The Political Economy of US Foreign Policy

Summary : (Part 1 of 4) I critique commenter Matt’s argument that, at the deepest level, American foreign policy has sought a “favourable investment climate” for itself in the Third World.

US Foreign Policy & Crony Capitalism

Before I get specifically into Matt’s beliefs, let me first address what I think is a common argument about US foreign policy : the “crony capitalist theory”. I stress, this is not quite the same as Matt’s view.

According to the crony capitalist view, most US actions in the Third World promote American business interests, including such things as the ownership or control of oil in the Middle East ; or the protection of fruit plantations in Central America and the Caribbean — classic staples of the vulgar street-corner naive cynic.

The crony capitalist model assumes narrowly self-interested, parochial actors that influence the US government in discrete cases. It’s plausible a priori, because, in the domestic context of any political system, “socialise the costs and privatise the gains” is a classic form of rent-seeking behaviour. If and when they can, businesses naturally seek to curry political influence and extract advantages for themselves in the design of legislation or the administration of policies. So the crony capitalist model is simply the same principle applied to foreign policy. Thus, one might argue that many of the US interventions in the Caribbean Basin, especially before 1945, emerged from documented collusions between the US government and very specific business interests, such as the United Fruit Company.

However, the crony capitalist theory fails when it is applied to the whole global strategy of the United States over the long run. It founders on the immense multitude of examples, especially during the Cold War, in which the United States clearly felt unbothered by economic policies or events in the Third World which were patently contrary to the objective of domination by US corporations.

A small but telling example from after the Cold War would be the US tilt toward Armenia in the Nagorno-Karabakh War. Although the United States had initially sought neutrality in the conflict, nonetheless Armenian-Americans in California prevailed upon the US Congress to embargo all aid to Azerbaijan. This is despite the fact that it was host to numerous US multinationals doing deals in oil and natural gas in the Caspian Sea. Likewise, under the influence of Cuban-Americans, the United States doggedly maintains an embargo against Cuba even though the US business community appears to favour doing business with it. Then there is Iraq : the fact that US oil companies neither control Iraq’s oil, nor receive much more fee revenue from its oil fields than the Malaysian state oil company, is a serious rebuke to all those “war for oil” babblers from the early 2000s.

The incongruities of the “crony capitalist” theory during the Cold War are never-ending. In the period 1950-80, nearly the entire Third World would indulge the global fashion for “import-substitution industrialisation” (ISI), which aimed to limit imports of manufactured goods from the rich countries and stimulate the production of local “import substitutes”. In some cases this plan involved the use of tariffs, subsidies and licences to encourage local production for the domestic market ; and in others central planners would allocate capital to state-owned enterprises and set up detailed production targets. Although in its classic form ISI is strongly associated with Latin America’s response to the Great Depression, some of the celebrated postwar stalwarts of the system included India, Nigeria, South Africa, Ghana, Tanzania, Turkey, Iran, Iraq and Israel (a state founded by socialists, with crucial support from the communist bloc).

The list is endless and it would be more efficient to cite the exceptions. Whether the country was a friend or foe of the United States, did not make much difference. Morocco, considered a staunch, conservative ally during the Cold War, had one “five-year plan” after another for its bloated state enterprises. (These were privatised in the late 1990s and early 2000s, although they went from state-owned to royal-family-controlled.)

But the best example of a prominent US ally whose political economy was not vividly different from that of neighboring Soviet-allied states was Iran under the Shah. He might have been restored to power by the USA and the UK after being overthrown in a nationalist revolution, but the supposed stooge himself fully nationalised Iranian oil assets. The stooge also led the drive in 1974, as member of OPEC, to quadruple the international price of oil, an act which brought economic chaos to his puppet master’s country. The Shah of Iran was also an economic progressive who used his carbon windfall to provide free public education and healthcare, and to finance a land reform which transferred millions of hectares of land to landless peasants

In contrast with the ISI countries, most of the East Asian countries turned to the strategy of export-led industrialisation. This was just as state-directed as ISI, except for a crucial difference. The ISI model assumes domestic producers could count on domestic consumption, whereas the Asian model exploits the preexisting cultural habits of high savings and low consumption. Thus the East Asian developmental state intensified the suppression of internal demand and promoted export-manufacturing industries. The likes of Japan and South Korea would close their markets, for the most part, to manufactures imports and foreign investment from the United States, the benefactor to whom both literally owed their existence. In return, the United States largely practiced unilateral free trade.

