Michael Roberts: The end of the upswing

[Militant International Review, No. 45, New Year 1991, p. 32-39]

What are the perspectives for the world economy? Michael Roberts explains.

At their international summit in July 1990, the finance ministers of the top seven capitalist nations (G7) exuded confidence that the economic boom which began in 1982-3 would continue indefinitely. They were happy to crow about the collapse of Stalinism in Eastern Europe and the failure of the planned economy (or ‚command economy‘, as they prefer to call it). Capitalism had been proven as the best economic system and was here to stay.

But by the time they met again in Washington for the International Monetary Fund’s annual meeting in October, much of this euphoria had dissipated. Now there were tell-tale signs of a slowdown in the US economy and growing difficulties in the major capitalist economies. On top of which there was the growing danger of war in the Middle East, which could have a devastating effect on the whole world economy. Any prognosis, in fact, has to be highly conditional: war in the Gulf would certainly complicate and intensify all the problems, economic and political, facing the capitalists internationally.

Very few capitalist commentators now deny that the world economy faces recession

Very few bourgeois commentators are now prepared to deny that world capitalism faces the prospect of a recession, in which, even if it brings very low growth or stagnation rather than an absolute fall in production, the working class will face lower living standards, higher unemployment and reduced social welfare and services. The argument is not whether there will be a slow-down, but how severe it will be and how long it will last.

Many bourgeois experts, however, argue that recession would not be on the agenda but for the prospect of the Gulf war and the accompanying oil price rises. But this is just not true. Even last July, beneath the confident statements contained in the G7 summit press releases, the statistics on the health of world capitalism were revealing that the extended boom of the 1980s was at an end. In retrospect, the latest figures show that growth in some countries like the USA and UK was already slowing down last summer (with an absolute fall in industrial production) even before Saddam invaded Kuwait.

During 1990 the growth in national output in nearly all the twenty-three advanced capitalist nations which are members of the Organisation of Economic Cooperation and Development (OECD) has been slowing. The USA grew 3% in 1989, but it is now growing at less than half that rate. Europe grew 3.5% in 1989, but is now growing at about 2.5%. Even Japan is showing signs of slowdown, from 4.9% in 1989 to 4.5% this year. The UK is a particularly poor relation with growth down from 2.5% in 1989 to a current annual rate of 0.5%. The third quarter of 1990 saw an absolute fall in output.

The slow-down of the world economy, which will be sharper in 1991 than this year, is only just beginning. It is led by the Anglo-Saxon and dollar-deficit countries, like the USA, Canada, Australia, the UK, and also Sweden. But even Italy now has falling production and France is suffering a marked slowdown in growth. The consensus of forecasts for national outputs in 1991 is for a general slowdown, and in the case of the US and the UK virtual stagnation.

In manufacturing and overall industrial production (which includes energy-related sectors), the slowdown in growth is much more obvious. In the USA, the UK. Italy, Australia, Spain, Sweden and Canada, manufacturing production is falling absolutely; while French and Italian manufacturing growth is slowing fast. Only West Germany. riding on the back of reunification with the former GDR, is spurting ahead. This fall-off in industrial production is also confirmed by a stagnation and fall in the level of utilisation of existing industrial capacity (i.e. factories and machinery). Capacity utilisation has dropped in the USA, Japan and the UK.

The organic composition of capital, Marx’s economic category which reveals the extent of investment in equipment and plant (fixed capital) compared to labour (variable capital), is now as high as it has ever been since 1973. The nearest indicator of Marx’s category in modern economic statistics is the capital/output ratio i.e. the relation of the stock of equipment etc. to Output. That has now reached a ratio of between 2 :1 to 5 :1 in the OECD economies.

As Marx explained, a rising organic composition of capital – an increase in the ratio of plant and equipment (stored up ‚dead‘ labour) to labour (living labour) – exerts a downward pressure on profitability (because ultimately profits have to be realised through the market, and the market is ultimately reduced in relation to productive capacity by the reduced share of capital going to labour). First the rate of profit is reduced, and eventually the mass of profits falls. According to OECD figures, profit rates stopped rising or fell in 1989 in the USA, Japan, Italy and Canada. They continued to rise slightly in West Germany, France and the UK. But in 1990, they began to fall in these countries too. This marked the end of the upswing.

