---------- Forwarded message ---------- Date: Fri, 11 Sep 1998 18:31:52 -0400 (EDT) From: Robert Weissman <[EMAIL PROTECTED]> To: Multiple recipients of list STOP-IMF <[EMAIL PROTECTED]> Subject: Le Monde Diplomatique: Will the world catch Asian flu? > LE MONDE DIPLOMATIQUE - August-September 1998 > > STERN TEST FOR CAPITALISM > > Will the world catch Asian flu? > > Three weeks ago analysts were still proclaiming that, since Russia only > represents 1% of world trade, it could only affect the global economic > situation marginally. This approach discounted the extreme vulnerability of > the financial markets and the "unrealistic level" of share prices that Alan > Greenspan, chairman of the US Federal Reserve Bank, warned of in July. It > also discounted the extent to which politics and economics are intermeshed. > The collapse of the Russian financial system has battered stock exchanges > around the world and brought the global economy closer to recession. Yet the > EU's political leaders still claim that the crisis will not affect Europe... > > by FRANÇOIS CHESNAIS > > Only a little over a year ago, the unannounced but unavoidable > devaluation of Thailand and Indonesia's currencies opened the > floodgates of a full-blown economic and financial crisis. By > January 1998, one of the three poles of the global economy had been > severely battered, after serving for ten years as a showcase for > the new "liberalised" and "deregulated" model of capitalist economy > and also, more importantly, as an escape route for the excess > capital of the OECD member countries. However hard the > free-marketeers have tried to deny it, from the collapse of Korea > onwards, it was no longer an "Asian crisis" but rather the first > episode of a process leading towards world financial crisis and > global depression (1). > > In Asia, the crisis has already led to the closure of hundreds of > factories. But more significantly, it has also led to the collapse > of the social bases and institutional mechanisms of economic > activity. In Indonesia and Thailand, tens of millions of people are > once more suffering from extreme poverty. A strong social backlash > is making itself felt in Korea, and even Japan (2), now that Asia > is in the process of passing from recession to depression. > > The term recession can legitimately be used when the economic and > social fabric affecting basic demand in a given country remain > intact. In such cases, cyclical recovery can, in the medium term, > be achieved by a revival in private consumption and investment or > state-run economic recovery programmes. Recession turns to > depression when falls in the level of production and trade becomes > cumulative, to the point where the social foundations of economic > activity are themselves affected. At this stage, it becomes > impossible to foresee a reversal of the downward movement: classic > recovery measures becomes difficult or even useless. Depression is > associated with a collapse of the principal institutional > foundations, not only of the accumulation of capital, but also of > elementary economic activity per se. This is the situation > currently prevailing in many countries in Asia, which means the > region as a whole is now under threat. > > The sharp contraction in banking and the drop in public spending > which immediately followed the collapse of markets and financial > systems resulting from the devaluation of the Thai baht and the > Indonesian rupiah, and the subsequent devaluation of other > currencies in the region, at first sight suggest similarities with > what happened after the devaluation of the Mexican peso at the > start of Mexico's crisis in the winter of 1994-95 (3). > > But the crisis in Asia has had its own specificities: the > principally private character of foreign debt held by international > banks; the inability of Japan because of its own difficulties to > play the role of lender of last resort in regard to Thailand and > Indonesia, the countries most affected, as the United States did in > the case of Mexico; the onset of crisis in both South Korea and > Japan, which are major exporting industrial countries, but are also > the main customers for goods produced in their neighbouring > countries. > > A key factor in the transition to depression is the tight > interdependence of countries whose economies have all been built on > the model of "export-led growth" (4) and thus need other countries > as outlets. In 1997 more than 50% of the trade of Thailand, > Indonesia, Malaysia and the Philippines, but also of China, was > intra-regional and about half of that was with Japan. The > percentage is a bit lower in the case of South Korea, but Korea's > exports are of a qualitatively higher level. The productive > capacities of the Korean conglomerates (chaebol) were created in > the expectation of regional growth continuing at the same rate as > at the start of the decade. > > The