Issue 223 of SOCIALIST REVIEW Published October 1998 Copyright © Socialist Review
In the last few weeks a real sense of panic has gripped many politicians and journalists about what is happpening to the economy. Are their fears justified and bow deep does the crisis go?
The speed with which the panic set in is remarkable. The crisis now threatens to be even more severe than the most pessimistic forecasts from a year ago. In the last two months shares on Wall Street have wiped almost $4 trillion off the world's financial wealth--the equivalent of the GDP of Japan. In Britain alone the stock market dropped some $300 billion in the same period. Yet just a week later the stock market rose rapidly, clawing back some of the losses. It highlights the volatile nature of the period and the rollercoaster effect this has on the world's financial markets.
It is now estimated that 40 percent of the world's economies are either in recession or on the verge of recession. If Asia fails to recover and the US dips into recession, global output could decline next year for the first time in 60 years. The talk therefore has switched from recession to a full scale depression.
No sooner had the crisis threatened to bring down the Russian economy, than all eyes switched to Japan--the world's second largest economy--which now teeters on the brink of another crash. Japan's economy has now contracted for the third quarter in a row and it could end the year experiencing a decline of 3.3 percent of GDP. This is having a devastating effect on Japanese industry. For example, the huge Japanese steel conglomerate Tao Steel Co announced recently that it was going into liquidation. This is the largest failure of a Japanese manufacturer since the Second World War. At the beginning of the year most commentators were predicting that the recession would mainly hit the Japanese financial and commercial sector. The fact that it is now embracing manufacturing--which was seen as the one area that could keep the Japanese economy afloat--is terrifying the ruling class.
The speed with which the recession has hit can also be seen with the huge Japanese multinational Hitachi. Last year it had a profit of 3.48 billion yen. This year it is expected to suffer a loss of 250 billion yen. The result is the closure of factories and mass redundancies. Nor is this examplc unique. Bankruptcies are happening at a faster rate in Japan now than they were at the beginning of the year. If any of the major banks were to go bust it would spread throughout the economy as other parts of industry are reliant on the banks to keep them afloat. These signs are terrifying the ruling class in south east Asia and throughout the world.
The problems also continue to worsen in the 'Tiger cubs' such as Indonesia, Thailand and Malaysia. The great fear is that China could be the next country engulfed by the crisis. There is pressure on the renminbi (the currency used for foreign trade transactions) which could lead to its devaluation. When this happened in 1994 it made Chinese exports cheaper, increasing the pressure on the exports of the other 'Tiger' economies. Even though the Chinese government has enough reserves today to prevent devaluation happening, Chinese exports are being badly hit. This presents a dilemma for the government.
What about the most important economy in the world--the US? Will the strength of the US economy be able to pull the rest of the world economy out of recession?
The ruling class in the US no longer believes that it will escape what is happening in the rest of the world. Alan Greenspan, head of the Federal Reserve, said at the beginning of September that the US 'cannot remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress'. The Financial Times said on 7 September, 'It is obvious that the US cannot escape the crisis in world financial markets unscathed.'
In the last three months alone the Latin American stock markets have fallen by 60 percent. This will have serious implications for the US as 40 percent of all US exports go to the region, and US banks are more vulnerable to what happens in Latin America than in Asia or Russia.
Already the Colombian government has been forced to devalue its currency by 9 percent following a collapse in the price for oil, on which it is heavily dependent, and the Ecuadorian government has followed suit. But what terrifies the ruling class most is the plight of Brazil, by far the most important economy in the region, responsible for 45 percent of Latin America's output. The Brazilian government may he forced to devalue the currency--the real. There has been a flight of money out of the country with some $1 billion leaving the country every day in September. The Brazilian government is pursuing a policy of high interest rates 50 percent at present--to try and protect the real. But this is pushing up the budget deficit which is currently 7 percent of GDP. The only way to get this down will be by making huge cuts in social spending which would increase unemployment and political instability.
The US has problems with its own money makers. A sharp drop in the value of the Dow Jones Index wipes billions of dollars off the value of a company at a stroke. For example, when the Dow Jones dropped 512 points on 31 August it meant the loss of 6 percent of the stock market's value in a single day. A Wall Street crash would also devastate consumer spending. In the last few years there have been reports of people taking money out on credit cards to invest in shares in the hope that the shares return a greater dividend than the money owing. A staggering 39 percent of US personal sector wealth is held in the form of shares.