In the G7 economies and the OECD overall, average profitability fell in 1989. Rising interest rates in all OECD economies, coupled with rising average money earnings Cie without accounting for inflation), also ate into profits made in industry, so that in 1990 industrial production has been affected first and heaviest. During 1989, the growth in the mass of profits slowed in all countries and fell absolutely in the USA.

* *

*

How severe will the new world downturn be?

So even before the beginning of the Gulf crisis, the boom of the 1980s was faltering, with the US teetering on the edge of a downturn. Now the question is, how severe and long-lasting will this new world downturn be? Will it be like 1974-5 or 1980-2 when there was a fail in production, and when unemployment rose sharply and investment fell over a period of two to three years, or will there just be a gentle slowdown, a pause before the world capitalist economy moves forward again, after just one year or less, as in 1986 or in the ‚pauses‘ prior to 1973?

Was the 1980s upswing the start of another period like 1948-73?

Behind these questions lies another more profound one: was the boom of the 1980s the start of another period like 1948-73, which was an epoch of expansion with only short pauses or slowdowns in growth, or what one pundit has called „an expansion punctuated by a series of rolling adjustments that stop well short of outright recession“? Or was the 1980s just the upswing part of a generally convulsive period of crisis for capitalism, just as the boom of 1922- 29 was followed by the catastrophic slump of 1929-33, then the weak recovery of 1934-7, followed by a further downturn and world war?

There are important differences, of course, in the character of the post-second world war world economy compared to the inter-war period. World trade plays a much more important role. The division of labour was taken much further after 1945, with the interlocking of the major capitalist economies through trade and investment, allowing capitalism partially to overcome the limitations of the nation state. The liberalisation of trade and the role of institutions like the IMF and the World Bank, dominated by the US, facilitated this development. Although world trade is currently slowing, it is still expected to grow by about 5.5% (measured by import volumes) in 1990 (compared to 8.5% in 1989). This growth is cushioning the world economy against the slowdown of the US in particular. At a certain stage, of course, world trade itself would be undermined by recession or slump in the major capitalist economies, and the national antagonisms and trade wars that would then erupt are foreshadowed by the current disputes in the deadlocked ‚Uruguay round‘ of GATT (General Agreement on Tariffs and Trade) negotiations. At the moment, however, world trade is still growing, though at a reduced rate.

Nevertheless, there is nothing in the economic performance of the 1980s, despite its relative longevity, to justify the arguments of many bourgeois commentators that capitalism has begun a new long-term upswing comparable with 1948-73 and will avoid any more economic recessions like 1974-75 or 1979-81 or even deeper down-turns in the future.

First, this latest recovery from the recession of 1980-2 was the weakest and slowest since 1945. Between 1960-73 the OECD capitalist economies grew an average 4.8% each year. From 1982-8 they grew only 36 per annum. More significantly, average profitability in all the G7 countries from 1980-6 was lower than in the pre-1974 period, with the exception of Canada; and in Japan, USA, West Germany and France it was lower even than in the crisis period of 1974-9. For the G7 and OECD economies as a whole, average profitability between 1980-6 was lower than pre-1974 and 1974-9, and even the peak high in 1989 was lower than the pre-1974 average. (See table)

Average profit rates (%)

	Pre-1974	1974-9	1980-6	1989
USA	22.8.	20.3	19.7	23.3
Japan	33.1	23.2	21.6	20.7
WG	20.1	17.1	16.3	18.3
France	21.1	17.9	16.1	18.3
Italy	23.7	19.6	20.9	23.0
UK	14.1	11.2	11.7	13.8
Canada	15.6	16.1	17.4	20.5
G7	23.7	19.6	19.0	21.1
OECD	22.3	19.2	18.5	20.6

Source: OECD Economic Outlook December 1989.

Private investment growth in the OECD was only 1.5% a year during the 1980s compared to 3.7% per annum prior to 1974. Annual productivity growth i.e. the increase in output per worker, between 1980-8 was less than half that achieved prior to 1974 and little better than that between 1974-9.

These statistics do not reveal what lies behind the much shallower nature of the 1980s boom. While the 1948-73 expansion was founded on investment in new technology and the expansion of new markets, the upswing of the mid-1980s was based much more on the intense exploitation of the labour force, speed-ups and reductions in trade union rights, the super exploitation of the Third World through low commodity prices and debt repayments, and above all, a growth of consumer trade fuelled by a massive input of credit. The productivity of labour shot up while the productivity of technology stagnated (at least until 1987-9).

