As currencies, companies and markets collapse
It's a crisis alright - but is it global?
We are told that we live in a fully globalised economy. In a sense we do, but what exactly does it mean? Has the world not been globalised for a long time? How much is new?
If there has been a change, what role does this play in the current world economic and financial crisis? What about the role of nation states within this global economy?
Do the increasing size and power of multi-national corporations make the nation state almost irrelevant?
Here ALAN THORNETT suggests some answers to these questions.
A world facing possible economic and financial meltdown
Only a year ago rosy expectations were held by many. Today few would dispute that capitalism is heading for world recession. Just read the capitalist papers.
Stock markets around the world have collapsed in wild fluctuations after three and half years of unrealistically inflated levels. The East and South East Asian Tiger economies (and aspiring ones) collapsed last year into financial and political turmoil, following devaluation of Thailand’s currency.
The implications are enormous. This region had been the most dynamic part of the world capitalist economy by far. Political repercussions so far have included the demise of Suharto in Indonesia at the hands of a mass popular movement – and as we go to press food riots have broken out again.
The trade unions in South Korea have mounted huge battles in defence of jobs. Car workers have been occupying the country’s biggest car plant and fighting off riot police with iron bars.
Russia is collapsing into chaos. Its currency has collapsed, its government has collapsed, its banking system is collapsing. It has defaulted on its debts to the western banks – possibly the most serious default in the history of the banking system. The Yeltsin plan for the restoration of capitalism is in tatters, and nobody knows what will replace it.
The Russian crisis poses the possibility of competitive devaluations, or debt defaults, or both across the region, especially the Czech Republic, Hungary, Poland, Ukraine and the Balkan states. Inside Russia itself, the possibility of serious civil unrest is posed – described as "Indonesia with knobs on".
But it does not end there. China is fighting to avoid devaluation as its currency is drawn into the turmoil – which could take the situation to a new international level.
Latin America, with its currencies also massively overvalued and stock markets plunging, faces widely predicted "meltdown" via its own series of competitive devaluations.
Venezuela seems particularly vulnerable. Like Russia, Venezuela is rocked by the drop in oil prices triggered by the drop in oil consumption in SE Asia.
The Latin American crisis is expected to engulf Brazil, the region’s biggest economy – its stock market plunged last week after panic dumping of anything which looked like a risky asset.
The economies of the USA and Britain (and the EU), whilst partly sheltered with comparatively strong growth, are nevertheless slowing down and have seen huge losses on their stock exchanges.
The Dow Jones lost 284 points in one day last week, and $33 billion was wiped off leading UK shares. They will be lucky to escape the storm as it spreads across the international economy.
Increasingly it is accepted that the global economy could be facing its sharpest downturn since the 1930s. It is an explosive situation. It is the most globalised crisis the world has seen.
Anthony Browne argued in The Observer on August 22:
"Economists are drawing parallels with the depression of the 30s and the aftermath of the oil crisis of the 70s. ‘This is the world’s first genuinely global crisis’ says Alison Cottrell, chief international economist at Paine Webber. ‘In the 30s, where was Asia? At other times, the problems have just been bouncing between the US and Europe. But this is genuinely global. In absolute terms it is worse than the 30s because far more people are involved. We have been ignoring it because Europe and America aren’t really affected yet’.
"The figures are huge, and the span truly global: in Indonesia alone, economic progress has been put back a generation and unemployment is heading towards 20 million, more than in all of Europe. In Japan 130 million people face the end of the economic miracle… China is fighting off pressures to devalue, as its billion people face the prospect of deflation. Millions more in Russia face a total collapse, whilst tens of millions in South Africa have seen post-Apartheid optimism turn sour."
A Latin American crisis, with all its likely consequences, should be added to this scenario.
The roots of the "Asian" crisis
The Southeast Asian crisis broke in mid- 1997 – the most significant event in world politics since the collapse of the Soviet Union in 1990. The term "Asian crisis" is not really accurate. This is a crisis of the global capitalist system, which started in this region and is spreading world-wide.
It came as a shock to those who had assumed that Asian Pacific capitalism would continue as the engine of the world economy well into the 21st century. It is more than just a financial crisis: it has structural and economic roots.
The origin of the rise of the Tiger economies is clear. They benefited from massive direct investment following the 1985 Plaza Accord. Under this the USA forced the Japanese government to sharply raise the value of the yen against the dollar to alleviate the huge US trade deficit with Japan. The value of the yen rose against the US dollar by over 40% as a result.
This did not do much for the US trade deficit, but, by making production in Japan far more expensive, it did do wonders for East and South East Asia, whose currencies were tied to the dollar. $15 billion of Japanese direct investment had flowed into the region by the end of the decade.
