[] MULTINATIONAL MONITOR November 1989 VOLUME 11, NUMBER 11, NOVEMBER 1989 The Pacific Rim Founder Ralph Nader Editor-at-Large Ellen Hosmer Associate Editors Stuart Gold, Amy Allina, Robert Weissman Managing Editor John Richard Contributing Writers Diane Bartz, Garth Bray, Justin Castillo, Katherine Isaac, William Jackson, Russell Mokhiber, Allan Nairn, Sandy Smith, Samantha Sparks, Jim Sugarman, John Summa, William Steif and Cathy Watson Staff Researchers Jessica Cowan, Jim Donahue Production and Design Kathleen Cashel Business Manager Regan Bailey Multinational Monitor [ISSN 0197-4637] is published monthly by Essential Information, Inc., P.O. Box 19405, Washington, DC 20036. Telephone: (202) 387-8030. Second-class postage paid at Washington, DC POSTMASTER: Send address changes to Multinational Monitor Subscriptions, address as above. Behind the Lines (omitted here; unscannable) Editorial Time to Trust Bust The Front Big Spillers The Destruction of the Southeast Asian Rainforest Features Dragons in Distress: The End of an Era for South Korea and Taiwan By Walden Bello & Stephanie Rosenfeld Japan's MNCs: The New Power in Southeast Asia By Rob Steven Interview On the Japanese Threat An Interview with Chalmers Johnson Economics Bank Relief, Not Debt Relief Mexico's Encounter with the Brady Plan By Cameron Duncan Corporate Profile Philip Morris: King of the Cancer Trade By John Summa Labor A Challenge to the One Party State: The Need for a Labor Party? By Samantha Sparks Names In the News Review Manufacturing Consent Necessary Illusions Resources ------------------------------------------------------------------------------ [] MULTINATIONAL MONITOR November 1989 VOLUME 11, NUMBER 11, NOVEMBER 1989 EDITORIAL TIME TO TRUST BUST THE U.S. REACTIONS to the Sony Corporation's purchase of Columbia Pictures ranged from fear to outrage to resignation; but all of these responses viewed the sale primarily as yet another sign that Japan is overshadowing the United States as a world economic power. If the Japanese can buy Hollywood, the essence of American culture, little is sacred. All but a very few missed a key issue in this deal: it was another corporate merger in the communications industry. Now Sony not only produces audio cassette tape, video cassette tape, video cassette recorders, television sets and movie cameras, it also produces movies, videos and television programs and owns movie theaters and movie channels. Thus, Sony's control over film production extends from raw materials and equipment to creative and marketing decisions. Sony can decide what is made, how it is made, how and where it will be distributed and what it will cost the consumer. By diversifying vertically within film, Sony has become dominant in the film industry. Domination of this type is just as harmful to the industry, the economy and the consumer as the more widely understood horizontal monopoly. Having vertical control over a field allows companies to distort the market in many ways. Columbia Pictures could make only movies which have a content and style that further Sony's interests; the movies could be made with Sony cameras and distributed through Columbia's movie theaters; when they come out on video, they could be available on Sony's video cassettes; when they show on cable television, they could be broadcast on Columbia's movie channel. The parent company is able to make many decisions which affect market choices and prices for consumers as well as for others in a particular field. When Sony's video cassettes get the contract for Columbia's video releases, smaller cassette manufacturers lose out and, perhaps, die out. In this way, the vertical concentration spreads horizontally and dominant companies continue to grow larger and more powerful. Corporate mergers strengthen corporate control and power. When these mergers occur in the communications industry, they strengthen corporate control over the flow of ideas and culture. Such media mergers are on the rise. In the June 12, 1989 issue of The Nation, Ben H. Bagdikian, author of The Media Monopoly, described the power that the few executives at the head of this empire now have. He wrote: Together, they exert a homogenizing power over ideas, culture and commerce that affects populations larger than any in history. Neither Caesar nor Hitler, Franklin Roosevelt nor any Pope, has commanded as much power to shape the information on which so many people depend to make decisions about everything from whom to vote for to what to eat. In 1983, most of the country's broadcast and film business, newspaper, magazine and book publishers were owned by 50 corporations; by 1987, only 29 companies controlled the field; and the number is only expected to shrink in the nineties. This kind of concentration is taking place in other industries as well. It has increased in recent years in the United States in part as a result of the failure of the Reagan/Bush administrations to enforce antitrust laws and regulations. The Reagan administration loosened the regulations in 1982 and 1984 and proposed relaxing anti-merger law radically. Under Reagan, the staff of the Justice Department's Antitrust Division was cut by more than a third. The Justice Department received 10,723 pre-merger notifications between 1981 and 1987 and challenged only 26 of those deals. By comparison, the challenge rate was 25 times higher in 1979, when the Justice Department challenged 53 of the 861 pre-merger notifications filed. Bush's new appointees to the Justice Department have announced that they will be tougher on anti-trust enforcement, though Bush's strong ties to big business and business's history of opposition to almost all forms of anti-trust regulation may limit any new anti-trust initiatives. Even putting such skepticism aside, former Federal Trade Commission officials point out that Reagan's federal courts upheld the mergers of the eighties and Bush's Justice Department may not be able to convince the federal judiciary to reverse its position. Either way, it is important to recognize that Bush's anti-trust regulators could do a great deal more than Reagan officials did and still not adequately address the current monopoly madness. The regulatory apparatus in this country was devastated by the Reagan presidency; it must be strengthened and rebuilt through legislation and with increased allocation of resources to the appropriate agencies. ------------------------------------------------------------------------------ [] MULTINATIONAL MONITOR November 1989 VOLUME 11, NUMBER 11, NOVEMBER 1989 THE FRONT EXXON'S 11-MILLION-GALLON oil spill in Valdez, Alaska received widespread attention and provoked much outrage. But a recently released study by Essential Information, the Center for Study of Responsive Law and Multinational Monitor shows that oil spills are an everyday occurrence. The report, "Big Spillers," draws on records obtained through the Freedom of Information Act from the U.S. Coast Guard. The 1984-1988 oil spill records for Exxon, Texaco, Mobil, Chevron, Shell, Amoco, Occidental, Tenneco and ARCO (Atlantic Richfield) reveal that in the five year period, the companies spilled, on average, over 144,000 gallons of oil-related material every month. These corporations--the nine largest oil companies-- collectively reported spilling more than 6.9 million gallons of crude oil, gasoline, fuel oil, diesel and waste oil on land and in water. The Chevron Corporation was the largest spiller, leaking 2.8 million gallons, followed by Amoco, which spilled 1.3 million gallons and Texaco with 926,000 gallons. The remaining spillers in ranking order were: Exxon 843,869 gallons, Shell 536,768 gallons, Mobil 495,696 gallons, ARCO 22,222 gallons, Tenneco 15,374 gallons and Occidental 375 gallons. Reported spills ranged in size from one gallon puddles caused by pinhole leaks in pipelines to an 11 million gallon, 10 year leak from a Chevron storage tank in El Segundo, California. Unfortunately, drastic inconsistencies in the annual totals for several oil spillers call into question the accuracy of the reporting system and the honesty with which these companies report spills. For example, seven of the nine surveyed oil companies reported no oil spills in 1986 and/or 1987, an unlikely event given their spill records in other years. Texaco spilled more than 300,000 gallons in 1985 and 1988 and reported no leaks for 1986 or 1987. Although Exxon spilled over 840,000 gallons between 1984 and 1988, the company did not report any oil spills for 1987; Shell did not report a single oil leak for 1986 or 1987. It is, therefore, possible that Chevron, which reported the greatest volume of spilled oil and the largest number of spill incidences of the nine companies, was simply the most honest and consistent reporter of its spills rather than the biggest spiller. The National Response Center of the Coast Guard collects all the spill data used by officials in Washington to analyze problems pertaining to spills. But the accuracy with which the agency keeps its records has been called into question. The National Response Center attributed a spill to Mobil, for example, which appears never to have taken place. Mobil told the Monitor that Coast Guard records showing a 210,000 gallon "spill" on Staten Island in 1984 were inaccurate because the alleged spill was actually a drill exercise by the company. According to the Staten Island Advance newspaper, the fire department was called to the scene at the time but realized it was a false alarm. The Staten Island fire department does not have a record of an oil spill for the date of the drill. Lt. Ramierez of the National Response Center denies the agency erred and still believes the spill occurred. He said, "Whenever we get a call and somebody is reporting a spill we put it into our data base, unless it's a drill." Ramierez, however, did say that it is possible that Mobil "might have forgotten to tell us it was a drill" and that this type of mistake "happens quite often." The National Response Center has also neglected to record at least one large spill that did occur. According to Mobil's spokesman John Lord, the agency failed to record a huge oil spill that occurred on March 19, 1984 in Washington State. Lou Cittle of the state's Department of Ecology acted as the on- scene coordinator for the spill. He says Mobil spilled between 170,000 and 233,000 gallons of number six low sulfur fuel oil, industrial fuel oil and heavy residual oil into the Columbia river. According to Cittle, the state fined Mobil $60,000 for pollution violations. Although the Portland, Oregon Coast Guard Station recorded the spill, the government officials in Washington, D.C. responsible for assessing oil leakages did not have a record of the spill because it was not included in the overall data collected by the National Response Center. Companies frequently report oil slicks near facilities, such as off-shore rigs or refineries, without taking responsibility for the spills, contributing further to the incomplete nature of the Coast Guard data. The surveyed companies reported 34,900 gallons of unclaimed spilled oil between 1984 and 1988. Fines for failure to report oil spills can be as high as $25,000, but the three governmental agencies that issue fines and notices--the Coast Guard, the Environmental Protection Agency (EPA) and the Minerals Management Service of the Interior Department--have become inactive and are delinquent in their responsibilities. Two hundred and eighty-eight notices were issued by the EPA in 1984. By 1987 the agency issued only 50 additional notices, an 83 percent reduction. Mobil spokesman John Lord emphasized the fact that the surveyed oil companies together transported the greatest amount of oil and produced only 8 percent of all the oil spilled between 1984 and 1988. "Statistically, the main problem is quite obviously not the big oil companies," he said. Asked whether 6.9 million gallons of spilled oil further degrades the environment regardless of the performance of other oil transporters he responded, "That's childish ... Please ask an intelligent question . .. It did not ruin the environment." He later conceded, however, that "it clearly harms the environment at the time of the spill. That is why you clean it up." Chevron spokesman Mike Libby said the company thought it had adequate spill prevention plans. "We're very concerned when any spills occur," he said, responding to the report's identification of Chevron as the number one spiller of the nine companies surveyed. "We have quite a number of programs designed to prevent leaks and spills and we're constantly striving to better our record. This corporation gives high priority to environmental concerns, I can assure you of that." He further stated, however, that he did not believe the oil industry and government regulators need to do more to protect the environment or that Chevron's 2.8 million gallons of spilled oil produced any substantial environmental damage. "How much are we supposed to expect life to be perfect and nobody to ever be harmed by anything?" he asked. Lord also downplayed environmentalists' concerns with oil spills by arguing that spills involving crude oil, the same oil leaked by the Exxon Valdez, do not pose as great a problem as other oils because "crude oil will biodegrade." "From what I read," Lord said, "probably the best way for a crude oil spill to get cleaned up is to let it happen naturally." He did acknowledge that such a cleanup policy would be a "problem" because "it could take so many years" for the crude to biodegrade. The volume of oil spilled by the nine surveyed companies varies widely by geographic region. The Gulf of Mexico and the Gulf states (Alabama, Louisiana, Mississippi and Texas) rank as the number one oil spill region with over 3 million gallons spilled between 1984 and 1988. The Western half of the United States followed with more than 1.4 million gallons. The remaining regions in ranking order were: Central, 862,350 gallons, Southwest 728,450 gallons, Northeast 520,964 gallons and South (excluding Gulf states) 165,278 gallons. Texas and California, the top two spill states, had 2.7 and 1.1 million gallons of oil spilled in and around their waters, respectively. Although the spillers were often vague when reporting the cause of an incident, 68 percent of the reported spills were attributed to mechanical failure and 20 percent to human error. The causes of 8 percent were unknown. Four percent of the spills were caused by inclement weather and less than 1 percent by vandalism. The specific causes listed most frequently by the nine companies were corrosion of pipes, overfilling of storage tanks, trucks and barges, malfunctioning of valves and operator spills as a result of cleaning and testing facilities. ------------------------------------------------------------------------------ [] MULTINATIONAL MONITOR November 1989 VOLUME 11, NUMBER 11, NOVEMBER 1989 The Destruction of the Southeast Asian Rainforest WHILE INTERNATIONAL attention focuses on the burning of the rainforest in Amazonia, the destruction of the Southeast Asian rainforests has received little publicity. These tropical forests have been seriously and, in some cases, permanently damaged by logging companies. There are few signs that the destructive harvesting of the forests in this region will slow in the near future. Each year, approximately 1.82 million hectares (one hectare is equivalent to 10,000 square meters or two and a half acres) of Asian forest are cleared, while millions more are irreversibly damaged. As in other regions, the tropical forest in South-East Asia has fallen victim to population pressures and the concomitant demand for fuel and arable land. But population growth is not the only problem; a large share of the damage is caused by commercial hardwood logging, an industry dominated by Japanese companies. Japanese demand for wood products has grown rapidly since the 1950s and so have the country's timber imports. As in many sectors of Japan's economy, there are insufficient domestic resources to meet the demand. Imports now make up more than two thirds of Japan's wood supplies. The World Wildlife Foundation (WWF), an international environmental organization, recently published "Timber from the South Seas," a report which sheds light on the ruinous impact that the Japanese timber trade is having on Southeast Asia. The report describes the environmental degradation caused by commercial logging and criticizes Japanese foreign aid policies and corporate practices for contributing to this process. The tropical hardwoods from this region are desirable for their density, workability and aesthetic quality. Several European countries and the United States import them for use in furniture, panelling and other decorative purposes. But "Timber