In particular, the US government’s spending on arms during the 1980s provided the purchasing power for the sales of Japanese and European products. This expenditure was financed by the US government through borrowing from abroad – in other words from the very Japanese and German manufacturers who were selling into the USA. This ‚recycling‘ of dollars maintained the boom – but only at the expense of rising interest rates caused by the demand for dollar loans and a growing debt burden precariously balanced like a house of cards, turning the US from the world’s largest creditor into its largest debtor in just one decade.

Moreover, even if there was a sustained, if shallow and partly fictitious, boom in the OECD countries, in the undeveloped semi-colonial countries of Latin America, Asia and Africa, there was permanent economic stagnation and social crisis (dealt with in our review of the World Bank’s latest report on ‚world development‘, on p. 40).

The huge Third World debt, the US government deficit, and extensive borrowing by the private sector in the USA, Japan, Italy and the UK (not to invest in productive manufacturing but in property, takeovers and even Van Gogh pictures) has created a massive credit overhang. Every day $500bn is traded on the foreign exchanges, but only one-tenth of this is exchanged for real commodities in international trade. A sharp downturn in production internationally could therefore trigger off a major financial crisis – the latter becoming the visible indicator of the former. As the Bank for International Settlements, the main international forum for central banks, put it in its latest annual report (June 1990): „we expect the difficulties experienced by the financial sector to become more widespread or more acute. They could have potentially serious consequences for economic performance not only in the industrial countries but also in developing countries.“ Again this was before the Gulf. Crisis.

At a some stage in the future a breakdown in the flow of credit could unleash a severe financial crash that would intensify any world economic recession. The capitalists mortally fear such a breakdown, and the major central banks will step in to try to prevent a collapse of the world financial system. In 1987, investors‘ and speculators‘ fears of such a collapse in credit provoked the world-wide stock exchange crash of October that year. There was widespread fear of an economic recession, but the G7 central banks stepped in with a massive ‚lifeboat‘ of credit. This credit, given the underlying growth in investment, production, and profitability, allowed the capitalists to stave off a recession. Clearly, there are limits to their ability to head off crisis. Moreover, rescue moves, like that after October 1987, store up problems for the future in the form of the debt burden and increased inflation. Nevertheless, the major capitalist economies still have big reserves. built up during the boom, and in spite of the dangers of inflation, will in the coming phase of downturn intervene with credit to prevent a collapse of the financial system. Eventually, however, under the capitalist accumulation process, as Marx explained, profitability stops growing and starts to fall (a process that began in this cycle at the end of 1989), and rising interest rates and wage bills then squeeze the mass of profits and bring about a downturn in production and investment, i.e. a recession or slump. Given such a trend, the ability of the capitalist state to stave off crisis through boosting the money supply and expanding credit becomes increasingly limited.

* *

*

So, will there be a major recession or slump; or just a pause followed by further fast growth, or a steady decline in the next few years in the OECD countries? The depth and nature of the slowdown will depend on several factors that are not easy to quantify. First, what will happen in the world’s key economy, the USA? Second, will European capitalism take on a new lease of life through ‚Europe 1992‘ and German reunification? And third, will the collapse of Stalinism in Eastern Europe open the way for new profits and markets for capitalism in the 1990s and thus avoid a classical recession?

The depth of the downturn still depends primarily on the health of the US economy

The timing and depth of any downturn in the OECD economies still depends primarily on the health of the US economy. It remains the largest producer in the world and the main market for all other OECD economies. When it spirals into recession, eventually it must drag the rest with it.

The USA has experienced seven years of relative boom, but it has been a boom that has not benefited the average US worker. Real wages i.e. after allowing for inflation, did not increase at ail in the 1980s and are now significantly lower than in 1973! For the poorest in the inner cities, conditions and life expectancy are now lower than in many Third World countries, and yet there are more millionaires in the USA than in the rest of the globe put together. Apparently there are 100,000 decamillionaires (those with $10m each)

During the 1980s US investment in new plant and equipment was weaker than any previous boom. The US investment rate in new capital is now only 4.9% of GNP compared to 6.9% in West Germany and 15% in Japan. The present US investment share of GNP compares with a rate of 6.9% in the 1970s and 7.5% in the 1960s. US savings for investment are now just one-third of that in the 1970s and half the OECD average in the 1980s.– the lowest rate of all at 2.4% of GDP. Thus US corporations were forced either to borrow from abroad or to sell their assets to Japanese and European investors in order to finance their purchases. This drove up interest rates throughout the OECD during the 1980s.

