Economic Crisis: From the crisis in Asia to a new collapse of the world economy

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We are publishing here the report on the crisis adopted by the 12th Congress of the ICC. This report was written in January 1997, and its discussion throughout our organisation was the basis for the adoption, at the same Congress, of the Resolution on the International Situation published in no.90 of this Review. Since these two texts were written, the development of capitalism economic crisis has been dramatically illustrated by the financial upheavals that have hit, first the now ex-dragons - of Asia from the summer of 1997, then the entire world's money markets, from Latin America to Eastern Europe, from Brazil to Russia, all the way to the great industrial powers: the USA, but first and foremost Japan.

Marxist theory against the lies and blindness of bourgeois economists

The point to which both texts were able both to forecast the open crisis in the Asian countries and above all to explain its underlying causes, is striking. However, we have no intention of bragging over the concretisation of our perspectives in so short a time. The fact that these forecasts were so quickly proved correct is not the most important thing. Had they been verified some time later, the validity of the analysis would not have been diminished by one iota. Similarly, we consider it a secondary matter that our forecasts were confirmed precisely in the Asian countries. In effect, these latter only express a general tendency, which appeared in Mexico in 1994-95, and which is appearing in Russia and Brazil as we write. What is important is the concretisation, sooner or later, of a tendency which only marxism is able to understand and to foresee. Whatever its pace or place, it confirms the validity, the seriousness, and the superiority of marxism over all the inept ideas, often incomprehensible, always incomplete and contradictory, never impartial, with which we are supplied by the economists, journalists, and politicians of the bourgeoisie.

Anyone who lifts their head for a while above the successive themes of media propaganda, designed either to hide the reality of the economic crisis or to give it a reassuring explanation, cannot but be staggered by the variety and contradictory nature of the explanations proposed by the bourgeoisie for the catastrophic development of the economy since the late 1960s and the end of the reconstruction period that followed World War II.

What is left of explanations that attributed the crisis to "excessive rigidity in the monetary system"[1], now that the anarchy of exchange rates has become a factor of world economic instability? What is left of all the talk of "oil shocks"[2] now that oil prices are drowning in overproduction? What is left of "liberalism" and the "miracles" of the "market economy"[3] now that economies are collapsing in a savage trade war for an ever more rapidly contracting world market? And what credibility can we give to today's explanations, based on the sudden discovery of the "dangers of debt" , but which ignore the fact that this suicidal level of debt has been the only way of prolonging the life of an economy in its death-throes[4]?

By comparison, marxism has continued to stand by the same explanation, developing it and improving its precision where necessary, through each new open expression of the crisis. This explanation is still there, in the report that follows. It has been taken up, defended, developed and made more precise many times in the revolutionary press, and in our publications in particular. A marxist understanding is historical; it has continuity and coherence.

"The conditions of bourgeois society are too narrow to comprise the wealth created by them". "In these crises a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity - the epidemic of over-production (...) And how does the bourgeoisie get over these crises? On the one hand, by the enforced destruction of a mass of productive forces; on the other, by the conquest of new markets and by the more thorough exploitation of old ones. That is to say, by paving the way for more extensive and destructive crises, and by diminishing the means whereby crises are prevented"[5].

These characteristics and tendencies revealed by Marx and Engels have been verified throughout capitalism's history. They have become stronger still in the period of decadence, which marks the end of "new" markets and the exhaustion of the old. The tendency to massive destruction of productive forces has become a permanent and dominant one during the 20th century, in particular during the world wars. We have seen "crises appear as a result of the contradiction between the capacity for expansion, the tendency of production to increase, and the restricted consumption capacity" and that "credit is precisely the means of making this contradiction break out as often as possible". But credit also "paves the way for [the] more extensive and destructive crises" forecast by the Manifesto: "After having (as a factor of the process of production) provoked over-production, credit (as a mediator of the process of exchange) destroys, during the crisis, the very productive forces it itself created"[6]).

The fall in shares and currencies, along with the bankruptcy of the Asian countries, illustrates both the historical dead-end that capitalism finds itself in - expressed in the over-production mentioned in the Manifesto, and in the unlimited use of credit - and an endless fall into social and economic catastrophe into which the whole planet is being dragged. It confirms what we have said about the incompetence, not to say the utter vacuity, of the bourgeoisie's propagandists and economists. It confirms what we have said about the clear-sightedness and profound validity of the marxist method for analysing and understanding social reality, and, in the case which concerns us here, the irreversible and insoluble crisis of the capitalist mode of production. A brief reminder will suffice to illustrate our condemnation, without right of appeal, of capitalism's zealous defenders.

