The financial crises which began in east Asia and Japan in the latter
half of 1997 hit what had been the most dynamic part of the world economy — cross-Pacific
trade overtook trans-Atlantic trade a decade ago. Together with the
gyrations they produced on world financial markets, these events showed
that the world capitalist economy is nowhere near the new ‘golden
age’ of prolonged economic growth predicted by some bourgeois
economists in the United States. On the contrary, the chain of economic
events which started in October 1997, with the greatest stock market
crash since 1929, is continuing to work its way through the international
capitalist economy. The crash of 1987 was followed by the 1990 collapse
of the Japanese stock market, the crash of world bond markets in 1994,
the Mexican crash in the same year, prolonged stagnation in the early
1990s in Japan and most of the European Union and, now, the crises
of the Asian ‘tigers’, recession in Japan and consequent
turbulence on world stock markets, with severe knock-on effects in
Latin America, eastern Europe and Russia.
The fact that this chain of economic instability has worked its way through
every single continent of the world demonstrates that its underlying
causes are located not primarily in the failings of individual economies
or regions, but in the functioning of the world capitalist economy as
a whole. Their underlying root is that capital accumulation, that is
in the share of the economy available for and devoted to investment,
has declined in the most advanced capitalist economies.
The precondition for re-launching any new period of prolonged economic
growth of the world capitalist economy, akin to the post-war boom, would
be the reversal of this decline in capital accumulation. But the figures
show that this has not happened and there is no tendency in that direction.
As a result, economic growth on a world scale runs up against an international
shortage of capital preventing synchronised expansion of the main centres
of the international capitalist economy.
For capital as a whole the only way to reverse this decline in capital
accumulation is to restore a high rate of profit by drastically increasing
the rate of exploitation of the working class. The efforts to drive down
real wages and dismantle the welfare state in western Europe and the
United States precisely reflect capital’s efforts to reduce sharply
the share of the economy going to the working class. However, what has
been done so far on this front is totally insufficient to reverse the
decline in capital accumulation and has the political effect of radicalising
the working class. Thus after the low-point of 1989-91 there has been
a rise of working class struggle through the latter half of the 1990s.
If the only way out of this situation for capital as a whole is to drive
up the rate of exploitation of the working class, individual capitals,
conceived as separate companies and capitalist states, have an additional
option — that is to increase their share of the total surplus value
produced by the working class at the expense of other capitalists. At
the level of the world economy as a whole, this takes the form of increasing
competition between the main imperialist powers.
To get a sense of the scale of what both of these capitalist ‘solutions’ to
the crisis involve it should be recalled that transition to the last
great re-launching of the world capitalist economy — the post war
boom — involved two world wars, the great depression of the 1930s,
fascism in most of Europe and tens of millions of deaths. These had the
effect of massively increasing the rate of exploitation of the working
class in western Europe and Japan and for the most powerful group of
capitalists, the US, militarily crushing its rivals and reorganising
the world economy under its leadership. They also, however, had the effect
of a third of the world’s population overthrowing capitalism altogether
in Russia in 1917, Easten Europe and Yugoslavia after 1945, China in
1949, Cuba in 1959 and Vietnam in 1975.
The fundamental point about the present situation is that, notwithstanding
its advance into eastern Europe and the former Soviet Union from 1989,
international capitalism has not created the preconditions, in terms
of a sharp rise in capital accumulation, for a new period of prolonged
economic growth. Therefore the worst is yet to come both at the level
of attacks upon the working class, the third world and the intensification
of inter-imperialist conflict.
It was precisely intensifying competition between the imperialist powers
which sparked the crises in east Asia as western Europe and Japan devalued
their currencies in attempts to escape from five years of stagnation.
At the level of competition between the major capitalist powers, while
the supply of capital available for investment has declined on a world
scale, Japan and east Asia have established a new benchmark of the level
of investment necessary to compete with the most dynamic economies.
In 1996 Japan’s gross domestic fixed capital formation was 29.6
per cent of GDP — a decline from its peak of 30-35 per cent of
GDP, but far in advance of its main capitalist rivals. To reach that
Japanese level Germany would have to increase the share of investment
in its economy by 8.6 per cent of GDP — that is by £103.4
billion a year; the US by 12.4 per cent of GDP — equivalent to £571.4
billion a year; and the UK by 14.2 per cent of GDP — £105
billion a year.
Those figures show the enormous increase in the supply of capital which
would be necessary to generalise the Japanese level of investment to
the other main centres of the world capitalist economy.
