Will there be world slump?

Submitted by Anon on 13 January, 1998 - 12:43

Business is always thoroughly sound, and the campaign in fullest swing, until the sudden intervention of the collapse”, wrote Karl Marx (Capital vol.3, p.616), and it has never been more true than of the “Asian tiger” economies now in crisis.

Since the 1960s industry in countries such as Thailand, Malaysia, Taiwan, Singapore and, especially, South Korea, has grown at rates unmatched in history, three or four times the pace in Britain in the 19th century which made Marx exclaim that “the bourgeoisie has accomplished wonders far surpassing Egyptian pyramids, Roman acqueducts, and Gothic cathedrals...”

The “tigers” got through the world recessions of 1974-5 and 1979-83 with few setbacks. They upgraded their industrial profile from cheap clothing through electronics assembly-shed work to cars, computers, and shipbuilding. Bourgeois optimists claimed that they had proved that world-market export-oriented industrialisation was the high road to prosperity for all.

Now the pundits denounce South Korea’s economic regime as overly-statised, bureaucratic, corrupt, and therefore biased towards extravagant over-expansion without the restraint of free-market discipline. They recommend instead, as a model, the more free-market economy of the USA — that same USA, let’s remember, which only a few years ago was cited as a sad example of decay, its cities becoming wastelands, its education system hopeless, its industry stymied by the breathless drive to cash in short-term gains. There is no escaping the conclusion: in all its various economic regimes, whatever their differences, capitalism has contradictions which lead to disaster.
The industrial growth of the east Asian economies has not, despite what some on the left say, been illusory or unreal. The educated, city-dwelling, many-million-strong working classes now central to countries which a few decades ago were peopled by illiterate peasants are no fiction. They would not be a fiction even if all the industry were a product of US, Japanese or European multinationals using the Asian countries as cheap-labour production sites, but in any case it is not: very little of Korea’s industry, for example, is foreign-owned.

Not the “hidden hand” of the world market, but the dollar-disbursing hand of the US government, was central to the growth. Vast sums were pumped in through aid and through purchases for the Vietnam war(1). Then the growth acquired its own momentum.
To explain why the crisis has come now, we must go back to the late 1980s. A brief splurge of easy credit then fuelled a property boom in many countries. The mechanics of such episodes were explained long ago by Marx: “Since elements of productive capital are constantly being withdrawn from the market and all that is put into the market is an equivalent in money [wages, payments to suppliers, etc.] the effective demand rises, without this in itself providing any element of supply... A band of speculators, contractors, engineers, lawyers etc enrich themselves. These exert a strong consumer pressure on the market, and wages rise as well... This lasts until, with the inevitable crash, the reserve army of workers is again released and wages are pressed down once more to their minimum and below it”. (Capital vol.2 p.390-1)

In the early 1990s, over a thousand savings-and-loans companies (building societies) collapsed in the USA, owing hundreds of billions of dollars, and leaving half-built shopping malls and office blocks all over the country. In Japan, property prices crashed after a peak which had valued Tokyo’s buildings at more than the total real-estate of the USA, and all the country’s big banks were left technically insolvent.

Both in the USA and in Japan, these property crashes passed without a general slump. In Japan, the banks were saved from collapse but a great overhang of debt has kept the economy stagnant in the 1990s. In the USA, growth has been, despite all the ballyhoo, pretty feeble, but profits have been high (with an increase in the rate of labour exploitation). Great streams of the world’s growing sea of footloose capital have flowed into the tiger economies — and into the USA, where they have allowed consumer demand and imports to remain brisk.

It has ended with the classic capitalist syndrome of relative overproduction of fixed capital. In Thailand, where the crisis first broke, over 50% of office building due to be completed will have no tenants, and property prices look like halving(2). Hectic investment overshot markets which were only moderately expanding, and generated a build-up of intractable debt beyond the capacities of the tiger economies, which are still much smaller than the USA’s or Japan’s. Now the knock-on effects are bringing a full-scale financial crisis to already-enfeebled Japan.

Even if the crisis spreads no further, its social effects in Asia will be huge. Millions of migrant workers will be expelled; vast numbers will be jobless; in Indonesia, where the financial-industrial crisis coincides with a drought, maybe 20 million people will be pushed below the absolute-poverty line.

