Issue 222 of SOCIALIST REVIEW Published August/September 1998 Copyright © Socialist Review
The world economy stands on the brink of the most serious economic crisis since the 1930s. For many the crisis has already arrived.
In Asia the former 'miracle' economies are already contracting at an unprecedented rate. In South Korea the economy contracted by 3.8 percent in the first three months of this year against growth of 5.7 percent in 1997. in Indonesia, the fourth most populous country in the world, the economy is predicted to shrink by a massive 20 percent this year, an economic collapse not seen since the Great Depression outside civil war. And these figures for 1998 are almost certainly underestimates. Millions are being thrown out of work and into dire poverty without even the most modest of social security safety nets. But this is not a crisis confined to the Tigers.
In Japan the financial system is weighed down with £370 billion of bad debt - £2,900 for every Japanese woman, man and child. Japan's prime minister, Obuchi, describes the world's second largest economy as facing a prolonged 'slump'. Having feared the perils of inflation for the last 25 years, prices are now falling, in some cases dramatically. And the continuing decline in the value of the Japanese yen threatens to trigger further devaluations throughout the region, bringing in their wake more economic disaster.
The crisis in Asia is already beginning to affect the wider world economy. The US trade deficit has suddenly opened up dramatically as exports to Asia fall and imports rise. The trade deficit in May soared to $15.8 billion.
In Britain Hyundai and Lucky Goldstar, the South Korean conglomerates, have frozen their investments. Siemens has closed a state of the art semiconductor factory, opened amidst fanfares only a year ago. Some 2,000 jobs have been lost as a result of a catastrophic fall in the price of microchips from $17 to $1.20 due to worldwide overproduction and 'dumping' by South Korean producers desperate to generate income even at a loss. And Grove Cranes and BOC have both announced redundancies as exports to Asia slump.
The fear engendered among many workers by these developments demonstrates how much supposed good times have depended on the market. Inward investment in areas such as the north cast of England, south Wales and central Scotland has been trumpeted as the answer to workers' needs by Tory and Labour governments alike. The brutal failure of the market is now there for all to see, as plants sack workers who were only recruited a few months ago, leaving them and their families with no alternative employment or livelihood.
The cast Asian crisis will mean further closures and job losses, more people on the dole, at a time when the government's only solutions to the problems of British workers are predicated on boom. What of welfare to work as factories shut down, let alone new hospitals and schools?
The British economy now faces a 'hard landing' - in other words, a serious recession in which the economy may even contract. The economy had been recovering from die recession of 1990-92. However, the British economy is now lumbered with high interest rates and a very high level of the pound. The most conservative estimates put the overshooting of the pound at 15 percent and some as high as 30 percent. British exports are now suffering from as much as a 30 percent overvaluation, which is why the manufacturing sector has been plunged into recession despite the recovery of its export markets. The manufacturing recession reflects a significant deterioration in the balance of payments deficit, the excess of imports over exports.
Lowering interest rates, and with that the value of the pound, has been trumpeted as the solution. However, the contradictions of the British economy do not make life so simple. Despite the pressure on prices and profit margins in the most internationally exposed sections of the economy, the less exposed sectors have been experiencing a limited boom, fuelled by consumer spending as a result of falling unemployment and rising personal debt. This is pushing up inflation in the economy as a whole.
Although the squeeze in the export sector is bound to feed through to a squeeze on the rest of the economy sooner or later, the Bank of England, which now determines interest rates, is keeping them up for fear of a further rise in Inflation. It will only very cautiously reduce interest rates when it chooses to do so, for fear of precipitating a collapse of the pound. Manufacturing has suffered very low levels of investment since 1979, despite the Tories' claim to have transformed the British economy. Although manufacturing plays a less significant role in overall economic activity than 20 years ago, It remains very important, particularly with respect to exports. Some economists estimate that over the last 20 years there has only been enough investment to replace worn out equipment and to produce a tiny margin for expansion. So the economy is running at near to full capacity This is why the Bank of England fears domestic inflationary pressures. And a significant fall in the pound could see inflation rise very quickly as higher import prices feed through into the rest of the economy.