from the South Seas" is particularly critical of Japan, which imports more than the United States or the European Community (EC), and which uses the timber products for less specialized purposes such as in plywood construction molds for pouring concrete or as flooring for buses. A major portion of the Japanese tropical timber imports is used for plywood in construction. Builders use plywood sheets an average of only 2.75 times before they discard them. Approximately 1.76 million cubic meters of hardwood is exhausted this way each year, according to the WWF report. The reports' authors allege that this sort of wasteful mass consumption is needlessly depleting the forests and probably causing permanent ecological damage. They claim that for many of these uses, other kinds of woods could be used from less sensitive and better managed forest resources. For instance, softwoods found in North America and the Soviet Union could replace the Southeast Asian hardwoods for the plywood used by Japan's construction industry. But such substitutions are unlikely as long as the tropical hardwood from Asia remains so inexpensive. Until recently, the main hardwood-producing countries have had either very weak or no controls over the logging and export of their timber. This has enabled Japanese companies to export hardwood logs without paying for reforestation or the development of indigenous industries. Where laws requiring the use of conservation techniques in logging and reforestation existed, the report's authors claim, Japan simply ignored them. In some areas, the companies have logged themselves out of business by destroying the forests completely. In the Philippines, for example, commercial forestry has declined drastically because of overlogging and consequent deforestation. The Philippine elites who held the large forest concessions were more than willing to cooperate with the Japanese trading companies who wanted to harvest and export mahogany. When the loggers have exhausted a country's resources (as they have in the Philippines and in Thailand), they move on to the next location, employing the same methods again, with the same disastrous effects. Several countries, including Thailand, the Philippines and Indonesia, have placed bans on the export of logs but this has not stopped the logging. Increasingly, Japanese companies are subverting these export controls by investing in overseas processing plants which make plywood and sawnwood for export to Japan and other markets. This allows Japan to import the wood as a processed product rather than in its regulated, raw form. The Japanese timber-trading companies operate in complex and interlocking relationships which make efforts to analyze, measure and regulate their activities difficult. Local companies do much of the actual logging and timber processing in Southeast Asia, but these smaller enterprises depend on Japanese trading companies for help with financing, equipment, distribution and marketing. The complexity of the corporate arrangements allows the trading companies to hide a great deal from the indigenous governments. Exporters consistently underreport timber shipments to Japan in their filings with the government customs agency, the WWF report states. In 1984, for instance, the Japanese customs administration reported that 903,000 cubic meters of Philippine logs were imported to Japan while the Philippines reported only 603,700 cubic meters leaving. Such cheating exacerbates the ecological problems by encouraging overlogging since the exporters will harvest as much timber as they think they will be able to slip out of the country. It also deprives the producing countries of revenue needed to fund forest conservation and economic development. Ironically, companies trading in tropical hardwoods often defend their business by claiming that they are helping the producing countries to develop their economies. The evidence suggests the contrary. Efforts to stem the destruction of the forests have focused on developing economically feasible reforestation techniques and viable alternative industries, like exporting nuts, fibers and meat or producing medicinal products which do not depend on tree harvesting. The urgency of the situation, however, has moved some groups to push for more immediate action to curb the hardwood timber trade. WWF and the Japan Tropical Forest Action Network, for example, have urged the Japanese government to regulate hardwood trade. Other organizations, including the European Commission of the EC, have proposed a "Code of Conduct" for hardwood importing companies, prohibiting business with hardwood producers which do not practice conservation techniques. But little progress has been made with these or other proposals. The WWF report points out the negative impact that bilateral aid and loans have had on the forests. Among other things, the authors write, foreign aid "has provided subsidies for the construction of logging roads in areas which were later exploited by Japanese companies. The official justification has been that local people want to use the roads. In many cases this is far from the truth." WWFs Tropical Forestry Program has been pressuring the Japanese government to rein in the tropical logging trade and to reform its aid policies, but they have achieved little success. Robert Buschbacher, director of the Tropical Forestry Program, says, "I don't see logging coming under any control." -Gawain Kripke ------------------------------------------------------------------------------ [] MULTINATIONAL MONITOR November 1989 VOLUME 11, NUMBER 11, NOVEMBER 1989 PACIFIC RIM DRAGONS IN DISTRESS: The End of an Era for South Korea and Taiwan By Walden Bello & Stephanie Rosenfeld Walden Bello is a senior analyst at the Institute for Food and Development Policy (Food First). He specializes in Pacific affairs and is the author of the forthcoming Dragons in Distress: A Critical Assessment of the NICs and Brave New Third World? Strategies for Survival in the Global Economy. Stephanie Rosenfeld is an intern at Food First. AT A TIME WHEN ECONOMISTS have been busily enshrining the NICs' (newly industrializing countries) model as the new orthodoxy in development economics, the formula has stopped working in Taiwan and South Korea, two of the four Asian tigers. (Singapore and Hong Kong being the other two.) Export-oriented industrialization, an undervalued currency and dirt-cheap labor are the central elements of the NICs formula. All these advantages have been severely eroded by fast moving developments in both the world economy and the NICs themselves. While other Third World countries in the 1960s were opting for economic strategies stressing the development of domestic markets, Korea and Taiwan chose a different path. Guided by authoritarian governments that protected their own entrepreneurs from international competition while urging them to export manufactured goods, Korea and Taiwan hitched their wagons to the expansion of the world economy and the U.S. economy in particular. The strategy worked. In 1987, Korea's current account surplus stood at almost $10 billion while Taiwan's came close to $18 billion. The United States was the prime destination of the two countries' exports, accounting for 45 percent of Taiwan's exports and 39 percent of Korea's. The NICs were so successful at penetrating the U.S. market that their exports actually pushed U.S. manufacturers from the lower end of the market in textiles, garments, footwear and electronic goods. Indeed, by the mid-1980s the NICs were in the process of replacing even the Japanese at the lower end of the U.S. market in such products as microwave ovens, video cassette recorders (VCR) and personal computers. Targets of the trade war By the late eighties, Korea and Taiwan had become two of the prime targets of the aggressive protectionist offensive launched by the Reagan administration. With the dramatic decline of the Soviet threat and the deepening technological crisis facing U.S. industry, the NICs, together with Japan, have become leading candidates to replace the Soviet Union as America's new "Enemy." Economic hostilities against two of the United States' staunchest Cold War allies were formalized in a much-publicized statement by senior Treasury official David Mulford in October 1987: "Although the NICs may be regarded as tigers because they are strong, ferocious traders, the analogy has a darker side. Tigers live in the jungle, and by the law of the jungle. They are a shrinking population." The U.S. trade offensive has several prongs. Washington has revoked the tariff-free entry of many of the NICs goods into the United States under the General System of Preferences (GSP); and, to make NICs' imports even more expensive and less appealing to consumers, it has forced the appreciation of the New Taiwan Dollar and the Korean Won by 40 percent and 30 percent, respectively, in the last three years. Protectionist measures were coupled with an aggressive drive to abolish import restrictions and lower tariff barriers for U.S. goods in the NIC markets. Korea and Taiwan have been forced to liberalize their trade restrictions considerably on a wide range of products, from computer software to cigarettes. The two governments have, however, been reluctant to lift agricultural tariff barriers, for fear of losing the political support of farmers, who believe they would go bankrupt under a free trade policy. While Washington has used trade policy to wage war on the NlCs, U.S. corporations have initiated technological warfare on Korea and Taiwan's cloners, companies which produce products that directly imitate well-established brand name models. The cloners have gained the reputation of turning out products that are even better and considerably cheaper than the originals. IBM is demanding that Taiwanese and Korean clonemakers pay 25 percent royalties on new clones of IBM computer models, plus 1 percent in "retroactive" royalties on past earnings. Since the United States is the main export market for their products, the cloners have no choice but to pay up. Even these small royalties are likely to have negative consequences for the Taiwanese and Korean computer industries since the cloners work on very narrow profit margins and can be devastated by small cuts in profits. Following IBM's example, Intel and Texas Instruments have successfully sued Korean chipmakers Hyundai and Samsung, respectively. In the case of Samsung, Korea's ambitious semiconductor firm, the settlement costs have been high; royalty payments to Texas Instruments may be as much as $95 million. The U.S. techno-trade offensive has drastically curbed further expansion of NIC exports to the U.S. market, which is the NlCs' primary outlet and the source of the region's impressive growth. Both Taiwanese and Korean exports to the United States grew by only 1 percent from 1987 to 1988, while imports from the United States to the NICs rose sharply, climbing by more than 100 percent in the case of Taiwan. The U.S. share of NlCs' exports fell from 39 percent in 1987 to 32 percent in 1988 in the case of Korea, and from 45 percent to 39 percent in the case of Taiwan. The challenge from labor Assaulted from the outside by U.S. protectionism, the government-business elites who supported and encouraged export- oriented growth have also had to contend with a formidable challenge from another front: labor. In the 1960s and 1970s, low-cost labor was the key element in the NIC development formula. Labor had no power in either country. In Taiwan, the grassroots units of the ruling Kuomintang Party (KMT) kept the working class in line, while in Korea, the notorious Korean Central Intelligence Agency (KCIA) of strongman Park Chung-Hee crushed even the slightest attempt at labor organizing. As late as 1987, Korean working conditions included: a 58-hour work week, the longest of any country surveyed by the International Labor Organization; an industrial accident rate which tripled from 1960 to 1988 and is now the highest of any country in the world; and wages in manufacturing that were 11 percent of U.S. wages and 14 percent of Japanese wages. By the late seventies and early eighties, however, high speed growth had tightened the labor market, pushing wages inexorably upwards. Moreover, labor organizers were registering successes despite severe repression. The working class insurgency really escalated, however, after the "democratization" decree of Korean President Roh Tae Woo in June 1987 and the lifting of the 38- year-old martial law in Taiwan in July of that same year. In Korea, 3,500 strikes broke out in 1987 alone, and in the last three years real wages have gone up 60 percent. Labor unrest in Taiwan too has become alarmingly "epidemic," according to the Economist Intelligence Unit. By 1988, South Korea and Taiwan were clearly no longer cheap-labor havens; blue-collar wages in other parts of Southeast Asia stood at a third to a half of wages in Korea and Taiwan, while wages in China were one-tenth the wages in Taiwan. But it is unlikely that labor will be pacified by higher wages alone. According to Seong Ok Choi of the Korea Information and Resource Center, Korean workers are beginning to make political demands, including calls for labor law reform. Workers in both countries have proved highly resistant to calls for "responsible unionism" coming from government and business. As Lee So Sun, one of Korea's most admired labor leaders told Multinational Monitor: "The government says the economy is successful. But only a few benefit from this economy.... There is nothing in it for us." In both Taiwan and Korea, workers are seeking significant influence in determining the direction of the economy. One young Korean metalworker in Inchon asserted, "We, the workers, will set our own agenda." Labor's resentment is reinforced by the increasingly unequal distribution of income in both countries. In Korea, the lower 40 percent of the population's share of the national income was 19.3 percent in 1965; by 1985, it was down to 17.7 percent. During the same period, the share of income going to the top 20 percent rose from 41.8 percent to 43.7 percent. The pattern was similar in Taiwan: in 1978, the lower 40 percent received 22.6 percent of the national income; by 1986, this had decreased to 21.8 percent. The top 20 percent, on the other hand, increased their share from 37.1 percent of income to 38.2 percent. The sensational exposes of corrupt dealings between the leading monopolies, or chaebol, and the discredited regime of former strongman Chun Doo-Hwan further stoked working class indignation in Korea. The legitimacy of the chaebol, whose concentration of wealth used to be justified as "capital accumulation," has also been eroded in the eyes of workers by the diversion of enormous sums from productive investment to real estate speculation, pushing housing costs in many areas of Seoul beyond the reach of even the middle class. With the rich flaunting their wealth, labor is in no mood to heed the government's call for "discipline." The explosion of conspicuous consumption among the "haves," who drive imported BMWs and Mercedes-Benzes, has jarred the sensibility of a people socialized to the myth of a relatively egalitarian Korea. The environmental nightmare The third major challenge posed to high-speed, export-oriented growth is the growing realization of the terrible toll it has taken on the environment. Both Korea and Taiwan have developed economically but have also paid a price environmentally. Most of Taiwan's rivers and streams, for example, are seriously polluted with untreated sewage, pesticide and fertilizer runoffs, heavy metals and toxic waste. Dr. Edgar Lin, the island's leading environmentalist, estimates that at least 30 percent of the annual rice crop is dangerously contaminated by heavy metals like mercury and cadmium. Taiwan's air is so polluted that it is officially considered harmful to residents' health for 17 percent of the year. Taiwan also has the world's highest incidence of hepatitis B, a phenomenon that undoubtedly stems from the fact that only 1 percent of human waste receives primary sewage treatment. The dimensions of the environmental disaster in Korea are only now coming to light, but what is known indicates that the situation is very bad. Seoul's air exhibits one of the highest concentrations of sulphur dioxide among the world's cities; and 67 percent of the rain falling on this city is reported to contain enough acid to pose a hazard to its 10 million people. The latest revelation is that most of Korea's tap water is unsuitable for drinking; at several of the country's purification plants, water has been found to contain heavy metals like iron, manganese and cadmium at nearly twice the official tolerance level, and ammoniacal nitrogen (generated