International Socialists

Introduction

"The word recession does not convey what's going on. In Indonesia Thailand and Korea, we're not talking recession, we're talking depression. It will be like the US in 1933."

 

That was the view of one US economist this month. Asia's economic collapse hit a new stage at the beginning of January, with every country showing new symptoms of the crisis.

 

The currencies of Indonesia, South Korea, Thailand and others crashed to new lows in the opening days of the year.

 

In Hong Kong and Singapore - two "Pacific Tiger" economies which seem to be unscathed by the crisis - stock markets plunged on fears that the countries banks would be pulled down by bad loans in the region.

 

Until just a few months ago, the Tigers were one of the main sources of dynamism in the world economy, credited with pushing the entire system forward.

 

Now the Tigers are facing a sharp slump and look like they will pull the rest of the world down with them. The latest symptoms of the crisis came just a week after major US and Japanese banks came up with a last-minute rescue plan to stop South Korea from defaulting on billions of dollars worth of foreign debts.

 

The deal narrowly averted what the British Financial Times newspaper called a "global financial catastrophe." And that crisis is far from over. The rescue deal only delayed repayment of South Korea's loans - no one has agreed on when and how the debts will be repaid.

 

Just a few weeks later, US and International Monetary Fund (IMF) officials were gearing up for another emergency effort - this time in Indonesia.

 

Their fear in this instance is not so much the threat of economic collapse but of political instability in the world's fourth-largest country. But the solutions of Western officials will only intensify the political crisis.

 

Asia's crisis is a clear demonstration of the madness of the capitalist system. It began because the Tigers were producing "too many" exports to sell at a profit on the world market - in a world where hundreds of millions desperately need the most basic industrial products.

 

The Tigers are beginning to face an outright decline in industrial growth - so the IMF proposes austerity measures to make the slump even worse. Asia's madness is not only Asian - it is the madness of the world capitalist system.

 

Just a couple of months ago, mainstream commentators were talking about the "miracle" economy. Now, the very same people are talking about a global showdown, brought on by the financial crisis in Asia. What happened?

 

In reality, the state of the world economy was never as strong as commentators made out. The world has been through three large-scale recessions in the last 23 years, the last one beginning around 1990.

 

A huge part of the world is still suffering from the effects of the last recession. Japan, the world's second largest economic power, is facing declines in industrial output and retail sales after a very short-lived spasm of growth at the beginning of 1996.

 

And in Germany and France - the two core economies of Europe - growth is still very slow after six years of recession, with unemployment continuing to rise. So among the established advanced industrial countries, the recovery has been very much confined to the US and, to a much lesser extent, Britain.

 

That explains why, until only a few months ago, the Asian Tiger economies were seen as the salvation of the free-market system. They regularly achieved very high growth rates, and we were told that they would come to dominate the world scene. Now these claims look laughable.

 

 

What caused the Asian crisis?

In the quarter of a century after the 1960s, two countries, South Korea and Taiwan, and two city-states, Singapore and Hong Kong, were able to make the transition from typical Third World conditions to modern industrial capitalism.

 

The characteristic feature of their development was that it was led by exports. The Pacific Tigers were able to carve out an increasingly large niche for themselves in world markets by combining low-wage labour with slightly out-of-date technology bought from the West.

 

In this way, they were able to move from textiles to iron and steel, ship building, electronic components production and assembly and finally to cars. It was this model of "export-led" growth which Thailand, Indonesia and Malaysia - sometimes called the "Tiger Cubs" - have been attempting to copy.

 

A variant of it also underlies the export-driven production unleashed by China's rulers in the coastal regions. But there are inbuilt limitations to this method of industrialisation. First, it relies on the rest of the world being willing and able to buy the growing volume of exports. This can't happen when there is recession or stagnation elsewhere in the system.

 

And the more countries there are trying to follow the "export-led" path, the greater the likelihood of a glut in export markets. All the classic symptoms of over-production have emerged in East Asia over the last year.

