn’t occurring on schedule and LTCM began to hemorrhage money as if from a fire hose. This was, of course, bad for LTCM and its investors, but it had some other important people worried too. One of them was Alan Greenspan, the Chairman of the U.S. Federal Reserve system and the most important central banker (some would say the most important man) in the world. A disciple of the extreme libertarian novelist Ayn Rand and high priest of the virtues of unfettered markets, Greenspan had assured the U.S. Congress in extensive testimony that there was no need to regulate hedge funds like LTCM because as professionals they knew the risks and were prepared to accept them. But now the risk staring Greenspan in the face was the collapse of the whole global financial system. LTCM had borrowed so much money and placed such risky bets that if it collapsed it threatened to take major banks and perhaps the system itself with it. Faced with that risk, Greenspan blinked and organized a bail-out of LTCM. In effect, he too imposed capital controls, and in doing so he probably saved the global financial system. He certainly saved the bacon of some major Wall Street players. In Kuala Lumpur, Mahathir could be heard laughing.

So this is one face of globalization. The IMF and many U.S. officials later admitted mistakes and inappropriate policies, but the United States escaped the worst global financial crisis since the Great Depression largely unscathed. The Indonesians, Malaysians, Thais, Hong Kong Chinese, and Koreans still bear the scars, and they still remember the unconcern, inconsistency, self-righteousness, and ignorance of the United States and the institutions of globalization.

DO AS I SAY, NOT AS I DO

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n August 6, 2002, President George W. Bush signed into law the Trade Promotion Authority Act, designed to improve the ability of his administration to negotiate international free trade agreements. Said Bush, ‘America is back in the business of promoting open trade.’ He further promised that he would ‘use this new authority to create more jobs and higher standards of living for American families.’ In earlier remarks to the Council of the Americas, he had emphasized that ‘open trade is not just an economic opportunity; it is amoral imperative.’ These views were further elaborated by Secretary of State Colin Powell, who said, ‘The reality is that free trade and globalization promote worker and human rights over the long run, one that helps the environment and improves economic equality for greater wealth for all.’
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He added the Bush administration is determined to ‘pursue free trade at every opportunity for the simple reason that trade works. It gives people hope, helps them feed their children, puts roofs over their heads. They start up the ladder, and they will never go back.’
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Neither Bush nor Powell were saying anything new or unique. Free trade and open markets have been the policy and the mantra of every American president since Franklin Roosevelt.

But try to tell that to Mody Sangare of Korokoro, Mali, in West Africa. Shortly before Bush’s signing ceremony, as reported in the
Wall Street Journal
, he hitched his one-blade plow to two oxen and began the first of the fourteen days it would take him to till his fifteen acres of cotton. Even as he toils at this backbreaking labor, he has little hope that it will do him much good. Prices being offered to Mali’s cotton farmers this year are 10 percent below last year’s record lows, and last year, after all the costs of production were paid, the Sangare family was left with less than $2000 to support two dozen people. With prices falling again and costs for imported fertilizers and pesticides rising, the family may be unable to support the education of some of its children.

The same
Journal
piece noted that, while Mody sweated and worried, on the other side of the globe, in Gunnison, Mississippi, Ken Hood stepped into his air-conditioned tractor, seated himself on his air-cushioned seat, and adjusted the global positioning satellite system to find out just how much fertilizer he needed to squirt on seedlings already pushing through the soil on his 10,000-acre spread. Despite falling world cotton prices, Hood and his family continue to buy land, and Hood, a director of the National Cotton Council, says ‘there are lots of reasons to be optimistic.’ Given the $800,000 average net worth of American cotton-farming households, it is easy to understand Hood’s confidence.