by human and animal waste) at nearly 10 times the tolerance level. The environmental disasters are not just long-term health threats in Taiwan. While the chaebol-government alliance in Korea faces its main opposition in the rebellious working class, in Taiwan the KMT-business elite's greatest challenger is a multiclass, grassroots environmental movement. This decentralized but increasingly powerful movement has already forced the suspension of construction on the country's fourth nuclear reactor and halted the construction of Dupont's $160- million titanium dioxide plant. Most recently, the environmentalists brought about the closing of a major petrochemical plant which fishermen had accused of dumping acid waste. Even more threatening to the KMT-business power structure than these specific examples of popular activism is the environmental movement's philosophy which de-emphasizes growth rates and favors channelling investment away from the high-tech industries and toward cleaning up the environment. Groping for a way out Facing formidable external and internal challenges, the business-government elites have come up with a new technocratic blueprint to replace the current strategy of emphasizing labor- intensive manufactures for export to the United States. The key elements of the new approach are developing the domestic market, diversifying export markets away from the United States and moving up to higher value-added capital- and skill-intensive industries. Though it is attractive on paper, this new strategy faces significant obstacles in the highly competitive international marketplace. "Developing the domestic market" is less an enthusiastic proposal than the technocrats' grudging concession to the reality that, as a result of the workers' push for higher wages, the internal market has already begun to develop. The boom in domestic demand that the higher wages created compensated for the severe slowdown in Korea's export growth in 1989. For instance, while Korea's car exports dropped almost 30 percent in the first half of 1989 compared to the first half of 1988, domestic sales jumped by 58 percent. Had they not been saved by higher incomes brought about by worker militancy, Hyundai Motors and Daewoo Motors, two of Korea's most aggressively anti-union firms, would have had a severe over-production crisis. Korea's technocrats, however, are very uncomfortable with a strategy that relies principally on domestic demand; like International Monetary Fund bureaucrats, they uniformly label it "inflationary." They still look to export markets as the engines of economic growth, though higher wages and salaries make Korea less and less competitive as an export platform. Moreover, the pro big business economic managers fear that a domestic demand- oriented strategy will provide organized labor with tremendous clout and will institutionalize regular wage increases at the expense of profits. The second element of the new blueprint, the hunt for untapped and prosperous export markets to significantly reduce the NlCs' overwhelming dependence on the United States is not likely to yield more than marginal dividends. Exports to Europe have risen, but so have antidumping moves against Korean producers by the European Economic Community (EC). In fact, many Taiwanese and Korean manufacturers assume that when the EC becomes a unified market in 1992, their access to the continent will be severely limited. NIC exports to Japan are currently up, but NIC entrepreneurs know that Japan's watchful, protectionist bureaucrats will eventually limit their market share. Already, Japanese knitwear producers have successfully persuaded Korean manufacturers to limit their exports to Japan. The prospect of markets in China, the Soviet Union and Eastern Europe has been hyped in the press, but recent developments reinforce the fact that these fragile socialist economies will generate no more than a small fraction of the massive U.S. demand. Taiwan: sticking to cheap labor In Korea, the trend away from production which relies so heavily on cheap labor is being taken more seriously than in Taiwan. In Taiwan, says sociologist Michael Hsiao, "moving up to more value-added, capital-intensive production is the stated policy, but reliance on labor-intensive production remains the operative policy." Taiwan's entrepreneurs have countered the upward pressure on wages in two ways. First, they have transferred their capital out of Taiwan to China and other lower-wage countries in Southeast Asia and the Caribbean. In 1988 and the first eight months of 1989 alone, Taiwanese businesspeople invested an estimated $3.3 billion abroad. An estimated $1.5 billion of Taiwanese investment is now in China. Their other response is to bring low-wage, foreign labor into Taiwan. By mid-1988, an estimated 10,000 foreign workers were working legally, with another 50,000 to 100,000 laboring illegally at less than half the average monthly wage of Taiwanese workers. There are now factories around Taipei that run almost entirely with illegal, foreign labor from the Philippines, Indonesia and Thailand, while the government looks the other way. Indeed, illegal Southeast Asian labor is the KMT government's not-so-secret weapon against Taiwan's increasingly militant unions. The low-wage foreign workers offer a competitive alternative to the better-paid indigenous workers and, therefore, dampen the wage demands of the local labor force. A system similar to that which developed in Europe in the 1960s and 1970s is gradually emerging; it is a two-tier labor force composed of poorly paid, unorganized "guest workers" and better-paid, organized indigenous workers. Taiwan may well be able to slow its loss of competitiveness in wage costs, but only at the price of destabilizing social conflicts in the medium term. Korea: the high-tech escape route Relatively few foreign laborers are going to Korea, and while Korean overseas investments are rising, the chaebol-government coalition is committed to upgrading technology or moving to high-tech industries in response to the loss of the cheap labor advantage. This means taking on the high-tech leaders themselves: the United States and, especially, Japan. This is no easy task, in part because Korea has been heavily dependent on Japanese parts and technology for its much publicized advances in consumer electronics, computers and automobiles. Japanese components account for 85 percent of the value of a Korean-made color television set. Core parts of strategic consumer-electronics exports, such as microwave oven doors and VCR decks are not available locally, and production of the VCR, claims one trade journal, "depends on the whim of Japanese headrum makers." Kim Woo-Chong, the founder of the Daewoo conglomerate admits, "Korean development is largely . .. promoted by foreign supplies of parts and equipment, and sustained by the technical know-how of foreign partners." In 1988, Korea had an $8.7 billion trade surplus with the United States but suffered a $3.9 billion trade deficit with Japan, mainly due to the importation of sophisticated electronic components, automobile parts and machinery. Korea is also heavily dependent on Japan for technology. Despite their reputation for being VCR producers, the top three Korean manufacturers (Samsung, Goldstar and Daewoo) all acquired their technology from one source, the Japanese corporation JVC, which is a Matsushita subsidiary. In 1987, 6 percent of the Korean companies' export earnings was turned over to JVC. The experience of Hyundai's popular subcompact car, the Excel, demonstrates some of the problems with Korea's continuing inability to develop core automobile technologies. The Excel's transmission is designed and produced in Japan by Mitsubishi, and the car engine is also designed in Japan. Its body style is drawn from an Italian design. Mitsubishi personnel claim that Hyundai's sole role is to integrate parts and components from various foreign sources. Hyundai has, in fact, unwittingly served as a stalking horse for Mitsubishi: when the Japanese corporation witnessed the Excel's tremendous success in the U.S. market, it proceeded to market the very same model with a slightly altered body design as the Mitsubishi Precis. Indeed, in automobiles, consumer and industrial electronics and semiconductors, a pattern is emerging; the Japanese sell less sophisticated technology to the Koreans for the low-profit, low end of the U.S. market and they keep for themselves the sophisticated, top-of-the-line technology for the more profitable, high end of the market. Being stuck at the low end of the market, where prices are inelastic at a time of currency appreciation, has forced the Koreans, in many instances, to sell products at a loss. In 1988, for example, Samsung lost money on every VCR unit it exported to the United States. The alternative to the increasingly costly strategy of acquiring less than cutting-edge technologies from the tight-fisted Japanese is autonomous development of these technologies. But the obstacles are formidable. Sheridan Tatsuno, an East Asia analyst, points out that Korea has produced only 4,500 electrical engineers or 110 per million citizens. This contrasts sharply with Japan, which was turning out 15,000 engineers, or 140 per million, annually in the 1970s, when it was undergoing the sort of structural transformation that Korea is now experiencing. According to the Korea Institute of Economics and Technology (KIET), Korea is more than 10 years behind the advanced countries in research and development; this is not surprising since there are only 52,000 qualified scientists and engineers engaged in research and development in the country. KIET claims, in fact, that without "urgent attention," Korea's high-tech industries will have a very hard time surviving beyond the nineties when, under U.S. pressure, they will be fully opened up to foreign investors. A Daewoo senior executive, commenting on Korea's effort to develop and mass produce the 1-megabit memory chip indigenously offered a harsher judgment when he told a U.S. reporter, "You just don't have the foundation in South Korea. The people aren't skilled. You're just renting space in Korea. China could do the same thing." Nevertheless, the government-chaebol alliance is intent on moving into high-tech in a massive way. A recent government report called for the investment of $33 billion in microelectronics, mechatronics, aeronautics, new materials, fine chemistry and biochemistry in the period 1990-94. But in a period of slower economic growth, such a massive allocation is likely to clash with the worker and middle class demands for more investment in social welfare, improving the quality of life and cleaning up the environment. Just cleaning up the country's contaminated water supply will cost $5.3 billion between 1990-96, according to the Construction Ministry. The government budget is likely to become the object of a bitter struggle among social groups with different priorities. Having clean water to drink and clean air to breathe may well translate into scrapping plans for more nuclear reactors and shelving ambitions to mass produce the 1-megabit memory chip. Even if Korea succeeds in the herculean effort to compete successfully with Japan, Western Europe and the United States in the frontiers of high-tech, it is likely to be at great social cost, which will surely result in even greater social and political instability. Focusing on high-tech industries will lead to a declining capacity to absorb unskilled and semi-skilled labor, that is, a rise in structural unemployment. Already, there are disturbing signs of this trend. According to one source, if one were to add the underemployed, the "precariously employed" and the seasonally unemployed to the figure for the formally unemployed, the current real unemployment rate would reach 20-25 percent of the work force. A survey of recent graduates of Korean universities showed that 40 percent were unemployed in 1989, compared to 18 percent in 1985. Trapped in the paradigm of export-oriented growth, the government-haebol coalition is likely to discover that high-tech will prove less an escape route than a losing battle. One former senior official of the Korea Development Institute recently admitted: "Old formulas for keeping the economy on track, usually technocratic solutions developed in a political vacuum-- are no longer appropriate given the new socio-political environment." Both Taiwan and Korea have been hailed as the economic successes of, and role models for, the modern, global economy, but their experiences have been examined only selectively. A single criterion has been used to evaluate their success: the unprecedented rise in GNP. While the NlCs have achieved high- speed growth, however, they have also created social and political divisions and environmental problems which the international economic community has tried to ignore. This uncritical examination created a distorted vision of the process of industrial development in these countries. As the circumstances which allowed for their growth have changed, Taiwan and Korea are now being forced to face the difficult issues which their dependence on foreign markets and their disregard for human and physical resources has created. ------------------------------------------------------------------------------ [] MULTINATIONAL MONITOR November 1989 VOLUME 11, NUMBER 11, NOVEMBER 1989 JAPAN'S MNCs: The New Power in Southeast Asia By Rob Steven Rob Steven is a professor of political science at the University of Canterbury in New Zealand. AS AMERICANS REACT with dismay to what they view as Japan's efforts to buy the United States, few people are aware that Japanese corporations are expanding in other areas of the world as well. The highly valued yen is driving Japanese companies to invest their capital worldwide. The effect that this is having in Asia is at least as significant as in the United States. And as currency values fluctuate in Southeast Asia, Japan's transnational corporations are shifting their investments within the region from the Newly Industrialized Countries (NlCs) of South Korea, Taiwan, Singapore and Hong Kong to the countries in the Association of the Southeast Asian Nations (ASEAN), Thailand, Malaysia, Indonesia and the Philippines. Much of the competitive power of Japanese companies has stemmed from the long tradition of low-cost production in that country. Even today,the average real wages of Japanese workers are only about 65 percent of U.S. real wages, and Japanese workers put in many more hours a week and have far fewer paid holidays a year than North American workers. But with the yen almost doubling in value versus the dollar from 1985 to 1988, Japanese companies have been forced to seek other labor pools to maintain their hold on low-cost labor. Labor costs are now even higher in Japan than in the United States. The rise of the yen from around 230 per dollar in 1985 to 140 in September 1989, without affecting real wages in Japan, almost doubled money wages. As a result, Japanese capital in the manufacturing industry, particularly manufacturers of components for cars and electronics, has been pouring into Southeast Asia. At first Japanese corporations were able to find cheap labor in the Asian NICs. The revaluation of the South Korean won and the new Taiwan dollar, however, raised money wages in these countries and Japanese companies are again fleeing rising labor costs. Now they are moving to the countries in the ASEAN. Since around mid-1987, the companies have made a clear switch from the NICs, where wages average a fifth of those in Japan, to ASEAN, where wages are only one-tenth of those in Japan. Japanese companies are also turning to Southeast Asia as a platform from which they can grapple with the effects of the United States's huge trade deficit. The rise of the yen made exports from Japan to the United States very expensive. The revaluation of the NICs' currencies made export from these countries to the United States a difficult proposition as well. Japanese companies have increasingly turned to the ASEAN countries, which offer safer and cheaper production sites for export to the United States, Europe and Japan. By virtue of their recent investments, Japanese manufacturers have completed their shift from import substituting investments in ASEAN to ones primarily intended for export. Japan's first wave of investment in Asia in the 1960s was spearheaded by textile and electrical companies which were keen to capture local markets, and their main targets were the countries which were to become the NICs. The second wave in the 1970s was, by contrast, for export back to Japan, but the companies were mainly chasing raw materials and energy, following oil and other commodity price rises