[Socialism Today, No. 24, December 1997, p. 11-16]
The world economic situation of capitalism has changed dramatically in a few weeks. Until recently, capitalist commentators presented glowing reports on its health. But now the illusion of a ’new paradigm‘, a renaissance of ‚free market‘ capitalism, is being shattered, as the world economy heads for a slump. Lynn Walsh writes.
Until recently, capitalist commentators were presenting glowing reports on the prospects for the world economy: ‚World’s future is rosy, says IMF‘ (Financial Times, 24 April 1997). The IMF’s Economic Outlook (April 1997) claimed: „There are few signs of the tensions and imbalances that usually foreshadow a downturn in the business cycle“.
US economists, echoed by president Clinton, proclaimed the idea of a ’new economic paradigm‘. The favourable combination (it was claimed) of liberalisation, globalisation, new technology, and low inflation had overcome the boom/slump cycle and laid conditions for continuous growth, for prosperity without limit.
Yet a crisis was already brewing in South-East Asia, which erupted in a round of competitive currency devaluations. Far from being a ’storm in a teacup‘, these events accelerated the development of a regional recession, precipitating a massive debt crisis, and provoking turmoil on Asia’s financial markets. In October, this impacted on Wall Street and other Western markets, triggering the biggest falls on the stock exchanges since 1987.
Initially, capitalist leaders lightly characterised the stock exchange falls as a welcome correction and the South-East Asian crisis as merely a ‚local difficulty‘. Now they are being forced to contemplate the real scale of the emerging crisis. Bourgeois illusions in the ’new paradigm‘, in a renaissance of ‚free market‘ capitalism, are now being shattered. They are being exposed for what they were, a fantasy induced by the phenomenal surge of profitability achieved in recent years through neo-liberal policies which have enormously intensified the exploitation of the working class.
Crisis in South-East Asia
The Crisis in South-East Asia has shattered the grandiose illusions built up in the ‚emerging markets‘. Until recently, these economies were held up by capitalist commentators as models of neo-liberal dynamism, locomotives which would pull the world economy into the 21st century. Their enthusiasm was especially focused on the new generation of ‚Tigers‘: Thailand, Malaysia, Indonesia, Philippines, and China. These are extreme cases of uneven development, with elements of advanced Western capitalism being injected into poor, undeveloped and, until recently, predominantly agrarian, societies. ‚Free market‘ economics, moreover, have cohabited with repressive, authoritarian regimes. Rapid economic growth under such conditions was bound to be highly contradictory, producing extreme social tensions.
Growth since the late 1980s was fuelled by massive inflows of capital from the advanced capitalist countries, as investors with a super-abundance of liquid assets searched for more profitable fields of investment in a select group of Third World countries. The liberalisation of trade and investment opened the gates wide to the exploitation of cheap labour, cheap materials, and a growing consumer market, especially among the emerging middle-class layers. Private capital flows (net of outflows) to Asia (excluding China) increased from an average of $4.7bn a year in the 1980s to $33.45bn a year between 1991-96. In 1996 itself $57bn poured into Asia (ex-China), while $23bn flowed into China. The flow was almost certainly higher in the first part of 1997.
In the early phase, most of this investment was through the multinational corporations (foreign direct investment), which set up production, assembly and distribution facilities. More recently, a growing proportion has been ‚portfolio‘ investment, i.e. much more volatile, short-term investment in shares and bonds. The stock exchanges in these countries have mushroomed, also attracting local investors (most of them investing on the basis of borrowing from abroad). The accelerated growth of the main cities generated a property boom, with massive speculative investment in property companies. The regimes of the region, particularly Indonesia and Malaysia, competed with one another to build the grandest prestige projects (the world’s tallest building, the Bakun dam, new airports, etc.).
The high growth rates of the last few years depended on the high rate of investment, which grew at an average 20% pa (and significantly higher in Malaysia), about three times the growth rate. This could not be sustained for long. In 1996 there were already signs that the headlong investment was producing regional overcapacity (in cars, microchips, etc.) and a glut of new property. A slowdown in exports resulted in growing trade deficits, as imports continued to flow in.
