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World recession gains momentum
The downturn is spreading around the global economy. The
sharp US slowdown is already having severe effects on Europe, Japan and East
Asia. LYNN WALSH charts the slide towards recession.
AROUND THE WORLD, capitalist leaders are praying that the US
downturn will be mild and brief. Their hopes for avoiding a world slump are
pinned on the expectation of a rapid revival of the US economy that will once
again provide the stimulus for global recovery. Otherwise, the prospects for
capitalism are bleak. Europe is experiencing a sharp slowdown. Japan, after a
decade of stagnation, is sliding into recession. East Asia, after a short
growth-spurt following the 1997-98 slump, is heading towards a new crisis. The
catastrophic slumps in Turkey and Argentina are a warning of what will happen in
any number of vulnerable, semi-developed economies in the coming months. A
vicious spiral appears to be developing, with a whole ensemble of adverse
factors pushing the international economy towards a generalised crisis.
Such is the prestige of US capitalism following the
fabulously profitable bubble-boom of the late 1990s that there appears to be
boundless confidence among capitalists everywhere that the US will supply the
antidote to the unfolding recession. Apart from the unbounded optimism of
America’s big-business leaders and commentators, however, there is nothing to
suggest an early recovery. On the contrary, both cyclical and structural factors
point to a prolongation and deepening of the downturn.
Preliminary GDP data that the US economy grew at an annual
rate of 2% during the first quarter of 2001 produced a brief rally on the stock
exchange, also stimulated by the Federal Reserve’s cuts in interest rates
(from 6.5% to 4% over recent months). Later, however, this was revised down to
only 1.3%. This followed 1% annualised growth in the fourth quarter of last
year, compared to the 4% per annum growth rate over the previous two boom years.
Almost a million jobs have been lost since last October, and manufacturing
industry has been particularly hit. Productivity growth has slowed dramatically
(despite the supposedly lasting gains of the ‘new economy’), dropping by
1.2% in the first quarter, the biggest drop since 1993. Lower productivity,
together with higher wage costs and fuel bills, has squeezed big-business
profits (already under pressure from overcapacity and intense competition which
has squeezed prices). First-quarter profits for the US’s 1,433 biggest
corporations were down 42% (following a 20% drop in the fourth quarter of 2000),
the worst profit figures for a decade. Inevitably, the corporations have sharply
reduced their capital spending.
Consumer spending, the main source of demand during the
boom, increased by 2.9% in the first quarter. This partly reflects wage
increases gained by workers at the peak of the boom, and without this spending
there would already be a marked recession. Household spending, however,
continues to run about 1% greater than after-tax income, indicating the huge
dependency on consumer debt. Bush and Greenspan claim that interest rate cuts
combined with tax cuts will bounce the economy back onto a growth path. These
measures, however, will have only a limited, short-term effect. A section of
taxpayers will share a total of $38 billion rebates this year. But this will be
a one-off boost (in subsequent years Bush’s measures will mean lower tax
payments mainly for the wealthy). The rate cuts may also help slow the pace of
the downturn (as well as postponing the decline of still grossly over-valued
shares). Demand, however, is not the problem, as the continued growth of
consumer spending shows: the downturn arises from the sharpening crisis of
over-capacity and profitability, which will not be reversed by these measures.
It is never possible to predict the exact trajectory of a
downturn, the severity or the time-scale. But on the basis of current trends, as
opposed to the foolish optimism of the speculators, a ‘second-half’ recovery
in 2001 is very unlikely - except, perhaps, as a brief prelude to an even
sharper downturn. Much more likely is a lengthy period of stagnation or even a
period of negative growth. Even stagnation of the world’s dominant economy
will have profound effects internationally.
Can Europe escape?