Now hardly anyone disputes that the US economy is heading towards a recession. Growth in total output during 1990 is averaging just over 1%. But industrial output has been stagnant since summer 1989, and in the third quarter of 1990 fell nearly 1%. Manufacturing employment has declined by 200,000 since March 1989. Manufacturing gross profits fell 12% in 1989, a figure to be repeated this year. House building is at its lowest level since 1982, while the use of manufacturing capacity has fallen to its lowest level for three years and is still falling. Only the relatively buoyant services sector has maintained any growth, and of course the arms industry, relying on the continuing government deficit. And all this is taking place before thereal effects of the Gulf crisis hit the costs of production and government spending. There are some pundits who continue to assert that the US slowdown will be relatively mild, no more than the pauses of pre-1973. But even these optimists predict a growth in GNP of only 1% or less in 1990 and 1991, together with falling investment, declining productivity and rising unemployment. Others are bracing themselves tor a recession, with a fall in national output, and prospects for the US economy will be much worse if there is a war in the Gulf.

The US slowdown is a product of the underlying slowdown in profitability and capital accumulation that is inevitable in the cycle of boom and slump under capitalism, as Marx explained. But it is also the result of the overextended nature of the 1980s boom, artificially fuelled by government and private corporation borrowing, Or what Marx called fictitious capital i.e. credit and money capital not based on real production. The federal government’s budget deficit doubled during the 1980s, reaching 4% of GNP. To finance it. interest rates reached record highs and ate into US manufacturing profits. Now, interest payments consume over 47% Of US corporations‘ cash flow – a serious drain on profits. The interest rate burden has driven up the cost of capital investment to much higher levels than its G7 competitors, so that whereas capital spending grew 3.7% per annum between 1950-82. in 1989 it grew only 1.8%.

The total accumulated liabilities on the US government are now equivalent to two and half years‘ GNP

Despite calls for a reduction in the deficit by manufacturers outside the military-industrial complex, the government has been reluctant to make cuts because it rightly feared that sharp cuts in spending could throw an already slowly growing US economy into a full recession – and arms manufacturers have naturally opposed too heavy reductions (most of the deficit is due to the defence budget). Thus in the 1989 tax year the deficit reached $152bn, a minimal reduction from previous years. This figure seriously underestimated the real deficit because it excluded the money taken by the government out of the social security fund used to pay for federal state pensions. Also it did not fully account for federal spending to bail out hundreds of US ’savings and loans‘ institutions (like UK building societies) which went bankrupt because of the collapse of the US property market and through wholesale swindles. This bailout is likely to cost the US taxpayer over $130bn in the next few years, and perhaps as much as $500bn over the decade or $2,000 for every man, woman and child in the country. Even excluding these items, the public sector deficit spiralled further to reach $300bn in 1990. It has been estimated that the total accumulated liabilities on the US government are now $14 trillion, or 2.5 times the US GNP.

This crippling debt has been more and more difficult to finance by attracting foreign investors to buy. US government bonds. Consequently. the threat of higher interest rates to attract foreign money forced the Bush administration to bite the bullet. renege on its promise not to raise taxes. and after a tortuous argument with Congress, agree on a package of $500bn cuts on planned government spending over the next five years and tax increases. If this package is implemented, it will reduce market demand and consumer spending even further and so speed up the slide into recession.

Alongside this huge government debt is a growing private sector debt which has already led to the collapse of companies heavily involved in leveraged buyouts i.e. loans to finance takeovers like Drexel which folded leaving $20bn in debts to other corporations, or in property investments – banks have gone to the wall in such deals all over Texas, Arizona and New England. Now in addition to bailing out the savings and loans institutions, the average US taxpayer faces the prospect of subsidising state intervention to prop up hundreds of banks threatened with collapse across the country, at a cost that would exceed even the mind-boggling losses incurred to help the swindlers in the savings and loans industry.