The ’shock‘ which triggered the crisis was the series of regional currency devaluations, triggered by the devaluation of the Thai baht in July. Most of the South-East Asian economies had pegged their currencies to the US dollar. This encouraged foreign investors, who were assured that the value of their assets would be maintained. While the US dollar was falling during the early phase of this business cycle, pegging to the dollar did not adversely affect South-East Asian exports. But after 1995, the rise of the US dollar made the region’s exports more expensive on world markets. At the same time, they were hit by China’s devaluation of the yuan by 35% in 1994. With the advantage of even lower labour and materials costs, China began to increase its share of regional and world exports at the expense of the South-East Asian economies. They suffered a marked slowdown in 1996, and their trade deficits began to grow alarmingly. Faced with a growing economic crisis, the Thai government decided to float the baht. which rapidly led to a substantial devaluation.
This set off a series of regional devaluations, as other governments attempted to preserve the competivity of their exports. Instead of providing them with a way out, the devaluations set off a chain reaction in the direction of recession. Exports did not grow significantly because of the region’s overcapacity. Moreover, in an effort to prevent an outflow of capital in response to devaluation, governments sharply increased interest rates. Immediately, this hit all borrowers, whether manufacturers, exporters, construction companies, or the government itself, especially as a large part of the debt was denominated in US dollars. In any case, a flight of capital was already beginning: a ‚flight to quality‘ i.e. to less risky assets in the advanced capitalist countries. The financial bubble burst: many banks became insolvent, and were closed down by governments: property prices crashed and finance companies went into liquidation. The consumer market, heavily dependent on credit, has also been severely squeezed.
During July and August, Western commentators tried to minimise the crisis as a ‚local difficulty‘ which would not impact on the world economy. But it is clear that a full-scale regional downturn was already beginning. There was extreme volatility on the region’s stock exchanges. This remained local until 23 October when there was a crash on the Hong Kong Stock Exchange. It was this that triggered the big falls on Wall Street, London, and other major exchanges.
South-East Asia is now experiencing a severe downturn, which will inevitably have a serious impact on the rest of the world. Fears aroused among investors by the crisis in Asia have already led to a flight of capital from Latin America and the former Stalinist states in Eastern Europe. A crisis is now developing, for instance. in Brazil. The contraction in Asia, moreover, will also cut US exports to the region (20% of US exports go to east Asia, 12% to Japan). The Chinese economy has also experienced a marked slowdown in recent months.
The downturn will mean a big increase in unemployment, and a sharp drop in workers‘ and farmers‘ income. There have already been big protest demonstrations, which signal the beginning of a period of social turmoil and political upheaval. The most direct and devastating impact, however, could be on Japan. The world’s second largest economy (producing 14% of the advanced countries‘ output, 8% of world output), Japan has stagnated since 1992 and could now be slipping back into recession. There was a brief growth spurt in 1996 (3.6%) mainly due to massive government spending on infrastructure projects. Since then, the government has cut spending and increased taxation, slowing the economy down again. Japanese capitalism is still weighed down by the mountainous debt burden, the ‚overhang‘ from the speculative financial and property bubble of the late 1980s. A huge proportion of the banks‘ book assets have, in reality, been massively devalued by the fall in share and property prices, aggravated by October’s 30% fall on the Tokyo Stock Exchange. The rate of bankruptcies continues to rise.
Japanese capitalism has been kept afloat by the growth of its exports, boosted by the fall of the yen in relation to the dollar. But 46% of its exports go to other Asian economies, including 12.5% to Thailand, Malaysia, Philippines, and Indonesia. Now these will be seriously undermined. At the same time, Japanese finance capital has huge loans at stake in these countries, and also in Korea, which itself is paralysed by a massive debt crisis. This year so far, six of Korea’s top 30 corporations have filed for bankruptcy, a disaster for big business. It certainly cannot be ruled out that the Asian crisis will spread to Japan, and „Japan’s malaise is much more serious than Malaysia’s“ (Daily Telegraph, Business News, 8 November 1997). „The malaise in Japan is more threatening … its influence on the West is very significant. Japanese companies have central positions in key industries like car making and financial services, as well as substantial portfolios“. Moreover, Japan is a growing market for exports from the US and other advanced countries. A recession in Japan, which is now likely, would trigger a worldwide downturn. The Japanese government, the Sultan of Brunei, and other regional governments have stepped in with financial packages to try to prevent a regional meltdown. The IMF, which is a proxy for US imperialism, has now become directly involved. „It’s the most complex financial bail-out ever“, comments Business Week (17 November 1997), „with a price tag of more than $100bn. At stake: global economic health“. This is double the cost of the Mexican rescue of 1995.
