The high cost of neoliberalism

Financial liberalisation undermines democracy, handing power to a “virtual senate” that acts on beha

In the contemporary world of state-capitalist nations, loss of sovereignty can lead to a diminution of democracy, and a decline in the ability of states to conduct social and economic policy on their own terms. History shows that, more often than not, loss of sovereignty leads to liberalisation imposed in the interests of the powerful. In recent years, the regime thus imposed has been called "neoliberalism". It is not a very good term, as the social-economic regime in question is not new; nor is it liberal, at least as the concept was understood by classical liberals. The very design of neoliberal principles is a direct attack on democracy.

The central doctrine of neoliberalism is financial liberalisation, which took off in the early 1970s. Some of its effects are well known. With the increase in speculative capital flows, countries were forced to set aside much larger reserves to protect their currencies from attack. It is striking that countries which maintained capital controls - among them India and China - avoided the worst of the Asian financial crisis of 1997-98.

In the United States, meanwhile, the share of the financial sector in corporate profit rose from just a few per cent in the 1960s to over 30 per cent in 2004. Concentration also increased sharply, thanks largely to the deregulatory zeal of the Clinton administration. By 2009, the share of banking industry assets held by the 20 largest institutions stood at 70 per cent.

Among the consequences of financialisation is the creation of what an analysis by the investment bank Citigroup calls "plutonomy". The bank's analysts describe a world that is dividing into two blocs: the plutonomy and the rest. The US, UK and Canada are the key plutonomies: economies in which growth is powered by - and largely consumed by - the wealthy few. In plutonomies, these rich consumers take a disproportionately large slice of the national pie. Two-thirds of the world's economic growth is driven by consumption, primarily in the pluto­nomies, which monopolise profits as well.

The virtual senate

Citigroup's "plutonomy stock basket" has far outperformed the world index of developed markets since 1985, when the Reagan-Thatcher programmes for enriching the very wealthy were taking off. This is a substantial extension of the "80-20 rule" that is taught in business schools: 20 per cent of your customers provide 80 per cent of the profits, and you may be better off without the other 80 per cent. Corporations recognised years ago that modern information technology allows them to identify profitable customers to whom they can provide grand treatment, while deliberately offering skimpy services to the rest, creating a form of "consumer apartheid".

Financial liberalisation also creates what some international economists have called a "virtual senate" of investors and lenders, who "conduct moment-by-moment referendums" on government policies. If the virtual senate determines that those policies are irrational - meaning that they are designed to benefit people, not profit - then it can exercise its "veto power" by capital flight, attacks on currency and other means. Take one recent example: after Hugo Chávez was elected president of Venezuela, capital flight escalated to the point where assets held abroad by wealthy Venezuelans equalled a fifth of the country's GDP. With capital flow liberalised, governments face a "dual constituency": voters and the virtual senate. And even in the richest countries, the private constituency tends to prevail.

The Bretton Woods system put in place at the end of the Second World War was designed on the understanding that capital controls and regulated currencies would create a space for government action responding to public will - for some measure of democracy, that is. Keynes considered the most important achievement of Bretton Woods to be the establishment of the right of governments to restrict capital movement. In dramatic contrast, in the neoliberal phase that followed, the US treasury department came to regard free capital mobility as a "fundamental right", unlike such alleged rights as those guaranteed by the United Nations Universal Declaration of 1948: to health, education, decent employment and security - entitlements that the Reagan and Bush administrations dismissed as "preposterous", "letters to Santa Claus", mere "myths".

In earlier years, the public had not been much of a problem. In his definitive history of the international monetary system, the economist Barry Eichengreen observes that, in the 19th century, governments had not yet been "politicised by universal male suffrage and the rise of trade unionism and parliamentary labour parties". This meant that the severe costs imposed by the virtual senate of lenders and investors could be transferred to the general population.

But with the radicalisation of the general public during the Great Depression and the anti-fascist war that followed, this luxury was no longer available to private power and wealth. Hence, in the Bretton Woods system, Eichengreen writes, "limits on capital mobility sub­stituted for limits on democracy as a source of insulation from market pressures". It is only necessary to add the obvious corollary: with the dismantling of that system from the 1970s on, functioning democracy was restricted.