simultaneous onset of the falling currencies and the stunting > of markets in these countries effectively killed off any classic > recovery that might have derived from the devaluations, thus > opening the way for deflation. During the first six months of 1998, > Thailand increased its exports by 25% in volume terms but actually > earned less, due to the collapsing prices of the goods sold. At the > same time, its imports shrank by an equivalent amount. The whole > region has been affected by a deflationary logic, with "mechanical" > repercussions that have come on top of deliberate strategies of > price competition. > > In economies where there are large inequalities in income, the > collapse of external markets cannot be compensated for by > increasing domestic consumption. In fact, the reverse is true. The > shrinking of overseas trade outlets will contribute to an > accelerated contraction of domestic demand, with industrial profits > and the meagre incomes deriving from waged work disappearing as the > level of exports shrinks. > > Ideological myopia > > In elevating the economy to the level of an independent sphere with > the supposed function of governing the whole of society, > neoliberalism has attempted to abstract it from its political and > social underpinnings. It has chosen to see market relations as > "natural" and, once they were apparently in place in a given > country or region, it has reckoned them to be self-perpetuating. > > This form of blindness, characteristic of totalitarian ways of > thinking, consciously or unconsciously, explains how it was > possible for the "experts" of the World Bank at the start of 1997 > to place Indonesia - then under the declining rule of President > Suharto - in pride of place as a country where development had been > particularly successful. > > The IMF had displayed the same blindness in its determination to > impose on countries that called for help the adoption of the kind > of harsh macro-economic policies which accentuate recessionary > effects and lead into depression. Observers have accused it of > exacerbating the movement towards recession: this is true but it is > a superficial view - which is perhaps why it was taken up by > leading neoliberals such as Jeffrey Sachs (5). The behaviour of the > IMF in Asia has been indicative of a vision of the world which is > shared by all those who have sought to set up a benign dictatorship > of capital away from the public gaze... A typical devotee has been > Renato Ruggiero, director-general of the World Trade Organisation, > who describes the Multilateral Agreement on Investment (MAI) as > "writing the constitution for a single global economy (6)". > > Student revolts and popular rioting of a variety strong enough to > bring down the Suharto dictatorship were obviously not part of the > IMF's parameters, any more than the daily spread of social chaos in > Indonesia. > > Full-blown depression is not going to be limited to Asia. Now the > Russians are experiencing the misery that comes with the collapse > of the basic foundations of economic activity; and they will soon > be followed by the peoples of the Ukraine and the other ex-Soviet > republics. Nor will the process stop: the Latin American countries > will be the next victims of rentier and mafia-dominated global > capitalism. > > Three parallel tracks > > As in the 1930s, financial crisis and global recession are now > progressing simultaneously along three parallel, interdependent > tracks. The first is the contraction in production, demand and > trade, and the fall in prices. This is what deflation is about - > and it is not the opposite of inflation. Unlike inflation, there > are no known and easy remedies, because the fall in prices is a > result of increased competition in a context of over-production, > excess stocks and productive capacity, as well as a reversal in > business expectations. Deflation affects raw materials first and > hardest. But it spreads through manufacturing like a disease. > > This process has now been at work for over a year. The sum of Asian > intra and extra regional trade amounts to a third of world trade. > This in itself was enough to discredit the idea of a purely "Asian" > crisis. In the 1980s steps were taken by the major capitalist > powers to bring OPEC to its knees and reverse the price of oil. > Liberalisation and deregulation of the oil market are at the origin > of the current collapse of prices and the resulting shock - which > will prove to have far more destructive effects than in 1973 and > 1978. In the case of Venezuela, Mexico and also Russia, this is one > dimension of their financial crisis. > > The second track is through the astronomical increase in bad debt, > both private and public, held by the banking system. When combined > with political graft, the brutal spread of insolvency can bring the > credit system to a halt, as in Indonesia and now in Russia. But