Given that every percentage point of GDP devoted to investment is not
available for consumption, such a shift in western Europe and the USA
is completely impossible without the most colossal social and political
upheavals.
The slowdown in capital accumulation has the result that the world capitalist
economy as a whole does not have sufficient capital to finance economic
recovery in all of the main imperialist states simultaneously. As a result,
economic growth in one part of the world takes place at the expense of
recovery elswhere.
At the same time, the struggle, in particular by the United States,
to alleviate this problem by seizing as much as possible of the capital
accumulated elsewhere in the world has resulted in successively greater
shocks being transmitted through the world’s financial systems.
The starting point of this process was the transformation of the relationship
of the United States to the world economy as a whole in the middle of
the 1970s. Between 1950 and 1979, the US was a net exporter of capital
to the rest of the world economy — thereby acting as a ‘locomotive’ for
the world economy as a whole. From 1979 the US became a net importer
of capital, financing part of its domestic investment with resources
drawn on a massive scale from the third world and Japan. In its current
economic recovery, net US borrowing from the rest of the world has increased
from $50.5 billion in 1992 to £149.5 billion in 1996.
This shift in the relation of the US to the world economy opened a new
period in the relations between the leading imperialist states. In essence
the US was able to partially compensate for its relative economic decline
by drawing on the resources of the rest of the world economy, and thereby
striking blows against its capitalist rivals — with large parts
of the third world being hurled backwards as a result, and Japan and
Germany having their growth rates pulled below that of the United States
in the 1980s and 1990s.
Without the flow of capital from Japan through the 1980s and 1990s,
the US economy would not have been able to carry out the scale of military
build-up which was critical in breaking the Soviet economy, nor to sustain
a higher rate of economic growth than Germany or Japan.
However, although Japan has the largest pool of capital available for
investment in the world, events have shown that even Japan is not capable
of simultaneously funding economic growth domestically and in the US.
As a result, the impact of the 1987 stock market crash was simply transferred
from the US to the Japanese economy and every subsequent attempt to revive
economic growth in Japan simultaneously with the United States, re-created
a world shortage of capital. The resulting rising international interest
rates then choked off the recovery in Japan, the US or both.
It was the rise in interest rates in West Germany and Japan in 1987
which triggered the US stock market crash of that year because they reduced
the flow of capital into the US and so undermined its economic growth.
The subsequent sequence of events was as follows. The Japanese decision
to cut interest rates following the 1987 crash — faced with the
choice of giving in to the US or seeing the world economy come apart — allowed
the United States to escape with an economic recession rather than a
1930s-style slump.
But the price paid by Japan was to transfer the financial crisis to
Tokyo, undermining its financial system and creating a period of stagnation
from which it has still not escaped.
The US recession after 1987, which resulted in George Bush losing the
presidency, then eased the pressure on the international supply of capital,
allowing interest rates to fall and a flow of capital to Latin America
and Eastern Europe.
But the recovery of the US economy from 1993, and with it the resumption
of capital imports from Japan, once again pushed up international interest
rates, culminating in the bond market collapse in 1994 — which
involved the biggest financial losses since 1929. Simultaneously, rising
international interest rates reflecting a renewed shortage of capital
as the major capitalist economies attempted to move out of recession,
resulted in funds being pulled out of Latin America and Eastern Europe
causing the 1994 financial crashes in those countries and necessitating
the IMF’s biggest ever financial package (until Korea) to prevent
a financial meltdown in Mexico.
Having experienced five years of the worst stagnation of any major capitalist
economy, Japan at the beginning of 1995 tried to revive economic growth
by cutting interest rates to 0.5 per cent. However, as the Japanese economy
started to revive, in the context of rapid growth and therefore demand
for capital in the US, the world shortage of capital again emerged, pushing
up long term interest rates first in Japan, then the US, UK and Germany — choking
the Japanese recovery.
The ability of Japan to bail out the US economy after 1987 by the resumption
of a massive influx of capital — to the tune of $100 billion a
year — illustrated the key advantage of the world capitalist economy
vis a vis the Soviet Union — it was able to function on an international
level. The function of the deregulation and globalisation of capital
markets being to allow the US to prop up its own economy on the basis
of capital flows from Japan and elsewhere. As events since 1989 and 1991
have shown, the planned economies in the Soviet Union and Eastern Europe
were more efficient than capitalism has subsequently been in those countries.