By far the most egregious discordance between the crony capitalist theory and the reality of American behaviour has to be the US support of Israel. (Its causes have parallels, writ much larger, with the case of the US stance on Cuba and Armenia.) The United States had actually been fairly aloof in the 1950s — and turned downright hostile in 1956 with the Suez Crisis — but the 1960s saw a tilt toward Israel and against its Arab enemies, very much solidified after the 1967 war. I don’t see what, at least in crude self-interested terms, the USA gets out of its extraordinary closeness with Israel, an intimacy which rivals the Anglo-American alliance. I mostly see handicaps in a region the USA regards as vital enough to have prosecuted several wars in. There was the 1973 oil embargo, the near-confrontation with the Soviet Union in 1973-74 resulting from the Yom Kippur War, diplomatic complications at every front, terrorist attacks since the 1970s, etc.

(A propos of which, there’s a strong whiff of inconsistency between blaming US intimacy with Israel and the Palestinian situation for the terrorism committed by Saudis, Egyptians, and Pakistanis, and at the same time arguing that the relationship is fundamentally driven by crass self-interest on the part of the United States. Not an outright contradiction, but there’s a tension between the statements which are often contained within the same mind.)

“A Favourable Investment Climate”

Matt is aware of such incongruities, and he’s pointed out some of them himself. So he favours a more abstract approach from which I quote the choice part :

The general strategy of US foreign policy in the Third World, and especially Latin America, during the Cold War was to promote a “favorable investment climate.”

It was also the strategy before the Cold War: the peak of US intervention in Latin America was 1898-1933; for half of this period there were no “commies” in existence, and for the other half they were hardly a serious threat…

Now, I repeat: US foreign policy is not omnipotent. We have limited resources, and we cannot do away with all the things we dislike at once. Since Communism was the greatest threat to favorable investment climates, we tended, at any given point, to focus most of our resources on combatting movements that were explicitly Communist or which we perceived to be Communist. This leads some people to believe that we only opposed Communism, and were just fine with democratic nationalism and other threats to the American-dominated international economic system. But this is the wrong moral to draw from the Cold War. It only sometimes looks as if this were true because we tended to focus less effort on opposing non-Communist nationalists, since Communism was the greater threat. But that doesn’t mean we liked economic nationalism, and it doesn’t mean that we didn’t do what we could to oppose it when it was feasible to do so.

The US also opposed fascism before and during World War II, especially from Japan. Why? Because fascism creates an inhospitable investment climate, or at least an imperfect one. The Japanese Greater East Asian Co-Prosperity Sphere would have put an end to US plans for an Open Door in Asia (even as it strove for a relatively closed one in the Western Hemisphere). The US also opposed European imperialism after WWII, and for the same reasons. Except, of course, where the alternative was worse, like in Indochina…

You mention South Korea, Iran, and Turkey (why not Taiwan too?), all US allies with nationalist economic policies. Notice something about these countries: they were all on the periphery of the Communist world. The US needed these countries as bulwarks against the Soviet Union and China. They needed to be prosperous and militarily powerful. We could not afford for South Korea to be Honduras…. [ More comments on the “net” strategic value of Iran under the Shah, Turkey, Israel, etc. which outweighed other considerations. ]

As Lenin recognised, capitalists often compete amongst themselves and do not coordinate their efforts against their ideological enemies. He was talking about capitalist states, but his observation applies equally to capitalists within a country. Businesses promote their own individual interests and do not necessarily advance capitalism in the abstract. So it is up to the neutral, disinterested governments of capitalist states to promote the general welfare of capitalism — at least their own capitalists.

