How important was October's sudden slide and just as sudden recovery in the stock markets? Many mainstream commentators are saying the recovery proves 'economic fundamentals' are very sound.That is what many of them have said whenever stock markets have begun to crash for instance in 1929 and again in 1987.
As Karl Marx noted in Capital, 'Business always appears almost excessively sound right on the eve of a crash... Business is always thoroughly sound until the debacle takes place.'
A stock market crash does not in itself automatically lead to a wider economic collapse. Stock markets, after all, are not part of the process of production of real goods. They are concerned with the buying and selling of shares in companies and production processes that already exist independently of them. They are, so to speak, secondhand markets for a claim on profits that are produced elsewhere, in the workplaces where people labour, sweat and are exploited.
So a fall by, say, a third in the value of the stock market does not in itself reduce by a single penny the amount of wealth being produced and stolen as profits.
'Big fleas have little fleas upon their backs to bite them. Little fleas have littler fleas, and so ad infinitum.' Stock market crashes occur as the fleas fight with each other over the blood they've sucked off the rest of us. But they fight because things are not going nearly as well for them as they imagine.
A crash is a sign that something is going amiss with the wider system of production and exploitation.In what way exactly does this happen? After all it is generally accepted that the US and British economies seem to be booming.The world has been through three large scale recessions in the last 23 years, the last beginning around 1990. There is a lot of talk in the US and Britain about 'recovery', and even discussion about whether it is about to turn into an inflationary boom. But a huge swathe of the world is still suffering from the effects of recession. Japan, the world's second economic power, is suffering falls in industrial output and retail sales after a very short lived spasm of growth at the beginning of last year. And in the core of Europe, Germany and France, growth is still very slow after six years of recession, with unemployment continuing to rise.
So recovery among the established advanced industrial countries has been very much confined to the US and, to a much lesser extent, Britain (whose output these days is lower than France or Italy, let alone Japan or Germany).
That explains why until only months ago East Asia was seen as the salvation of the system. Remember the visits less than two years ago, of Tony Blair to Singapore and of Peter Mandelson to South Korea, telling us this was the future that worked. Remember the articles in the Observer by Martin Jacques only a couple of months ago about the wonders of Hong Kong and the Chinese economy. We were told that in a few years these economies would dominate the world scene.
Now all such claims look rather hollow as a crisis which began in Thailand has engulfed Malaysia and Indonesia and is having an impact on Hong Kong and China.
All those capitalists who poured money into the area in the hope of rapid profits are now terrified of losing out and have been withdrawing their funds. This in turn has caused a series of currency devaluations, rapid falls in property prices and enormous damage to banking systems. One estimate suggests that for South East Asia as a whole 'non-performing loans' are equal to 13.3 percent of total output. Writing off such loans would wipe out the capital of six of Thailand's nine biggest banks. In Indonesia attempts by the government to deal with the crisis have already involved closing down several private banks and, according to Financial Times reports, 'dozens of leading conglomerates are believed to have turned illiquid', ie run out of cash to pay urgent bills.
The situation is so serious that the IMF which started off talking about raising $4 billion in loans to deal with the crisis in Indonesia alone has now, at the behest of the US government, put together a $37 billion package. This comes on top of a separate $17.2 billion package for Thailand.
When the Thai crisis first erupted in mid-summer, many commentators were prepared to dismiss it as something which would be seen in the future as 'nothing more than a blip on the path of rapid East Asian growth' (Martin Wolff in the Financial Times) or to insist that a country like Malaysia would be able to avoid the fate of Thailand (James Kynge in the Financial Times).
Now the Far Eastern Economic Review, which has lauded the East Asian 'miracle' as much as anyone else in the past, can comment, 'Tear up the story of the Asian miracle fuelled by an endless flow of funds. Instead, write one about the illusion of endless growth and ever expanding corporate profits fuelled by an endless flow of cheap funds.'
Does this mean that all the talk about a new wave of industrial development centred on the Asian 'tigers' lacks a basis in reality?There have been real changes that have transformed major countries in the region enormously. South Korea and Taiwan are industrial countries today, and national income per head is higher in Singapore than in Britain. It makes no sense to call any of these places 'Third World'. There is a massive level of industrialisation in some of the Chinese coastal regions, from which goods are exported right across the world.
Those people on the left Paul Baran, for example who used to claim there could be no industrial development in the Third World under capitalism have been proven completely wrong. But, as I pointed out in my articles 'Where is Capitalism Going?' in International Socialism four years ago, the classic Marxist position of people like Lenin and Trotsky was not to claim there could be no development. It was to insist that this would be subject to all the irrationality, the ups and downs,the sudden booms and precipitous slumps, that characterise the rest of the system.
The picture in the Third World, the newly industrialising counties and the former Soviet bloc, I pointed out, would not be 'the endless expansion promised by the neo-liberal market ideology.' Nor would it be 'everywhere one of uniform decline or stagnation'. Instead, it would be one of 'sudden ups and downs, with bursts of industrial growth in the midst of widespread poverty, of new technologies transplanted on top of old production methods, of moving two or three steps forward as well as four or five steps back'.