Stock Exchange Gyrations
The fall on the Hong Kong Stock Exchange (23 October) triggered the biggest falls on Wall Street and other Western stock exchanges since the crash of October 1987. The falls, at this early stage, could not be attributed to the direct effects of losses on Asian markets. They reflected the growing nervousness of international finance capital. Above all, they reflected the massive overvaluation of shares in the US and other major exchanges. There were jitters on Wall Street earlier in the year, reflecting fears that Greenspan, chairman of the Federal Reserve, would put the brakes on the US economy.
However, after the mid-October falls, most of the major exchanges quickly returned nearly to their previous high level. The aficionados of capital passed the episode off as a necessary, welcome correction. Buoyed up by the super-profits they have made in the recent period, the bourgeoisie is incredibly complacent. They survived the 1987 crash, which proved to be a brief interruption of the long bull market. So why shouldn’t they survive this time? The mood on Wall Street is also reinforced by the continued growth of the US economy, particularly with high profits and low inflation.
But as a correction, the October falls were completely inadequate to reduce the massive overvaluation which has developed. Despite the delusions which always appear at the height of an upswing, a further, much more severe correction, is clearly on the agenda.
In the US, which now serves as a model for the other advanced capitalist countries, the total capitalisation of equity markets soared from 53.8% of GDP in 1990 to 108.7% in 1996, and now probably exceeds 150% of GDP. Hyper-rich investors, flush with money (higher returns, higher salaries, lower taxes), have thrown their cash into company shares, eager to grab their slice of the loot. Big business profits have been swelled by intensified exploitation of the working class (lower wages, longer hours, tougher management), by a new wave of mergers and acquisitions (asset stripping, downsizing), land and property speculation, the intensified super-exploitation of the Third World, and by fabulous rates of interest from the world’s ever-growing debt mountain.
The scramble for shares (currently more profitable than government bonds in the US), have inevitably pushed up share prices – faster than the profits of the big corporations. Since 1991, the companies listed on the Standard & Poor’s 500 Index increased their profits on average by 20% pa. But their share prices recently averaged 23 times earnings (from dividends) compared with a post-1928 average of 14 times. Gillette shares have been selling at 59 times earnings, while Coca Cola shares go for 46 times earnings.
Such share prices cannot last for ever. Yields inevitably fall (the dividends, which ultimately depend on company profits, are a lower percentage of rising share purchase prices). Since 1925, the yield on S&P 500 shares averaged 4.38%, while in August 1997 the average yield was down to an all-time low of 1.65%.
In a rising ‚bull‘ market, of course, investors buy and sell shares regularly, collecting a capital gain on sales. Moreover, in recent years some corporations have been distributing profits to shareholders by buying back their shares at current, inflated prices. Nevertheless, shares are still overvalued, even since the October fall, a symptom of what Greenspan termed ‚irrational exuberance‘, in other words a symptom of a speculative bubble which will inevitably be deflated.
During July of this year, a few speculators, less deranged by their recent profit-taking than the average, were predicting a crash. These included George Soros and Barton Briggs, chairman of Morgan Stanley Assets Management, who said „I have the feeling we are setting up for something out of the blue soon. Something with the stunning violence of a punch in the mouth when you aren’t expecting it“. (New Yorker, 28 July 1997).
Fundamentals
‚The Fundamentals are strong‘, soothed president Clinton after the fall on Wall Street. There was not going to be an economic crisis. Greenspan made similar noises. Growth in the US, it is true, is now running at an annual rate of about 4%. with low inflation (2.2%) despite low unemployment (4.9%).
A broad, historical assessment, however, shows that it is only profits which have grown strongly in the 1990s. Rates of growth, investment, and productivity growth have all been lower than the 1980s, and substantially lower than the 1950-73 upswing period.
Commenting on the profits boom, the 1997 Report of the UN Commission on Trade and Development (UNCTAD) says: „Capital has gained in comparison with labour, and profit shares have risen everywhere… In the North (the advanced capitalist countries [ACCs]) there has been a remarkably upward convergence of profits among the major industrial countries. The rate of return on capital in the business sector in the G7 countries taken together rose from 12.5% in the early 1980s to over 16% in the mid-1990s. This is again the counterpart to declining wage shares“. This has been achieved through the intensified exploitation of the working class, not through the extensive expansion of production. Wages have been squeezed, while the working week has lengthened. More and more workers are part-time or temporary. Management regimes have intensified, while the salaries of top executives have grown enormously in relation to average wages.