EARLIER THIS YEAR European capitalist leaders were putting
forward the fanciful notion that Europe would avoid the effects of the US
downturn, some even claiming that Europe would emerge as the locomotive of world
growth. In March, the president of the European Central Bank (ECB), the quixotic
Wim Duisenberg, said: "At this juncture, there are no signs that the
slowdown in the US economy is having significant and lasting spillover effects
on the euro area". Even at the beginning of May, he was still asserting
that, although the US slowdown was having an impact, it was only a "limited
impact". Others were taking a more realistic view. "We are already
observing the sharp slowdown in Europe", commented a Merrill Lynch
economist: "You do not have to wait any more to see it. It is here right
now". (International Herald Tribune, 24 May)
The fantasy of European immunity has been dispelled by the
sharp first-quarter slowdown in the German economy, which accounts for 35% of
the eurozone’s economic activity. Combined with the beginnings of a slowdown
in France, this indicates a generalised slowdown in the European economy.
Throughout Europe, the manufacturing sector, which is still the decisive core of
the capitalist economy, has been hit by the slump in US demand and the continued
stagnation in Japan. Germany’s manufacturing output fell by 3.7% in March, and
is continuing to decline (along with the construction industry, which has been
in the doldrums for several years). Claims that Germany would not be seriously
affected by the US have been proven completely false. Although direct exports to
the US amount to only 3% of Germany’s GDP, there is a whole range of
intermediate goods – chemicals, bearings, etc – which are exported to other
European countries for the manufacture of products ultimately destined for the
US market.
Replying in April to Duisenberg’s unreal optimism, Horst
Koehler, managing director of the International Monetary Fund, pointed to
multiple "linkages between the slowdown in the US and the slowdown in Asia,
and, of course, the slowdown in Europe. These are linkages not only via trade.
The linkages are via financial and corporate connections, stock prices, and
business confidence". (International Herald Tribune, 24 May) Finance-sector
economists are now predicting only a 1.5% growth in Germany this year compared
with 3% last year, but this, too, may be optimistic. The German slowdown is
already affecting Austria, Czech Republic and Poland, which send about a third
of their exports to Germany.
The French economy is also slowing, as are Denmark and
Netherlands. Forecasters are now predicting 2% growth for the eurozone twelve,
compared with 3.4% last year. Far from becoming the locomotive of world growth,
Europe is reverting to the slow track, after a brief growth-spurt (of a
relatively feeble 2.8% to 3.5% per annum) in the last couple of years. Between
1992 and 1999, the European Union averaged 1.9% per annum growth, compared to
3.6% per annum in the US.
The slowdown has also highlighted the lack of policy
coordination between the twelve states of the eurozone and the disarray of the
ECB. In March, when clear signs of a slowdown began to appear, the US leaders
appealed to the ECB to follow the example of the Federal Reserve and cut
interest rates. Duisenberg responded by arguing that Europe would ride out the
US downturn and that the danger of inflation was greater than the danger of a
slowdown. On 10 May, however, the ECB cut its rate by 0.25% to 4.5%. Duisenberg
claimed that this was simply a technical adjustment to compensate for previous
errors in the ECB’s estimates of the Eurozone money supply, but the cut was
widely seen as a panicky response to accelerating slowdown, especially in
Germany. Under current conditions, the interest rate cut is unlikely to have any
significant effect in reviving growth.
Clearly, the cut did nothing to bolster confidence in the
euro on world financial markets. The euro fell to around $0.86 compared to the
all-time low of $0.83 in November 2000 (approximately 30% below the 1.17 euro/$
when it was launched in January 1999). Last year, the ECB (assisted by the
Federal Reserve) stepped in to support the euro; this time the ECB denies any
intention of trying to support the euro’s value.
The decline of the euro reflects a continued transfer of
financial assets by companies, banks and speculators from the euro to the
dollar. This partly reflects a continued flow of investment capital from Europe
to the US, based on expectations that the US downturn will be short-lived and
there are better prospects for profits in the US than Europe. The flight has
been accentuated by the rise of inflation in the eurozone (which obviously has
the effect of devaluing euro-denominated assets for overseas investors). Data
appearing just after the rate cut showed eurozone inflation to have risen to
2.9% (compared with the ECB target of 2%). In Germany inflation rose to 3.5%,
while unemployment – already over four million – rose, raising the old
spectre of ‘stagflation’. Consumer-price inflation in particular reflected
higher meat prices (due to the BSE and foot-and-mouth crises) and sharply
increased fuel costs. The weak euro, which increases the domestic prices of
imports, also contributed to higher inflation, and this will be accentuated if
the euro continues to fall against the dollar, yen and pound.