Real choices

In Latin America, specialists and polling organisations have, for some time, observed that the extension of formal democracy was accompanied by an increasing disillusionment about democracy and a lack of faith in democratic institutions. A persuasive explanation for these disturbing tendencies was given by the Argentinian political scientist Atilio Boron, who pointed out that the new wave of democratisation in Latin America coincided with neoliberal economic "reforms", which undermine effective democracy. The phenomenon extends worldwide, although it appears that the tendency may have reversed in recent years, with departures from neoliberal orthodoxy.

The annual polls on Latin American opinion by the Chilean polling agency Latinobaró­metro, and their reception in the west, are interesting in this respect. Few elements of the reigning western orthodoxy are upheld with more fervour than the view that Chávez is a tyrant dedicated to the destruction of democracy. The polls are therefore a serious annoyance that have to be overcome by the usual device: suppression.

The November 2007 poll had the same irritating results as in the preceding few years: Venezuela ranked second behind Uruguay in satisfaction with democracy and third in satisfaction with leaders. It ranked first in the assessment of the current and future economic situation, equality and justice, and education standards. True, it ranked only 11th in favouring a market economy but, even with this flaw, overall it ranked highest in Latin America on matters of democracy, justice and optimism, far above the US favourites Colombia, Peru, Mexico and Chile.

The Latin America analyst Mark Turner has written of an "almost total English-speaking blackout about the results of this important snapshot of [Latin American] views and opinions". He also found the usual exception: there were reports of the finding that Chávez is about as unpopular as Bush in Latin America, a fact that will come as little surprise to those who are familiar with the bitterly hostile coverage to which the Venezuelan president is subjected in the media, not least (and this is an odd feature of this putative dictatorship) in his country.

In the US, faith in institutions has been declining steadily. It is interesting to compare recent presidential elections in the richest country in the world and the poorest country in South America, Bolivia. In the 2004 US presidential election, voters had a choice between two men born to wealth and privilege, who attended the same elite university, joined the same secret society where privileged young men are trained to take their place in the ruling class, and were able to run in the election because they were supported by pretty much the same conglomerations of private power. Their announced programmes were similar, consistent with the needs of their primary constituency: wealth and privilege.

By contrast, in the December 2005 election in Bolivia, voters were familiar with the issues: control of resources, cultural rights for the indigenous majority, problems of justice in a complex multi-ethnic society and many others. They eventually chose Evo Morales, someone from their own ranks, and not a representative of narrow sectors of privilege. There was real participation, extending over years of intense struggle and organisation.

Election day was not just a brief interlude for pushing a lever and then retreating to passivity and private concerns, but one phase in ongoing participation in the workings of the society. The comparison, and it is not the only one, raises some questions about where democracy promotion is most needed.

Latin America has real choices, for the first time in its history. The usual modalities of imperial control - violence and economic strangulation - are much more limited than before. There are lively and vibrant popular organisations providing the essential basis for meaningful democracy. Latin American and other former colonies have enormous internal problems and there are sure to be many setbacks, but there are promising developments as well. It is in these parts of the world that today's democratic wave finds its basis and its home. That is why the World Social Forum has met in Porto Alegre, Mumbai, Caracas, Nairobi, not in northern cities, though by now the global forum has spawned many regional and local offshoots, doing valuable work geared to problems of significance in their own regions.

The former colonies, in Latin America in particular, have a better chance than ever before to overcome centuries of subjugation, violence and foreign intervention, which they have so far survived as dependencies with islands of luxury in a sea of misery. These are exciting prospects for Latin America, and if the hopes can be realised, even partially, the results cannot fail to have a large-scale global impact as well.

Extracted from "Hopes and Prospects" by Noam Chomsky (Hamish Hamilton, £18.99)
© Noam Chomsky 2010

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Why Isis seeks a battle with Western nations - and why it can't be ignored

Islamic State believes it must eventually confront and then defeat the West. To get there, it seeks to polarise Muslim and non-Muslim communities alike.

