Keith Harvey
The collapse of the Thai currency last summer unleashed a chain of banking and company failures throughout South East Asia. Keith Harvey assesses the likely effect on the world economy in 1998 and the impact on the Asian class struggle.
With tears rolling down his cheeks, Shohei Nozawa, president of Japanese securities firm Yamaichi, bowed three times and addressed the cameras. “I beg you, do not let my employees starve; do not let them walk the streets. They include some highly competent salespeople,” he wept. It was Monday 25 November 1997, the day the economic crisis in South East Asia finally hit Japan.
It takes a lot to make a capitalist cry, especially over the fate of his employees. But a lot had happened to Shohei Nozawa: three months after he was appointed to “sort out” Japan’s biggest stock broker it had just gone bust, collapsing under an avalanche of bad debts and dodgy deals.
Most capitalists aspire to emulate Bill Gates or Richard Branson, the titans of modern capitalism; few aspire to become the living symbol of the system’s doom. No wonder he was crying.
On the day Yamaichi collapsed, US President Bill Clinton addressed a hastily gathered economic conference of South East Asian states. “We have a few little glitches in the road here. We’re working through them,” he told ministers from the Philippines, Indonesia, South Korea, Taiwan and Malaysia as they queued up for IMF loans.
Government spokespeople across the globe queued up to explain that the currency crisis of South East Asia, the stock market panics of October and November 1997, the looming recession in South Korea and the collapse of Yamaichi were “unrelated”. Not only is the world capitalist system strong, they said: but it has never been stronger.
And this was not just hype. For the last two years the professional economists of the IMF and World Bank had been extolling the virtues of the “new paradigm” pioneered in Clinton’s USA: dynamic growth, near to full employment, low inflation and a minimal welfare state. This, we were told, was the future of the entire world. Globalisation, intensified competition, lower prices and new technological advances have combined to raise productivity and growth. The cycle of recession and recovery is dead, they said; the terms “crisis” and “crash” could be considered history.
But now the words crisis, crash and slump haunt the business pages of the world’s press. In five short months a crisis that started with speculation against Thailand’s currency has led to the bankruptcy of the fourth largest securities firm in Japan and, in the words of the Financial Times, put the whole Japanese economy “at the brink”.
What are the causes of the Asian stock market collapse? What effect will it have on the real economy? How will it impact upon the major industrial economies of the G7 in 1998? In this survey, written with many acts of the current drama yet still to come, we sketch out the background to these questions and their general implication for the global class struggle.
All crises start somewhere
The role of bourgeois economists and journalists in times of such economic crisis is to obscure the real reason for the crisis and direct our attention to the superficial aspects of the problem. Current official explanations focus on “over hasty lending”, “bad regulation” in the banking sector, or “lack of transparency” in the dealings of the finance houses of South East Asia and Japan. As the crisis develops, these will no doubt be larded with surreptitious racist references to the “national character” of the Asian countries in the eye of the storm.
Meanwhile, the economists tell us, the “fundamentals” of the world economy remain sound – especially in North America and Europe. Swift action and prudent supervision by the IMF and World Bank, it is argued, will remove what Clinton calls the “glitches” and set the world economy back on the road of sustained growth.
In the face of such optimism it seems rude to point out that, six months ago, there were no alarm bells sounding about lending practices and banking regulations in Asia. US, Japanese and European banks were falling over themselves to lend money to the “tigers”. As one Indonesian economist told the Financial Times: “Don’t blame us. Those willing banks from the West and the North just push money down our throats.”
It is only now, when the loans look like going down the pan, that the major investment banks of the G7 countries throw their hands up in horror at South East Asian capitalism’s addiction to dodgy credit.
In fact, the furore about “regulatory regimes” (i.e. the lack of strict controls on Asian banks) is there to mask the real cause of the present crisis. At root the crisis is a classic crisis of capitalist production and exchange: a crisis rooted in the very nature of the economic system itself.
Its roots lay in the interlinked problem of over-investment and declining profitability in major industries throughout SE Asia in 1995-96. The economies of South Korea, Indonesia, Thailand, Malaysia and the Philippines attracted the bulk of industrial investment in the region in the 1990s. Much of it was capital borrowed from abroad by locally-owned companies to expand their capacity to produce computer chips, cars, fridges, consumer electronics and construction machinery.
