LE MONDE DIPLOMATIQUE - August-September 1998
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...
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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 FranAois Chesnais, "La face financiEre d'une crise de surproduction", Le Monde diplomatique, February 1998, and Diana Hochraich, "Crise financiEre et compEtivitE dans les pays d'Asie: au dely de la crise boursiEre", 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 modEle mexicain"; FranAois Chesnais, "DEfense et illustration de la dictature des marchEs"; and Ignacy Sachs, "Quelques leAons 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.
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