You can see how this has worked out concretely. In the quarter of a century after the 1960s two countries, South Korea and Taiwan, and two city states, Singapore and Hong Kong, were able to make the transition from typical Third World conditions to modern industrial capitalism. They were able to do so because of exceptional combinations of favourable circumstances: substantial direct American aid, an enormous boost from US military purchases for the Vietnam War, the weakness or absence of the rich landed interests who have acted as a block on industrial development in many other parts of the Third World, and dictatorships which were able both to impose a single will on rival capitalist interests while terrorising into submission a recently formed new working class.
The characteristic feature of their development from the 1970s onwards was that it was export led. They were able to carve out an increasingly large niche for themselves in world markets by combining slightly out of date technology bought from the great western firms with low wage labour. In this way they were able to move on from textiles, to iron and steel, shipbuilding, electronic component production and assembly, and finally to begin to move into cars.
It is this model of 'export led' growth which Thailand, Indonesia and Malaysia sometimes called the 'tiger cubs' have been attempting to copy. A variant of it also underlies China's rulers' unleashing of export driven production in the coastal regions.
So what is happening now? Why have the 'tiger cubs' not been so successful and why has the export led model stopped working?There are three inbuilt limitations on this method of industrialisation. First, it relies upon the rest of the world being willing and able to buy the growing volume of exports. This does not happen when there is recession or stagnation elsewhere in the system. And the more countries try to follow the 'export led' path, the more the problems for all of them when exports are no longer easy.
All the classic symptoms of overproduction have emerged in East Asia over the last year. Chen Zhan, editor of the economic review The China Analyst, reported in June of factories right across the region working well below capacity because of lack of markets with only 60 percent capacity utilisation in China, 70 percent in Korea and 72 percent in Taiwan. China's Economic Daily reported in March that 'stockpiles of goods in warehouses across China exceed £37.7 billion' 8 percent of national output.
In the case of South Korea, the Financial Times reported back in March, 'all of the main industries electronics, steel, petrochemicals, cars and ships suffered from a simultaneous cyclical drop last year.' The result has been the bankruptcy of a major steel firm, Hanbo, fears about the banking system and a state takeover effectively nationalisation to keep afloat the country's seventh biggest company and second biggest car producer, Kia.
Second, the problems with exports lead to attempts to restructure industry. But some firms stand to lose out in this and put up resistance, leading to enormous pressures building up within previously united ruling classes hence the huge rows inside the South Korean ruling party in the run up to this month's election, the tensions within China between the managers of state run heavy industry and the export oriented industrialists of the coastal provinces, and the splits which have emerged beneath Suharto in Indonesia.
Finally, workers fresh from the countryside who could be held down in the early stages of industrialisation begin to put up resistance. Attempts to buy off resistance eventually lead in some cases (in the 'tigers' as opposed to the 'tiger cubs') to wage levels that can be comparable to those in the west. And that spells the end of the low wage, low tech, high export economy.
The year 1988 was the turning point in this respect in South Korea with a wave of strikes which forced employers to concede substantial wage increases. Significantly, we are now seeing spontaneous waves of strikes in China and Indonesia, even though the overall level of industrialisation of these countries is still much less than in South Korea ten years ago.
A Financial Times report says, 'There is a growing recognition that President Suharto's hold on his own people is not what it used to be... Many ordinary Indonesians are restless... Students have clashed with police in various cities...in various cities workers have gone on strike and the government faces the prospect of a run on the banks.'
A Far Eastern Economic Review poll of Asian businessmen shows that few believe the Chinese government can avoid substantial social unrest as it attempts cutbacks in the workforce of heavy industry, and already there have been riots in some areas.How important is this crisis and the accompanying social unrest for the world system as a whole?Very important. This was the region that was being spoken of only a few months ago as the dynamic driving edge of the system as a whole. Now it's looking to be dragged back from the brink by help from elsewhere.
The scale of the IMF packages for Thailand and especially Indonesia are an indication of how seriously the major governments view the situation.
There are worries that a collapse in East Asia would give a big enough jar to the Japanese economy to drive it from stagnation into a thoroughgoing recession of the kind the world has not seen since the 1930s. After all, Japanese firms have $38.7 billion of investments in Indonesia alone, and the region is an important outlet for Japanese exports.
The crisis in South Korea is creating a shock in Brazil, as South Korean financiers withdraw funds from the country. This is seen as a threat to a Russian stock market which has been bolstered up by Brazilian funds.
Then there are the possible effects on certain important companies in the advanced western states like Britain's biggest banking group, the HSBC, News International, or Cable and Wireless or the American banks with their $64.5 billion exposure in South East Asia.
Finally there is the unknown impact on the world's financial system, especially after the vast growth of 'derivatives' in the last decade. These are funds which are gambled on future changes in interest and currency rates. They have grown in 10 years from about $5,500 billion to $98,000 billion about five times greater than global economic output!
Well before the outbreak of the East Asian panic the Bank for International Settlements warned of 'international exuberance in financial markets' and worrying about 'the economic losses which might be associated with a major failure in payments systems, which now routinely process several billion dollars' worth of payments a day'.
But it is not only the economic impact which worries the governments. Robert Rubin, the US treasury secretary, has made it quite clear that the potential for political unrest in the area is terrifying the US administration. All the states of the region have been arming themselves at great speed over the last decade. The US government is probably fearing that, if the economic crisis does indeed lead to political upheavals, it could find itself caught out in much the same way as when revolution swept away its favourite ally, the Shah of Iran, 18 years ago.