 

Chen Zhan, editor of the economic review The China Analyst, reported in June that factories across the region were working well below capacity because of lack of markets - with only 60 percent capacity utilisation in China, 70 percent in Korea and 72 percent in Taiwan.

 

China's Economic Daily reported in March that warehoused goods in China exceeded $50 billion - about 8 percent of national output. In the case of South Korea, Britain's Financial Times reported back in March that "all of the main industries - electronics, steel, petrochemicals, cars and ships - suffered from a simultaneous cyclical drop last year." Even before the December crisis hit, this has led to the bankruptcy of six of the country's top 30 corporations.

 

The other problem the Tigers have come to face is that workers fresh from the countryside who could be forced to accept paltry wages in the early stages of industrialisation began to put up resistance.

 

Attempts to buy off the resistance eventually led in some cases - in the Tigers as opposed to the Tiger Cubs - to wage levels that can be comparable to those in the West. And that spells the end of the low-wage, low-tech, high-export economy.

 

In South Korea, the turning point was in 1988, when the country was hit by a wave of strikes that forced employers to concede substantial wage increases. Significantly, we are now seeing spontaneous waves of strikes in China and Indonesia, even though the overall level of industrialisation in these countries is still behind what existed in South Korea 10 years ago.

 

 

Meanwhile, the region's economic superpower - and the world's second-largest economy - Japan is in economic turmoil as well. How does that fit in?

At the end of December, Japan's financial system was facing what one newspaper called a "death spiral." The latest stage of the crisis actually came in response to a long-awaited announcement that the government would step in to prop up the economy.

 

On December 17, Prime Minister Ryutaro Hashimoto announced a $100 billion plan to bolster the country's banking system and a package of tax cuts worth $23 billion to inject some life into the stagnant economy. As substantial as that might seem, it fell far short of what most observers figure will be necessary to fix the problems.

 

Over the course of the next week, the Japanese stock market plummeted to a new two-year low, losing 13.7 percent of its value. The stock market crisis is part of a vicious cycle.

 

The drop in share prices hits the stock portfolios of Japanese banks, forcing them to tighten conditions for lending, which leads to an increase in corporate bankruptcies, which leads to further drops on the stock market. These problems aren't new, either.

 

The Japanese economy never really recovered from the recession of the early 1990s, and it has been hampered throughout the decade by massive levels of debt that date from when the incredible real-estate boom of the 1980s went bust.

 

According to the government, the banks have about $300 billion worth of bad loans on their books - other estimates put the figure at three times that. The overall output of the economy hardly grew at all in the 1990s. When the government forecast a growth rate of 1 percent for 1998, private economists were scoffing.

 

December's financial panic could be the straw that pushes the economy into an outright recession - and that will wreak havoc throughout the world, especially in the US, where loans from Japan finance important sectors of the economy.

 

 

What will be the impact of Asia's crisis and the accompanying social unrest on the world system as a whole?

You can see how the crisis in Asia is spreading throughout the world. This is the flipside of the tendency toward globalisation that our rulers were so excited about until recently. The stagnant economy in Japan is likely to slow down even more because of the crisis in South Korea, since this is Japan's biggest export market in the region.

 

Meanwhile, the South Korean crisis is causing an economic shock in Brazil because South Korean financiers are pulling money out of that country. And this is seen as a threat to the Russian stock market, which has been bolstered by funds from Brazil.

 

New Zealand could be particularly hard hit by the crisis, as exports to Asia make up a significant percentage of the total. Whilst initial effects have been largely confined to luxury service industries - like Queenstown's hotels - in the next few months reduced consumer spending in Asia will have a direct impact on manufacturing output here, leading to bankruptcies and layoffs.

 

But what our rulers - both in New Zealnd and Asia - fear more than anything is the possible social revolt this crisis might unleash. That hope of collective working class action is what socialists should be fighting for.