Thailand? "An Eldorado (...) a bubbling market"[7]. Malaysia? "an insolent success"[8], "a real locomotive [which] will soon be one of the world's top fifteen economic powers"[9]; the country plans to become, "like Singapore, a high-tech paradise"[10]; "explosive Malaysia, which sees big, really big (...) the most fortunate Asian financial market"[11]. "The Asian miracle is not over", insisted an expert consultant in February 1997 ... [12].

We could have gone on, and doubtless found other "pearls" of the same variety. They are endless, and their purpose is always the same: to deny or hide the irreversible reality of the crisis. We might have hoped that there would be no more George Bush coming to promise the "era of peace and prosperity" that the collapse of the Eastern bloc was supposed to bring; no more Jacques Chirac predicting the "end of the tunnel" . .. in 1976! But they are still there, more numerous than ever, assuring us that "the fundamentals are good" (Bill Clinton), and that "the correction [ie the fall on the world's stock markets] was a healthy one" (Alan Greenspan, president of the US Federal Reserve), or that "the recent disturbances on the financial markets could bring benefits in the long term for the American economy", and that "this does not mean the end of the boom and of growth in Asia " (Greenspan again)[13]. Nonetheless, the latter began to correct his over-optimistic words two weeks later, faced with the evidence of multiple collapses and bankruptcies affecting Japan and South Korea in particular: "the consequences of the Asia crisis will be non-negligible". Certainly, the words spoken at the high point of the crisis on the stock exchange were designed to reassure the latter, and to avoid a generalised panic; even so, they reveal both the blindness and the impotence of their authors.

What a slap in the face the Asian collapse has given to all those triumphant pronouncements about the wonders of the capitalist mode of production! How it has shown up all those pompous declarations about the exemplary success of these "emerging countries"! How it has given the lie to the speeches about the submission, discipline, sense of sacrifice in the service of the national economy, low wages and "flexibility" of the working class in these countries, as a source of success and prosperity for all!

The bankruptcy of Asia is a product of the historic crisis of the capitalist mode of production

Since July, the Asian "tigers" and "dragons" have collapsed. By 27th October, in one week the stock exchange had lost 18 % of its value in Hong Kong, 12.9% in Kuala Lumpur (Malaysia), 11. 5 % in Singapore, 9.9 % in Manila (Philippines), 6 % in Bangkok (Thailand), 5.8% in Jakarta (Indonesia), 2.4% in Seoul (South Korea) and 0.6% in Tokyo. Over the last year, the same countries have recorded falls of respectively 22 %, 44%, 26.9%, 41.4%, 41 %, 23 %, 18.5%, and 12 %[14]. The fall has continued up to the time of writing this article.

In the wake of this collapse, and despite all the calming talk about its lack of effect on the world economy, Wall Street and the European stock markets have been hit by a serious crash. Only the intervention by governments and central banks, plus the regulations of the stock exchanges - which cut off trading automatically when prices fall too quickly - have halted the movement of panic. By contrast, in the Latin American countries stock markets and currencies have plunged. Most concern has been expressed over Brazil. Moreover, the same phenomenon is now appearing in the "emerging" countries of Eastern Europe: Budapest has fallen by 16%, Warsaw by 20%, Moscow by 40 %. The decline in the stock exchange has been accompanied by the depreciation of local currencies, as in Asia and Latin America.

"The experts fear that Eastern Europe will undergo a financial crisis similar to Asia's [which would be] one of the worst threats to the recovery of the economies of the European Union" (15). As if the recession had not been hitting the whole of capitalism for a decade: "If we leave aside the euphoria of globalisation, the situation in every region of the globe since 1987 can best be defined as stagnation".

As if the origins of capitalism's bankruptcy lay in the peripheral countries, and not in the capitalist mode of production itself. As if its epicentre did not lie at the centre of capitalism, in the industrialised countries. At the end of the post-war reconstruction period in the late 1960s, it was the world's great industrial centres that were hit by open crisis. The bourgeoisie in these countries used domestic and foreign debt to the hilt to create artificially the markets it lacked. Since the end of the 1970s, there has thus been an explosion of debt, which has led first to the bankruptcy of the Latin American countries, then to the collapse of the Stalinist state capitalisms in Eastern Europe. Now it is Asia's turn. At first, the central countries had succeeded in pushing bankruptcy and recession away onto the peripheral countries. Now they are returning with tenfold strength to the central countries, which have themselves used and abused the poisonous medicine of debt: the USA is heavily in debt, while none of the European countries is capable of meeting the criteria of the Maastricht agreement on the single currency.