The low levels of investment and productivity growth are reflected in the feeble growth rates of the 1990s. The advanced capitalist countries have grown at an average of 1.8% pa since the beginning of the 1990s, even worse than the 2.8% pa average of the 1980s. Despite its current high growth rate, even the US averaged only 2.3% pa in the 1990s, against 2.7% in the 1980s. The ACCs grew at an average rate of 4.5% pa during the 1950-73 upswing, while the USA grew at 33% pa.
Trade grew faster than production in the 1990s, reflecting growing globalisation. World exports grew at 6% pa between 1989-96 (by volume), and grew at over 10% in 1995. But there was a sharp slowdown in 1996, partly reflecting the beginnings of the crisis in Asia, and is not likely to rise above 4.5% this year.
Low investment and especially de-industrialisation have inevitably led to higher unemployment. The recovery of the 1990s has largely been jobless. apart from the US, where jobs have been created on the basis of low pay. casualisation, etc. Last year the European Union countries had over 18.7m unemployed (slightly down from the 1994 peak of 19m). In the advanced capitalist countries as a whole, there were 36.3m unemployed (1993 peak: 37.7m). The official figures, moreover, seriously underestimate the numbers of jobless, underemployed, semi-employed, etc. On a world-wide basis, the International Labour Organisation estimates that there are at least 800m unemployed.
The Third World grew faster than the ACCs in the 1990s, but still at a slower rate than the 1980s. Growth was mainly due to the exceptionally high growth in Asia. The Third World averaged 4.8% pa growth (3.9% excluding China). However, Latin America grew on average less than 3% pa, while Africa continued to stagnate, with some countries sliding back into barbarous poverty.
Of the three advanced capitalist regions, only the US has experienced the semblance of a recovery in the 1990s. Japan has stagnated, while the European Union has achieved a pathetic 1.7% pa growth. One of the main factors in Europe, has been the extremely restrictive policies imposed by adoption of the Maastricht criteria for EMU.
Far from showing ’strong fundamentals‘, these data show that world capitalism is in a period of depression, of long-term stagnation of the productive forces. There are, of course, still cyclical recoveries and growth spurts in certain regions, such as south and east Asia. Nevertheless, each recession leaves world capitalism in a weaker position, with more acute contradictions within the system.
Heading for a slump
The crisis which is now unfolding is revealing the underlying contradictions of the neo-liberal phase of world capitalism since 1980. The very features, such as globalisation and new technology, which were hailed as dynamic growth factors, have now become the agents of instability and crisis.
In the process of globalisation, there were massive flows of capital from the advanced capitalist countries to a handful of semi-developed countries (while a hundred or so underdeveloped countries fell further behind the ACCs). Capital flows have been increasingly dominated by short-term, speculative capital. Now the process has begun to go into reverse, with a flight of capital not only from South-East Asia, but also from Latin America and ‚emerging markets‘ in Russia and Eastern Europe. There is a so-called ‚flight to quality‘, as investors search for safe havens. The increased integration of world markets means that the Asian crisis has been rapidly transmitted to the rest of the world, and is already beginning to have an impact on the advanced capitalist countries, whose ‚fundamentals‘ are far from strong.
The rejection by the US Congress of Clinton’s proposal to renew his ‚fast-track‘ authority on trade deals (particularly with Latin America) reflects the growing revolt against corporate downsizing, casualisation, lower wage levels, etc., which are blamed on globalisation, including the North Atlantic Free Trade Area. In Asia, the outburst of the Malaysian prime minister, Mahathir Mohammed, against ‚immoral speculators‘ like George Soros, and Mahathir’s threat to ban financial speculation and re-impose capital controls, is another sign of a reaction against the liberalisation and deregulation of world trade and finance. These moves undoubtedly foreshadow a turn towards protectionism, which will emerge during a downturn, probably on the basis of the main trading blocs rather than individual nation states. Globalisation, like any other phase of capitalist development, can accelerate production and trade for a period. But it inevitably reaches limits, when there will be a tendency for the trends to be reversed.