Moreover, the euro has been undermined by currency movements
made in anticipation of the scheduled replacement of national currencies by euro
notes and coins in January 2002. At the beginning of this year, over $40 billion
a month was flowing from the euro to the dollar. Much of this extraordinary
transfer, it is believed, reflects a move by the criminal underworld, especially
Russian and Balkan mafia and other black marketeers, to change their money into
dollars before the euro change-over. "The reasoning of the gangsters is
pretty simple", says one of the researchers who have investigated this
transfer: "If you are running black markets, you don’t want to show up at
bank with a large suitcase of marks and have to explain where they came from
before you exchange them into euros". (Washington Post, 7 May)
Eternally optimistic, many finance-sector economists are
issuing comforting assurances that there will be a rebound in the European
economy later this year. Admitting a "bigger global shock than European
policy-makers initially thought", Robert Lind of the ABN-Amro bank says:
"But, as with the Asian crisis, it should be a temporary slowdown in Europe
rather than a collapse". (Financial Times, 3 May) All the indications are,
however, that Asia is once again sliding into crisis, mainly as a result of the
US downturn. Referring to the German economy, The Economist (19 May) asserts
that it is "better tuned than it was" (because of Schröder’s
attacks on social spending and workers’ conditions): "Give it a steady
supply of American fuel and it could spring to life again". Again, this
reflects a widespread assumption among capitalist strategists that the US
downturn will be short-lived. But this ‘given’ factor is nothing more than
blind faith.
Japan’s collapse
THE CANDID ANNOUNCEMENT on 8 March by Japan’s finance
minister, Miyazawa, that ‘the nation’s finances are abnormal, in a condition
that is quite close to collapse’, sent a tremor around all the world’s
financial markets and finance ministries. Later, he apologised for his ‘inappropriate
words’, claiming that what he had intended to say was that ‘Japan will face
a hard time reforming its fiscal situation’. Really, of course, he had blurted
out the truth.
In the last days of premier Mori’s government, it was
becoming clear that despite ten pump-priming packages totaling over $1,000
billion, the world’s second largest economy was sliding back into recession
(having averaged only 1% per annum growth over the last ten years). Successive
government spending programmes, mostly spent on white-elephant construction
projects, have failed to stimulate growth – but have run up the national debt
to 130% of GDP. Only extremely low interest rates have allowed the country to
escape a major fiscal crisis. At the same time, successive Liberal Democratic
Party (LDP) governments, all promising ‘reforms’ and ‘restructuring’,
have failed to seriously tackle the private-sector debt mountain. Despite
pumping in Y9,300 billion ($77.5bn), the banks are still burdened with between
Y17,000 billion and Y35,000 billion ($142-292bn) of bad debts. As quickly as
hard-core bad debts are cleared (mostly on the basis of government hand-outs)
new bad debt appears as more companies become insolvent or collapse. The
combined total of government and corporate debts (according to a recent
estimate) amounts to five times Japan’s GDP.
Data for March and April showed ‘Japan’s slide towards
recession picking up steam’, as one headline put it. In the past four months,
industrial production has fallen at an annual rate of 2,000%. Unemployment rose
to 4.7%: the official figure, which undoubtedly underestimates the real level,
has been hovering around this amount for some time. Consumer prices fell again,
as did consumer spending, which will accentuate the spiral of deflation gripping
the economy. These trends make it likely that the economy will slip to zero or
even negative growth later this year.