In the early 1990s further massive inflows of investment from western banks followed, as the advantages of dictatorial regimes and high levels of exploitation, as well as currency advantage, became clear.
The result was massive overcapacity in the manufacturing and building sectors. An enormous building boom created the infamous property speculation "bubble", which was soon ready to burst.
Last year the value of the yen was again at the centre of developments – this time because of its devaluation. The crisis of the Japanese economy itself now forced down the value of the yen, and capital flowed out of the Tiger economies even faster than it had flowed in. There was also pressure from China and the devaluation of its currency a year earlier.
The result was massive speculative attacks on the East and SE Asian currencies, forcing a major round of competitive devaluations on an enormous scale: Indonesia 89%, South Korea 75%, Malaysia 73%, Thailand 71%, Philippines 57% and Hong Kong 47%.
Stock markets collapsed by similar percentages. According to the Institute of International Finance, the net private capital flows in and out of Indonesia, Malaysia, South Korea, Thailand and the Philippines swung from $92.8 billion inward investment in 1996 to $12 billion outflow in 1997 – at the onset of the crisis!
The result was a series of bank collapses and debt defaults across the region.
The onset of crisis saw the rapid intervention of the IMF into the region. It had two objectives. First, to ensure that debt repayments continued to western banks via austerity programmes (which in practice made the debt crisis worse). And, secondly, to pursue the US neoliberal agenda of deregulation, flexibility, and free-market reform so that newly competitive US capital could achieve a greater penetration in the region.
In the IMF’s view, the Tiger economies have always been far too protectionist. "Structural adjustment" was the order of the day. Rates of exploitation had to be raised and deregulation introduced into economies like South Korea and Japan itself, where the "job for life" concept still existed to a great extent.
These neoliberal reforms sought to recreate the international economy in the image of the US , so that the free market-minimal state road would have an unparalleled competitive advantage.
The global framework of the crisis
There are global dynamics behind this crisis which shape its progress.
The first is the long recessionary wave which has dominated the world economy since the mid 1970s, despite fluctuations within it.
The second is the existence of economic and political power blocks on a world scale – the EU, the USA/NAFTA and Japan and the Asia Pacific region – which are in competition with each other, and which increasingly polarise international economic relations.
Within this framework there has been conflict between the Japanese model of state regulation and intervention – so successful for Japan since World War 2 and one of the features of the rise of the East and South East Asian economies – and the American free-market, deregulated, neoliberal model which has now essentially won out.
Asia is under assault from it, and the EU is already implementing it. US policy today is to complete the neoliberalisation of the world through its principal agencies, the International Monetary Fund (IMF) and the World Bank (WB).
This would concentrate wealth into fewer and fewer hands and lead to a further loss of democratic control, greater levels of exploitation, more unemployment and job insecurity and social marginalisation.
The gap between rich and poor will increase as will the disparity between North and South, as exemplified by the debt crisis. The people of the Eastern block face third world conditions.
This has given the United States in an advantage in the current crisis, but not immunity. In fact this American "success" is at the root of the current crisis through driving the Japanese economy (the second largest in the world) into stagnation and now slump.
So when did "globalisation" take place?
Of course there have been many "globalisations" of the world economy over the past five or six hundred years. The internationalisation of world economic activity goes back a long time.
In the Middle Ages there was extensive trading between states and city states and across continents.
In Europe during the fourteenth century British-produced wool and cloth was exported to Holland, Belgium and elsewhere. Italian trading and banking houses occupied a key position in the internationalisation of business activity at that time. By the end of the fourteenth century it is estimated that there were as many as 150 Italian banks already operating multinationally.
The conquistadors conquered and colonised South America, and Britain expanded its empire around the globe.
During the seventeenth and eighteenth centuries colonial trading companies such as the Dutch and British East India Companies traded globally. Fifteen million people were transported from Africa to America as slaves. The industrial revolution developed the precursor to the modern-day multi-national corporations.
Initially North and South America presented the most favourable investment opportunities, but were soon followed by Africa and Australia.
Multinationals were well established by the First World War. International business activity grew vigorously in the 1920s as multi-national Corporations matured. The international gold standard existed between 1879 and 1914 – a globalisation of the international monetary system in some ways more complete than today.
The world reshaped after World War Two, with the emergence of a much stronger USA, and the Bretton Woods agreement on currencies.
Since then, factors such as the collapse of the USSR and the rapid advance of new technology have become a part of the current phase of globalisation.
Do we now live in a "globalised" world?
"Globalisation", in its radical sense, has become a fashionable catch-phrase and is often used without any real content. There are a wide range of views on what it means.
So to say we live in a globalised world does not take us very far.