It was precisely the type of attack that had long been feared: a co-ordinated and brutal act of urban warfare that brought Paris to a standstill for more than three hours on an otherwise typical Friday night. Six of the nine attackers had spent time fighting for Islamic State in Syria. Indeed, it was the third act of international terrorism perpetrated by IS in a fortnight, a campaign that started with the bombing of a Russian Metrojet flight over Sinai in Egypt, followed by a double suicide bombing in Beirut that killed 41 people – the deadliest attack in the Lebanese capital since the civil war there ended in 1990.

There are several significant operational observations to be made about what transpired in Paris. The attackers wore suicide belts in which the active ingredient was TATP, a highly unstable explosive based on acetone and hydrogen peroxide. TATP was also used in July 2005 when the London transport network was attacked. Known as the “mother of Satan” because of its volatility, it is usually manufactured at home and it is prone to accidental detonation – or, indeed, sometimes fails to detonate at all.

When two weeks after the July 2005 attacks four bombers attempted to replicate the carnage, their bombs failed to explode precisely because they had not been manufactured properly. The same was true for Richard Reid, the “Shoe Bomber”, and Umar Farouk Abdulmutallab, the “Underwear Bomber”, who smuggled TATP explosives on to American aircraft in 2001 and 2009, respectively.

Perhaps the most worrying aspect of the Paris attacks is that every device proved to be viable – a reality born of the permissive environment in Syria and Iraq. A new generation of terrorists is now able to learn and rehearse the skills required to build devices that detonate successfully. The skills come with experience, and the newly ungoverned spaces of the Levant provide an ideal training ground.

Yet, for all the viability of the TATP devices used in Paris, the greatest loss of life came from assault rifles. This demonstrates how relatively unsophisticated tactics can still achieve mass casualties for terrorists determined to kill as many people as possible. The threat is particularly acute in mainland Europe, where automatic weapons move easily across the Continent, typically originating from criminal gangs in eastern Europe. Smuggling them into Britain is harder because the Channel limits the number of potential entry points.

The added protection resulting from Britain being an island is often overlooked. Just as guns are able to move more freely across the Continent, so, too, can people. This was brought into sharp relief when Imran Khawaja, a British man from west London who joined Islamic State in January 2014, attempted to re-enter the UK.

Khawaja had been particularly cunning. He hoped to slip back into Britain by evading the authorities after faking his own death in Syria, a plan his compatriots facilitated by eulogising and glorifying him. He then made his way across Europe by land, passing through several European countries before being arrested on arrival at Dover. None of this is to suggest that Britain does not face a very serious threat from Islamic State terrorism (it does), but the risks here are diminished compared to the threat facing countries in mainland Europe.


Trying to understand the strategic rationale behind Islamic State’s attacks outside Syria and Iraq is daunting. A degree of conjecture is required, although information gleaned from its communiqués, statements, and behaviour can go some way towards
informing a judgement.

It may seem obvious to observe that IS sees itself primarily as a state, yet this is worth restating, because other jihadist groups have made claims to statehood while continuing to act as terrorists or insurgents, tacitly recognising the nonsense of their own position. Not so Islamic State. It truly believes it has achieved the Sunni ideal of a caliphate and it acts accordingly.

This was the thinking that led the group to break from al-Qaeda, rebuffing Ayman al-Zawahiri’s position as the group’s emir. From Islamic State’s perspective, countries are not subservient to individuals. The significance of this self-belief became apparent last summer when the US began dropping aid parcels to stranded Yazidis who were otherwise starving and dying from exposure in the Sinjar Mountains of Iraq. The US also committed itself to protecting Erbil in northern Iraq by bombing IS fighters who were moving on the city, not least because US diplomats were based there and President Obama could not afford a repeat of the 2012 Benghazi debacle in Libya.

Islamic State responded by beheading its first Western hostage, the American journalist James Foley. Although the video of this was billed as a “Message to America”, it was directed specifically at Obama rather than the American people. In a speech evidently written for him, Foley told viewers that the US government was to blame for his execution because of its “complacency and criminality”.

