Lead article from News and Letters newspaper November 1997

Globalized capital in crisis

by Andrew Kliman

The financial crisis spreading throughout Southeast Asia sent shock waves throughout the world last month. Mounting fear among investors caused stock prices to plummet by 10.4% in Hong Kong on Oct. 23, which in turn sparked large declines in stock markets throughout the world. The Dow Jones index fell by 13% before rebounding partially.

It is too soon to predict the effect of the stock market plunge on the real economy in the U.S. and globally. Nevertheless, the plunge has created space for a sober assessment of its current condition.

Nothing seems able to pull capitalism out of its 24-year-long slump. Worldwide growth of GNP (Gross National Product) per capita, which averaged 2.8% between 1965 and 1973, has since fallen continually to 1.3% between 1973 and 1980, 1.2% in the 1980s, and 0.5% between 1990 and 1995.

When production grows only modestly, it is now typically "jobless growth" since technological revolutions are steadily lowering labor requirements. Western Europe’s unemployment rate, which averaged 2.7% in the decade preceding 1973, has therefore risen steadily, averaging 9.6% in the first half of the 1990s. That rates in the U.S. and Britain are somewhat lower is due largely to policies that encourage jobless workers to drop out of the labor force rather than seek work.

What keeps the world economy afloat for now is an ever-growing mountain of debt. The ratio of U.S. government debt to GDP (Gross Domestic Product) jumped by 57% between 1980 and 1994. The other technologically advanced nations have, on average, experienced the same surge in debt/GDP ratios. Personal income is rivaled by personal debt—today’s personal debt is nine-tenths of after-tax income, compared to two-thirds in 1980--as working people struggle to maintain their standards of living in the face of declining real wages.

DEFLATION: THE NEW THREAT

In the absence of a new boom, the current rate of spending is unsustainable. Personal bankruptcies in the U.S. are spiraling upward; defaults on credit card borrowing alone will total nearly $10 billion this year, up from about $3 billion in 1994. The plunge in stock prices has only increased the threat of bankruptcies.

Coupled with the looming prospect of deflation -- a general fall in prices -- this upsurge in indebtedness threatens to turn the next recession into a depression. By lowering incomes, profits, and tax revenues, deflation raises the real burden of debt that borrowers must repay -- if they still can. Technological advances, worldwide stagnation and falling wages, and fierce competition are already causing wholesale prices to fall in the U.S., Germany, Japan, and elsewhere.

With the U.S. inflation rate now dropping even as the economy grows, a downturn in the economy could well pull retail prices down. The prospect of rising wages in the wake of victories by UPS workers and by transit workers in the California Bay Area could also lead the Federal Reserve to counter with deflationary policies.

Imperialist power relations, especially the sharply falling export prices and onerous debt repayment burdens that Third World countries face, ensure that their masses are the ones to suffer the most from the global slump. Thus, from 1985 to 1995, their GNP per capita fell by an average of 1.1% per year in Black Africa, and 0.3% in the Middle East and North Africa, while rising a paltry 0.3% in Latin America. Likewise, per capita food production has stagnated in Latin America and the Middle East, and has fallen by a shocking 25% in Africa, leading to persistent hunger and starvation. Nearly one-third of the people in the Third World (1.3 billion persons) live on the equivalent of less than a dollar per day. About one-third of workers in the Third World (700 million persons) are either unemployed or counted as "underemployed", in other words, engaged in activities such as scavenging in city dumps or hawking a few foodstuffs or handicrafts.

SOUTHEAST ASIA’S CRISIS

The main exceptions to this malaise had been the economies of Southeast Asia. With its emergence as a manufacturing exporter, and with the world’s fastest growing per capita GNP between 1985 and 1995, Thailand had widely been expected to become the fifth "Asian tiger" economy. Indonesia’s and Malaysia’s industrialization and fast growth led to widespread perceptions of them, too, as up-and-coming "Asian miracles". Due to their openness to foreign capital and minimal regulation, these countries were regularly touted by neoliberal policymakers and pundits as models for other Third World and Eastern European nations to emulate.

Now the Southeast Asian bubble has burst. On July 2, Thailand surrendered to speculators’ attacks on its currency, allowing it to fall in value. A wave of currency depreciations elsewhere in the region followed. The currencies of Thailand and Indonesia have fallen by about 35% against the dollar; those of Malaysia and the Philippines, about 25%. Finance capital has fled the region, partly due to lenders’ fears that, by making foreign debt more costly to repay and perhaps lowering export earnings, the depreciations have increased the risk of default.

Three years ago, Latin America experienced a similar flight of capital after Mexico allowed the peso to depreciate. Stability was restored only after the U.S. organized a $50 billion rescue package so that Mexico could repay its creditors, in return for the imposition on its masses of drastic austerity measures -- cuts in social services and tax increases -- meant to ensure that debt repayment becomes the country’s top priority. After a brief and partial recovery in the early 1990s from a decade of depression, the lot of Mexican workers and peasants has once more worsened significantly.

