Saturday, July 11, 2009

The Other Side of State Manipulation of Economic Markets: The United States, Israel and India

I have suggested that state owned enterprises continue to affect the development of normative frameworks through which private markets are conceived and thus regulated. The role of state owned enterprises in such markets suggest the leading edge of what may be the merger of politics and economics in the construction of future markets for goods and services. A sense of the resulting public-private market construct is very much in evidence in the markets for armaments and arms technology. A recent example provides a window on the way these markets function.
Under pressure from the Pentagon, Israel Aerospace Industries (IAI) has been forced to back out of a joint partnership with a Swedish aerospace company to compete in a multi-billion dollar tender to sell new multi-role fighter jets to the Indian Air Force. The deal, estimated at a whopping $12 billion for over 120 new aircraft, is being fought over by Lockheed Martin's F-16, Boeing's F-18/Hornet, Russia's MiG-35 and BAE's Eurofighter. IAI was asked by Saab, manufacturer of the Gripen, to jointly develop an advanced model which would compete for the deal. The Defense Ministry ordered IAI to back out of the deal after the Pentagon expressed concern that American technology, used by Israel, would be integrated into the Gripen offered to the Indians. Yaakov Katz, IAI Forced Out of Indian Jet Fighter Bid, Jerusalem Post, July 5, 2009.
The heavy handedness was very much in evidence. Elements of the American government, using their relationships and positions within the federal government used issues of national security to affect the competitive framework in the global market for jet fighters and jet fighter development. The parallels to the almost simultaneous actions by the Chinese government in creating a political element in the framework for the operation of private global markets in natural resources are quite striking. See Larry Catá Backer, State Owned Enterprises and the Integrity of Private Markets and Commercial Activity: On the Arrest of the Rio Tinto Executive, Law at the End of the Day, July 10, 2009. It suggests that what had been more commonly accepted in the elaboration of markets for armaments might now become the standard for other sectors of economic activity.

The conflation of public and private interests in the American actions to intervene in the competition was quite open.
"The stated concern was that Western technology in Israeli hands would make its way to the Indians," one Israeli official said. What was strange with the American request was that Boeing and Lockheed Martin - the two largest US defense contractors - are also competing for the Indian deal. For this reason, Israeli officials said it was more likely that the Americans were concerned that if IAI competed for the deal with Saab, it would force the American companies to lower their prices. Yaakov Katz, IAI Forced Out of Indian Jet Fighter Bid,supra.
Moreover, it is well known that the Israeli partner on the proposed bid, SAAB, had been an American owned company until very recently. Indeed, the timing of the American pressure was suspicious, coming within weeks of the announcement of the sale by General Motors of its interests in SAAB to foreign interests. David Jolly, GM Sells SAAB to Swedish Automaker, New York Times, June 16, 2009. It seems that the Israeli participation became a problem only when it ceased partnering with an American owned firm. And worse, the new SAAB would have been in some sense an instrumentality of the Swedish state, if only indirectly. "The companies said a deal was contingent on $600 million of financing from the European Investment Bank that is to be guaranteed by the Swedish government. They did not release further financial details of the deal, which is expected to close in the third quarter." Id. Not that the Gripen entry is dead--it is just that the Americans have ensured that SAAB will have to scramble for a new partner , likely raising the cost of their bid. In the name of secrecy, the American state has ensured that those secrets will be shared only through planes developed by American based enterprises with significant relationship to the American military establishment--if such planes are actually chosen by the Indian military.