A lot of this capital was attracted by the low wage rates and terrible labour conditions, especially in the second tier of the so called “Asian tiger” economies: Thailand, Malaysia, the Philippines and Indonesia. Much of their goods were destined for export to Japan and the USA. In the top tier, South Korea’s economy had matured onto another technological level and it was no longer able to compete against the West using cheap labour.
However Korean capitalism used the supply of easy money to expand the operations of its budding multinationals (e.g. Samsung, Lucky Goldstar) abroad, including the UK and the USA.
The scale of foreign investment into South East Asia in the 1990s has been staggering. The nine countries of this region have absorbed 40% of all foreign direct investment (FDI) in the 1990s. In a growth phase of the business cycle, capitalist firms invest like there is no tomorrow – or rather in the belief that every tomorrow will bring unlimited openings for selling the goods produced by the new factories and machines.
Capitalism is, by its very nature, anarchic. As Marx said, over 100 years ago, production is carried out for production’s sake, irrespective of the limits of the market. Each firm is driven to expand its “market share” at the expense of others in order to capture a larger portion of the available quantity of profits.
Feverish investment in the Asian Tiger economies was compounded by the surge of output in China. A 40% devaluation in the yuan in January 1994 gave China an immediate labour cost advantage over the “tigers” and prompted a huge surge in China’s exports. They rose by a massive 25% between January and September 1997 alone.
The inevitable result is that, at a certain stage, there will be what Marxists term an over-accumulation of capital and goods: one of the classic first signs of a crisis of overproduction.
Capitalism is the first economic system in history where crises occur because there is “too much”. When profits decline, when bad debts are called in, it is revealed that there is too much capital chasing too little profit. Despite the current focus on rogue businessmen and currency speculators, it is this that underlies the crisis in South East Asia.
In June this year it was reported that only 70% of South Korea’s industrial capacity was being used. In March the Financial Times revealed that in South Korea, “all the main industries – electronics, steel, petrochemicals, cars and ships – suffered from a cyclical drop last year”. The Economist (1 November) reported that the whole “region has a glut of capacity in industries such as television, chemicals and steel as a result of over-investment.”
This translates into economic crises as follows: the given amount of profits available from the industry in question are no longer big enough to give all producers their anticipated rate of return. Individual companies experience this directly as a loss of “corporate earnings” – a fall in profits. How badly their profits fall depends upon a number of factors. But the decisive factor in the case of South East Asia is that many companies had a very high ratio of debt servicing compared to the value of their assets. Many companies are reported to have debts to the value of more than 400% of their capital. Put simply, this is like having four mortgages on one house. Any major drop in income would put them in difficulty when it came to paying their instalments.
This was all bad news. But it did not translate into the first appearance of crisis until the wave of currency speculation that hit the tiger economies in mid 1997. The crisis broke out in Thailand’s stock and currency markets in June because Thailand’s economy was the weakest link in the chain. Once the markets observed the industrial slowdown they realised that the massive over-investment in the Thai property market in particular was unsustainable; there would be nobody to rent their costly office space
Foreign investment began to dry up and domestic assets started to lose value. In July the Thai currency, the baht, gave way under the strain. Given the reluctance of foreign banks to lend dollars, more baht were demanded to borrow the same amount of dollars as before; the long established fixed exchange rate collapsed and the baht devalued.
Once the dam had burst the other regional currencies followed suit; in part because they too suffered from over-investment and in part because they had to follow Thailand in a round of competitive devaluation or risk losing export markets to Thailand.
By October the malaise had spread to the region’s major economy, and the 11th biggest in the world – South Korea. The investment glut and industrial slowdown now hit it. In October a major South Korean steel group Hambo, was allowed to go bust and this was followed by car manufacturer, Kia.
But the downturn immediately impacted upon the banks who had extended much of the investment capital. The Financial Times on 12 November reported that South Korean banks were carrying around $28.5 bn of bad loans which in turn threatened their own commercial viability.
In this situation the South Korean government was forced to step in and try to guarantee the deposits of these overstretched banks as well as cover the loans made to these banks by foreign banks in US dollars. But South Korea’s foreign reserves stood at only $30bn in November 1997.
