[Socialism Today, No 25, February 1998, p. 2-4]
„Large numbers of supposedly well-informed experts completely failed to warn of the fragility of the East Asian economic region until after the event. I find this unforgivable”. Hamish Mckae, The Independent, 13 January, 1998.
„All the classic symptoms of an impending economic crisis are visible … After seven years of weak, uneven recovery, we are most likely witnessing the closing phase of this business cycle … We should be prepared for major upheavals in the world economy”.
Socialism Today editorial, October 1997.
The crippled Asian tigers are toppling into a pit. A couple of months ago, president Clinton dismissed the turmoil as „a few glitches‘. while capitalist commentators proclaimed that it would be no worse than the Mexican peso crisis of 1994. Yet in the first week of January, the London Financial Times (8 January) proclaimed on its front page, „Asian crisis gains fresh impetus‘. as the financial press generally reported widespread fears that Malaysia, Indonesia, and perhaps others, would default on their massive debts (South-East and North-East Asia’s foreign debt now totals at least $400bn). Even the most Panglossian commentators are now forced to admit that Asia is sliding into a deep recession.
This is already provoking social turmoil and political upheaval. Five million workers will be thrown out of their jobs in South-East Asia in the short term. Two or three million migrant workers will be sent home, further depressing living standards in the region’s poorest countries, like Burma [Myanmar] and Vietnam. The economic crisis has already brought a change of government in Thailand, and the fall of Suharto in Indonesia is only a matter of time. These are only the first signs of the political explosion which will follow.
The deepening of the Asian crisis, moreover, is beginning to erode the astounding complacency of Western capitalists. The US Treasury secretary, Robert Rubio, is still reportedly „remarkably relaxed”. (Economist, 10 January). While acknowledging „a set back” in Asia, the McDonald’s boss, Jim Cantalupo, says „we believe they ultimately will continue to thrive”. More realistic commentators, however, are not so sanguine. For instance, Barton Biggs, chairman of Morgan Stanley asset management, was predicting a downturn even before the October crash on world stock exchanges. Now he warns: „Most Americans are grossly underestimating the recessionary and disinflationary-deflationary force of what is happening in Asia. By competitively depreciating its currencies, Asia is exporting its deflation, its overcapacity and its lack of growth to the West, particularly to the US. Initially the affect on inflation and interest rates is benign, since the US economy is operating at full capacity, although the loss of pricing power will result in profit margin pressures and earnings disappointments. But with the dollar the strongest currency in the world, the US economy inevitably will begin to be hollowed out and the protectionist outcry will begin. If trade barriers result, it will be an impoverishing step backwards for free markets and global prosperity.
„World wide competitive devaluations, trade wars and deflationary tendencies could result in a synchronised global slowdown-recession and a simultaneous bear market in Western stock markets. If capital flows were to collapse, disillusionment and unrest could appear in the developing world. A vicious circle could develop“. (Wall Street Journal, 6 January)
Biggs adds a qualification: This bleak scenario could be avoided „if the US and other great powers act promptly and wisely“. He calls on the IMF to abandon its ‚tough love‘ policy of imposing austerity measures on Asia. Instead, the US and the IMF should support policies which promote renewed growth. (Another New York financier, David Malpass, Bear Stearns‘ chief economist, goes further, calling on the Japanese government to ‚try printing yen‘ in order to stimulate growth.) Biggs also calls on the US Federal Reserve and the German Bundesbank to forget its fears about inflation and ‚worry more about deflation‘, adopting a policy of stimulating growth. He also calls on measures to control international speculators (like himself?) ‚who today almost rule the world‘.
This kind of advice is not likely to be followed by the US Treasury or the IMF, which is effectively an economic-political weapon of US capitalism. The IMF’s prescription in South-East Asia and Korea (and Japan, too, for that matter) is still: raise interest rates and cut budget deficits. This is more likely to kill the patients than cure them. But the IMF, still committed to the strict neo-liberal doctrine of the 1980s, is determined to secure the repayment of Asian loans to Western banks. Even the leaders of the IMF’s sister institution, the World Bank, are openly beginning to criticise IMF policy. „These are crises in confidence,“ says the World Bank’s chief economist, Joseph Stiglitz. „You don’t want to push these countries into severe recession. One ought to focus … on things that cause the crisis, not on things that make it more difficult to deal with … Virtually every American economist rejects the balanced-budget principle during a recession. Why should we ignore this when giving advice to other countries?“ (Wall Street Journal, 8 January).
The massive rescue packages formulated by the IMF are not at all guaranteed to prevent a collapse of the banking system in South-East Asia, Korea, or even in Japan. There is a strong possibility that several countries, including Korea, could default on its loans. At the very least, there will have to be a massive rescheduling of repayments. But there is no possibility of IMF policies reigniting growth in Asia. The region is sliding into what will most likely be a deep slump, which is likely to continue for some time.
The shattering of the Asian growth model reflects not merely a cyclical crisis, but a deep structural impasse. Japanese capitalism, now the world’s second largest economy and the decisive power in Asia, has no easy way out, even if it calls on its reserves to prop up the core of its rotten banking system.
After the 1973 oil shock, which terminated the long postwar upswing, Japanese capitalism adopted a new strategy. It transferred a large share of its heavy industry to other Asian countries (South Korea, Taiwan, Malaysia, etc.) and concentrated home production on fast growing, high value exports such as motor cars and electronic consumer goods, capturing a significant share of US and European markets. This development has reached its limits: any increase in Japan’s share of exports to the advanced capitalist countries will inevitably provoke more acute trade tensions.