Events have accelerated during this financial crisis. South Korea, the world's 11th economic power, is deeply affected. Its financial system is completely bankrupt. Bank and company closures are spreading, and tens of thousands of redundancies have already been announced. This is only the beginning. Japan, the world's second economic power, "has become the sick man of the world economy"[15]. Here too, company closures are announced and redundancies are growing. What a cruel end for all those triumphant and definitive declarations about the Korean and Japanese "models"!

And what a refutation also for the pitiful explanations given for the swathe of stock market falls since the summer! First of all, the bourgeoisie tried to explain the collapse in Thailand as a purely local phenomenon ... an explanation which was obviously refuted by the facts. Then it was supposed to be a crisis of growth in the Asian countries. Finally, it was supposed to be necessary cure for the speculative bubble, which would have no real effect on the real economy... a claim immediately refuted by the bankruptcy of hundreds of heavily indebted financial establishments, a wave of closures of equally indebted companies, and the announcement of drastic austerity plans that herald recession, redundancies by the thousand, and increased pauperisation for the local population.

Capitalism's generalised indebtedness

What are the mechanisms that underlie these events? The world economy, especially during the last two decades, has been running on debt, and even on "super-debt". In particular, the development of the so-called emerging economies of South-East Asia, like those of Latin America and Eastern Europe, has been built essentially on the investment of foreign capital. Korea, for example, has a debt of $160 billion, of which almost half must be repaid in the coming year - just as its currency has lost 20 % of its value. In other words, this gigantic debt will never be repaid. We do not have space here for an examination of the debt of other Asian states - colossal debts, like those of the world's other "emerging countries" , and whose size no longer has much meaning - whose currencies are all falling relative to the dollar. Most of these debts will never be repaid either. All these "bad debts" are lost to the industrialised countries, which will in turn aggravate their own level of debt[16].

What is the bourgeoisie's response to these enormous collapses, which threaten the entire world financial system with bankruptcy? More debt! The IMF, the World Bank, and the central banks of the richest countries have clubbed together to provide bail-outs of $57 billion to Korea, $17 billion to Thailand, and $23 billion to Indonesia. These new loans will be added to the old, and "the danger is already looming on the horizon of a collapse of the Japanese banking system, riddled with bad, and even irrecoverable debt, including $300 billion loaned to ten SE Asian countries, and to Hong Kong. And if Japan should fail, then the USA and Europe will find themselves in the heart of the storm"[17].

Japan is indeed at the centre of the financial crisis. Its bad debts are of roughly the same order of magnitude as its assets in US Treasury Bonds. At the same time, the increase in the government's budget deficit in recent years has added still further to its overall level of debt. It goes without saying that despite the 'Keynesian" policy of increasing the level of debt, there has been no recovery in the Japanese economy. By contrast, bankruptcies are proliferating amongst Japan's most heavily indebted financial institutions. In order to avoid a Korean-style collapse, the Japanese state is getting still further into deficit and debt. The possibility of Japan suffering a cash-flow crisis - which is what is happening - fills the world bourgeoisie with alarm: "Will the world's number one creditor, which for years has financed without counting the American balance of payments deficit, be able to go on playing the same role with a sick economy, eaten away by bad debt and a financial system drained of its resources? The worst case scenario would see Japan's financial institutions making massive withdrawals of their investments in US bonds"[18]. This would bring the financing of America's economy to an abrupt halt, in other words it would open up a brutal recession. The catastrophic consequences of the economic crisis exported to the capitalist periphery during the 1970s, by the massive use of credit, have returned to strike the central countries, and the worst of their effects are still to come.

It is difficult to say, today, whether these extra loans will succeed in calming the storm and putting off widespread bankruptcy for later, or whether the chips are finally down. As we write, it seems more and more unlikely that the $57 billion that the IMF has scraped together for Korea will be enough to stop the rout. There have been so many calls for help that the IMF's own funds, only recently increased by all the great powers, have already proved inadequate, so much so that the IMF is thinking of ... borrowing in its own right! But whatever the outcome of this particular financial crisis, the tendency is always the same, and can only get worse in the economic crisis. At best, the problem can only be put off till later, when its consequences will be still more profound and dramatic.