New technology has also proved to be a mixed blessing for capitalism. Cheap, speedy communications and transport based on new technology have served as vehicles for globalisation. State-of-the-art production facilities can now be established, at least in certain branches of production, in semi-developed, or even the poorest underdeveloped countries. The big multinationals have relocated segments of their production and distribution, in order to take advantage of cheap labour, cheap materials and energy. But this has led to the development of massive overcapacity in some fields, like cars, micro-technology, textiles and garments, etc.
The intense competition stimulated by free trade, moreover, makes it increasingly difficult for manufacturers to recoup a satisfactory return on their capital, especially when the pace of innovation requires a rapid replacement of production equipment in order to keep up to date. Although new technology undoubtedly has enormous productive potential, it has not, on a world scale, resulted in any dramatic increase in the growth of either production or productivity. On the contrary, the long-term trend towards lower growth rates has continued, with a handful of exceptions, during the 1990s.
When the stock exchanges crashed in October, capitalist leaders confidently predicted there would be a rapid recovery, as after the crash in 1987. At that time, a co-ordinated reflation by the main capitalist powers led to a growth spurt during 1988-89. This, however, only delayed the downturn: with the rise of inflation, the US Federal Reserve put the brakes on in 1989, pushing world capitalism into a world recession, relatively shallow but also longer than previous recessions.
But the position of world capitalism is weaker now than in 1987. Then, the G7 countries relied on Germany and Japan, with their massive surpluses, to finance a global bail-out. Now Japan itself (as well as its satellite Korea) needs the bail-out.
The sharp rise in big business profitability, accompanied by a marked shift in wealth to the capitalists at the expense of the working class, has burned up much of the ‚fat‘ accumulated during the post-war upswing period. Social spending has been slashed, real wages have generally declined. A huge section of workers have been thrown onto the scrap heap of permanent unemployment. The former state industries, built up by investment financed by taxpayers, have been sold off to the capitalists, opening up highly profitable fields of activity. But this process of counter-reform, accelerated by the collapse of the Stalinist states, is also reaching its limits.
Moreover, while these measures have improved the ’supply side‘ for capitalism, they have increasingly undermined the ‚demand side‘. Cheaper inputs of labour, materials, energy, combined with lower taxes and widened opportunities for profit-making, have produced a profit boom. But cuts in social spending, wages, and the rise of mass unemployment have cut deeply into the market for capitalism.
It is this fundamental weakness, which goes to the heart of the system’s contradictions, which ultimately accounts for the crisis in international financial markets. The financial crisis, in turn, exacerbates the problems of the real economy.
The world is moving towards a slowdown. The timing, the pace of its development, the depth of the coming recession, cannot be precisely forecast. A lot depends on the US economy. While it is still growing at present, most capitalist agencies are predicting a slowdown next year. As a result of the crisis in Asia (and in other ‚emerging markets‘) the US economy could now turn down more sharply.
A US recession would bring a fall in the value of the dollar (there are already some signs that this is beginning, with a decline since August). As in past episodes of dollar decline, this would almost certainly provoke turmoil on world financial markets. When the US owes $1.3 trillion to overseas lenders, a fall in the dollar will, at a certain point cause a flight from the dollar. As with previous flights (which tend to cause revaluations of ‚refuge‘ currencies like the Swiss franc and the deutschmark, which then attract further inflows from other weak currencies), there would be a period of exchange rate volatility (which would almost certainly scupper EMU).
When the US recovery comes to an end, the rest of the world will also be pushed into recession. The US accounts for 36.5% of the advanced economies‘ GDP, 20.7% of world GDP. This time, there is likely to be a synchronised downturn, unlike 1990-93, when the staggered cycle between US, Japan, and Germany cushioned the ‚rather protracted“ recession. The coming downturn could be much deeper. Whether it will be triggered by a big financial crash or accompanied by a series of downward spirals on financial markets remains to be seen. Given the scale of the international debt crisis, a crash certainly cannot be ruled out.
While the tempo and depth of the downturn cannot be predicted in advance, one thing is certain: it will shatter the illusions in the power of the market and the success of capitalism reinforced by the collapse of the Stalinist states after 1989. There will be a profound recoil against the barbarities of a new crisis following a long period of neo-liberal assault on working class living standards.
Schreibe einen Kommentar