It is widely argued, for example, that in today’s global economy national economic management, and politics at the national level, are increasingly irrelevant. The world economy is dominated, the argument goes, by uncontrollable market forces, and huge transnational corporations, that owe allegiance to no nation state but simply locate wherever the global market dictates.
‘Reclaim the Streets’ for example tend to rage against the world market, the international neoliberal offensive rather than national governments. They tend to see multi-national corporations – along with the international agencies of capital, the IMF, the WB, and the Multilateral Agreement on Investment - as principally responsible for the problems of the world.
In this view, the role of national governments is relegated, as is the role of imperialism, which as such hardly comes into the analysis. It adds up to a one sided view of the world.
These ideas were prevalent in the discussions around the counter summits opposing the EU in Amsterdam and Cardiff. They have become a cover for another set of ideas, advanced in Amsterdam and Cardiff by people like Colin Hines.
These people advise capitalist states to withdraw from the global economy, in which they are apparently powerless, and set up small scale domestic capitalism. This would be devoid of multinational corporations and protected from the outside world by tariffs .
Hines calls it the new protectionism. It is as bankrupt as the old protectionism of Harold Wilson and James Callaghan.
But the world has changed!
There have been major changes in the world economy in the last 25 years. It is more global.
The current world crisis shows this clearly enough. The crisis embraces more of the world economy, far quicker.
The collapse of the USSR and Yeltsin’s rush for capitalism, along with that in China, means those economies, whilst not yet capitalist, have been far more integrated into this crisis. They have a different relationship to the world capitalist economy than at any time since the Russian and Chinese revolutions.
Far larger sums of money move around the world at even greater speed, and this is increasing all the time. New technology is an important element in the current globalisation, introducing the cyber dollar and the ability to move vast sums of money instantaneously.
Multi-national corporations (MNCs) have increased dramatically in size and influence. It is easier to relocate production facilities than in the past - although such relocations have always taken place.
The closure of Siemens Tyneside microchip plant a year after it opened is a case in point - a direct result of the current Asian crisis. The cost of producing chips in SE Asia, given the collapse of both the currencies and wage rates (and massive rises in unemployment), has fallen dramatically.
The power of the MNCs has increased in relation to the nation state. In the last few weeks we have had the biggest merger in history of BT and Amoco with joint capital of $60 billion (with a loss of 20,000 jobs). MNCs now scour the planet for the cheapest locations, production facilities, labour costs and most favourable political conditions.
There has been a huge deregulation of markets, particularly the removal of restrictions on the movement of capital. The Post- war Bretton Woods arrangements, linking the dollar to the price of gold and designed to moderate the rapid escalation of crisis, were ended in 1971.
Since then there have been floating exchange rates (exemplified by the break-up of the ERM). Massive pressure has been put on third world countries to deregulate capital movements.
The international agencies of capital
There are three principal international agencies of (western) capital: the IMF, the World Bank (WB), which were both set up at Bretton Woods in 1947, and the World Trade Organisation (WTO). The latter was set up in 1994 as a result of the 1986 "Uruguay Round" of negotiations under the General Agreement on Tariffs and Trade (GATT).
The arrival of the WTO, and the results of the Uruguay Round, have had a fundamental effect on the organisation of world trade. At the end of the eight year Uruguay process it represented 128 countries including most of the East European block countries.
Along with GATT the WTO has become a powerful device for restructuring the world market to the benefit of the leading powers, particularly the USA.
Their purpose is to restructure the world along the lines of the American model, and to bring into that model non-aligned countries including former eastern block countries as they struggle create market economies. They seek to re-establish a world market which was disrupted by the Russian and Chinese revolutions.
All this represents a big development over the comparatively weak organisations set up at the time of Bretton Woods, and extends the global control particularly of the United States.
Conclusion
There have been big changes, even greater than in previous periods. But is this a qualitative change or change within the same overall framework?
Globalisation in its radical sense would imply a new economic structure, and not just greater international trade and investment within an existing set of economic relations.
Multi-national corporations are getting bigger, but genuinely transnational companies are relatively rare. Most companies are nationally based and trade multinationally on the strength of a major national location of production and sales.
Those who argue there has been a radical globalisation have failed to specify what structural changes have taken place to make this particular globalisation qualitatively different to any other.
Increasing dominance of the US model, the fall of the Berlin wall, the greater impact of China on the world market or the more rapid flows of capital are not by themselves evidence of a completely new phenomenon.
The new developments of globalisation have not made the nation state irrelevant. Far from it. But they have changed the international framework in which the nation state operates.
Socialists would ignore that at their peril. The need is to internationalise the struggle, but not by counterposing it to the struggle at national level. We have to be involved in both.