worldwide. Their targets were predominantly ASEAN countries. The geographic distribution of the current wave of Japanese direct foreign investment is carefully tuned to the labor intensity of the projects and to the cost of labor. The more labor-intensive branches of the machinery industries have found their way to ASEAN, while the ones involving the highest technology are located in the technologically advanced European countries and in the United States. Projects requiring intermediate technology are located in the NICs. While ventures like NUMMI (between Toyota and GM) consolidate an alliance between the advanced industrial powers, unequal joint ventures between Japanese and ASEAN companies serve only to preserve the inequality of the industrialized nations' technological dominance over the Third World. Making cars in Southeast Asia The primary appeal of the ASEAN countries lies in their ability to provide cheap components and low-cost assembly. Honda discovered the game of "internationalism" through its motorcycle investments in the 1960s; Nissan, with its keen eye for human misery, set up major engine production bases in such places as the Mexican maquiladoras at about the same time. Nissan is currently establishing a production network among six affiliates spread out among Thailand, Indonesia, the Philippines and Malaysia. Mitsubishi is taking full advantage of the global production process with its "Asian car," which combines cylinder heads and aluminum parts from Australia with door panels and steering systems from its joint venture with the Malaysian government (Proton Saga), a variety of relatively sophisticated parts (including engines and transmission gears) from its offshoot in South Korea (Hyundai), transmissions from the Philippines, bumpers from Thailand, engine assembly in Indonesia, car radios in Singapore and assembly almost everywhere, including Taiwan. Toyota was a late-comer, but once it started, it set itself up for low cost component-making in ASEAN with unequalled speed. As of mid-1988, Toyota Motor Company had 52 overseas subsidiaries, 10 in Thailand alone, three in Indonesia and one each in Malaysia and the Philippines. According to the Far Eastern Economic Review, Toyota is currently planning "what looks like the boldest scheme yet to integrate components manufacture in ASEAN." The ASEAN car parts complementation agreement of October 1988 slashed tariffs on inter-regional trade in components between subsidiaries of the same company. Toyota plans to take advantage of the agreement by substituting shipments from Japan with regionally made parts as well as by exporting about 20 percent of ASEAN production back to Japan. Announced in September, 1989, Toyota's ASEAN car will comprise diesel engines, stamped parts and electrical equipment from Thailand, petrol engines and stamped parts from Indonesia, transmissions from the Philippines, and steering gears and electrical equipment from Malaysia. Toyota is investing 30 billion yen in the ASEAN countries for the plan, says Hiroshi Hashimoto of Toyota's public affairs division. In addition to expanding their investments in Southeast Asia, the Japanese auto companies are employing local companies to produce cheap components. Because the Japanese car makers rely more heavily than U.S. companies on subcontractors, competitive pressures have been especially strong to cut costs by using ASEAN's low cost parts manufacturers. The auto companies' shift into ASEAN also reflects their collective effort to cement an alliance between the Japanese and the local business elites. Throughout ASEAN, local businesses are dominated by a number of conglomerates based either on colonial-style commodity trade or on favors from the post- colonial state. For example, Toyota's Thai partners include Bangkok Bank, the country's largest business group, dominated by the Sophonpanitch family, and Siam Cement, Thailand's largest manufacturing company, is dominated by the royal family. Nissan's partner in Thailand is the country's third largest conglomerate, Siam Motors, the core company of the Phornprapha family empire. The joint venture partners of Japan's car companies elsewhere in ASEAN are similar, although the strategy is most fully developed in Thailand, which has been Japan's number one target for low-cost manufacturing since the rise of the yen. ASEAN's top tier By the end of 1989, the number of Japanese manufacturers in Thailand is expected to top 1,000. Over a quarter of those entering the country in the past few years have been makers of electrical and electronic appliances and parts. Some of these companies have relocated the bulk of their production in ASEAN. Minebeas has made Thailand its world production center, where it employs 12,000 workers compared to only 3,500 in Japan. A company-owned Boeing 727 connects Japan, Thailand and Singapore twice a week. Sharp has even made Thailand its largest offshore production base in the world, with 80 percent of output for export to Europe and the United States. But apart from a share of the profits for the joint-venture partners, it seems that the local economies receive few developmental benefits from Japanese investments. Technology transfer is almost non-existent. Staporn Kavitanon, the deputy secretary-general of Thailand's Board of Investment, told Japan Economic Journal that "Local production is impossible unless foreign firms give Thai workers technological training. But in the case of designing and development technology, Japanese companies are quite hesitant to transfer such know-how to Thailand, as Western firms do. The Japanese seem to regard Thailand as only an export base and not as a development base." Malaysia is also very attractive to Japanese electronic companies looking for cheap offshore production sites. "Malaysia provides an investment environment that is conducive to the needs of the foreign electronics manufacturers," explains M. Suppiah, director of the Malaysian Industrial Development Authority in New York. The key components of this environment are low wages and a workforce which is only permitted to organize in in-house unions. A few Japanese electronics manufacturers, like Matsushita with its six large subsidiaries, have been there for some time. But the more recent investors, particularly in the Free Trade Zones of Kuala Lumpur and Penang, have been U.S. and Japanese (such as NEC, Fujitsu and Hitachi) chip makers. Following the fall of Ferdinand Marcos, these companies moved the main base of their labor-intensive assembly process from the Philippines to Malaysia. They have since made chips Malaysia's largest export item, exceeding even oil. A growing number of small and medium sized component makers have also been gravitating toward Malaysia, partly because "electrical goods and electronics companies that have moved to Thailand and Malaysia urged their suppliers to come and join them," according to Japan Economic Journal. But another reason for the move is Malaysia's proximity to Singapore, which is being used by a growing number of Japanese transnationals as a distribution center for the region. The Singapore government has offered special incentives to companies that establish operational headquarters on the island. Sony was one of the first to take advantage of this welcome in November 1987, and it now has a design center (Sony Precision Engineering), a distribution center (an International Procurement Office, or IPO) and produces a wide range of precision components for video cassette recorders and compact disks there. Aiwa, a subsidiary of Sony, has made Singapore its worldwide production center, which will account for over half its total output. The routine assembly tasks which used to occur in Singapore are being shifted to ASEAN, particularly Malaysia and Thailand. Singapore is developing in other directions. "The last few years have seen a growing number of world-scale manufacturers, including Japanese ones, distribute their manufacturing and related activities between Singapore and its neighbors, with Singapore operations handling such activities as product design and development, manufacture of newly-developed and high value- added products and production of critical high-precision components for manufacturing plants elsewhere in the region," says Masaki Watanabe of the Singapore Economic Development Board. Thirteen Japanese companies, including Matsushita (which operates six wholly-owned subsidiaries), have IPOs in Singapore, and many cut labor costs by using nearby Malaysia as a production base or employing Malaysian migrant workers in their Singapore factories. The prospects for continued mobility The main attraction for Japanese companies in Southeast Asia today is unquestionably low wages. As these economies and wages rise, however, Japanese firms may again shift production, in search of even lower labor costs . Some companies have already started to move to China, Indonesia and the Philippines. In the 1970s, following the oil shocks, Indonesia and the Philippines were the chief targets of Japan's raw material scramble. But they also saw a gradual increase in machinery investments during this time. In some cases, these investments actually led to the establishment of a number of major local conglomerates. For example, in Indonesia, the Gobel group is essentially an offshoot of Matsushita; the Rodamas group is an outpost of Asahi Glass; and the Astra group is not much more than an assembly of Japanese car and component makers, chiefly in the Toyota group (Toyota, Daihatsu, Nippondenso, Kayaba and Japan Storage Battery). Six of Astra's seven core companies are linked to Japanese transnationals. Most of the interest in Indonesia today comes from Japanese car makers who are aiming to procure parts for their Asian cars as well as to capture the growing local market. But more attention is also being paid to Indonesia by such well established giants as Asahi Glass, which has become the dominant force in the industry in both Thailand and Indonesia and is enlarging its operations in the latter. Even in the Philippines, the only remaining Asian country where U.S. foreign investment still exceeds that of Japan, a few major business groups have arisen on the coat-tails of Japanese transnationals. The empire of ex-Marcos crony Ricardo Silverio is largely a product of his alliance with Toyota, while Matsushita has spawned the fortunes of the del Rosario clan. Although Japanese interest in the Philippines all but disintegrated after the fall of Marcos, in part because the high incidence of corruption between the two governments was disclosed, the lure of low wages is pulling the labor-intensive Japanese companies back. In the forefront of the turnaround are Matsushita, Toyota, NEC and Uniden. Uniden is in the process of withdrawing from "costly" Taiwan, where it pays workers three times what its Filipino employees get. Current Japanese multinational activity complements earlier onslaughts on the region. It is expressed in changing patterns of trade, such as growing Japanese imports from Asian subsidiaries. Southeast Asia is now also being crowned as a full-fledged Japanese sphere of influence by the arrival of the major Japanese banks in Indonesia, Malaysia and Thailand. ASEAN is being transformed into JASEAN. ------------------------------------------------------------------------------ [] MULTINATIONAL MONITOR November 1989 VOLUME 11, NUMBER 11, NOVEMBER 1989 INTERVIEW ON THE JAPANESE THREAT An Interview with Chalmers Johnson Chalmers Johnson is the Rohr Professor of Pacific International Relations within the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. He is the former chairman of the University of California, Berkeley's Center for Chinese Studies and its Department of Political Science. He holds A.B., M.A. and Ph.D. degrees in economics and political science from the University of California, Berkeley. He has written extensively on the subjects of East Asian political economy, revolution and social movements including such books as MITI and the Japanese Miracle, Japan 's Public Policy Companies and Autopsy on People's War. MULTINATIONAL MONITOR: What does it mean to refer to Japan as a capitalist developmental state? CHALMERS JOHNSON: The state provides opportunities for entrepreneurship and the state creates markets. In this sense, the state takes on developmental functions. Let me use two fundamental concepts--they're Marxist concepts, but they're also perfectly sound Adam Smith concepts--ownership and control. When ownership and control are both in the hands of the state, that is the command economy, classically, the U.S.S.R. A variation of this type of economy, one that is typical of reformist Leninist state, is to retain state ownership but recognizing the enormous inefficiencies in the command economy, and to devolve control to the level of the household enterprise. This produces the kind of pattern that one saw in China before June 4, 1989, or in Hungary before November 1989: so-called market socialism. It promotes efficiency, but it doesn't unleash entrepreneurship. The capitalist developmental state reverses these priorities. It provides genuine private ownership of capital and of property, and state control. This is important because here we see the Schumpeterian principle of entrepreneurship being released. The family is a perfectly logical focus of entrepreneurship, being the most intense form of social communication that we know, and the property has to be defensible in law and inheritable. The capitalist developmental state insures that the areas of entrepreneurship are those of state interest. The fourth possibility is private ownership and private control, of which examples would be the United States and, to some extent, Hong Kong. In my view this is the only model to which neoclassical economics applies. MM: And the capitalist developmental state is established in Japan through the Ministry of International Trade and Industry (MITI)? JOHNSON: There is a vast array of institutions, including the Ministry of International Trade and Industry, but also the Ministry of Finance, the Economic Planning Agency and other economic ministries. There is also a most unusual, unprecedented in this country, organization of the private sector, in an almost corporatist manner, headed at the top by Keidanren, the Federation of Economic Organizations. Keidanren has the ability to process private sector priorities, and to enforce them. So we don't have the sort of situation you have in America, where the private sector never, ever speaks with a single voice. In Japan there are thus a considerable number of institutions that contribute to the developmental state. The Ministry of International Trade and Industry is critically important because it is the agency in charge of so-called industrial policy. Industrial policy has become controversial among neo-classical economists because they don't want to acknowledge that such a thing exists. And yet, much of our economics today is unable to explain the growth of the Asian economies or the emergence of Japan as the world's richest nation. Japan is today the richest in terms of either per capita income or gross assets, and also the leading supplier of long-term capital on earth. This would suggest, among other things, that there's something wrong with our economic theory. But the reason we don't do much about that, in my view, is vested interests in the theory of the free market in America. We have been fighting the Marxists for so long that we no longer recognize challenges to our way of thinking based on non-Marxist, non-Smithian principles. MM: What do you think about what people refer to as the Japanese threat to the American economy? JOHNSON: Well, it is a threat in various senses. But it is not a threat in the sense of being malevolent. I think this should be understood. There may be a few Japanese who still believe that World War II isn't over, or something like that, but a much greater danger is the Americans who have the nerve to attempt to explain Japan, even though they have never been there, and don't read a single word of Japanese. Such people tend to project onto Japan what they think Japan's reactions and behavior ought to be, rather than actually studying it. Japan is today leading a campaign of foreign direct investment in the United States that is simply unprecedented in scope and velocity. And it is impossible to prove, as Kozo Yamamura has recently demonstrated in his new book on Japanese investment in the United States, that the jobs being created in Tennessee compensate for the jobs lost in Ohio. It is also a squandering of American resources for the State of Kentucky to spend $150 million in taxpayers' money to attract one of the world's richest firms, Toyota, to build a plant in Georgetown, Kentucky. Another