Halfway through the 1980s boom, Japanese capitalism co-operated with US capitalism to reduce the value of the dollar and raise the value of the yen. This was part of a calculated strategy to increase the power of Japanese finance capital. The stupendous growth of Japanese credit stimulated a speculative bubble in company shares and property. On the basis of a strong yen, moreover, Japanese capitalists invested massively in South-East Asia, North America and Europe, by building factories and buying up property. The debt mountain on which this was based was not an accidental phenomena but a calculated policy. The bursting of the bubble, however, meant that a large proportion of the debt became, in practice, unrepayable. This bad debt has been systematically concealed until the present wave of bank and finance house failures. Now the Japanese banks are calling in their loans, both at home and throughout South-East Asia – intensifying the region’s deflationary crisis.
Japanese capitalism has massive foreign currency reserves. But it has no easy way out of its present fix. The recent growth-stimulus packages implemented by the government, mainly in the form of infrastructure projects which benefited the big construction companies, did not revive the economy. High levels of consumer debt and the rising trend in unemployment will make it extremely difficult to expand the home economy. Any attempt to increase Japanese exports to the West, particularly to the US, will result in demands within the US for protectionist measures. In reality, Japanese capitalism has been stagnating since the ‚recovery‘ period of the early 1990s, and is now likely to slide into recession or even a slump. (See pp. 22-25).
Korean capitalism followed a similar trajectory to Japan, and now faces a similar structural impasse. Although elected as an opposition candidate, Kim Dae-jung has no solutions to offer the working class. (See pp. 17-21).
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The Asian crisis despite the denials of Western leaders, will have a devastating impact on the advanced capitalist countries of the West. US and European exports to Asia will inevitably be cut quite severely. Some argue that this will have only a marginal effect. But this view leaves out of account a number of important factors. The crisis in world financial markets, triggered by the Asian crisis, has far from worked itself out. Whether there is a crippling financial crash or a more protracted downward spiral of financial markets, the ending of the ‚bull market‘ will cut investment, which in any case has by no means been booming during the early nineties. Moreover, a drive by the Asian economies to increase their exports to the advanced capitalist countries, on the basis of massive devaluations of their currencies, will hit the sales and profits of producers in the West. This effect will be intensified if, as now seems possible, China goes for another devaluation of the yuan (its previous devaluation, in 1994, triggered a currency crisis in South-East Asia).
The US economy will be particularly vulnerable to a surge of cheap imports from Asia. This would push up the US’s already massive trade deficit, fuelling protectionist demands from congress. Imports would also squeeze the profits of US companies, triggering a cut back in investment – which could tip the US economy towards a slowdown.
The confidence of capitalist leaders, not just in the US but in Europe too, rests to a large extent on the apparent buoyancy of the US economy. Despite relatively rapid growth and low unemployment, inflation is virtually zero, while corporation profits have been restored to the peak levels of the 1950-73 upswing period. But after six or seven years, this economic cycle must be approaching its limits. Consumer expenditure, for instance, is more and more dependent on credit (used by workers and the middle class to compensate for the squeeze on their real incomes). While Clinton has managed to almost wipe out the federal budget deficit (through a combination of spending cuts and the higher tax revenues accruing from faster growth), the external indebtedness of the US to the rest of the world has steadily increased (and now totals around $1.3 trillion). The slowing down of the dominant US economy, which will most likely develop during the course of this year, will be a crucial turning point for the world economy.
A contraction of the US market would obviously squeeze the export earnings of Asian countries, desperate to pay off their debts. A US slowdown, moreover, will almost certainly mean a decline of the dollar. A marked decline, which as in the past would lead to a flight to ‚haven‘ currencies (like the deutschmark and the Swiss franc), could lead to a period of stormy volatility on world currency markets, as Capitalist investors dump declining dollars in favour of safer currencies.
It is these factors which underlie the warnings of the more clear-sighted capitalists, like George Soros. „The international financial system is suffering a systemic breakdown, but we are unwilling to acknowledge it,“ he says. „We are dealing with a self-reinforcing process … It is impossible to tell how far it may go. What started out as a minor imbalance has become a much bigger one that threatens to engulf not only international credit but also international trade. We are on the verge of worldwide deflation“. (Financial Times, 31 December 1997).
We are clearly in the opening stages of what, at the very least, will be a marked slowdown in the world economy. The deepening of the crisis, which was triggered by the South-East Asian currency crisis back in July 1997, now makes it likely that world capitalism will move into an economic slump. (It may take some time to unfold – there will not necessarily be a catastrophic financial crash triggering an immediate slump – though that cannot be entirely ruled out). But over the course of 1998 and 1999 we will most probably see the unfolding of a spiral of decline.
The sharp downturn in Asia has already triggered the beginnings of a deep social crisis which will erupt into political struggles. In the advanced capitalist countries, even stagnation (with zero growth) will provoke social and political crisis – an absolute fall of even one or two per cent will produce volcanic eruptions in society. The 1990s opened with the „triumph of capitalism‘, which was fabricated on the collapse of the Stalinist „socialist‘ economies and the speculative boom in the advanced capitalist countries. Even before the decade is out, however, illusions in the viability of the capitalist system will be shattered by its internal crisis. Throughout the world there will be a mass rejection, not merely of the system’s barbarous effects, but of the market itself and the profit-sucking capitalist class which dominates society. The ideological pendulum will, once again, begin to swing to the left. The conditions will be created for the development of mass anti-capitalist consciousness – which will provide fertile ground for the development of socialist consciousness, provided that the new forces of the revolutionary socialist left boldly advance the necessary ideas, programme, strategy and tactics.
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