Some capitalist strategists and economists (like Paul
Krugman of MIT) have for some time been urging that the Japanese government
should deliberately stimulate inflation (of between 2% and 4%). Their argument
is that Keynesian-type public spending projects have had no effect in
stimulating growth (only in feather-bedding the big construction companies and
other corporations). One reason is that Japan has a high level of personal
saving, especially as an ageing population feels compelled to make personal
provision for retirement and health care. A moderate level of inflation, it is
argued, would push people into spending on goods, housing, etc, rather than
allowing the value of their savings (deposited in banks at a zero nominal
interest rate) to be eroded by inflation.
Inflation would also have the effect of reducing the real
value of debt, relieving the corporations and the government of some of the
burden of servicing their massive debts. Inflation, in fact, would tend to bring
about a redistribution of wealth from the savers (in this case, the majority of
working-class and middle-class households) to heavily indebted borrowers
(corporations and the government). This, it is claimed, would (together with the
liquidation of bankrupt companies) begin to stimulate the revival of growth.
Such an approach would be a compete turn away from the monetarist policies
associated with neo-liberalism over the last two decades, to a blatantly
Keynesian policy of trying to stimulate demand. Nevertheless, the argument,
previously advanced by a few academics like Krugman, appears to be gaining
ground among policy-makers in Tokyo, Washington and elsewhere.
The Japanese authorities appeared to take a step towards
implementing such a policy in March when the Bank of Japan effectively cut
interest rates to zero (having prematurely raised them from zero to 0.15% last
August on the mistaken assumption a revival was underway). At the same time, the
bank announced that it was taking ‘quantitative measures’ to increase
liquidity, that is, by increasing the central bank credits available to the
banks for commercial lending.
Commentators who favour a pro-inflation policy, however,
doubt whether the central bank’s measures will actually have much effect. Even
if there is more liquidity, why should banks lend more money when there is
already so much bad debt and the scope for profitable investment is limited? The
Bank of Japan, say the new Keynesians, should print money to buy government
bonds in order to pump liquidity into the economy. The bureaucrats who run the
central bank, however, appear to be held back by fear that printing money in
that way (while undoubtedly counteracting deflation) would open up the danger of
run-away inflation. They also fear that without drastic restructuring to cut
away bankrupt or unprofitable corporations, an inflationary binge would further
postpone the day of reckoning for unviable businesses. Inflation would also
reduce the value of the yen, which would stimulate exports but add to
inflationary pressures (through dearer imports) and create problems for rival
economies in East Asia.
Nevertheless, faced with the prospect of a slump, Japanese
capitalist leaders may well be pushed towards an inflationary policy at a
certain point. Inflation, however, will not provide an easy escape from
prolonged stagnation. A pro-inflation policy is unlikely to be implemented in
the measured, controlled way envisaged by economists like Krugman. More likely,
the ruling class could lurch into a new policy under conditions of sharpening
economic and political crisis, with the possibility of unpredictable and
uncontrolled effects.
Junichiro Koizumi, the new LDP prime minister who replaced
the discredited Mori, is promising a programme of ruthless change to tackle the
fundamental problems gripping the Japanese economy. At the moment, he is
enjoying a honeymoon of almost unprecedented popularity, mainly because of his
slick personal presentation and the fact that he is not identified with the
established leadership of the LDP, who are notorious for their bureaucratic
arrogance and corrupt links with big-business interests.
If Koizumi proceeds with his policies, however, they will
have devastating effects on the working class and wide sections of the middle
class. Basically, his policy (like that of all other LDP leaders) is to rescue
the big banks and the corporations that remain viable. The government, for
instance, is planning to buy up corporate shares held by the banks as collateral
for corporate loans. Many of the loans are now ‘bad’ (that is, unrepayable)
while the shares, since the collapse of the bubble, are next to worthless. The
rescue policy would use tax-payers’ money to get the banks off the hook. At
the same time, Koizumi would continue to use government funds to write off bad
debts, but, he claims, only if there is a restructuring of the corporations and
unviable companies are allowed to collapse.