When Mohammed Emwazi – “Jihadi John” – appeared in Isis videos as executioner-in-chief, he went some way towards explaining those accusations. “You are no longer fighting an insurgency. We are an Islamic army and a state,” he said. “Any attempt, by you, Obama, to deny the Muslims their rights of living safely under the Islamic caliphate will result in the bloodshed of your people.” To that extent, Islamic State has pursued a campaign of retribution over the past 12 months against those it regards as belligerent enemies: the United States, Britain, France, Russia and its regional arch-rival Hezbollah, the Lebanese-based and Iranian-backed Shia militia.

There is an unspoken corollary to this approach, too: that Islamic State wants to make the cost of acting against it so unbearably high that its opponents are intimidated into acquiescence. For all its nihilistic sadism, IS is a rational actor. The group controls a large landmass, enjoys autonomy and makes claims to a revived caliphate. That is a project it wants to continue expanding and consolidating by being left alone to overrun the Middle East, a process that involves massacring minorities, including the Shias, Christians, Yazidis and Kurds.
If the West intervenes in this it must be prepared to face the prospect of mass-casualty terrorism at home.

Some will invariably argue that this is precisely what we should do. Leave them to it: Islamic State may be distasteful, but the cost of acting against it is too high. Besides, we cannot police the world, and what concern is it of ours if Arab societies implode in this way?

This view overlooks a broader (and inevitable) strategic imperative that can never be divorced from Islamic State. The group’s millenarianism and commitment to eschatological beliefs are such that it wants to be left alone – for now.

IS ultimately believes it must confront and then defeat the West in a comprehensive battle between haqq and batil: truth and falsehood. That became clear enough when Abdul-Rahman Kassig (originally Peter Kassig) became the fifth Western hostage to be executed by IS in November last year. The video of his killing was different from those that preceded it and started with the execution of 21 soldiers from the Syrian Arab Army who were fighting on behalf of President Bashar al-Assad.

A short speech by Mohammed Emwazi – again, directed at Obama – noted that the execution was taking place in Dabiq, a town in north-western Syria. The significance of this is not to be underestimated. Dabiq is noted as being the venue of a final showdown between the armies of Islam and those of “Rome”, a reference to the superpower of the day.

“To Obama, the dog of Rome, today we’re slaughtering the soldiers of Bashar and tomorrow we’ll be slaughtering your soldiers,” Emwazi said. “We will break this final and last crusade . . . and here we are burying the first of your crusader army [Kassig] in Dabiq.”

Kassig was branded a “crusader” because he had served in the US armed forces.

That final encounter is not necessarily reliant on Western intervention. Emwazi explained that Islamic State would also use Dabiq as a springboard to “slaughter your people on your streets”. Thus, for Islamic State, a confrontation with the West is inevitable. It would rather be left to consolidate its position for now, but there is no eventuality in which we could expect to escape its sabre-rattling indefinitely.

The religious significance attached to sites such as Dabiq plays a huge role in motivating the fighters of IS. While the world looks on with horrified bewilderment at its rampages, the power of its eschatological reasoning provides some insight.

Writing shortly after Russia entered the conflict, a relatively well-known Dutch fighter called Yilmaz (also known as Chechclear) invoked the importance of end-times prophecies. “Read the many hadith [sayings of the Prophet Muhammad] regarding Bilad al Sham [Greater Syria/the Levant] and the battles that are going to be fought on these grounds,” he said. “Is it not slowly unfolding before our eyes?”

Herein lies the power of Islamic State’s reasoning – its fighters, and the movement as a whole, draw huge succour from the religious importance of the sites around which they are fighting. It serves to convince them of the righteousness of their cause and the nobility of their endeavours.

Faced with a campaign of Western aerial bombardment (albeit one that is limited and unambitious), Islamic State has decided to bait its enemies into fighting it on the ground. To that end, towards the end of the Kassig execution video, Emwazi advises Obama that Islamic State is “eagerly waiting for the rest of your armies [sic] to arrive”.