Fund managers, who control huge investment resources in the British economy, are now more concerned about the state of the economy than they were when they were polled in 1980 and 1990 prior to the last two recessions. They are 'bracing themselves for a severe down turn' (Guardian, 11 August). And it is no wonder. The crisis in the Tigers Is cut ting inward investment, cutting exports and putting downward pressure on prices. Cripplingly high interest rates, an overvalued pound and deflationary pressures from Asia therefore promise to slash profits and plunge the economy into recession.Gordon Brown promised an end to the boom-bust cycle. He did not say that he would do it by just having slumps!
Things aren't looking up in the Far East
Depressed growth, overproduction of goods, rising unemployment and job insecurity (which is cutting consumer spending), the banking crisis and the knock on effects of the crisis in the Tigers have all combined to produce severe deflationary pressure in Japan with prices of commodities beginning to fall in real terms. This threatens to produce a further downward twist to the spiral as companies and consumers hold off from spending in the expectation of benefiting from further price falls. Moreover the real value and therefore burden of Japan's deeply indebted industry rises as the price of goods falls. This is making the economic crisis substantially more intractable.
The government and central bank have attempted to arrest this downward spiral. Interest rates have been cut to just above zero and there have been significant injections of government spending through tax cuts and infrastructure spending, amounting to some 40 percent of total annual production.
These actions have only had modest effects. With prices deflating and banks lumbered with bad loans, cuts in interest rates have proved an ineffective stimulus to the economy, as Keynes pointed out they would in the 1930s.
Despite further promises of tax cuts and spending increases there is little reason to suppose these would lift general spending and raise consumer and business confidence.
In the face of worsening economic prospects the government has begun to consider radical surgery to the financial sector. It was already committed to a 'big bang' deregulation of the financial sector which might bring in foreign capital (and ownership). But there will be no significant improvement in the financial system until the problem of bankrupt banks and bad loans was addressed. This means bank closures and loans being called in. Companies which proved unable to pay would be bankrupted and their assets sold.
The government started to go down this road in November 1997 when it allowed three banks to fail, but it then got cold feet because of the consequences. Bank closures were bound to make the crisis even worse in the short term as unemployment production fell further. In the northern island of Hokkaido where the main island bank, Takushoku, was bankrupted in late 1997, the closure 'devastated the regional economy' (Financial Times) with 600 bankruptcies alone between January and July this year.
No one knows what the scale of the collapse is likely to be if companies and banks begin to be liquidated on a large scale. Successive governments and the central bank had tried to avoid this option for that very reason, and yet failure to clear out the excess capital and bad debt also promises to make the crisis worse.
Finally, Japan's position as the biggest creditor nation in the world, despite the deep economic problems in Japan itself, makes the rest of the world, and particularly the US, vulnerable to changes in the Japanese economy. Any contraction of savings as a result of the recession or changes In relative interest rates and sentiment on the dollar/yen relationship would have dramatic effects on exchange rates, stock markets and the financial system generally, compounding what is already a highly unstable situation.
The scale and speed of the economic collapse in the Tigers and Tiger cubs elsewhere in Asia in the aftermath of the currency devaluations between July and November 1997 has taken everyone by surprise. Foreign capital, on which the region had become increasingly dependent, has all but dried up. With western banks unwilling or unable to extend trade credit fines, many companies are finding it difficult to purchase the imports they need.
Although the collapse has affected different countries differently, most of them are now experiencing contracting economies. This was undoubtedly made worse by the International Monetary Fund. The IMF demanded that the Tiger governments raise interest rates, cut spending and raise taxes in order to stabilise the currency, cut imports and boost exports. The prime motivation was to see the Tigers earn the foreign currency to pay off the debts they owed to western banks. In addition they demanded the deregulation of the economy to enable western companies to come in and cherry pick the most financially viable companies.
Devaluation did promise to boost exports but there were problems. Many Tiger companies, at least outside South Korea, were dependent for their exports on Imports which had rapidly risen in price. The crisis in the domestic financial system and the drying up of foreign loans meant that financially strapped exporters were unable to obtain the loans they needed, and the devaluations lowered the dollar prices of their exports.