But the Soviet Union faced not merely individual capitalist states, but
an international capitalist economy — which the strategy of ‘socialism
in one country’ was unable to overcome. This was because, on the
one hand, it weakened the most important ally of the Soviet Union, which
was the class struggles in Asia in the post-war period, and, on the other
hand, it alienated the Soviet working class by subordinating their living
standards to heavy industry in a utopian struggle — in the framework
of the economy of one country — to catch up with the most advanced
capitalist states.
Although it succeeded in cracking the Soviet economy, however, this
effort of funding both its own investment and the United States’ placed
an enormous strain on the Japanese economy. In the first place it cost
Japan literally hundreds of million of dollars.
Secondly, it created the ‘bubble’ on Japanese stock and
property markets which finally ‘burst’ with the collapse
of both in 1990. Japan had reduced its interest rates to zero in real
terms, taking account of inflation, which had the effect of channeling
a vast flow of capital into the US. This prevented the financial melt-down
which otherwise would have followed the 1987 crash. However the effect
of such low interest rates was to fuel a mass of speculative investments
in Japan — inflating the bubble — which then became unprofitable
when Japanese interest rates finally started to rise at the end of the
1980s — bursting the bubble.
That in turn undermined the Japanese banking system — the 50 per
cent fall in the stock market in 1990 and the 70 per cent fall in property
prices wiped out a large part of the asset base of the banks. At the
same time, companies which had borrowed money for investments at ultra-low
interest rates could not repay the loans once interest rates rose above
the rate of profit on those investments at the end of the 1980s — creating
the raft of non-performing loans which still threatens the viability
of a significant number of Japanese banks today.
The resulting ‘credit crunch’ has kept the country on the
verge of recession ever since. The Japanese economy which had grown at
an average rate of 10.5 per cent a year in the 1960s, 4.5 per cent in
the 1970s and 4 per cent in the 1980s, essentially stagnated in the 1990s — with
growth averaging little more than one per cent a year.
It was the way in which Japanese capital, from spring 1995, tried to
pull itself out of this period of stagnation which underlay the crises
in the east Asian ‘tiger’ economies. Traditionally the motor
of Japanese economic growth had been exports which in the 1960s grew
at an average rate of 15.9 per cent a year — 50 per cent more rapidly
than the economy as a whole.
By the 1990s, however, the Japanese economy was so large — with
an annual GDP two thirds the size of that of the US — that a Japanese
export offensive would destabilise other key areas of the world economy,
notably the US.
US capital therefore urged a different course upon Japan — that
is Keynesian stimulation of its domestic economy, by cutting interest
rates and public spending programmes, together with the deregulation
of its inefficient agricultural and service sectors, where, unlike in
manufacturing industry, productivity lagged far behind that of the US.
This would have had the advantage for the US of allowing it to penetrate
those sectors of the Japanese economy where US capital had a competitive
edge. It had the disadvantage for Japanese capital of creating political
instability because either the Japanese working class or petty bourgeoisie
would have to pay for the public spending programmes necessary to stoke
up domestic demand.
The attempt to make the Japanese working class foot the bill, with the
collaboration in government of the Japanese Socialist Party, simply resulted
in a growing switch in votes to the Japanese Communist Party.
Secondly, pressure for deregulation of Japanese agriculture and services
threatened the entire Japanese political party system — whose linchpin,
the Liberal Democrat Party, is dependent on the urban and rural petty
bourgeoisie for a very large part of its electorate.
Thirdly, a strategy of developing domestic consumption would reduce
the share of profit in the Japanese economy, which was not an attractive
proposition for the Japanese bourgeoisie.
This course was therefore abandoned in spring 1995 in favour of trying
to restore economic growth by a new export offensive. The mechanism for
this was to push up the exchange rate of the dollar against the yen,
by a flow of Japanese funds into the US. As a result, between spring
1995 and the first week in December 1997 the exchange rate of the yen
fell by 28 per cent against the dollar.
In consequence, the Japanese balance of payments surplus started to
increase rapidly — impacting particularly in Asia which absorbs
40 per cent of Japanese exports. It was this fall of the yen against
the dollar, together with the rapid rise in China’s manufacturing
capacity and a 35 per cent devaluation of the Chinese yuan in 1994, and
significant devaluations of those European Union currencies tied to the
German D-mark, which put the competitive squeeze on the east Asian ‘tiger’ economies
whose currencies were tied to the dollar.
South Korea’s balance of payments deficit, for example, rose from
$4.5 billion in 1994 to $23.7 billion in 1996. This rapidly became unsustainable,
and the crisis ridden devaluations in the second half of 1997 were the
result.
