Doubts linger over world economy
In its issue of March 24 the Economist talked openly in the leading article of the possibility of "the new world economy’s first recession". Over the last few months the fall in stock markets has spread from the USA to Europe and elsewhere, and from the high-tech sector to the rest of the economy.
Many US companies are slashing employment and close to 200,000 manufacturing jobs are expected to go in Britain this year. How serious are these problems for global capitalism? Is the world on the edge of recession or not?
The problems that the world economy now faces result directly from the experience of the last decade and the strategies followed by capital during this period. In Socialist Outlook we have argued for some time that the global economic turbulence of the late 1990s needed to be seen as the product of a number of separate, but interlinked, developments.
Three in particular were especially important;
the long-term stagnation of the Japanese economy,
the speculative bubble in the USA
and the turmoil in international financial markets leading to continual currency crises in developing economies.
The nightmare for the capitalist class has been the possibility that these three developments might fuse together into a generalised crisis, which would destabilise the rest of the world, in particular the fragile project of the euro.
Such a development seemed possible in 1997 and 1998, but did not occur at that time. The reason was the decision of the US government and central bank to keep the American boom going at all costs, even if this meant encouraging further speculation.
The funds which flowed out of East and South East Asia at this time largely went to the USA. The US policy of a strong dollar allowed for some economic recovery in Europe as the euro fell in value and for an export boom in Asia which gradually pulled much of the region away from recession.
The financial markets regained some confidence, on the expectation that the US would act to avoid any global meltdown. As a result the currency crises in Russia in 1998 and Brazil in 1999 each had only localised impact, although regionally their effects were severe.
What is different now? Most obviously, the USA is no longer in a position to play the role it did in 1998. For the US to continue to take in the amount of imports from the rest of the world that it has done over the last few years requires the continuation of the American consumer boom.
This appears less and less likely as US citizens’ wealth falls with the decline in the stock market and the rise in unemployment there.
Also, the US no longer appears as safe a destination for investment funds as it did previously. The result is a panic in the financial markets. Investors in regions like South East Asia are faced both by a decline in exports from the area as the US economy slows, and by a shortage of other places to take their money to.
In such circumstance each capitalist will try to act as quickly as possible to safeguard their funds, but the result of all acting in this way can easily trigger a crisis.
The first country among the so-called emerging markets to suffer from this mood has been Turkey. Here a process of financial liberalisation similar to that undergone by East and South East Asia in the 1990s has had the same effect of encouraging speculative investment. At the same time the underlying profit rate has not justified the speculation.
The realisation of this by the markets sparked a collapse of the currency. But the worries for international capital are centred more in the Asian economies and in Latin America than in Turkey.
The concern of observers like The Economist over the last two years has been that the Asian economies did not restructure themselves in a free-market direction as much as had been hoped after 1997.
The strength of the US expansion meant that South Korea, Thailand and Malaysia could start growing again without wiping out large amounts of unprofitable capital, on the basis of a massive upsurge in exports to the US.
But this has left such countries tremendously vulnerable to any prolonged downturn in the American economy. As a result, there is the possibility of the combination of such a downturn with a renewed financial panic in Asia.
In Latin America, the dependence on exports to the US is much less. But the strains arising from any currency turbulence are felt regionally.
When the Brazilian real was devalued in 1999 this placed tremendous strains on the Mercosur trading bloc of Brazil, Argentina, Paraguay and Uruguay. Now the country under scrutiny is Argentina.
With the economy in recession for almost three years now, and threats of a debt default current, the Argen-tine government has acted to raise tariffs on consumer goods. This has sparked a major dispute within Mercosur.
A currency crisis in Argentina would be especially significant because of the system used for fixing the exchange rate in that country. Argentina is the largest of a number of countries who use what is known as a ‘currency board’. This ties the amount of money in circulation to the level of foreign exchange reserves.
This has come to be seen in many circles in recent years as a way of avoiding the contradictions expressed in foreign exchange crises.
If the government is prevented by law from expanding the money supply, then the markets will be confident the currency will maintain its value and there should be no crisis.
However, this depends on the willingness of capitalists and workers in such countries to endure unlimited periods of recession in order to defend the value of the currency.
If the value of the Argentinian currency does plummet, then the credibility of currency boards will be shaken severely. This could cause another round of panic on the international financial markets.
It would also present a major political dilemma for governments in developing economies. The choice would be posed starkly of either letting currencies rise or fall with the market or of actually adopting the currency of an imperialist country, notably the dollar.
Such ‘dollarisation’ has been discussed more and more in the last few years amongst elites in Latin America and elsewhere as a way of integrating the region into the project of globalisation. But the potential of such a project for raising the level of class struggle has been shown dramatically over the last year in Ecuador.
The possibility then of a decline in the US economy coinciding with another period of instability in the international financial markets cannot be ruled out.
In addition to this, there are continuing problems in the Japanese economy. Over the last few years Japan has appeared a number of times to be beginning to grow again. Such rises in production though have never been sustained for more than a short period.
The central problem is that all attempts at growth in Japan have been dependent on a massive increase in government borrowing. Such borrowing now stands at around 8 percent of GDP. The strategy has been to solve a crisis of overproduction by soaking up commodities through government purchases, in the absence of an upturn in private consumption and investment.
The problem here is that Japanese firms and workers recognise very well that this debt will eventually have to be repaid and that they are likely to face higher taxes and cuts in public expenditure in the future. Their response has been to increase their levels of savings.
This has been encouraged even more by falling prices, which have brought the interest rate in Japan down to a level of zero. In such circumstances it makes sense to delay purchases into the future. The more the government spends, the more the rest of the country holds back on spending and the greater the deficit has to become.
Two questions emerge from this situation which are important for socialists in Britain. First, how likely is it that these separate problems will actually come together to create a global crisis? Second, what will be the impact of these developments on Britain?
It is clear that the dangers of a world economic crisis are now greater than at any time since 1997 and 1998. How likely such a crisis is to develop, however, depends on a number of factors which are difficult to predict.
Most importantly, it is not clear how successful the strategy of the US federal reserve in trying to boost the American economy through interest rate cuts will be.
Neither is it clear whether international financial in-vestors will react in the same way now as they did in 1997. Much also depends on whether the EU economies or Japan are able to take up some of the slack left by US developments through an increase in their rates of growth.
What we can say, however, is that the strategies adopted by capital to try to avoid economic crisis now are bound to store up further problems for the future. The US is encouraging further borrowing through interest rate cuts at a time when debt is already at record levels.
The Japanese government budget deficit is moving towards a level which will be unsustainable in the long run. And with previous ‘success stories’ like Argentina facing problems in maintaining currency values, the range of options open to developing nations is narrowing drastically.
Some have argued that the direct effect of such developments on Britain will be limited. It has been pointed out that Germany exports more proportionately to the USA than the UK does. But this ignores two factors.
Firstly, the effects of the increased internationalisation of capital mean that indirect effects of global unrest are likely to be more important than direct effects. If the Asian econ-omies run into difficulties, for example, as a result of a US slowdown, then this will rebound on Britain.
Secondly, the linkages between Britain and the USA are much more through foreign investment than through trade. A decline in the value of British investments abroad, coupled with financial instability affecting the City of London, will cause serious problems for British capital.
It is impossible to predict how serious the current difficulties faced by global capitalism will be. But whatever the eventual outcome, these developments offer a wealth of opportunities for socialists to argue their case.
It will be much more difficult over the next few years to argue that the market can solve the problems facing humanity than it has been recently.
And in such circumstances it becomes both more possible and more important to argue the contrary; that central to the problems facing the world today is the role of the market and its destructive effects.