problem with Japan's direct investment in the United States is the transfer of control. Control remains important because the trend today is not toward borderless economies, but more toward bloc formation. What with the single market in Europe in 1992 and the Canadian-American free trade agreement. The point is that if you believe Japanese investment in America has no consequences, you also would have to believe there is never going to be another recession, or that, if there were another recession the Japanese are going to fire Japanese before they fire Americans. I don't believe these are realistic assumptions. I also think that it is a matter of elementary reciprocity. We cannot invest in Japan without going through an elaborate licensing procedure. Such a policy is, in my view, completely justified. The question is, why we don't have a similar licensing procedure? Regardless of what the economists tell us, Japanese foreign direct investment is going to lead to some resentment here, and that will at some point become ideologized.The most common headline in Hawaii today is "Last Golf Course in Maui Sold to Japanese." And I want to say after a while, if you didn't want the last golf course in Maui to be Japanese controlled, don't always blame the buyer. You could have come up with a public policy that prevents that. Japanese say to me, "We would not have allowed you to impose such costs on us. It's up to you to come up with rules that say, Japanese investment is welcome, but it can only be in the old industrial heartland--that is, in Michigan, IIlinois, Indiana, and Ohio." And we don't do it simply because we are stymied by doctrine, by the Council of Economic Advisors, by the vestal virgins of St. Adam Smith who tell us it would be a sin. But we're perfectly capable of licensing and exercising our policing control; and we need to do it, it seems to me, in order to prevent worsening relations between Japan and the United States. We don't have a foreign investors registration law in this country. The information that we have about foreign investment in America comes from the private sector. I believe we do not have such a law largely because of lobbying by the banking community which does not wish to have its transactions scrutinized for reasons that are all too obvious given the rate of both S&L and bank failures in America. What I'm saying is that the Japanese threat to America is in some ways a self-inflicted wound. And the problem is not going to go away by harassing Japan. It basically is caused by incompetence in the American government. Since money talks, what fool would believe it isn't going to talk when it owns a major source of cultural diffusion? MM: And what you've been talking about here is rules, laws to control and direct the form that Japanese investment in this country takes? JOHNSON: Exactly. Let's talk about an issue that threatens the world as a whole: the fact that the 10 largest banks on earth today are Japanese. It would seem to me that anyone with any prudence--particularly as one looks at the amounts of money we are going to use to bail out the savings and loan industry in Texas--would be asking themselves: what are the quality of the assets of these banks, particularly when we know that Tokyo real estate prices look like they're undergoing a tulip-panic again? We know that this is a speculative bubble that's going to burst at some point. Similarly, I believe that any prudent investor or person with a fiduciary responsibility would be curious to know the quality of bank examiners and bank regulation in Japan. Well, the truth of the matter is that they are almost non- existent. Let us not forget that the Great Depression of the 1930s began with a failure of a major bank in Austria. I find it easy to imagine, particularly in light of the U.S. stock market collapse of October 19, 1987, that a bank in Japan could collapse, or that the bottom could fall out from under this huge speculation and borrowing against inflated real estate values. This is a severe threat that requires public policy. Managers and people in position of private sector responsibility in the United States are responding to the incentives that are put before them. The incentives are changed by legislators, not by economists. And this is where the problem lies. If you want a longer-term perspective on the part of American entrepreneurs, you've got to give them incentives that pay off better in the long run. Right now, they have the most extreme short-term incentives, largely legally imposed. The fiduciary responsibility of someone who invests the pension fund of the University of California is to shift out of National Semiconductor into Taco Bell if Taco Bell is performing better than National Semiconductors. The critical relationships between Japan and the United States are anachronistic. They were created during the Allied occupation of Japan, at the time of the Korean War and as a result of the security treaty struggle at the beginning of the 1960s, when America was a hegemonic power. Japan was a late- developing and then economically-recovering economy. Today, these relationships are outdated--they no longer have any reality to them, in the sense that we are defending a nation to which we are simultaneously going into debt. This is an unstable situation to say the least, and this is where the threat lies. How to deal with it depends, in part, on one's intellectual assumptions. If you assume, as most Americans have, that Japan and the United States are in some sense converging, that they are both becoming consumer-based, mass consumption, environmentally sensitive, haute bourgeois societies, then indeed the policies that we have pursued are accurate. These are the policies of the State Department, which are basically ameliorative, glossing over, painting over glitches and problems. If you believe, as I do, that Japan and the United States are very different places, are not converging, and that the difference between a capitalist developmental state and a capitalist regulatory state is real, then these policies are mistaken, because they are merely suppressing fundamental differences that will at some point badly explode. There is something utterly implausible about the idea that Japan and the United States are converging. The only reason the idea exists is because Americans know almost nothing about Japan; there are very few people in the U.S. government who are in positions of responsibility who can read a word of the Japanese language. Therefore they deal with Japan by defining it as another version of Italy or France, which it isn't. Both the Japanese and the American governments reflect vested interests built up in the 1950s and sixties to paper over differences and to suppress differences, rather than resolve them. Therefore we have a situation which is a bit like a pressure cooker that is slowly building up steam and becoming ideologized. We now have Americans who are using Japan as a scapegoat; and I can assure you as someone who reads Japanese, who has been reading the literature for the past 30 years, that there are Japanese who scapegoat the United States. These are the sort of issues that I think are becoming significant. They certainly surfaced in the recent Sony acquisition of Columbia Pictures. MM: In what sense? JOHNSON: Well, as you know, there was a good deal of alarm expressed in the United States over that deal. Japan is the world's richest nation. And it's the world's leading source of long-term capital today. And it's investing all over the world. Since money talks, what fool would believe it isn't going to talk when it owns a major source of cultural diffusion? Now, if you recall, there was a movie that won an Oscar a couple of years ago, "The Last Emperor," about the last Chinese emperor. When it was shown in Japan several sections dealing with the rape of Nanking had to be cut out. That's a Columbia (now a Sony-owned) movie. So are "The Bridge of the River Kwai" and "From Here To Eternity." Meanwhile Mr. Morita, who is the recently resigned chairman of Sony, has just written a best- selling book together with another serious Japanese neo- nationalist, Mr. Ishihara. Mr. Ishihara is a sort of Jerry Falwell of Japan but he also just ran for the prime ministership of Japan. In their book, these two make neo-nationalist arguments about how they resent their dependency on the United States, and about American attitudes and work habits. Now if the next day we read that one of the main producers of American culture has been acquired by Mr. Morita's firm, and the only assurance we have is that the chairman of the board says that he is not interested in influencing things, I think it's worth being alarmed. MM: What do you think about protectionist legislation? JOHNSON: Well, I think the issue should not be viewed exclusively in economic terms and we shouldn't use the concept of protectionism. Remember that international trade theory, which is based on neo classical economics, always makes at least two errors. One error is that economists don't recognize that institutions are an important variable. Economic theory, especially of the Nobel Prize variety, is extremely abstract, and has to be translated into reality through institutions. And institutions are things created by people, not by markets. Second, economic theory also fails to recognize that markets have rules and histories. The issue right now is not protectionism but how to maintain the global market. This means coming up with rules. The GATT rules are not something handed down by Adam Smith; they were written largely by Americans when we were the most powerful nation on earth. We are now trying to produce GATT rules that will keep the international trading system going in the 1990s. In a sense we ought to tell the economists to shut up. They have nothing intelligent to say on this subject because it is not an economic issue. Right now we are in our 21st year of bilateral trade deficits with Japan. We have tried all sort of things to reduce these deficits, from the Nixon surcharge to Ronald Reagan's devaluation of the dollar, all of which were based on good, sound economic theory, and yet they didn't work. We now have a $52 billion trade deficit with Japan--a deficit so big that it threatens the entire global trading system. International trade has made us all relatively wealthy, and it has made the Japanese and the Americans among the wealthiest people on earth. Obviously we would like to continue this, rather than see it destroyed. So we must attack the fundamental problems that cause this huge trade deficit to continue. In my opinion, there are really only two things to do about it. Either we quit buying so much from Japan, or Japan buys a great deal more from us. Now, I believe we should quit buying so much from Japan; it would be one of the easiest things on earth to achieve. We could simply dust off the Nixon surcharge again. Just as on August 15, 1971, when the Secretary of State called the Japanese Minister of Foreign Affairs, and said, "Watch TV tonight," the President could simply announce "There's a 25 percent surcharge on Japanese goods, because we Americans over- consume. And so we're going to force people to quit consuming so much." But I think that by far the more important issue is to expand domestic Japanese demand. One of the things that led to the loss of the upper house majority by the Japanese conservative party last July, is the phenomenon of "rich Japan, poor Japanese." The Japanese are statistically the world's richest people, but they never feel that way, except perhaps when they go on vacations abroad. Every Japanese citizen wants better housing, for example. And better housing could be had if the political payoffs to agricultural landowners were ended. Japanese domestic demand needs to be expanded in that way, much as the Americans did in the 1950s when they invented the 30-year mortgage, and the National Defense Highway Act. The result came to be known as the American Dream, but it's a dream that doesn't go back before the war. The idea that all citizens in the country should their own houses. It made us all wealthy and it saved the Western world because the Americans were not protectionist. It is obviously extremely dangerous to have our government financed by foreign savings, not just because of what the Japanese Ministry of Finance is doing, but because as you talk to American leaders today, you find American Senators realizing what they'd have to do if the Japanese fail to come to the next treasury auction. In the case of Japan, it's not so much a matter of our becoming protectionist, it's a matter of saying that Japan can no longer continue to behave as if it were a developing economy. What is really needed in the Pacific is not more producers, but more markets, and Japan must become a real market. Our objection to agricultural protectionism in Japan is not just that we might supply some of their food; I think ultimately Australia might supply more of it. But agricultural protection forces Japanese households to spend more than a third of their income on food. And this is absurd in a nation as wealthy as Japan. MM: What kind of role does organized labor play in Japan? JOHNSON: Well, one of the keys to the developmental state has been to restrict labor entirely. Labor in Japan does not play an important political role. This is a significant comparative advantage in making industrial policy. The people at the MITI do not have to ask themselves what is the position of labor on this or that issue. Labor is not truly exploited in Japan, but labor has no significant political role. Only now this is ever so slightly beginning to change. MM: What do you think of Japanese Socialist Party Chair Doi? JOHNSON: Well, we don't really know enough about her. On the one hand, she is that unique and exceptional Japanese politician, someone who is moderately charismatic. Most Japanese politicians are gray bureaucrats. Here is a smart, outspoken, telegenic, middle-aged woman who has a contralto voice. She's obviously interesting, and, in a world in which the media play a huge role, in which organized interests no longer command much voter respect, there is a huge middle class floating vote. Ms. Doi's victory may renew democratic development in Japan by forcing the breakup of the vested interests on which the uninterrupted rule of the Liberal Democratic Party has rested since 1955, and which has stood in the way of producing effective change in Japan. That's why I regard it as a terrible mistake for our government to come out and lament the loss of conservative monopoly in Japan. It actually means we may now finally see some changes. But if Ms. Doi is really going to become Prime Minister, she will have to put together a more stable coalition than she has right now. Clearly she is currently the beneficiary of a protest vote. ------------------------------------------------------------------------------ [] MULTINATIONAL MONITOR November 1989 VOLUME 11, NUMBER 11, NOVEMBER 1989 ECONOMICS BANK RELIEF, NOT DEBT RELIEF Mexico's Encounter with the Brady Plan By Cameron Duncan Cameron Duncan is a Visiting Scholar at the Institute for Policy Studies in Washington, D.C. and co-author of From Debt to Development: Alternatives to the International Debt Crisis. The sounds of triumph which greeted the preliminary announcement of the Mexican debt agreement last July had a hollow ring. Listening to the pronouncements of Mexico's President Carlos Salinas de Gortari and U.S. Treasury Secretary Nicholas Brady, one might have concluded not only that Mexico's economic crisis had been solved, but that the resolution of the Third World debt crisis required only the cloning of Mexico's agreement in each debtor country. But as Mexico and its creditor banks approach completion of negotiations for refinancing the country's foreign debt, the package has proved to be disappointing. "The bank deal is no good even from the perspective of the Mexican negotiators," said Carlos Heredia, an economist formerly with the Mexican Finance Ministry. The country's $48 billion long-term foreign bank debt has barely been touched. If the economic growth which this country desperately needs after seven years of nearly unbroken recession is, as many Mexicans claim, dependent upon sharply reducing foreign debt payments, then this agreement will not provide the solution. The restructuring of Mexico's foreign debt is occurring in the context of a government policy of financial and trade liberalization or apertura (opening up), that began in 1985. In four years, Mexico has moved from a managed trade system based on import licenses to a more liberal system based on tariffs. New laws have effectively lifted investment controls in most sectors of the Mexican economy. At the same