the > share of foreign banks in insolvent debt means that the process > rapidly becomes global. It begins by losses by major > internationally-exposed banks and the announcement of profit falls > that impact on increasingly vulnerable stock markets. But bad debt > can also lead to the weakening of the capacity of banks to provide > credit to their own firms. "Credit crunch", as economists call it, > is now a central feature of the Japanese recession, but other > countries are not immune. > > The third track is the one where the timing of events is hardest to > predict, but where the effects are the most radical. It pertains to > the very close interconnection between major stock markets and the > real time transmission from one stock exchange to the others of > gregarious market behaviour by increasingly nervous financial > investors. As a result of the hierarchical nature of the world of > finance, the decisive key to the world stock market contagion is to > be found in New York and Chicago. The state of Wall Street is > obviously largely a function of the state of the US economy, which > plays a central role in determining both the profitability of the > firms whose shares are being exchanged and the mood of investors. > > But profitability also depends on the state of the world economy > and, as it deteriorates, investors become increasingly sensitive to > political events far removed from Wall Street. This was clearly > shown in the free fall which shook the markets on 4 August, with a > fall of 299 points - 3.4% - in a single day following > disappointment with the new Japanese government's economic > programme; and again in the fall that shook the markets on > successive days in late August after the devaluation of the rouble > and the political turmoil in Russia. > > An end to euphoria > > Over most of the year, while Asia was moving into depression, > financial markets in the Western world were booming. One of the > reasons for the buoyancy has been a "subjective" element on which > all observers agreed, even though they disagreed over its depth - > namely the euphoria associated with the worldwide "bull" market in > shares, of which Wall Street is both the front-runner and the > pivot. In the months that followed the Thai devaluation, the World > Bank estimates that around $110 billion drained out of the four > countries most affected by the crisis. The combination of falls in > interest rates and surging rises on the stock markets was directly > linked to this massive influx of liquid assets seeking refuge in > the major financial institutions of the West and adding to the > euphoria among the "new investors" of the upper middle classes. > > This phase is now over for two major reasons, first, the end of the > economic boom and the reversal of the business cycle in the United > States (7) and second, the fact that politics and economics are > closely interwoven. The dykes of the neoliberal capitalist order > are beginning to collapse one after another and, each time one goes > down, the remainder are under even greater pressure. This is clear > for Brazil, Argentina, Mexico, not to speak of Hong Kong and > China... > > ______________________________________________________________ > > * Professor at the University of Paris-XIII-Villetaneuse; author of > La Mondialisation du capital, new edition, revised and enlarged, > Syros, Paris, 1997. > > Translated by Ed Emery > > (1) See François Chesnais, "La face financière d'une crise de > surproduction", Le Monde diplomatique, February 1998, and Diana > Hochraich, "Crise financière et compétivité dans les pays d'Asie: > au delà de la crise boursière", Les Etudes de CERI, no. 42, > Fondation Nationale des Sciences Politiques, Paris, June 1998. > > (2) See "Asia: Social Backlash", Business Week, 17 August 1998 and, > particularly, the report on the real levels, and social effects, of > unemployment in Japan. > > (3) See Francis Pisani, "La fin des illusions pour le modèle > mexicain"; François Chesnais, "Défense et illustration de la > dictature des marchés"; and Ignacy Sachs, "Quelques leçons de la > crise mexicaine", Le Monde diplomatique, respectively February > 1995, March 1995 and April 1995. > > (4) See Gabriel Kolko, "Mais exportez, donc! dit le FMI", Le Monde > diplomatique, May 1998. > > (5) Jeffrey Sachs, "High Time to Rein in the IMF", International > Herald Tribune, Paris, 3 May 1998. > > (6) On the Multilateral Agreement on Investment see Le Monde > diplomatique, February and March 1998. > > (7) Business Week, 17 August 1998, uses the term "paper wealth" to > describe a significant portion of the wealth enjoyed by rich and > middle-class American families and to analyse the foreseeable > effect of stock market losses on private consumption and > subsequently on investment. > > ALL RIGHTS RESERVED © 1998 Le Monde diplomatique > > <http://www.monde-diplomatique.fr/inside/1998/09/13chesnais.html> >