In effect, Koizumi is no more than threatening to implement
plans that many previous governments have advocated but have repeatedly diluted
or postponed. This is partly because LDP leaders are tied to business interests
who favour ‘reform’ only if it does not cause them any financial pain. But
it is also because they fear the explosive social and political consequences of
the collapse of a whole swathe of corporations and finance houses, which would
inevitably follow a decisive wiping out of bad bebts and worthless
share-holdings. Millions of workers and middle-class salary earners would be
thrown out of work. In effect, the decisive, rapid wiping out of the excesses of
the 1980s bubble would have the same effect as a slump – the brutal capitalist
‘cure’ that has been continually postponed by the financial life-support
schemes provided by a succession of LDP governments over the last decade.
Not surprisingly, many capitalist commentators, both in
Japan and in the West, are skeptical about Koizumi’s prospects of actually
carrying through a radical restructuring. Despite the change of government, a
recent editorial comment by the Financial Times (9 March) remains valid:
"Japan’s economic problems are so deeply embedded that only a fundamental
change in the way the system is run will help. But it is difficult to see what
will change in Japan without a financial shock".
Recovery in East Asia
EVEN THE IMF/World Bank strategists were surprised at the
recovery in East Asia following the 1997-98 crisis. Growth resumed quite
strongly in many of the former ‘tigers’, and financial markets appeared to
stabilise. This recovery was overwhelmingly dependent on the accelerated growth
of the US economy, stimulated by the further inflation of the stock exchange
bubble. The US market provided a massive market for goods produced in Asia,
which were further cheapened by the devaluations following the 1997 crisis. The
mushrooming of the US technology sector, moreover, increased demand for IT
products. In 2000, the region sent about 25% of its exports (in dollar terms) to
the US, and a high proportion of inter-Asian trade is ultimately tied to trade
with the US.
Resumed growth (with the revival, of course, of
profitability) has softened criticisms from Western capitalist leaders directed
against ‘crony capitalism’, and muted demands for ‘reforms’ - that is,
for the restructuring of finance, industry and services on Anglo-Saxon,
neo-liberal lines in order to open up the region to the US and European
multinational corporations. Nevertheless, Jamal Kassum, the World Bank regional
vice-president, recently warned that big-business confidence was being ‘diminished
by the slow pace and questionable quality’ of financial and corporate
restructuring, and the slowness of deregulation of trade and finance.
The brief Asian recovery, however, has not meant a return to
the pre-1997 position. Millions of workers throughout the region remain
unemployed, or under-employed on poverty wages. The option of returning to the
countryside has been ruled out for large sections of migrant workers because of
the development of capitalist farming. Contrary to previous claims that the
market would lift the region’s people out of poverty, around half the
population of East Asia live on less than $2 a day.
Moreover, as the result of brutal, breakneck
industrialisation, followed by a deep economic crisis, a number of countries
were convulsed by revolutionary movements (Indonesia), sweeping protest
movements (Philippines) and massive strike waves (South Korea). "In one
respect", comments The Economist (19 May), "matters look much bleaker
than they did in 1997. Then the region – most of it, anyway – was seen as
politically stable. Now, from Indonesia to the Philippines, it looks explosive.
In other respects, there are some uncomfortable parallels…".
As in 1997, the first part of 2000 has seen a sharp slowdown
of growth (with absolute falls in several countries), a decline in exports, and
the intimations of a currency crisis. Stock markets are falling, while corporate
defaults are soaring. The immediate cause of the unfolding crisis is different
from 1997: the sharp fall in the US’s demand for Asia’s exports, combined
with reduced demand from Japan.
"Across Asia", reported the Washington Post,
"the US economic slump is taking a heavy toll, battering exports, dragging
down growth and threatening to derail recovery… Asia’s export dynamos have
stumbled badly in recent months… Many fear that the worst is yet to
come". (International Herald Tribune, 31 May) In contrast to 1999 and 2000,
when the region achieved an annual growth rate of around 7%, there has been a
sharp slowdown in the region’s major economies since the end of last year (eg
Hong Kong, South Korea and Taiwan), with negative growth in others (eg Malaysia
and Thailand). Exports have been falling precipitately. In the year to April,
exports slumped 11% in Taiwan, 10% in Thailand, 10% in Korea, and 2.4% in Hong
Kong.