The focus on the SAAB-Israel partnership could be understood in terms of power relationships at the political level. The Americans could effectively project its political power on the Israeli State in ways that would have been more difficult with respect to the governments of the other competitors for the Indian jet. At any rate, with the SAAB-Israel jet bid more crippled, the American government increased the changes that an American firm would win at least a part of the contract. It also reduces the possibility that BAE, another competitor, will win part of the bid through its association with the Gripen. State intervention, then, was used to reduce competition and to "nudge" the results to make it more likely that American private interests would profit. And this was done in the name of political, secrecy, concerns.
This is not the first time that an Israeli company has been forced out of a deal due to concerns that competing with American companies would endanger Israeli-US relations. Last summer, the MoD ordered Israel Military Industries (IMI) to back down from submitting a bid for a half-a-billion dollar deal to develop and manufacture a new tank for the Turkish Armed Forces. At the time, Turkey had informed the MoD of its interest in developing a new tank and asked if IMI would want to submit a bid. SIBAT - the MOD's Foreign Defense Assistance and Defense Export Organization - decided not to submit an Israeli offer so not to compete with the Americans and endanger Israeli-US defense relations. Yaakov Katz, IAI Forced Out of Indian Jet Fighter Bid,supra.
And thus a possible template for regulated markets of the future, where economics and politics are amalgamated. People may be complaining about Chinese heavy handedness in the Rio Tinto drama, but that may well be little more than a harbinger of the future of global markets. When states become market actors, it will be difficult for them to refrain from using sovereign power in aid of market strategies.

In the market for armaments, this conflation has already been internalized within its framework. This is well brought out n a recent analysis of the competitors for the Indian fighter order. India’s MMRCA Fighter Competition, Defense Industry Daily, May 25, 2009. The report noted: "Recent changes in India’s needs and the contest participants are changing the relative rankings of the contenders. Geopolitical considerations are also intruding, as most of these choices have the potential to improve relations with an important potential ally. Standardization arguments will also carry weight. As of January 2006, India’s Air Force operated 26 different aircraft types, and the IAF is not eager to add to its support headaches." Id. With respect to the Gripen, the Report concluded: "The Gripen’s acceptance carries no spin-off geopolitical benefits, however, and that last weakness may prove to be the plane’s most critical hindrance in this competition." Id.

The idea that economics is political, and that politics is economics, and that direct state interventions in all sectors of market activity is necessary, cannot be far behind. But understand, this is not a reversion to the Stalinism of the last century that passed for political economics. That model clearly remains discredited. Instead, it might be better understood as a modern, and globalized normative framework of a pre-Stalinist conception of the unity of the legal order.
In the eyes of the Marxists the economic structure of society is the fundamental factor for regulating social relationships. 'Private law' is therefore wholly dependent on public law because the latter gives legal form to this economic structure. To deny the distinction between public law and private law is therefor to affirm the unity of law, and this unity results form the fact that law, in all its branches, is essentially a reflection of the economic organization of society. René David and John E.C. Brierley, Major Legal Systems in the World Today (New York: Free Press, 1978), at 265.
But these are not merely Marxist notions. They conflate with a stream of fascism well understood before its erasure in the mutual triumph of capitalism and Marxist Leninism in 1945. Fascism suggests the merger of of state and enterprise.
Fascism, rejecting the distributionist preoccupations of socialism, advocated a program of national industrial development. Its focus was productionist . . . Fascist thought turned on two constants: production and the nation. The nation required rapid industrial expansion and to this end all the productive categories were to cooperate.A. James Gregor, The Ideology of Fascism: The Rationale of Totalitarianism (New York: Free OPress, 1969), at 161-162.
But this was not a 20th century re-articulation of 19th century economic liberalism. Rather it pointed to the conflation of state and economy within a context in which economic actors were autonomous but subject to the political will of the state, to the extent, at least, that the state could enforce that will. Id., at 162. "Because the functions of the private merchant and industrialist are functions of national concern, they are obliged to execute them in conformity with the national interest and in the direction of production they are responsible before the state. Id., at 295 (quoting La Carta del Lavro, Guiseppe Bottai, ed., Rome, 1928 (commentary)). This appears to find echos in recent actions by many major political players.

While these notions might have been laughable, and unworkable, or frightening, within traditional states--where power and territorial control provided a distinctive fundamental organizing principle of the state--it appears to have acquired some power, in fact (if not in form), at the transnational level. Here, there is governance without government, and government without a state, a global order in which states and enterprises govern through networks of power that are not tied to territory but to function. Economic globalization may therefore provide the only context in which it is possible to elaborate systems grounded in (1) the unity of law, as traditionally understood, but in which public law is not limited to assertions by the apparatus of states and (2) the episodic and partial merger of state and enterprise within a global context in which no state and no enterprise can assert a monopoly of economic or political power sufficient to dominate globally. Governance without government, then, may produce a revolution in the way in which legal frameworks are conceived.

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