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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
>
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