Tiger governments have vacillated in the face of the crisis and IMF pressure. Some banks and companies have been allowed to fad whilst governments have intervened to save others.
The wild card in Asia is China. Devaluation of the renminbi (the currency used for foreign trade transactions) in 1994 made Chinese exports cheaper and intensified the pressure on the export earnings of the Tigers. The response of the Tigers was to expand investment through foreign debt, producing a crisis of overproduction and an increasingly short term and unsustainable debt burden.
Now Chinese exports are suffering in reverse as a result of the devaluations of the Tiger currencies and the slump in exports to Japan, which is being compounded by the fall in the yen. However, the export slowdown is hurting the dynamic export sector and reducing economic growth at a time when the Chinese prime minister, Zhu Rongji, has embarked on a programme of privatisation to revitalise the inefficient and ailing state manufacturing sector. This is producing rapidly rising unemployment.
China's financial sector is loaded down with bad debts. Moody's, the credit rating agency, says the biggest four banks in China, which employ 1.7 million people and account for more than 80 percent of banking business in China, are technically insolvent. A large and growing portion of their loans are uncollectable and the cost of bailing the banks out would absorb in value terms 20 percent of China's annual production.
The temptation is growing for devaluation, but this will exacerbate financial destabilisation across the region.
The east is wallowing in crisis, and US commentators are crowing that the US free market model of capitalism has been vindicated against the state controlled version of the cast. The US experienced a relatively mild recession in 1990 and has had significant growth since-neither too hot, producing inflation, nor too cold, leading to rising unemployment. This is the so called 'Goldilocks' scenario.
Economic growth and falling unemployment combined with government spending retrenchment has seen a startling turnround in the US government's budget deficit which has turned into a surplus.
The US ruling class has had some success in restructuring the excess capital in the economy and above all in increasing the exploitation of the working class through speed up and restraint of wages. Combined with corporate tax cuts and the boost to manufactures from the devaluation of the dollar after 1985, manufacturing profitability has risen significantly.
However, there are significant problems ahead. Spending by consumers in the US economy has outstripped any rise in incomes by record amounts. Private debt reached a record 3.3 percent of annual US production in the first quarter of 1998. It beggars belief that personal debt can continue to grow sufficiently to fuel US economic growth, particularly if Wall Street suffers a significant fall.
Corporate investment has also risen and is beginning to compound the worldwide problem of overproduction. The growth in profits has anyway been flattered by low tax rates and falling interest bills. Unemployment has now reached historically low levels and continuing growth in demand for labour will push the price of labour up even in the absence of collective action as employers are forced to pay more to attract and retain labour. Wage cost increases combined with overproduction and a stalling of consumer spending is bound to squeeze profits even before the deflationary effects of cheap Asian imports.
Corporate America is facing intensified competition from japan and the Tigers as a result of their devaluations. But the greatest danger for significant disruption to the economy comes from a savage 'correction' - a fall on Wall Street. The growth of personal debt has been sustained by the rise in the value of mutual funds on Wall Street. Any significant fall on Wall Street will reduce this fictitious wealth and therefore the collateral for further personal indebtedness.
Any faltering of the US economy will have repercussions for the rest of the world and particularly for Latin America, also suffering loss of foreign lending, currency pressures and higher interest rates in the aftermath of the Asian crisis, and for the ailing Japanese and Asian economies.
Why is there a general crisis? Firstly and most importantly, the world economy has been suffering significantly lower rates of profit since the early 1970s than those that prevailed in the preceding 25 years of the 'long boom'.
Profit rates fell because intensified competition on a world scale saw the displacement of investment on employing workers in favour of buying machines. This raised the productivity of labour, lowering the costs of production and enabling the bosses to compete more effectively against their rivals. But overall it reduced the return on total investment.
Brand new high tech ... and closed
Profit is ultimately dependent on workers being paid less than the value of what they produce. As more investment is ploughed into machinery relative to workers being employed, such investment undercuts the very source of profit exploited workers-and causes the overall rate of profit to fall.