These then knocked into the financial systems in the region — because
South Korea, Thailand, Indonesia and Malaysia had become dependent on
large volumes of short terms loans denominated in dollars. Massive devaluations
against the dollar meant that these loans could not be repaid without
a colossal level of financing by the IMF — with South Korea receiving
the biggest IMF-organised financing package in history, $57 billion,
linked to conditions which are already provoking massive domestic opposition
to the mass redundancies and opening up of the economy to foreign capital
which will follow.
The unfolding financial crisis in east Asia then impacted back into
the Japanese banking system, with the collapse of its fourth largest
investment company and threatening many others. This will get worse because
the profits of Japan’s big industrial companies will be hit by
the devaluations in east Asia — which are essentially a defence
mechanism against Japan — and in western Europe. That would leave
the US as the principal target of a Japanese export offensive, hitting
the US industry and provoking rising trade tensions.
The demand by the Japanese banks that the government bails them out
will pose anew the political problem of how to make the Japanese working
class and petty bourgeoisie pay for a crisis which is ultimately the
result of Japan’s role in propping up the US economy.
Finally, the link between the bubble on Wall Street and the situation
in east Asia is that it has been the flow of capital from Japan to the
US which has fuelled the rise of American stock markets to historically
unprecedented — and unsustainable — levels. By the second
half of 1997, US dividends had fallen to their lowest levels in history,
roughly a quarter of the interest rate on 10-year government bonds. Rational
investors would put their money into shares rather than bonds only on
the basis of the expectation that share prices would continue to rise.
If the expectation became that share prices would fall, this would create
a panic to get out of shares, provoking a crash. For the yield on US
shares to rise to that of US government bonds, the stock market would
have to fall by something like 75 per cent. That would far exceed anything
which happened in 1987 or 1929.
Furthermore, unlike in 1987, Japanese capital probably could not bail
out the United States a second time. With Japanese interest rates at
0.5 per cent, it would not be possible to reduce them further to aid
the US financial system — so that the consequences of a financial
crash for the US real economy would be far more severe than the recession
which followed 1987.
The trigger for such a Wall Street crash would be any reversal of the
flow of capital from Japan. At present it is profitable to invest in
US shares on the basis of funds borrowed in Japan because Japanese short
term interest rates stand at 0.5 per cent and are negative for investors
in the US because they have to be paid back in a yen which is falling
in value against the dollar. However, a rise in Japanese interest rates,
or rise in the exchange rate of the yen, or both, would make investments
in the US less profitable, quite probably provoking the fall on Wall
St which could then trigger a severe financial crisis in the US. It is
the fact that Japanese interest rates did not rise during the latter
half of 1997 which provided an element of stability to US stock markets.
The east Asian link in the chain of financial crises will have significant
results. First, as growth stalls in the ‘tigers’ world economic
growth will slow. Second, devaluations by the former ‘tigers’ will
intensify competitive pressure on the European Union, and above all upon
the high exchange rate countries — the US and Britain. Third, the
attempts to make the working class of the region pay for the financial
crisis will start to break up political stability and result in rising
class struggles — already evident in South Korea. The role of the
US and IMF in this, that is their efforts to seize control of chunks
of the ‘tiger’ economies, will lead to anti-US political
currents and weaken the bloc of the ‘tigers’, US and Japan
against the rising weight of China.
Overall, these events show that no new prolonged upswing of the world capitalist economy is imminent. The necessary preconditions, a qualitative rise in the level of capital accumulation in the major imperialist states, do not exist. Notwithstanding the immense negative impact of capitalism’s breakthrough into eastern Europe and the Soviet Union in 1989/91, there is no coherent imperialist strategic project analogous to that of the US at the end of the second world war, for resolving this situation. The only way out for capital as a whole — to drive up the rate of exploitation of the working class — is creating significant political radicalisation: in Russia, western Europe, east Asia, and even a shift to the left at the top of the trade unions in the USA. And, at the level of ‘many capitals’, the US seizure of surplus value accumulated by other capitalists, notably Japan, is putting increasing strain on the ‘globalised’ capitalist economy, the chain of financial crises being a symptom of this.
This inability of capital to consolidate its gains of 1989/91 has allowed
the left wing international workers’ movement to start to recover.
Regroupment has begun on the basis of the re-emergence of significant
working class mobilisations — on their greatest scale in Russia,
but also in the EU, South Korea, Latin America, South Africa and in the
United States.