Up to now the torrent of credit maintained and extended the US boom, but at the expense of rising interest rates and rising inflation, topping 3% per annum now. Interest rates in the 1980s were at record levels and loan terms shortened to under five years, which meant that demands for repayment would come very quickly if confidence in credit disappeared. And that is exactly what happened in 1989.

Every boom in US capitalist history has followed the same cycle of a peak in interest rates, a boom in property and shares, then a bust in property and shares, and finally a rush to cash and out of credit, i.e. a crash. It seems that the US is halfway through that financial roller-coaster.

The government and the US Federal Reserve Bank still hope that with careful ‚fine tuning‘ they can control interest rates, borrowing, taxation and spending to ensure a gentle recession that will lower inflation without leading to any lengthy absolute fall in) production, and so enable a new acceleration of growth in six to twelve months. But it is a precarious gamble.

It is difficult to calculate how much longer this balancing act can be maintained. Any sharp rise in World interest rates, perhaps caused by a reduction in lending by Germany to finance German reunification, could place the US government in a serious dilemma: either to raise its own interest rates further to attract funds and risk a full scale recession in industry, or to see funds flow out of the USA, causing a depreciation of the dollar which would feed into higher import prices and inflation.

The Bush administration has resisted raising US rates to match recent rises in global interest rates. Thus the gap between US and European levels has narrowed. Consequently, since the beginning of 1990, the dollar has depreciated in value. This may help exports but it also adds to inflation and reduces the attraction of investing in US government bonds or industry to finance the public and private sector borrowings which have kept the economy going.

As the US economy enters a period of stagnation or recession, import purchases will be cut back (exports from the newly industrialising countries of south-east Asia are already being hit) the trade deficit will decline, especially if this is accompanied with a further fall in the dollar. The reduction in the trade deficit will not be a reflection of growing competitiveness on world markets but more a result of a cutback in living standards and incomes in the USA.

In addition to the US, all the dollar deficit economies i.e. those with large balance of payments deficits, are also in recession. But as was the case at the beginning of the 1980-2 world recession, the world trade cycle is desynchronised. The dollar surplus economies like Germany, the Benelux countries and Japan are still peaking, and are unlikely to enter a downturn until 12-18 months after the US and the UK, perhaps in late-1991. One dollar surplus economy, Japan, now has a higher GNP per head of population than the USA, although its total GNP is only slightly more than half the size of the US GNP. This dramatic success in productivity is because of: sustained and high investment into technology leading to high productivity increases, relatively lower wage bills (up to the 1980s), low interest rates, low armaments and social services expenditure, and considerable financial support from banks and the state to direct investment.

Real GNP rose 4.8% in 1989 and is rising at about 4.5% this year. There are signs of a beginning of a slowdown, with investment growth declining from 16.4% in 1989 to an expected 9.5% this year. More seriously, with industry at maximum use, and demand being stimulated by extra government spending (at the bequest of US capitalism who want Japan to buy more US goods or face protectionist measures), inflation has spurted ahead. New sales taxes drove the annual rate up to 3.5% and it is still about 3% – the highest this decade.

A huge credit boom, as in the USA, led to an orgy of price rises in the property and stock markets during 1989. Finally, in early 1990, the government reluctantly agreed to raise interest rates to stem inflation and to stop the fall in the value of the yen which had accelerated because of inflation. This immediately led to a slump in the property markets and several very nasty plunges in the Tokyo stock exchange.

The interest rate rise appears to have stabilised the value of the yen and thus the stock market, but it is likely to cause a slowdown in growth of production and investment during 1990. If Japan’s most important market, the US, is at the bottom of its downturn by mid-1991, then that could also sharply reduce growth in Japan or even provoke a recession there.

* *

*

Until the momentous events in Eastern Europe in late 1989, it seemed that West Germany was at the same point in the trade cycle as Japan. After relatively slow growth in the mid-1980s compared to the US and Japan, growth accelerated to reach a maximum rate of increase at 4.0% in 1989 and was expected to slow a little in 1990.

