The Roots of the Asian Crisis.
Andy Kilminster.
Each week another of the formerly "miracle" economies of East and South East Asia slips further into crisis.
This week it is the turn of Indonesia as the failing Suharto regime desperately bargains with the IMF and its international creditors. Last week it was Hong Kong as the stock market tumbled following the collapse of the Peregrine investment brokers.
International capitalists are frantically trying to predict where the next disaster will occur. Yet they have been singularly unable to explain why the crisis emerged in the first place, or what it means for the world economy in the future. How can a region which was seen as the most dynamic sector of capitalist growth now have become its biggest problem area?
The basis of an answer to these questions lies in the analysis of capitalist crisis developed by Karl Marx over a century ago. There were of course important differences between the capitalism of Marx's time and ours.
But the essence of the system remains unchanged and we can use Marx's approach to study the causes and outcomes of the Asian crisis. In particular, three main aspects of Marx's account of crisis are relevant to what is happening today.
Marx saw one of the fundamental causes of capitalist crises as lying in the contradiction between the social nature of production in a modern industrialised economy and the isolated decision making arising from private ownership of property.
Crises occur because, while production is social in the sense that what happens in each individual factory, company or office affects thousands of other people working elsewhere through innumerable links, the decisions about this production are taking by individual capitalists or groups of employers, separated from society as a whole.
What is rational for one capitalist, seeking to gain profit for their own company in isolation, can if repeated by all company owners, be disastrous for the capitalist class as a whole.
So, in Asia it appeared sensible for individual companies to borrow heavily and invest in speculative ventures and property projects in order to stay ahead of the competition. But the result of this behaviour being generalised is a glut of property and a mountain of bad debts which threaten the stability of the system as a whole.
The contradiction between social production and individual ownership is fundamental to capitalism. Many writers over the last decade, including a number who used to be seen as on the Left, argued that the Asian economies had been able to overcome this contradiction and develop a new and superior form of capitalism.
They argued that the networks of collaboration and influence in economies like Japan and South Korea between the state and business, the financial sector and industry and between industrial companies had socialised economic decision making. They claimed that these economies were based on a structure of trust and stability which would mean that crises were a thing of the past.
The events of the last year show the hollowness of this claim.
In reality, the networks of influence between the state and business have been an avenue for corruption. The close relationships between banks and companies have led to the build up of risky debt. The links between industrial companies have increased the vulnerability of the whole system to defaults in any part.
The call now is for a movement back towards the free market model of US capitalism. Yet this will not remove the contradictions but only change their form.
The second element of Marx's analysis of crises which is relevant to Asia today is his account of financial crisis. Marx focused on the role of the banks and the rate of interest, but his analysis is just as relevant to the stock market.
As capitalist economies boom credit is drawn into more and more speculative and risky investments, which in turn need a greater and greater supply of finance to keep going. At some point the supply of credit dries up, and due to the build up of speculative debt one default can trigger off a reaction which feeds through the rest of the system leading to a slump.
In East Asia this has happened in two ways. Firstly, domestic finance has been withdrawn through the selling of shares. Shareholders have lost confidence in the future profitability of companies. As they sell and the value of shares falls it becomes more difficult for companies to raise further funds. This can then limit further investment.
More seriously though the fall in the share price does not just affect future investment. It also represents a devaluing of the capital that has previously been invested in companies, either by their owners or by outside investors. That capital had been invested in the hope of future profits which now appear unlikely to be realised. Those who invested that money have seen a large part of their capital wiped out.
In economies like those in East Asia, with a high level of interlocking shareholdings between companies, this effect can seriously undermine the system. It is also bound to lead to attempts by the employers and state in these countries to recoup their investments by squeezing more profits out of the working class.
The other way in which financial crisis has exhibited itself in Asia is through the withdrawal of international funds. This has caused a collapse in currency values. While on its own this might help exports and production in the future the problem is the build up of foreign debt in the past. The collapsing currency makes it almost impossible for countries like Indonesia and South Korea to repay their debts.
Again, what is individually rational for an international capitalist, namely to withdraw their money from the region before problems arise, threatens the stability of the system when everyone tries to do it.
The final aspect of Marx's theory of crisis which is relevant to the Asian example relates to the outcome of the crisis. For Marx the results of crises were never predetermined.
If the working class is weak a crisis can perform a positive function for capital. Weaker companies are eliminated through bankruptcy and consequently the average rate of profit is raised. Investment and growth eventually restart on a new and more profitable basis. This is what the IMF and the international banks and investors are trying to engineer in the region.
If the working class is stronger however a crisis may be resolved in a way which, at least temporarily, weakens the position of the employers and lays the basis for future gains for workers. Up until now the organised working class has been relatively weak in most Asian countries, with the important exception of South Korea.
But past experience shows that in conditions of acute crisis this situation can change very rapidly, as new organisations are formed and existing ones recapture old traditions of struggle. This is particularly relevant in Indonesia as the succession to Suharto and the future of his regime become more urgent issues.
Marxism can illuminate the causes, mechanisms and possible outcomes of the Asian crises in a way that conventional economics has failed to do. In doing so it becomes ever more clearer that there is no such thing as `Asian capitalism'.
The Asian economies remain simply capitalist economies in crisis, no different in essence from similar societies elsewhere. As the impact of the crisis in Asia makes itself felt throughout the world economy the chances are that the problems of the region will not be remain limited there, and the same ideas of Marx will continue to be useful for analysing a world in crisis as they have been in the past.