The economic cycle has interacted with the generally lower rates of profit to produce weaker and more contradictory periods of economic growth and more serious recessions. When profits are high and the bosses are optimistic about the future, they will plough back relatively large levels of investment both to improve their productivity and to expand their capacity. Not to do so risks losing out in the competitive race for profit with rival companies.
Whilst investment will be planned by each company, overall it will be unplanned. As investment rises, shortages of inputs to investment will sooner or later occur-shortages of raw materials, machinery and labour, and particularly skilled labour. These shortages will push up costs. However, as the new production comes through from the rise in investment, the market for the extra goods becomes flooded, the cost increases cannot be passed on and prices of goods may even fall. As a result profits are squeezed. This is the classic crisis of overproduction, a crisis unique to capitalism.
The interaction of the boom-bust cycle with a general fall in the rate of profit has produced three recessions, in 1974, 1980 and 1990. Worldwide there was an estimated loss to world production of potentially 40 percent arising from the first two of these recessions and the weak recoveries that followed. Since then there has been the further recession of 1990. the stagnation of the Japanese economy and the collapse of the Tigers.
The financial system internationally has become much more deregulated and global over the last 20 years in particular. This has enabled funds to be more easily transferred from areas of relatively low return, such as Europe and the US in the early 1990s, to areas of higher return such as the Asian Tiger and Tiger cub economies (until the middle of last year).
Whilst the financial system can help to increase the rate of capital investment, it will also exacerbate the tendency for crises of overproduction to set in. As more loans turn bad, banks will become less able to make new loans and a credit crunch will occur. The financial system itself will face possible collapse.
Because capitalist economic crises result from a fall in the rate of profit, the crisis obliges the bosses to seek to restore the rate of profit by raising the rate of exploitation and to clear out the excess capital which has caused the overproduction of goods.
The endemic instability of the world economy since the early 1970s has been accompanied by efforts to speed up work, cut wages and lengthen the working day in order to increase the amount of surplus value pumped out of the working class. While the bosses have had some success in increasing exploitation, resistance from the working class and the sheer physical limits to how much work can be pumped out of workers has meant that success has been limited.
It has proved even more difficult for the world's ruling classes to restructure capital to eliminate excess capacity and overproduction. This is because the sheer scale of investment now required to compete effectively in major areas of production has proved too large for any state or major company to see large chunks of this capital written off. When states have been forced to back off from direct subsidy to sustain production, it has sustained it through general spending and through companies taking on debt.
Failure to restore the rate of profit to a sufficient and sustainable level is why the world once again stands on the brink of serious worldwide economic crisis. Once again the ruling classes will intensify their efforts to increase exploitation but they are running scared that the increasing pressure for the major scrapping of excess capital will precipitate even worse and potentially uncontainable economic meltdown. And they are even more scared that economic crisis and collapse will precipitate political instability and working class revolt.
Economic crisis undermines 'political stability', the ruling class's ability to continue their rule in the old way. This is exactly what has happened in Indonesia where riots, demonstrations and splits in the ruling class have ensured the ejection from office of one of the longest standing and most brutal dictators, Suharto. And this is just the start.
The human consequences of economic crisis are enormous. Millions are thrown out of work and into despair. Millions more are forced to work much harder, in more miserable conditions for even less reward. Crises in newly industrialising countries in Asia and Latin America are literally a matter of life and death. Unemployment can mean starvation. This is a fate already inflicted on millions over the last 25 years of economic instability in the poorest countries in the world.
In Britain, Labour's whole strategy is based on the assumption that Britain will avoid significant recession. But recession will imply more hospital closures, more education cuts, more attacks on the most vulnerable sections of the community. Welfare to work will turn into no work and little welfare.
It is all so totally needless. There are abundant productive resources in the world and enough productive workers for everyone to have a decent standard of living. If the ruling class, has no answers to the economic crises, socialism does. This means the people who produce the world's wealth, the working class, need to take control of that wealth from the bosses and plan production to meet need rather than profit. In the wake of general economic crisis, the class conflict that lies ahead will provide a much larger audience for that simple and compelling idea.