Economic developments in Germany have taken a new turn

But with the collapse of Stalinism, economic developments in Germany have taken a new turn. The West German economy is the largest in the EEC, with 33.5% of manufacturing output and 21.5% of total output including services. After swallowing up East Germany, a greater Germany has become even more dominant – although not necessarily dominant enough to impose its order on the direction of trade and investment in Europe. Even if East Germany had the same levels of income per head as West Germany (it is less than half at present), a unified Germany is still only 25% larger than the old West German economy and takes up only 31% of the EEC’s GNP. But it is considerably larger in the vital manufacturing sector – 80% larger than French manufacturing, twice as large as Italy’s and 150% larger than the UK’s – taking two-thirds of all EEC manufacturing output.

It is argued that such an economic integration could allow Germany and an enlarged EEC including Eastern Europe to enter a new age of golden prosperity which could eventually lead to one federal European state based on capitalism, But it is highly unlikely that Western European capitalism, under the leadership of Germany, will be able to take over the economies of Eastern Europe successfully. The reunification of Germany alone is fraught with difficulties and pitfalls.

The old West Germany bears the full cost of redeveloping the East’s shambling infrastructure

The old West Germany now bears the full cost of redeveloping the East’s industry and its shambling infrastructure, cleaning up its shocking pollution, and also financing benefits for the sharp increase in unemployed East Germans (15-25%) that are fast appearing as East German industry is priced out of world markets. Huge transfers of resources will be required, not just for a year or two but for the rest of the decade. Otherwise East Germany will become just a massive depressed area like southern Italy or Northern Ireland – a breeding ground for social upheaval.

According to the most accurate estimates, all of Germany’s capital reserves and trade surplus are going to be soaked up in order to meet this demand on its resources for the foreseeable future – and that also assumes that Germany will continue to grow at its present rate for the next decade. Initially, growth has been boosted by the move into the former GDR and by increased exports to the USSR and Eastern Europe, but soon the cost of reunification will begin to undermine that extra gain.

Some bourgeois experts deny that German reunification costs are any problem. They argue that West Germany is in fine fettle to cope with financing the rebuilding of the East. West Germany was exporting DM 120bn or so of surplus savings every year. It simply needs to divert this to home use. The amount would more than cover expected costs in the initial, high-cost years. As for growth, these bourgeois optimists believe that Eastern European development, as well as that of East Germany alone, will make a significant contribution to profit growth throughout Western Europe within a fairly short time, the first beneficiaries being German-speaking Corporations in the construction, capital goods, financial services and engineering markets.

But at best this can be justified only in the long-term. At worst, it is blind optimism. The financing cost of taking over East Germany will produce a budget deficit for the unified Germany of 3.6% of GNP, or over DM 100bn in 1991. That estimate covers only public sector funding. Including private sector needs, capital requirements would run at DM 20-50bn per annum.

If the old East Germany were to grow at 10% per annum (which it will not), it would add about 1.3% to a unified German growth. But as West Germany’s current account surplus will fall to 1% of German GDP over a four-year period to finance development in the East, German growth would be reduced by 1% a year, cancelling out the gains from the development of the East. Germany’s competitors would gain a little by exporting into the East but only by about 0.3% a year, while Germany would no longer have enough capacity to increase exports to its traditional trading partners and to cope with rebuilding the former GDR.

That would not be the end of the world for an economy which already exports 5% of GNP in capital investment. But the stark truth is that if Germany’s net public credit demand of DM 100bn in 1991 were to be matched by a similar reduction in German capital outflows, a sum equivalent to 40% of the required financing for the US current-account deficit over the last three years would be removed from the system.

The rest of the world cannot afford this reduction. The US and the dollar deficit economies are really hooked on their annual dose of DM 90-100bn in German capital outflows. But that will all go, because it is exactly the amount of annual financing that German reconstruction is initially going to need. The social costs of unification will be at least 1.5% -2.5% of German GDP. Development expenditure will be as much again. There are offsets, of course, like lower defence spending, doing away with grants to West Berlin and perhaps the dynamic effects of growth in East Germany after a few years. But the net result is that Germany will no longer be a net exporter and may become an importer of capital. That also means that German imports will rise and the surplus on the current account will diminish.

* *

*

Beyond the question of the consequences for world capitalism of German reunification is the wider issue: can Western capitalism finance the restoration of capitalism in the former Stalinist states and thus open up new profitable markets for capital and usher in a new golden era like the period 1948-73?