time, world oil prices have been falling and Mexico has responded by scrapping plans to diversify its energy exports away from the U.S. market. Thus, a "silent integration" of the two economies is underway. Mexico's increased debt dependency on the United States is a key part of this economic integration, which could result in a bilateral free trade agreement after the conclusion of the current General Agreement on Tariff and Trade (GATT) multilateral trade negotiations. Whatever minimal debt relief results from Mexico's bank agreement, one thing is certain: the average Mexican will not benefit from it. The standard of living of Mexican workers is still less than a quarter that of U.S. workers. This income gap was narrowing steadily until the 1980s, but now it is widening. The contrast between rich and poor in Mexico is among the worst in the world; the poorest 20 percent of Mexico's population receives 3 percent of total income, the richest 10 percent get 41 percent. Forty percent of the workforce is either unemployed or underemployed. Mexico has been, in many respects, a model debtor. It has followed most of the conditions imposed by the International Monetary Fund (IMF) and the World Bank, and has paid its debt service and opened its economy. Despite the tremendous hardship these conditions brought, Mexico has little to show for its efforts. Production in 1988, for example, was 16 percent lower than before the debt crisis broke. "Investment, the key to growth, has fallen from 22 percent of GDP in the 1970s to only 14 percent last year," said Heredia. To maintain political stability, Mexico needs growth of at least 4 percent a year to absorb its expanding labor force. But faster growth is impossible without more investment, which is, in turn, impossible as long as Mexico is forced to transfer 5 percent of its GDP abroad each year in interest payments instead of using it for investment. As the first test of the Brady plan for Third World debt, the Mexico accord has dramatically failed in its effort to address these obstacles to economic growth. The point which is supposed to distinguish the Brady plan from the Baker plan and other abortive predecessors is that it does not rely on banks to provide new money, thus increasing debts rather than reducing them. Brady's new approach, announced in March of 1989, was intended to solve this problem by encouraging the banks to accept a 30 percent write-off of their outstanding loans. The main elements of the Brady proposal are: (1) a U.S. Treasury estimate that Third World bank debt will be reduced by 20 percent over three years; (2) a de facto agreement by the banks that they would write down their loans in exchange for a guarantee of the remaining debt service payments by the IMF and the World Bank; and (3) an expectation that countries which benefit from debt reduction incentives will adopt free-market adjustment policies, including open trade and liberalized foreign investment rules. When the Mexican agreement was announced on July 24, 1989, Mr. Brady and his Treasury colleagues must have felt great relief. The complex deal--negotiated with a country which has by far the most orthodox adjustment program in Latin America and which has a newly-elected government and a perfect record since 1982 of fulfilling its debt service obligations--was perhaps the most difficult agreement ever negotiated in the rancorous history of Latin America's relations with its commercial bankers. If the proposals made by the Treasury Secretary cannot work in the case of Mexico, by far the most important debtor in U.S. political terms, there will be little hope of applying them in more difficult cases like Venezuela, Argentina and Brazil. In fact, Mexico, the United States and the world are now discovering that the Brady plan is unworkable even for Mexico. Behind the facade of success created by the Treasury lies the reality that the agreement provides only a tiny amount of debt relief for Mexico. Moreover, it abandons the principle of debt reduction upon which the whole Brady plan rests. The success of the package depends on a significant number of the banks being willing to make new loans, an unlikely event at present. The preliminary agreement between Mexico and its 15 leading banks covers approximately $48 billion, about half of Mexico's $100 billion-plus foreign debt. Mexico's chief debt negotiator, Angel Gurria (sometimes known as "the Angel of Debt"), predicts the deal will be signed by the country's roughly 500 bank lenders in January. Under its terms, banks have three choices: They can swap their old loans for new 30-year Mexican Government bonds at a discount to face value of 35 percent; these "discount bonds" will pay interest at the same rate as the old loans- -13/16ths of a percentage point over international market rates. They can swap their old loans for new 30-year bonds with the same face value at lower interest rates; these "par bonds" will carry a below-market fixed interest rate of 6 1/4 percent. They can extend new loans (or recycle interest received from Mexico) over a four-year period equivalent to a total of 25 percent of their current medium- and long-term loans. The package aims at a maximum 35 percent debt reduction, a compromise between the 25 percent cut favored by Treasury and the 50 percent reduction proposed by the Mexican negotiators. Citibank, the largest single creditor with about $2 billion in loans to Mexico, is the only bank known to have converted almost all of its exposure to new loans. Others, including Bank of America, have said they will make some new loans, but most banks are converting their exposure into bonds. Some banks, of course, may decide to opt out of the deal entirely. Their loans, however, will be maintained under the existing rescheduling agreement, and will be the last to be serviced. A senior Mexican Finance Ministry official told Multinational Monitor that Mexico "will default on any loans under the old contract." If these banks sue Mexico, the official said, "We'll be happy to go to court, since our assets [in the United States] will be protected by the 95 percent of banks that participate in the exchange." During the last week of negotiating the preliminary July agreement, two issues continued to divide the Mexicans and the bankers: the banks' insistence that they obtain increased interest rates, contingent in turn on higher oil prices, and the banks' eagerness for, and the Mexican negotiators' outright rejection of, debt-for-equity swaps. The Mexican team yielded to the bank demands on both points. The banks are entitled to increased interest payments if oil prices top $14 a barrel, but the interest would not begin to accrue until 1996. And Mexico will resume debt-equity swaps on a scale of $1 billion annually over the next three years. Mexico suspended debt-equity swaps in April 1988, arguing that they unduly privileged foreign investors and fuelled inflation. "By opening the debt-equity window again, the Government is holding a garage sale of Mexican assets," claimed Heredia. According to the debt agreement, the operations to reduce principal will be guaranteed by $3 billion worth of bonds bought from the U.S. Treasury. The "par bonds" option will be backed by about $3.5 billion in bonds that will guarantee interest payments for 18 months. Mexico will borrow $6 billion from the IMF, the World Bank and Japan and will put up $1 billion of its own money to purchase those bonds, which are referred to as "debt enhancements." Even if, as the Mexicans have projected, 80 percent of creditor banks opt for reduction of principal and/or interest, Mexico's debt would drop by only $7.5 billion. "In this case, there would be almost no net gain for Mexico," said Jorge Castaneda, a professor of political science at Mexico's National Autonomous University, "Because the borrowing to back the debt reduction schemes totals $7 billion." In terms of savings on debt service, Mexico will probably get less than half of what negotiators originally sought from the banks. Estimates as to the likely breakdown of bank participation in the three options suggest that the deal, combined with commitments already in place from multilateral and official lenders, would reduce Mexico's $10 billion in annual interest payments by no more than $800 million. In terms of reduction of the absolute debt, the bank deal could provide even less. Counting the approximately $1 billion in new commercial bank loans, instead of gaining a 35 percent debt reduction from the deal, Mexico may end up with a bank debt at least as large as it has today and certainly will continue to transfer annually the equivalent of between 4 and 5 percent of the nation's gross domestic product to foreign creditors. The immediate reaction to the "debt reduction" pact has been mixed. The U.S. Treasury and the commercial banks are pleased, mainly because the agreed debt relief was only a maximum 35 percent. But one U.S. bank official admitted that the deal offers Mexico little real relief, as it would only stretch out debt repayments. "In reality it is the Baker plan again, but with more effective 'menu' items," the official said. In Mexico, President Salinas proclaimed the result a victory. But economists of the nationalized bank, Banamex, believe that only a cut of at least 50 percent in the amount owed to foreign banks will make it possible to revive Mexico's economic growth. "There is some concern that when the Social Pact ends in July 1990, the pressure may build up again, since the debt reduction package offers no rapid prospect of a return to economic growth," said Jorge Castaneda. The Social Pact between labor unions and business was launched in 1988 in an effort to stem mounting inflation. The previous Mexican president, Miguel de la Madrid, implemented the plan which devalued the peso, limited wages and froze prices. There are other serious criticisms of the structure of the deal. Casteneda says "It is the banks who have been bailed out, not Mexico." The new center-left Party of the Democratic Revolution (PRD) is demanding that the bank deal be scrapped in favor of a payment moratorium and renewed negotiations with creditors. Ifigenia Martinez, a senator representing the PRD argues "It is our nation, not Mr. Brady or the banks, which should determine the real value of our foreign debt and how much we can afford to pay to creditors after satisfying our domestic development needs." Organized labor, chafing under wage restraints and suffering from the 50 percent fall in real wages during the previous administration, views the bank deal as a signal that it should take a tougher bargaining line. Public sector unions and miners have struck to protest the agreement. Unions and left-wing parties, under the loose alliance of the National Patriotic Front which sprang up in September, have planned more protests. The Mexican government is very concerned about the public impression of the deal because if the perception takes hold that this is a bad deal for Mexico, the prospective boost to investor confidence could be lost. Salinas hopes that the bank agreement will lead to an investment boom and a return of the estimated $55 billion in private flight capital which Mexicans have deposited in U.S. banks. About $2 billion in flight capital has returned to Mexico since July, but this is probably less the result of the bank deal than of a Finance Ministry decree, issued on August 2, 1989, which declared a tax amnesty on repatriation of capital deemed to have left the country within the past three years. Since it would be difficult for the Ministry to differentiate capital by date of withdrawal, Mexicans suggest that the real intent may be to extend a blanket amnesty to all sacadolares (Mexican investors with dollar deposits abroad), by cloaking it in the more politically palatable guise of selective tax application. The Mexican deal, far from being the triumph U.S. Treasury propaganda purports it to be, has merely underscored the obstacles which still remain in the path of meaningful debt relief for Third World borrowers and assurances of solvency for the greedy banks which poured so much good money after bad this past decade in Latin America. ------------------------------------------------------------------------------ [] MULTINATIONAL MONITOR November 1989 VOLUME 11, NUMBER 11, NOVEMBER 1989 CORPORATE PROFILE PHILIP MORRIS: King of the Cancer Trade By John Summa U.S. HEALTH OFFICIALS ESTIMATE that 350,000 people will die this year from tobacco-related illness, mainly cancer and heart disease. But Philip Morris, the ubiquitous cigarette giant, still unabashedly maintains that there is no "conclusive proof of a cause-and-effect relationship between cigarette smoking and chronic diseases." Philip Morris chairman Hamish Maxwell is a pack-a-day smoker who, despite repeated warnings by the American Medical Association, the U.S. Surgeon General and other reputable health organizations, stands behind the company's contention that cigarettes don't kill. There is a single explanation for such obstinate behavior in the face of overwhelming medical evidence and opposition: profits. Now ranked 10th in size among Fortune 500 industrial firms, Philip Morris's 1989 revenues are expected to top $44 billion. Its profits, the New York Times reports, are expected to rise about 20 percent above 1988's of $2.34 billion. To be sure, Philip Morris markets more than just "cancer sticks." Its December 1988 purchase of the food giant Kraft, for $12.9 billion, has turned the tobacco company into a veritable emporium for the American palate. The company also purchased General Foods in 1985 for $5.7 billion. Philip Morris now sells over 130 products induding: baked goods, barbecue sauces, beers (Lowenbrau, Miller), candy, cereals (Post, Fruit de Fibre), coffee (Brim, Maxwell House, Sanka), desserts (Cool Whip), frozen foods, cheeses, pastas and soft drinks. But tobacco is still the biggest earner, bringing in about 65 percent of the company's profits. The company's cigarette brands include Marlboro, Virginia Slims, Benson & Hedges, Merit and Parliament among several others. The company started in England in 1847 where Philip Morris operated a shop; Morris began making his own cigarettes seven years later. In 1919, U.S. stockholders gained control of the company and in 1929 it opened its first factory in the United States. It was during the Depression that Philip Morris really cracked the U.S. market. When the companies that once made up the "Tobacco Trust" all raised their prices, Philip Morris launched a campaign to market economy cigarettes. This move was enormously successful. Under the tutelage of marketing genius Joseph Cullman III, the company rapidly grew during the post- World War II expansion of the economy as middle class demand for cigarettes increased. But the opposition to smoking which began in the 1970s and gained steam in the 1980s presents new challenges, and demands that Philip Morris exhibit new flexibility. Growing public awareness of the dangers of smoking, the requirement that tobacco ads and packages carry health warnings and stricter regulations against public smoking are taking their toll on the tobacco industry. Per capita consumption of cigarettes has declined since the mid-1970s and has fallen at an accelerating rate in the 1980s. Cigarette sales are dropping by 2-3 percent per year in the United States. Increasingly, smokers in the United States are snuffing out their habits. Preserving the smoking culture Philip Morris is working hard to keep a smoking culture alive. The cigarette giant advertises very heavily in the print media and sponsors events like the Virginia Slims women's tennis tournament. The company also publishes a glossy magazine for smokers that reaches 12 million readers. According to Philip Morris, the magazine offers a "calm and rational forum for less well-heard points of view on issues of importance to smokers." Its May-June 1989 issue, for instance, featured Governor James Maffin from North Carolina--the largest tobacco producing state in the country--railing against "higher consumer excise taxes." Other issues have presented articles about athletic smokers, reports about the generosity of Philip Morris in the art world and editorials slamming anti-smoking legislation as an attack on individual rights. Since 1971, Philip Morris and other tobacco companies have been constrained in their marketing strategies by a federal prohibition on advertising cigarettes on television and radio. Beginning in late 1989, Philip Morris introduced a strategy to circumvent this ban. In exchange for $600,000, the National Archives agreed to co- sponsor advertisements with the cigarette giant, celebrating the 200th anniversary of the Bill of Rights. The ads feature the original document and voices of