Capitalism's crisis is irreversible

This massive and growing use of debt illustrates the saturation of the market: when economic activity is based on debt, that means that the market has been created artificially. Today, the bubble of deception has burst. The saturation of the world market has prevented the "emerging countries" from selling as they need to. The present crisis will reduce sales further, and aggravate the trade war. We can already see an indication of this in the pressure the Americans are putting on Japan to maintain the value of the yen and open its domestic market, and in the conditions imposed by the IMF on Korea - and the other "assisted" countries. The Asian collapse, and their increased commercial aggressiveness, will affect all the developed countries, which are already calculating how much their growth rates will be reduced.

Once again, the bourgeoisie is at last forced to recognise the facts, and sometimes even to reveal a reality (in this case the saturation of the market) constantly affirmed by marxism:: "last August, the Wall Street Journal revealed that many industrial sectors were being confronted by a long-forgotten danger: too much productive capacity, and not enough customers", while "according to an article published on 1st October in the New York Times, over-production today threatens not just America, but the entire world. The global glut is even thought to be at the root of the Asian crisis"[19].

Recourse to credit to counter over-production and the saturation of the market only delays their effects, and in its turn becomes an aggravating factor in their development, as marxist theory has explained. Even if the IMF's new loans, which are out of all proportion to anything that has gone before (more than $100 billion to date), succeed in calming the situation, there is still a bill to be paid, to which these new loans must now be added. Capitalism is still in a dead-end. And the consequences are catastrophic for the whole of humanity. Even before this crisis, which will reduce millions more workers to misery and unemployment, and degrade the living conditions of billions of human beings, the International Labour Organisation revealed that "unemployment now affects almost a billion people throughout the world, almost a third of the working population"[20]. Before this crisis, UNICEF stated that 40,000 children die every day around the world from hunger. Every day, the economic, political, and social blockage of the capitalist mode of production imposes on billions of human beings a living hell of exploitation, hunger, poverty, wars and massacres, and generalised decomposition. And the most recent events will only accelerate this fall into barbarism on every continent and in every country, rich or poor.

These dramatic events herald a brutal decline in the living conditions of the whole world population. They mean a further deterioration of an already wretched situation for the working class, whether in work or unemployed, whether in the poorer countries of the periphery (Latin America, Eastern Europe, Asia) or in the industrialised countries, including in the main bastions of the world proletariat in Japan, North America and Western Europe. The disaster taking place under our very eyes, and whose effects are beginning to appear in mass layoffs in Japan and Korea amongst others, demands a response from the proletariat. The world proletariat must throw back in the face of the ruling class and its states all the talk about the Japanese and Korean "models", cited as an example for more than a decade in order to justify attacks on workers' living and working conditions: sacrifices and submission do not bring prosperity, just more sacrifices and poverty. The capitalist world is plunging humanity into catastrophe. It is up to the proletariat to respond, with a massive and united struggle against sacrifices, and against the very existence of capitalism.

RL, 7th December 1997


[1] When Nixon decided to float the dollar in 1971.

[2] As a cause of the crisis in the 1970s.

[3] The fashionable theme during the 1980s under Reagan and Thatcher.

[4] International Review no.69, March 1992.

[5] Communist Manifesto, 1848 (Lawrence and Wishart, 1970).

[6] Rosa Luxemburg, Social Reform or Revolution, in Political Writings of Rosa Luxemburg, Monthly Review Press, 1971.  

[7] Investir, 3rd February 1997.

[8] Les Echos, 14th April 1997.

[9] Usine Nouvelle, 2nd May 1997.

[10] Far Eastern Economic Review, 24th October 1996.

[11] Wall Street Journal, 12th July 1996.

[12] From Jardine Fleming Investment Management (Option Finance no.437). Quoted in Le Monde Diplomatique of December 1997.  

[13] International Herald Tribune, 30th October 1997.

[14] Figures taken from Courier International of 30th October 1997.

[15] Le Monde, 14th November 1997.

[16] On the level of debt in the industrialised countries, see International Review nos.76, 77, and 87.

[17] Le Monde Diplomatique, December 1997.

[18] Le Monde, 26th November 1997.

[19] Le Monde, 11th November 1997.

[20] Le Monde Diplomatique, December 1995.

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