All the available evidence suggests that it will not be possible for the West to develop ‚market economies‘ in the East – at least not within a decade. Consequently, these former Stalinist states will suffer serious reductions in production, investment and living standards over the next two to three years. One careful capitalist observer concludes that living standards will fall on average in Eastern Europe (excluding the USSR) by 3-7% by 1993. Unemployment will rise to between 15-25% in East Germany, Poland, Czechoslovakia and Hungary.

It is difficult to see how Eastern Europe will avoid a severe slump. That is partly because they have nothing to sell the West; and partly because the Soviet Union will progressively reprice their commodities in hard currencies, so taking some 15-25% of Eastern Europe’s (much needed and very scarce) annual hard currency export earnings away. And this does not even take into account the huge cost of financing energy supplies as the Gulf crisis drives up oil prices worldwide.

To bring about substantial improvements in the production and incomes of Eastern Europe will require an investment level equivalent to 25% of GDP in Eastern Europe for the next two decades. That is equivalent to 5% of Western Europe’s GDP for the next 15 years. Such a level of resources is not even vaguely being considered by the Western powers. After the Second World War, the USA, the most powerful and hegemonic capitalist power, agreed to provide free financial resources through the Marshall Aid plan to ’save‘ Europe and Japan from ‚Communism‘ i.e. no repayments and no interest. Huge sums were funnelled through government agencies to rebuild capitalism in the West.

Neither free nor substantial finance is being promised this time for Eastern Europe. The soon to be formed European Bank for Economic Reconstruction set up by the US and the EEC powers will have only $12bn for funds to be lent at commercial rates. The Soviet Union is asking for $20bn immediately to overcome the present crisis – and is not allowed to borrow anything from the new bank.

US capitalism is in no position to finance capitalist restoration sufficiently generously or quickly on its own. Germany will have its hands full with East Germany, and even there it will not be plain sailing. Only Japan seems prepared to make a substantial commitment, but purely on commercial terms which Eastern Europe must repay in sales of its industries, in unemployment and cuts in living standards of its people.

Another consequence of applying all available capital surpluses into Eastern Europe will be that capital will be drawn away from the ‚tiger‘ economies of South East Asia, already experiencing a slowdown, from the non-oil developing countries of the Third World, already in desperate straits; and from the weaker OECD economies like Greece, Portugal and Turkey. This draining of capital will only add to the prospects of a recession in the capitalist: world.

* *

*

The capitalist leaders in public continue to forecast a golden future for capitalism. They claim that the coming recession will be mild and short-lived, much more like a pause than a fall in production. The dollar deficit economics will recover quickly from their mild recession, while the dollar surplus economies will hardly notice any slowing. Thus the West will be able to develop Eastern Europe without too much social upheaval over the next three years, and so eventually open up new markets there that can take capitalism into decades of prosperity.

But an alternative, darker scenario is more likely. The US economy is moving into recession, with a falling industrial output and a marked cut in imports from other capitalist economies, and will pull others into stagnation or recession by 1992. War in the Gulf would certainly make the darker prognosis mere probable. Consequently, there will be insufficient resources to transform Eastern Europe, provoking social upheaval there, and thus reinforcing the recession in the West. The Third World will be thrown into an even greater abyss of poverty and depression. The world recession appears to be desynchronised, with Japan and Germany lagging behind the downturn in the dollar deficit economies. That could mean that a slump of the proportions of 1974-5 is avoided, although a less severe downturn like 1980-2 would still be most likely. Then, perhaps after 1992-3, there would be a weak recovery of two to three years, But if the Gulf crisis was to break out into a long and painfully expensive war driving up oil prices, increasing the risk of financial instability, and reducing living standards. the recession could descend into a deeper and more long lasting downturn

Capitalism has not entered a new era of growth and prosperity

Whatever happens exactly, it is clear that capitalism has not entered an era of permanent growth and prosperity: Europe is not going to enter a long period of prosperity based on an harmonious integration of economic resources under the shelter of German capitalism, but is much more likely to feel the tensions and contradictions of unbalanced and unstable grow that could tear Fortress Europe apart.

Moreover, the restoration of capitalism in Eastern Europe is by no means certain and not at all likely to produce profits for the West for some time ahead – on the contrary the burden of economic crisis and social upheaval there could speed up economic crisis in the West.