Business Week magazine (22.12.97) expects that “The image of Asia’s workers may now change — from salaryman in a starched white shirt to banner-waving protester”. The workers’ movements, new but buoyant, will be pushed towards politics. South Korea, for example, has been transformed in most respects into an advanced capitalist economy, but still has no welfare system, not even a minimal one like the USA’s. Workers losing their jobs — in an era when the old option of going back to the family farm is less available — will be driven to demand social provision.

Will there be a world slump? Yes, and very quickly, if Japanese capitalists, in order to pay their debts, start selling lots of the $320 billion worth of US Treasury securities which they hold. The USA’s economy depends heavily on its inflow of foreign cash: overseas buyers bought $367 billion of US Treasury securities in 1996. The Japanese start selling; the US financial system goes into shock; the wealthy world-wide start dumping dollars; and within days the world trading system, based as it is on the dollar being “hard cash”, could be in chaos. Measured against the vast scale of foreign-exchange dealing today, the gold in Fort Knox is mere small change; in fact, the foreign-exchange turnover each day, at over $1500 billion, exceeds the total reserves of all the central banks in the world!

On balance I think this fast-track to world slump is unlikely. If I’m right, socialists should not mourn a missed chance to gloat at the discomfort of our enemies. Schadenfreude, the politique du pire, the idea that whatever’s worst for capitalism is best for us, is not Marxism. The European and US labour movements are beginning hesitantly to revive. A sudden cataclysmic economic crash would probably, in the short term, wipe out that revival and swell social despair.

Slower routes to world slump are also possible, maybe even probable. Business Week magazine (January 1997) may ask, of the US economy, “Could it possibly get any better than this?” — but it certainly could. Investment is sluggish — 70% of profits, an unprecedentedly large proportion, are shovelled out in dividends to shareholders, helping a middle and upper-class consumer boom. The average real incomes of the poor have dropped 20% since the 1970s. The much-feted drop in unemployment is in large part (though not all) a product of fiddling the figures. Consumer debt has ballooned (it’s 40% greater, relative to income, than it was in 1985); the stock-market boom has overshot so much that a return to historic average relations between share prices and the real economy would bring those prices crashing down by 68%; unsold inventories are increasing fast. Many of the conditions for a downturn are already there, and a sharp decline in Asian export markets could bring them together.

As for Europe: after the 1992 Exchange Rate Mechanism crisis, I wrote that the European Union’s schedule for a single currency had been wrecked. Yet the European governments have pressed ahead and agreed to fudge the “Maastricht criteria”(3).
The question remains of how stable and workable the single currency will be if put under a strain by big losses for European banks in Asia, and a decline of Europe’s exports to Asia and the USA. A single currency implies large-scale industrial restructuring (4); it means that economic troubles focused in single countries will be more intractable (because the national government has less scope for the usual offsetting measures of monetary policy, which sometimes do have an effect); and it is more vulnerable to inflation. (National governments, being governments, have almost unlimited credit; and with a single Euro-currency they cannot be restrained from over-borrowing by the devaluation threat which follows from over-borrowing in a national currency. The Maastricht Treaty provides for the European Union to enforce penalties and fines for over-borrowing; but how will it enforce them?)

The relatively even (though not actually buoyant) course of world trade since 1992 has allowed not only for the Euro-decision — which may soon be proved reckless — to ram through monetary union, but also for a little era of “liberalism”, partly comparable to the phase of “democratic pacifism” which Trotsky analysed in Europe around 1924, symbolised by the bland politics of Clinton and Kohl, Jospin, Prodi and Blair. A new downturn will raise the temperature.

1. The “revolution from above” made in Korea and Taiwan under US military supervision after World War 2 also provided important preconditions for growth. Land was confiscated from the landlords — effectively without compensation — to forestall the threat of Stalinist revolution; a population of smallholding farmers was created who, offered generous credit, developed fairly productive agriculture. In the early stages of industrialisation, young workers could be employed at very low pay and without any welfare provision because the family farm underpinned their subsistence.
2. According to estimates cited in “The Banker”, December 1997.
3. The Italian economist Luigi Pasinetti reckons that “all major European countries find themselves outside the [public-finance] sustainability area, except Belgium and Italy...” Cambridge Journal of Economics, 22, 1, 103-116.
4. Despite its thick web of trade connections, Western Europe is still in crucial ways much less economically integrated than the USA. In particular, across Europe industries are not “clustered” as they are in the US (aerospace and information technology in California, cars in Detroit, finance in New York, etc.) A single currency implies integration, which implies clustering, which implies industrial relocation and restructuring.

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