This time, however, fear among investors has only intensified, although the IMF (International Monetary Fund) has tried to contain the crisis by offering similar packages of aid in return for austerity to Thailand, the Philippines, and Indonesia. In part, the fear stems from the hesitancy of some Southeast Asian rulers to "restore confidence",that is, to give up hopes of becoming major economic powers and instead to restructure their economies into debt repayment machines.

At the IMF-World Bank meeting in late September, some of them threatened to slow or even reverse the liberalization -- deregulation and openness to foreign capital -- of their economies. Most extreme has been Malaysia’s Prime Minister Mahathir. Though he had eagerly welcomed foreign capital into his country during its boom phase, he has now blamed his nation’s crisis on everyone from currency speculators to Jews, and has tried unsuccessfully to curb currency trading.

The ultimate impact of the crisis on the masses in Southeast Asia is uncertain because the worst is yet to come. In Thailand, for instance, austerity measures are only now beginning to be implemented. Moreover, many loans have still not come due, loans which are in severe danger of default because they must be repaid in foreign currencies which are now more expensive and because they are backed by assets now worth less. Bankruptcies and financial collapse may ultimately lower employment by as much as 8% to 12%.

Angry Thais have started to fight back. On Oct. 17, popular outcry forced the government to rescind a hike in the gasoline tax it had imposed in order to qualify for the $17.2 billion IMF aid package. Four days later, several thousand workers, youth, and businesspeople demonstrated, calling for the resignation of Prime Minister Chavalit.

GLOBALIZED CAPITAL VS. LIVING LABOR

Now that the Southeast Asian "miracle" has soured, at least for the present, the experts who had heralded these countries’ liberalization now blame them for the crises they face. Yet the deeper determinants of the crises are the vicissitudes of the capitalist world market in which they are ensnared. Their manufacturing industries boomed because their sweatshops exploited the cheapest labor-power and thus produced at lowest cost. In 1994, however, China decided to challenge them in the "race to the bottom" and undercut them by means of a 35% currency devaluation and other measures that have lowered its export prices by 25%.

At the same time, five years of stagnation in the world’s second largest economy, Japan, has caused the yen to depreciate against the dollar. This led the dollar-linked currencies of Southeast Asia to surge in value which made their exports even more expensive.

What had fueled the growth of these economies, however, was not only their feverish exporting; they had become dependent on a massive influx of foreign, especially Japanese, capital. The lion’s share of this investment was not direct investment in production and trade, but short-term "hot money" loans, payable in foreign currency. Thus, the Southeast Asian economies achieved their rapid growth by exposing themselves to substantial risks. Crisis awaited them if capital inflow were to cease and if depreciation of their currencies were to raise their real debt burden -- risks that have now turned into realities.

A similar fate may be awaiting much of Eastern Europe. Several of its nations depend at least as much on foreign loans, and have currencies at least as overvalued, as did Mexico or Thailand. The deepening crisis has also begun to make financiers wary of investing in the other "emerging markets." Given its 100 million displaced peasants and another 50 million workers who will be downsized from state industries, capital flight or even a slowing of foreign investment into China could create an explosive situation there.

The continuing financial crises have exposed the weaknesses in the capitalist world economy as a whole. Currency crises are made possible by the absence of a stable world money since the U.S. abandoned the Bretton Woods gold exchange standard in 1971. This situation in turn stems from the decline in U.S. economic and political hegemony, and rising inflation, during the Vietnam War, which led to its inability to guarantee the dollar as a "good as gold" money.

Moreover, although falling transportation and telecommunications costs have permitted increasing globalization of capitalist competition, the fierceness of this competition -- over market shares, but especially over scarce capital -- stems from the quarter-century-long slump in the world economy. As Karl Marx pointed out, "it is the fall in the profit rate that provokes the competitive struggle between capitals, and not the reverse" (Capital, vol. 3; Vintage, 1981. p. 365).

Hence the source of the global economic crises is not "globalization" per se, as some of its foes in the labor bureaucracy and deep ecology tendencies contend. The crises are crises of capitalism, the imperialist tentacles of which have been multiplied and extended by means of high technology. Both theory and the experience of the state-capitalist countries that called themselves "Communist" show that it is impossible to place capital under either local control or the control of an individual nation-state. Capital’s very nature is to self-expand by means of unpaid labor, subordinating everything with which it comes into contact to its inhuman logic.

Those on the left who concur with President Clinton’s pronouncement in Sao Paolo last month that "Globalization is irreversible" are, however, equally mistaken. It is true that capital seeks to produce at minimum cost, and is thus attracted to low-wage, repressive countries that give it freedom from workplace safety, child labor, environmental and other regulations. Yet the flight of investment from apartheid South Africa in the wake of the struggle against it in the 1970s and 1980s, and from Mexico in the wake of the Zapatista rebellion since 1994, also demonstrate that capital is repelled by such challenges to its will.

Working people thus face the dilemma of submitting to the bosses’ dictates or fighting and risking unemployment. This dilemma is now being played out on a global scale, yet it is as old as capitalism itself. Now, as always, the only way to escape the vortex of the world market is to put an end to the inhuman logic of value production and thereby enable freely associated individuals to bring production under their conscious and planned control.

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