prominent people, such as Martin Luther King, Jr., from the Archives' voices collection. At the end of the ads, Philip Morris' sponsorship is noted and the company's logo is displayed. "The ads are clearly illegal" and designed to increase the sale of Philip Morris' products, says John Banzhaf lll, Executive Director of Action on Smoking and Health (ASH). If the exact same ad ended by saying "'brought to you by the Golden Arches,' no one would doubt it was an ad for McDonalds," states Banzhaf, who is largely responsible for the passage of the 1971 law banning the broadcast of cigarette advertising. Philip Morris had several reasons for running the ads, critics believe. First, the company hopes to improve its image by associating itself with a revered document, the Bill of Rights. Second, sneaking by the ban on television advertising in this instance will get the company's foot in the door for future ads. If it succeeds in this instance, asks Banzhaf, "what's to stop Virginia Slims from running a one minute tribute to women athletes?" Third, Philip Morris hopes to subtly support its civil liberties argument that citizens have a "right to smoke." The prominence of Martin Luther King, Jr. in the ads is designed to tie restrictions on smokers to restrictions on blacks' civil rights, Banzhaf believes. The company's huge marketing and public relations expenditures are paying off for Philip Morris. Though industry sales are falling, Philip Morris' sales are expected to rise by up to a half a percent in 1989. Philip Morris has increased its market penetration from 37.8 percent in 1987 to around 40 percent, with Marlboro alone grabbing 25 percent of the total demand. This success is not just a result of advertisements. The company has also tailored its products to address U.S. health concerns. The most recent example is its test marketing of a new tobacco product: NEXT, a "de-nicotined" tobacco. According to Scott Ballin of the Coalition on Smoking or Health, this is Philip Morris' response to Surgeon General Koop's damning report on nicotine addiction, released two years ago. It hopes to turn the medical evidence to its advantage as tobacco companies did when they came out with low-tar cigarettes following the 1964 Surgeon General warnings about tar in cigarettes. In reality, however, low nicotine cigarettes may be more harmful than regular cigarettes. Because most smokers are addicted to nicotine, Banzhaf explains, if they are smoking a low nicotine brand "they will consciously and unconsciously adjust their smoking behavior" to keep their level of nicotine intake constant. They will smoke more cigarettes and hold smoke longer. Since the low nicotine cigarettes do not contain lower amounts of tar, the consumers of low nicotine cigarettes will actually increase their tar intake. Going international While the company is working hard to maintain its U.S. sales, it is looking mainly to foreign markets, particularly in the developing world, for future growth. The reliable medium of television has become the key component of Philip Morris' international marketing strategy. Since the 1971 ban in the United States, cigarette advertising on television has gone international. Though the original Philip Morris Marlboro Man has now become an anti-smoking activist, Philip Morris's new Marlboro Man still rides into the sunset-- but only on television screens in the Third World. Many poor citizens in developing countries will end up spending what little money they have on cigarettes. Philip Morris and other cigarette companies have lobbied hard for the U.S. government to pressure foreign countries to reduce trade barriers to the cigarette trade. The Reagan and Bush Administrations have assented, strong-arming countries which restrict imports of U.S. cigarettes by using a distorted interpretation of U.S. trade law. Section 301 of the U.S. Trade Act of 1974 allows the United States to impose trade barriers on countries which discriminate against U.S. imports; the Reagan and Bush administrations have used this law only reluctantly-- except to advance the interests of U.S. cigarette manufacturers over the objections of health activists in foreign countries as well as in the United States. The strategy has been successful: in 1986, Japan removed its barriers; Taiwan did so in 1987; and South Korea lifted its restrictions in 1988. The pressure continues on other Asian countries, notably Thailand. Japan may offer the biggest prize to cigarette makers like Philip Morris. The government ended its monopoly on making cigarettes several years ago and foreign firms wasted no time moving in. Philip Morris has captured an estimated 7.5 percent of the market and is poised to expand. Philip Morris and other tobacco companies have identified women and young people as the big growth market in Asia, says Ballin. They are pitching the "You've come a long way, baby" theme in their advertisements in the Asian countries where women are starting to earn money of their own but where few women smoke. About 90 percent of Japan's new smokers are children and about 5,000 youths start smoking each day worldwide. Philip Morris may also soon expand into Eastern Europe. The company is trying "once again [to] beat out public health officials" in advancing their competing messages, according to Richard Daynard, head of the Tobacco Products Liability Project. "As the nations of Eastern Europe emerge from bondage to the Stalinist system, Marlboro may be there to impose their own bondage," he says. Making Philip Morris pay? Along with a rising health consciousness, one of Philip Morris and other tobacco firms' greatest concerns is liability litigation. Terminally ill smokers and their families, or families of the deceased, are challenging cigarette manufacturers in court. By 1987, some 152 suits were filed against makers of cigarettes. The first verdict favorable to a plaintiff was handed down in 1988 in New Jersey, where $400,000 was awarded to Antonio Cipollone, the widower of a cancer victim. In early January 1990, however, a federal appeals court overturned the verdict and ordered a new trial. The effect the Cippolone ruling will have on Philip Morris and other manufacturers is not clear. Ironically, the appeals court ruling actually broadened the basis on which tobacco victims and their relatives could make claims against tobacco companies and could also lead to larger verdicts against cigarette makers. Daynard says that the decision will make it "much easier to bring suits" against tobacco companies. He hopes that now Wall Street will respond to the threat of large judgments against tobacco firms and bring tobacco company stock values down. Until now, he says, the companies have persuaded market analysts that the suits will not hurt them. Concern with liability suits began in 1984, peaked during 1987-88, but has quieted since then, according to Jennifer Coury, a tobacco industry analyst with Shearson Lehman Hutton. "Analysts are not concerned about the recent litigation," Coury states. The costs of litigation are so high that Coury and other analysts believe lawyers will be unwilling to take tobacco cases. Since the original verdict in the Cippolone case, Coury says, "the number of [willing] plaintiffs grew, but lawyers were not willing to take the cases." It is easy to see why attorneys have been reluctant to handle tobacco liability cases. While the tobacco companies hope to win their cases, a crucial component of their strategy is to make litigation extremely costly. The goal is "basically to make to make it too costly [to bring] suits," explains Daynard. The plaintiffs' lawyers in the Cippolone case, for example, have spent six years on the case and have accumulated $3 million in expenses; the three tobacco company defendants, one of which is Philip Morris, have spent an estimated $50 million. Plaintiffs have to find attorneys who are willing to spare no expense. Daynard and other tobacco opponents hope that the Cippolone ruling will change this, making it less costly to sue and easier to win big verdicts against tobacco manufacturers. Even if tobacco suits become more prevalent, Philip Morris may be less vulnerable to them than its competitors. "Because [the company's] market share has been rising so precipitously and since lung cancer takes so long to develop," Daynard notes, Philip Morris is a defendant in a low proportion of the cases relative to its current market share. In the near and medium term future at least, slick advertising, brilliant marketing, international expansion and cagey legal maneuvering seem likely to enable Philip Morris not only to survive but to expand rapidly. Competitors and critics alike recognize that Philip Morris is in a "position of preeminence because they are smarter, quicker and faster than people in other [tobacco] companies," Daynard says. But he adds "The question is whether [Philip Morris's] technical competence should be a reason to ignore the basic moral quality and public health" consequences of the company's product and marketing techniques. The families of millions of deceased smokers should have no difficulty answering this query. ------------------------------------------------------------------------------ [] MULTINATIONAL MONITOR November 1989 VOLUME 11, NUMBER 11, NOVEMBER 1989 LABOR A CHALLENGE TO THE ONE PARTY STATE: The Need for a Labor Party? By Samantha Sparks "Beaten! Whipped! Smashed! ... Our followers scattered like dew before the rising sun." -Ignatius Donnelly, author of the 1892 Populist Party platform in Minnesota, after the party received 11 percent of the presidential vote in that state. "Mass [political] resignation represents a public manifestation of a private loss, a decline in what people think they have a political right to aspire to...." -Lawrence Goodwyn, The Populist Moment LABOR ACTIVIST TONY MAZOCHI believes that the talk about creating a third political party misses the point. What is really needed, he contends, is a second party: one that represents interests other than those of multinational corporations and those concerned about their capital gains. "By squinting just a little," Mazzochi wrote in this magazine nearly three years ago, "it is clear that the United States is a one party society." While it is easy to be cynical about the notion of a new, alternative party, it is equally difficult to deny that there is a great void in the current political system. On economic matters, Democrats are often virtually indistinguishable from Republicans. It is well-financed constituent interests and not party affiliation which shape voting by elected officials. Where foreign policy issues are concerned, elected officials in the United States speak with one voice. Who but a few mavericks had the gumption even to suggest that the U.S. invasion of Grenada in 1983 was a farce? This "bipartisanship" (actually monopartisanship) also prevails in U.S. policy toward Nicaragua, Panama and the Soviet Union. A recent poll of the Oil, Chemical and Atomic Workers' union reflects workers' profound dissatisfaction with this state of political affairs. Nearly 50 percent believe neither the Democratic Party nor the Republican Party best represents the interests of working people. Nearly 66 percent believe that both parties care more about big business. And nearly 53 percent agree that it is time for organized labor to build a new party of working people. Other national unions are in the process of conducting similar polls and expect to see similar results. Support for a third party is evident, in polls such as these. Still, throughout U.S. history alternative political parties have failed to break the Democratic/Republican electoral stranglehold--though not for lack of trying. The Prohibition Party has made the longest run of it, starting in 1872 with an anti-liquor platform and continuing to this day, briefly changing its name and adding religious liberty and anti-abortion rights planks to its cause. The Socialist Labor Party held its own on national tickets from 1892 through 1972 and there are several others: the Anti-Masons in 1836, the Greenbacks and the Populists at the turn of the century and the People's Party of 1976, just to name a few. The trouble with all these parties, including the ones in existence today, is that while they have had some success in shaping national and local debate, they have not had a broad and lasting base. Tony Mazzochi believes that a workers' party can make a difference in the way people think and vote. The party, as he explains below, would not begin by posting leaders to stand for office. Instead, it would work to create a movement, nurturing a new kind of political thought that would challenge establishment politics, including the labor bureaucracy itself. Tony Mazzochi is secretary-treasurer of the Oil, Chemical and Atomic Workers Union. MULTINATIONAL MONITOR: How can you organize a labor party when there isn't really a labor movement to speak of in this country? TONY MAZZOCHI: Organized labor has still got 14 or 15 million people out there. It's got incredible resources at its disposal. Not that this labor party will be formed from the top of the movement. It's a labor party that would be supported, I believe, from the local level on down and that's an enormous base to start from. First of all, people are organized. Secondly, they're geographically dispersed. This is a process that is going to take some time since it's non-electoral. It's got to begin to define itself [and ] begin to develop an agenda. And then it's got to pursue that agenda. We're years away from a party that moves for electoral power. Organizing is always a monumental task. MM: Is there a risk that the party would be viewed as a "special interest" union party and not attract non-union members? MAZZOCHI: No, I don't see that. I think the agenda will speak for itself. [It] is a social agenda which would really be speaking to broad issues: national health care, wages, job security. These are issues which affect everybody. MM: What about the fact that a lot of union members, even those who don't identify themselves as Republicans, voted for Reagan and Bush? MAZZOCHI: There aren't that many people voting to start with. And I can understand even those people who voted for Bush, given that there weren't any options. But I think that we would attract those people. The 50 percent who don't vote are mostly alienated but you're never going to attract all the people. MM: What are your strategies for attracting people who have not voted for many years? MAZZOCHI: We wouldn't start by attracting people to vote. I think the people who don't vote have conducted a sophisticated analysis, although they may not think of it in those terms. If they were in Eastern Europe when you got a chance to vote for none of the above, they would be voting for none of the above. What's going to attract them is a program that speaks to their needs. MM: Have you spelled out that program? MAZZOCHI: No, that's something that's got to be spelled out with the people we enlist. I am absolutely adamant on a program that comes up from down below, [that] is not imposed on people from the top. The program is going to evolve through discussion with the rank and file. I still think the best and brightest people out there will be interested in having this party as their intellectual base. MM: Job security and wages are the main problems that working people want to see addressed, but these problems have a lot to do with international forces, perhaps beyond even elected politicians' control. MAZZOCHI: But if you don't deal with those issues, the others are irrelevant. For the first time, working people in this country have to think in transnational terms. Our program has to deal with that. MM: Do you see a conflict between the shop floor issues, which the union people would want to address in their political party, and the non-shop floor issues which others in the party might want to see addressed? MAZZOCHI: No, because I think that the shop floor issues rarely will get articulated in a political vein. I think what the politics would do is empower people to make a lot of moves on the shop floor. [We could have] a political program that empowers people to act, for instance, on occupational health and safety. The government has all these federal inspectors; I think the inspectors' duties should pass to the workers in every single facility. Legislation would empower people to act on their own It would empower the community to have their own inspectors too. So I think the community would have a common interest with the workers, in their ability to intervene in that part of the productive process which involves public health. MM: Can you give other examples of empowerment? MAZZOCHI: Labor law. In order to have a level playing field, a repeal of