Technology exporters have been hit particularly hard
(electronic components account for a third of Taiwan’s exports, for instance).
While spending by US firms on technology products soared 25% last year, it is
likely to be negative this year. The demand for servers, chips, and other
electronic gadgets has slumped.
As with Europe, capitalist leaders dismiss the idea of a
prolonged regional slump. "This is not the same East Asia that faced the
crisis in 1997", claims Kassum of the World Bank. As with Europe, their
optimism is predicated entirely on a short ‘V-shaped’ slowdown in the US
followed by the resumption of rapid growth – and demand for Asia’s exports.
At the same time, they underestimate the economic, social and political factors
that may well interact to produce a deep regional crisis.
China tiger?
SO FAR, CHINA appears to have escaped the regional downturn.
The World Bank predicts that China will have growth of 7.3% this year, compared
with 8% last year. Credit Lyonnais, however, considers that official Chinese
government figures overstate growth, which they estimate at 3% to 4% this year.
(Credit calculates that the six south-eastern provinces together with the cities
of Beijing and Tiajin account for 46% of China’s GDP and 75% of exports by
value - International Herald Tribune, 8 May). China has had the advantage of
receiving around four-fifths of the Foreign Direct Investment flowing into the
region, as well as lower wage levels and cheaper production costs. Moreover,
capitalists are now starting to move production into the interior where wages
and other costs are even lower. Recently, Chinese exporters of technology and
other products have been increasing their share of export markets at the expense
of other Asian producers. In 2000, China’s share of US information technology
imports rose to 11%, exceeding the shares of South Korea and Taiwan.
Nevertheless, the health of the Chinese economy decisively
depends on exports to the US and Japan (which account for about 40% of China’s
exports). While China has in recent months gained at the expense of regional
rivals who have already been hit by the downturn, the Chinese economy will not
escape the effects of the world slowdown. Internally, the Chinese regime is
already facing growing economic and social tensions. Externally, the position of
the Chinese economy is beginning to be threatened by the fall in the value of
the yen and other East Asian currencies (which cheapens the export prices of its
rivals). The Chinese government (according to some commentators) is beginning to
complain about the weak yen in particular and to be privately raising the
prospect of a devaluation of the Chinese currency, the renminbi (yuan). That
could trigger a round of competitive devaluations – if not already triggered
by another Asian state – leading to another serious currency crisis.
Most East Asian currencies (in contrast to the pre-1997
situation) are not pegged to the US dollar (apart from the Malaysian ringitt,
which is officially pegged, and China’s renminbi, which is effectively pegged
to the dollar). The slowdown of production and trade, together with falls on
financial markets, has led to the downward floating of all of the un-pegged
currencies. Most important has been the decline of the yen against the US dollar
(from around Y105 to the dollar last year to around Y120 currently). This trend
is being encouraged by the Japanese government, which some commentators believe
would like to see it float down to Y140-150 to the dollar. This is strengthening
the competitive position of Japanese exporters just at the time when their
rivals are being squeezed by the slowdown in the US and in Japan itself. At the
same time, the big Japanese corporations are now moving quickly to relocate
production facilities in low-cost Asian countries, putting additional pressure
on their rivals.
Asian leaders clearly fear that stagnant economies and
sliding currencies may, as in 1997, give rise to volatile speculative flows from
currency to currency, destabilising the regional economy. In May, the Japanese
government made currency ‘swap agreements’ with South Korea, Malaysia and
Thailand, involving hard currency reserves that would supply liquidity to
countries facing speculative runs on their currencies. Talks are also taking
place to set up swap agreements between all ten ASEAN members plus China, Japan
and South Korea. To be effective, the swap agreements have to be backed by hard
currency reserves: Japan’s agreement with Thailand runs to $3 billion, that
with Malaysia $1 billion. "These are not sums", comments The Economist
(12 May), "that will terrify the currency markets". In other words,
swap arrangements will provide little protection against a new Asian currency
crisis that could plunge the region into another slump. As in 1997-98, that
would have a major adverse impact on the whole world economy.
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