But it is important to understand what lies behind that confidence and the vast gap between Mody Sangare and Ken Hood. A logical and readily acceptable explanation would be competitiveness and productivity. In another speech, President Bush emphasized that ‘American farmers and ranchers are the most productive in the world,’ a fact that could easily account for Mr. Hood’s prosperity in the face of Mr. Sangare’s poverty. Ten thousand acres and modern equipment going against oxen and single plows on tiny plots wouldn’t seem to be much of a contest. Maybe, as Mr. Hood says, ‘the farmers in Africa should not raise cotton.’ But actually, Mississippi Delta cotton farmers are not the low-cost producers. They are the highest-cost producers in the world, spending about $600 to produce an acre of cotton. All that high-tech equipment is expensive. Delta land is irrigated, and the seed is premium priced because it is genetically modified to resist pests. Then there are the costs of expensive fertilizers and defoliants. So why all the optimism in Gunnison? Easy: subsidies. A few days before Mody Sangare roped up his oxen and Ken Hood climbed into his tractor, President Bush signed into law another piece of legislation that is expected to substantially increase last year’s $3.4 billion in cotton subsidies. Of this, Ken Hood expects to get nearly $1 million.
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But the good fortune of Mr. Hood and the rest of America’s 25,000 cotton farmers comes not only at the expense of the American tax payer. It comes also at the expense of the entire economy of countries like Mali and, perhaps eventually, at the expense of American lives and national security. Despite its high production costs, America is the world’s largest exporter of cotton, competing in global markets with Mali. West Africa, as a region, is the third largest exporter. The U.S. subsidies assure American farmers that they will earn 70 cents per pound of cotton regardless of the world price (55 cents per pound as of January 2003)
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Further, they set no limit on acreage planted. Not surprisingly, U.S. planters harvested a record crop of nearly 10 billion pounds last year, creating a huge glut on the world market that pushed prices far below the break-even mark for most farmers around the world. In short, U.S. subsidies mean that the world’s highest-cost producers dump cotton on world markets and gain a greater and greater market share as they drive the low-cost producers out of business. That isn’t the way capitalism is supposed to work, but that’s how it looks from Mali, one of the ten least developed countries in the world and a place that can’t even provide its people with basic health care and education, let alone match U.S. subsidies. A recent World Bank report calculates that annulment of U.S. subsidies would reduce U.S. production and lead to a rise in world cotton prices that would bring as much as $250 million of extra revenue to West and Central African countries – a fortune in a region where many live on less than a dollar a day.
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The subsidies are undermining more than the world’s cotton growers. They also undermine U.S. efforts to combat global poverty as a central element in the war on terror. In an attempt to break the cycle of misery and instability that makes the developing world susceptible to hosting terrorist groups, the U.S. government has begun to emphasize development aid and open trade. In Mali, for example, the United States spends $40 million annually on education, health, and other development programs.
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But that sum is almost totally negated by the state cotton company’s loss of $30 million caused by sinking world cotton prices. The result is increasing bitterness in this predominantly Muslim country of 11 million. Says Mody Diallo, a leader of the farmer’s union, ‘This is where America is heading. It wants to dominate the world economically and militarily.’ Fortunately, such sentiment has not yet boiled over into action, but the impoverished citizens of West Africa are increasingly crowding into European cities, and those who stay behind are seeing more mullahs from Pakistan and the Middle East in their mosques and Quranic schools, while there are reports of Malians and others going abroad for religious training. In West Africa, the face of American-style globalization and free trade is not the hope-inspiring one of Colin Powell, but a harsh, hypocritical one that inspires a drift to radicalism and perhaps to terrorism. The cost of dealing with that would, of course, far exceed anything spent on subsidies or aid.

One Malian, Bakary Traore, president of the state cotton company, has a creative solution. ‘It would be better for the United States to pay their farmers not to plant cotton,’ he says. He is surely correct. In fact, Delta farmers could grow corn, soybeans, or wheat much more inexpensively than they can grow cotton. With these crops they could compete in world markets without subsidies. But Ed Hester has the answer to that: ‘I can only run cotton through my cotton picker.’ And because Ed and his fellow cotton farmers have powerful friends on the agriculture committees of the U.S. Senate and House of Representatives, there is little doubt that he will be running cotton through his picker for some time to come. How much that will eventually cost the United States and the world, only time will tell.

STEEL IS FOREVER

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n the other hand, the cost of the emergency tariffs President Bush imposed on imports of a wide range of steel products in March 2002 was known instantly and precisely. The impact of the 30-percent tariff would raise costs for U.S. steel users by $3 billion while cutting the sales and profits of foreign steel producers and exporters by 20 percent.
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Coming at a time when efforts were underway to launch a new round of trade liberalization negotiations aimed at restarting the then stalling global economy, this protectionist action unleashed a firestorm of criticism from all corners of the globe. It was seen both as a violation of the very free trade principles the United States was pushing for the new trade liberalization talks and as another example of the United States rejecting the pleas of its allies and acting unilaterally in its own selfish interests. Actually, it was a case of the President doing the wrong thing for the right reasons.

As a result of often unfathomable dynamics, certain industries take on special symbolic significance. The airline industry is a good example. Airlines rarely make money, but virtually every country has one whether it makes economic sense or not. It is as if you aren’t a real country if you don’t have an airline. So it is with steel. Along with steam power and railroads, steel was one of the pillars of the industrial revolution. For most of the nineteenth century, Great Britain led the world in steel production and measured its industrial supremacy in terms of its lead in this vital commodity. First Germany and then the United States protected their industries to enable them to catch up to the British, and when they did, it was seen as a sign of the emergence of new powers and of British decline. Japan got into the game in the early 1900
s
; after World War II, the European Iron and Coal Community served as the forerunner of the formation of the European Common Market and eventually of today’s European Union. During the Cold War, Soviet Prime Minister Nikita Khrushchev promised that communism would bury capitalism by, among other things, out-producing it in steel, and nearly every developing country from Korea and Malaysia to Mexico and Poland has felt it imperative to develop a steel industry as part of its industrialization strategy. It follows that the world has installed a lot of steel production capacity over the past hundred years.