In that vein Matt regards the US government, not as the captive of discrete business insiders with numerous conflicting agendas, but as a rational, ‘above the fray’ actor with a coherent, long-range plan to make the world safe for American business in general. So, rather than haphazardly seek any short-sighted commercial gain, the USA flexibly weighs its options and pragmatically sets priorities in the face of threats to Pax Americana. All three European colonialism, German/Japanese fascism, and Soviet communism have been rivals of US mercantilist capitalism, and in defeating them utterly the United States was able to take the long view and tolerate the fairly minor deviations from ideological orthodoxy, like state-led industrialisation in the Third World.

Matt’s argument in a way mirrors George Kennan’s diagnosis of Soviet behaviour in the famous “Sources of Soviet Conduct”, published in Foreign Affairs in 1947 under the pseudonym Mr X. The analysis ties together very well the internal and external roots of Soviet behaviour. The Marxist-Leninist equivalent of the “favourable investment climate” was identified by Kennan : the ideology required its own expansion, but it would be accomplished with patience, flexibility and opportunism. Which is of course how the Soviet Union actually behaved in the world, not dogmatically, but pragmatically in pursuit of its long-range ideological goals. The Soviets just weren’t very choosey or punctilious about the ideological orientation of their clients.

But since the collapse of the Soviet Union and international communism, the United States is now virtually unrestrained in its ability to pursue laissez-faire capitalism around the world. That ideology need no longer take a back seat to strategic military priorities, nor is there an alternate superpower to balance against American hegemony. Thus arrived the neoliberal “Washington Consensus” of the last quarter-century with the mantra of privatisation, financial liberalisation, free trade, fiscal austerity, and deregulation.

Conveniently, the Third World boom of 1950-80 had wound up in the utter shambles of hyperinflation, massive debt, balance of payments crises, growth collapse, and (in some cases) civil war and famine. With the economic nationalism of the Third World and the central planning of the communist states both in discredit, the trinity of the IMF, the World Bank and the US Treasury could now impose on desperate countries the most dramatic top-d0wn economic restructuring the world had ever seen. There had even been a dress rehearsal : Chile under Pinochet spent the years 1973-89 remodelling a stagnant social-democratic populist regime after the postulates of Milton Friedman and the Chicago Boys.

In exchange for assistance and debt relief, the neoliberal institutions of the Washington Consensus enjoined the financially desperate countries be pried open to penetration by global capital. Whether it was water works in Bolivia or electricity providers in South Africa or the national telephone monopoly in Mexico, the ‘commanding height’ assets of the Third World could be carved up much like they had been in the 19th century.


Matt’s “favourable investment” global strategy is inherently unfalsifiable.  If one’s prior is that everything the United States does in the world is in order to create/maintain a favourable investment climate in a broad sense, then all decisions can be rationalised around that premise. If the United States didn’t appear much bothered by countless instances of economic nationalism or social democratic experimentalism in countries which were either neutral or pro-American in the Cold War, then those must have been because their strategic value was more important than their investment value ; or their markets just weren’t that big anyway ; or the USA was not omnipotent and had to weigh their priorities in view of limited resources ; or the USA was sacrificing short-term gains with a disciplined eye toward the long-term goal of defeating the Soviet Union, the principal obstacle to the unalloyed triumph of capitalism.

It’s not possible to falsify such a premise with individual cases. So I attack his thesis in a different way.


Edit : Responding in the comments section, Matt has said, I have not accurately characterised his views : “I was caught off guard by your attribution to me of a belief that the United States had a grand, long-term master plan to conquer the economies of the Third World. Although I never said that the US promoted favorable investment climates with such a scheme in mind, when I reread my comments I can see how someone could come to that conclusion”. I had also made characterizations of Noam Chomsky to which he objected. So I have removed references to Chomsky from the above, in order to avoid confusion.

(The comments section of this post is closed. If you’d like to comment, please go to Part 4, “The Mystery of US Behaviour in the World”.)

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