One final point should be noted about the possible strategic aims of the Paris attacks of 13 November. Islamic State has been dispirited by the mass migration of Syrian refugees into Europe. Instead, it has appealed to them to migrate eastwards, towards the caliphate, rather than into disbelieving Western nations.

In an attempt to dissuade refugees from heading to Europe, IS released a series of videos featuring Western foreign fighters – including some from France – who told viewers how much they despised their home countries. Their message was one of persecution, of Muslims under siege, and of a hostile, unwelcoming Western world.

By way of contrast, they attempted to display the benefits of living in the so-called caliphate, with stilted images of the good life that would make even North Korean officials blush: schoolchildren in class, doctors in hospitals, market stalls filled with fresh produce.

Smuggling fighters into France who had posed as refugees is likely to have been a deliberate and calculating move, designed to exploit fears among some about the potential security risk posed by accepting Syrian refugees. Islamic State likens refugees seeking a future in Europe to the fracturing of Islam into various encampments following the death of the Prophet Muhammad in 632AD. Most of these sects arose from divisions over who should succeed the Prophet in leadership of the Muslim community, but some went into open apostasy.

Viewing events in this way, Islamic State argues that any Muslim not backing its project is guilty of heresy. For refugees to be running from it in such large numbers is particularly humiliating: the group even ran an advert that juxtaposed an image of a camouflaged military jacket alongside that of a life vest. A caption read, “How would you rather meet Allah?”

An article published this year in Islamic State’s English-language magazine Dabiq made this very point. It noted that: “Now, with the presence of the Islamic State, the opportunity to perform hijrah [migration] from darul-kufr [the land of disbelief] to darul-Islam [the land of Islam] and wage jihad against the Crusaders . . . is available to every Muslim as well as the chance to live under the shade of the Shariah alone.”

Islamic State recognises that it cannot kill all of the refugees, but by exploiting European fears about their arrival and presence, they can at least make their lives more difficult and force them into rethinking their choice. All of this falls into a strategy where IS wants to eradicate what it calls the “grayzone” of coexistence. Its aim is to divide the world along binary lines – Muslim and non-Muslim; Islam and non-Islam; black and white – with absolutely no room for any shades of grey.

“The Muslims in the West will quickly find themselves between one of two choices, they either apostatise and adopt the kufri [infidel] religion propagated by Bush, Obama, Blair, Cameron, Sarkozy and Hollande in the name of Islam so as to live amongst the kuffar [disbelievers] without hardship, or they [migrate] to the Islamic State,” says an editorial in Dabiq magazine. “The option to stand on the sidelines as a mere observer is being lost.”


Atrocities such as the Paris attacks are designed to put a strain on the “grayzone”, thereby polarising Muslim and non-Muslim communities alike. Indeed, this is precisely what Islamic State said it hoped to achieve after the Malian-French radical Amedy Coulibaly declared, in a video released two days after his death, that he had participated in the Charlie Hebdo attacks on IS’s behalf. “The time had come for another event – magnified by the presence of the Caliphate on the global stage – to further bring division to the world and destroy the grayzone everywhere,” Dabiq said.

Beyond the tendency of all totalitarian movements to move towards absolutism in their quest for dominance, Islamic State also believes that by polarising and dividing the world it will hasten the return of the messiah. Once again, eschatology reveals itself as an important motivating principle.

This is both a blessing and a curse for Islamic State. Certainly, it is what underwrites its remarkable self-assurance and certainty and at the same time fuels its barbarism. Yet it may also prove to be its unravelling. IS has now attacked Russian and French civilians within a fortnight, killing hundreds. The wider world is finally realising that Islamic State is a threat it cannot afford to ignore.

Shiraz Maher is a contributing writer for the New Statesman and a senior research fellow at the International Centre for the Study of Radicalisation at King’s College London

Shiraz Maher is a contributing writer for the New Statesman and a senior research fellow at King’s College London’s International Centre for the Study of Radicalisation.

This article first appeared in the 19 November 2015 issue of the New Statesman, The age of terror