What are the causes of the current economic crisis? Do our rulers have any explanation for what has happened?
Only two years ago the ruling class and politicians were looking to the model of south east Asia as a way forward. Remember the visits of Tony Blair to Singapore and Peter Mandelson to South Korea? The words 'Tiger' and 'Tiger cubs' were on everybody's lips. None predicted that this would be the region that would lead the way into the next worldwide recession. Even when the crisis first broke with the devaluation of the Thai bhat, people like Martin Wolf in the Financial Times were prepared to dismiss it as 'nothing more than a blip on the path of rapid east Asian growth'.
Now they are at a loss. For example, the Herald Tribune said recently, 'What is frightening about the world's current economic troubles is a sense that rules we thought we understood don't seem to apply now... Now, with Russia and much of Asia having crashed, with eastern Europe and Latin America imperilled and with much of Africa going backward, the certainties of only a year ago seem far from certain.'
Yet the eruption of the crisis In Asia, and its spread internationally, is the classic boom/slump cycle of capitalism that Marx recognised, with the problems that overproduction brings to the system. That economy has grown rapidly over the last few decades and this has completely transformed the region. Countries such as South Korea and Taiwan, and city states such as Singapore and Hong Kong are now modern industrial capitalist economies. Their characteristic feature was that they were export led, so they were able to carve out a niche for themselves in the world market and move from producing goods such as textiles to expand production into iron and steel, shipbuilding, electronic component production and cars. But this relies on the rest of the world being able to buy the mass of goods produced. If this does not happen there is overproduction. In the case of South Korea It was apparent as far back as March last year that all the main industries were finding it increasingly difficult to find a market. The result was the bankruptcy of the major steel firm Hanbo, and the nationalisation of the second biggest car producer, Kia.
As problems of overproduction emerge, capitalists are forced to drop the price of goods. The price of microchips has dropped from $17 each to $1.20. This inevitably leads to a squeeze on profits and some capitalists go to the wall. The expansion of the Japanese economy was greatly reliant on credit and loans from the banks, but when profits were squeezed debts couldn't be paid. Some banks recalled their loans and most of the others were reluctant to advance more capital. It became a downward spiral.
Long term, the rates of profit have been falling since the 1970s. This has produced weaker periods of growth and more serious recessions. Failure to restore the rate of profit to a serious and sustainable level means we are now facing the fourth major recession since the 1970s and this one looks set to be the worst.
As the 'Tiger' economies contracted, this decreased demand for raw materials such as oil. The collapse in the oil price greatly increased the financial crisis in Russia and put pressure on the oil exporting economics of Latin America.
The other factor exacerbating the crisis is the fact that the financial system is now more global and deregulated. Money can be transferred much more quickly from areas of poor return to those where the profits are greater. While this can greatly increase profits during a boom, when a crisis sets in it can spread much more quickly. The only way the capitalists can try to restore the rate of profit is to increase exploitation of workers and cut excess capital to stop overproduction--in other words, closures and redundancies.
What is the likely impact for the British economy? Blair and Brown claim they can get rid of the boom bust cycle. Will this be possible?
The idea that Britain can be immune to what happens elsewhere is a joke. Even Peter Mandelson is already warning of job losses on the horizon. But the British economy is already feeling the effects of the economic turmoil. Manufacturing is badly hit, and the closure of plants such as Fujitsu shows what happens when the recession bites. Japanese and other overseas investors will simply close plants overseas and concentrate production in their home region where the bulk of expenditure on research and development takes place. Fujitsu won't be the last--Japanese capitalists won't borrow money to build new factories when they know there is a glut of goods on the market. So more closures, or 'restructuring', are inevitable, meaning more unemployment.
The policy of the Blair government to put control of interest rates in the hands of the unelected Bank of England and Brown's policy of being tight on inflation have led to high interest rates and a strong pound, meaning British manufacturing exports are expensive to sell.
The Blair government has based all its
spending plans on the premise that the
British economy is doing well. Promises for
education, the NHS or Welfare to Work
depend on the economy growing. Recession
will throw the plans into turmoil. Ideas of
raising money from privatisation will be hit
by further falls on the stock market. So
there is a bumpy ride ahead. The one thing
that unites Blair and Brown with other
governments is the belief that the market is
the best way to solve the problems that exist
at the moment.