Taft-Hartley would be high on our agenda. [The law] has certainly shackled workers all over the country. More workers would be in unions if the law wasn't so stacked against them. First of all, if you file for an election, it takes years and years. It's not like the European system, where, if you sign one person up, you practically have a union. People vote for unions, it's just that we have a winner take all system. American elections demonstrate that, probably more than anywhere else in the world. If 35 percent of people vote for a union here, you get beat. In Europe, you have a whole different legal system that grew out of a political process in which workers have some say. MM: What levers would the labor party, as a non-electoral party, use? MAZZOCHI: It has a lot of levers. If the people are in motion around a set of proposals they feel would advance their interest, they would frame the issues and they would force existing legislators, regardless of their party, to react to that. I'm for a party that begins to create a tempo, that changes the nature of the political dialogue and ultimately, will vie for electoral office. But that's way down the line. MM: Why? MAZZOCHI: Because we're not ready for that. To run candidates today and have them defeated would totally demoralize any group. That's the history of third parties. Plus, I think developing an agenda that's relevant, that can mobilize people under its flag, takes time. And purely democratic discussion takes time. MM: What's your response to people who say that a third party would simply undercut the Democrats' chances and help the Republicans? MAZZOCHI: We'd be non-electoral. But, anyhow, that argument doesn't move me because I don't see the difference between the Democrats and the Republicans. They all want to vie for that narrow area of people who vote by adopting conservative positions. There are Democrats worth supporting and our people will support them until such time as the party is formed. Then [we will] ask them to cross them aisle. MM: The results of your poll show continued support for Democrats. MAZZOCHI: I think that's there, but most people think that's the majority support. Our poll and more and more [other] union polls show majority support for a labor party. MM: Do you foresee any problems with extending the party from its union base? MAZZOCHI: I think there are plenty of people to be included later on. I don't see any difference in the response [to polls about a labor party] from non-unionists. If you did it in a non- union context, you'd get the same answers. Most people who work are alienated from the political process and they're cynical about the existing choices that confront them. MM: How will the party forge consensus on non-workplace issues, such as abortion? MAZZOCHI: The party will have to draw up its own issues. The workforce is predominantly women today. The industrial workforce is minorities. That's the party's constituency, and it will develop positions based on discussions with the rank and file, not imposed from people above saying "That's not a winning formula." I'm emphatically opposed to elite structures. MM: How would the party be financed? MAZZOCHI: I think the members would finance it through membership dues and local unions would put money up. I think there are millions of people out there willing to spend money for a party that they think speaks for them. MM: What's the next step? MAZZOCHI: Probably next winter we'll bring together a group of people to talk about fundamental steps. Generally, we'll start at the local level. There' s going to be a lot of trial and error. It's a long, difficult road. MM: Yet you sound very optimistic. MAZZOCHI: I am optimistic. I have found in the 15 years I've been agitating on this question that people are all for it and they're more for it today. I think we're heading into another severe recession and none of the major parties will have the answers to that. What answers they will have, will be for the protection of global corporations rather than people. I think this is the right period to organize a new party. And all the issues that we deal with are going to have to be resolved by working at an international level. We need a vehicle to begin thinking about it. The issues are not resolvable in any one nation. ------------------------------------------------------------------------------ [] MULTINATIONAL MONITOR November 1989 VOLUME 11, NUMBER 11, NOVEMBER 1989 BOOK REVIEW "OBJECTIVE" PROPAGANDA: U.S. Media Business and Government Manufacturing Consent: The Political Economy of the Mass Media by Edward Herman and Noam Chomsky New York: Pantheon Press 412 pages, $14.95 Necessary Illusions: Thought Control in Democratic Societies by Noam Chomsky Boston: South End Press 422 pages, $16.00 Reviewed by Robert Weissman IN THE UNITED STATES many people believe the press relentlessly challenges government policy and is antagonistic to business. Conservative commentators find the media overzealous; liberal observers more frequently celebrate the effectiveness of the media in checking abuses of power. In one of their most clearly written and accessible works, Manufacturing Consent: The Political Economy of the Mass Media, Edward Herman and Noam Chomsky offer a sharply contrasting view. They dispute the notion that the media operate independently of business and government, in defiance of authority. They argue instead that the media perform a propaganda function, serving "to inculcate and defend the economic, social, and political agenda of privileged groups that dominate the domestic society and the state." The authors suggest that news must pass through five filters which cleanse it of stories, facts and perspectives contrary to the broad interests of business and the government. The filters are: 1. The size, concentrated ownership, owner wealth and profit orientation of the major mass media firms. Following the lead of Ben Bagdikian (see MM, May, 1987), Herman and Chomsky document the massive size of the major media firms and the intense concentration in the industry. They claim these characteristics align the media industry with the interests of business and government. Interlocking boards of directors and other close relationships between media corporations and other major corporations, are common. Moreover, the media companies are themselves profit-seeking multinational corporations and often the subsidiaries of other multinationals: for example, General Electric owns NBC. Herman and Chomsky argue that these tie create many shared interests between the major media firms and corporate America. 2. Advertising as the primary income source of the mass media. Advertisers do not desire large audiences per se, but audiences with buying power. Additionally, advertisers are unlikely to advertise on programs or in publications which attack them. Therefore, media firms which orient themselves to a working class and poorer audience, or which challenge corporate interests, will find that they are not able to generate advertising revenue. The authors point to the experience of the social democratic press in Britain to demonstrate the importance of this second filter. Three leftist papers failed or were absorbed into the mainstream press between 1960 and 1967, largely because they were unable to secure sufficient advertising support. Businesses did not advertise in these papers even though one of those papers had a readership double that of The Times, the Financial Times and the Guardian combined. 3. The media's reliance on information provided by government, business, and "experts" funded and approved by these entities. Journalists are dependent on sources for tips and commentary on news events. The government and large corporations have unparalleled resources which they can devote to reaching the public. They house public relations offices which make contact with the media through interviews, press conferences, press releases and other means. Reporters rely on public relations officers because they make reporting easier. They are easy to contact, trained at framing stories and always available to the mainstream press. Their institutional affiliations give government and corporate public relations officers immediate credibility. As journalists come to rely on and develop relationships with government and corporate sources, they become less likely to report stories critical of these sources, for fear that they will lose access to an inside source, and also to avoid harming any personal relationships that might have developed. 4. "Flak". Government and corporate entities respond to media criticism with "flak"--attacks on the media. Flak may come from corporate or government officials offended by news reports, or it may originate with corporate-founded institutional flak producers, such as Accuracy In Media (AIM). Flak received in one instance has a conservatizing effect on a news organization in the next. 5. Anticommunism. News organizations and reporters interpret both domestic and foreign stories in an anticommunist framework. Because anticommunism is deeply ingrained in the society, efforts to effect fundamental change are almost automatically labelled "communist," regardless of the validity of the claim. Herman and Chomsky are most successful in demonstrating that the media, at least in their coverage of foreign affairs, do in fact act as propaganda vehicles for the government and business powers. They show that the media will treat similar events very differently, depending on whether the incidents are viewed favorably or negatively by U.S. elites. Comparing the media's coverage of the Polish police's assassination of a Polish priest active in Solidarity and one hundred religious victims of state violence in Latin America, the authors show the differing standards used by the media in covering the activities of allies and enemies. The murder of Polish priest and Solidarity activist Jerzy Popieluszko received more mention on network news and was the subject of more column inches in the New York Times, Newsweek, and Time than all one hundred of the Latin American religious figures (including Salvadoran Archbishop Oscar Romero and the four U.S. nuns killed in El Salvador) combined. The quality and content of the media's treatment of the murders varied as well. Herman and Chomsky convincingly demonstrate that in the case of the Polish priest, the media detailed the gruesome nature of his murder and diligently sought to locate responsibility at the top of the government hierarchy. The media sanitized the murders of the Latin American victims, avoiding the details of their deaths and ignoring strong evidence that many of the Latin American victims (including Romero and the U.S. nuns) were killed at the command of top military leaders. As a second example of the media's double standards, the authors contrast coverage of elections in U.S.-supported El Salvador and Guatemala with coverage of Nicaraguan elections. To advance U.S. geopolitical interests, the Reagan administration characterized the 1982 and 1984 Salvadoran and the 1984-5 Guatemalan elections as free and fair and said that the 1984 Nicaraguan election was a meaningless exercise in which the basic conditions for elections were not met and which should not be allowed to obscure the dictatorial nature of the Sandinista government. According to Herman and Chomsky, the media will relay these conclusions to the U.S. public, irrespective of the facts in the three countries. The media did, in fact, parrot the Reagan administration's line; and Herman and Chomsky conclusively demonstrate that, in order to do this, the media was forced to apply vastly different standards to El Salvador and Guatemala than to Nicaragua. Relying on a massive amount of evidence collected from human rights and academic organizations such as Amnesty International, Americas Watch, and the (U.S.) Latin American Scholars Association, the authors assert that "neither El Salvador nor Guatemala met any of the...basic conditions of a free election, whereas Nicaragua met some of them well, others to a lesser extent." Yet the media presented a very different picture. Any regular reader of newspapers in the United States is familiar with the Nicaraguan government's harassment and censorship of the Nicaraguan opposition paper La Prensa. But a consumer of the mainstream media would have searched in vain for reports about the plight of La Cronica del Pueblo and El Independiente, two Salvadoran papers which had been critical of the government. La Cronica was closed in 1980 "because its top editor and two employees were murdered and mutilated by the security forces;" El Indepediente shut down six months later, when "the army arrested its personnel and destroyed its plant." Herman and Chomsky further buttress their theory of the media as an elite propaganda machine with five additional case studies. In each instance they show that the media suppressed or ignored evidence and perspectives which contradicted the interests of US. elites. The authors do not adequately substantiate their theory of why the media behaves as it does. The five filters of the propaganda model stand as very valuable hypotheses; undoubtedly the institutional factors Herman and Chomsky outline strongly influence the news produced by the media. But the main shortcoming of Manufacturing Consent is that the authors, for the most part, do not explore how institutional forces manifest themselves in the production of news. Thus the reader is unable to discern the relative importance of the factors they describe or to determine if other factors should be incorporated into their model. For example, sexism and, particularly with respect to foreign affairs, racism, might well be filters through which the news passes, each arguably more important than "flak." Herman and Chomsky avoid examining how news is produced--what reporters and editors do, or even the direct ways in which publishers and owners interfere with stories--because they want to focus attention on institutional influences. But those institutional forces are only effective as they are channelled through the reporters and editors. While some reporters may be corrupt "errand boys" for the elite, Herman and Chomsky believe most are honest and often courageous in the performance of their duties. They do not set out to suppress facts; rather, they report reality as they see it through the lens of an internalized elite perspective. In Necessary Illusions (and other works by the two authors), however, Chomsky argues that the internalization of a business worldview occurs generally among intellectuals, not just among reporters. If this is so, it suggests that the class position not only of media owners but of columnists and reporters is also an important factor in determining what is reported and how it is reported. Based on five lectures delivered in Canada in 1988, Chomsky's Necessary Illusions: Thought Control in Democratic Societies covers much of the same ground as Manufacturing Consent but Manufacturing Consent is a clearer and more comprehensive presentation of the propaganda model. The most valuable parts of Necessary Illusions are the appendices which follow the text. In one of the appendices, Chomsky responds to critics of the propaganda model, offering a detailed defense of the theory and elaborating its nuances. He compares U.S. and other Western media coverage of the same events, demonstrating that the Canadian press, for example, covers stories which are not found in the U.S. mainstream media. This serves as a supplement to comparisons of media coverage of similar events in allied and enemy countries, and as another means of demonstrating the validity of the predictions of the propaganda model. The appendices also contain a variety of informational nuggets; Chomsky offers clear and concise essays on subjects ranging from Costa Rica to Woodrow Wilson's Red Scare, from the Containment Doctrine to the state of civil liberties in the United States. In Necessary Illusions and especially in Manufacturing Consent, Herman and Chomsky provide compelling evidence that the media fulfil a propaganda function for business and government. And they offer valuable hypotheses about how and why the media do not adopt a more independent, critical and genuinely adversarial stance in their coverage of foreign affairs. As with any useful theory, Herman and Chomsky's book suggests future areas of exploration.The media's coverage of domestic issues merits the same scrutiny that they have applied to the reporting of foreign affairs. Additionally, the model needs to be fleshed out to include a careful examination of how the news is produced. Hopefully, the authors or others will take up these challenges. In the meantime, their work deserves the widest possible readership. .