This was far too little to be able to pay the loans issued by foreign banks should they decide to call them in. Hence, amid protests about “national shame”, the government was forced to go cap in hand to the IMF and agree a December loan of $55bn, the biggest loan made by the IMF in its 50 year history. It could well end up as much as $70bn or even $100bn.
Imperialism strengthens its grip
While they were booming, the “tiger” economies were cited as proof that any less developed country could become as powerful and dynamic as the world’s leading powers. The age of imperialism and semi-colonial servitude was over, it was said. Now, the crisis effecting the “tiger” economies – and the likely form of its resolution– only serves to underline the semi-colonial and dependent character of these economies.
In South Korea’s case the ability of its home-grown monopolies to carry out their own foreign investment drive after 1990, as well as its admittance to the select club of major industrial capitalist nations (the OECD) in 1996, seemed to announce its transition to the premier league. South Korea, it was argued, had become a “first world” economy.
But the crisis has starkly revealed the limits of South Korea’s independence: it was always based on ready access to foreign capital. Now that the Malaysian, Indonesian and South Korean governments have begged the IMF and World Bank for loans, these US dominated agencies will exact a heavy price. As elsewhere, the working class will be made to pay in the form of cuts and unemployment. But, in the process, the IMF will rub the noses of the South East Asian capitalists in the mess they have created.
In former decades, international bodies like the IMF and World Bank used their financial and political powers to combat protectionism in the semi-colonies.
In the 1990s they concentrated on forcing them to implement a policy geared to attracting foreign capital investment: lowering taxes on FDI, shifting subsidies from “national” companies to FDI-based companies, selling off strategic industries like telecoms to western multinationals.
The crisis that broke in November 1997 gives them a massive opportunity to pursue these aims even further. The IMF has lent Malaysia $17bn, Indonesia $38bn and South Korea the first $20bn instalment of a much bigger sum.
This was all done to “restore confidence in the financial markets” – in other words guarantee the profits of the major US, European and Japanese banks and force concessions from the semi-colonial governments. South Korea entered this crisis with an enormous foreign debt of $110bn, 80% of which matures within one year. The imperialists, having hooked the developed semi-colonies on cheap credit, will now suck them dry. They will demand that South Korea opens up its economy to foreign multinationals and banks even more. Already the crisis has eased access to Korea’s debt market for foreign investors – something forbidden until recent events.
The IMF will demand “liberalisation” of the exchange rate system; it will demand a thinning out of the number of banks; and it will insist that US and Japanese banks are allowed to buy up their Korean counterparts. The Korean government will concede all this as the way to shore up its reserves and preserve its financial system. The whole process will strengthen the grip of US, European and Japanese multinationals on the country, setting the terms of the lending rates and allowing them to buy up national assets at knock-down dollar prices.
Japan’s traumas
The stock market crash in South East Asia hit Japanese capitalism when it was already down. The lowest point in its recession was in 1994 but, since then, it had experienced only a weak recovery.
The recovery was inhibited by the massive overhanging debt carried by the Japanese financial system in the wake of the Tokyo property and stock market collapse in 1989. Successive governments had avoided a radical clear out of ailing banks in Japan and delayed the far-reaching restructuring called for by the nature of the losses.
In this way, Japanese capitalism had, as Marx so tellingly wrote, solved a crisis only by means of preparing for a newer and bigger crisis. Indeed, as we shall see, this could prove true for the whole imperialist world which in October 1997 was indulging in a bout of nostalgic self congratulation over its survival of the stock market crash of exactly ten years before.
In Japan the domestic economy has been flat for most of the recovery, failing to respond to several huge reflationary (government spending) packages. Yet these packages did have the effect of increasing budget deficits and in early 1997 the government imposed a 2% increase in sales tax to close the deficit.
This sent the domestic economy into a nosedive. Between April and June 1997 GDP shrank by 2.9% (i.e. at an annual rate of 11.6%!). As profits fell, the Nikkei stock market index plummeted in June, falling as much as 25% by early November (and down 58% on 1990 levels).
It is important to stress that, despite our disgust for the activities of the stock market gamblers, the share indexes are not mere casinos divorced from the activities of capitalism in its factories and offices. Share markets represent the aggregate values of all public companies in a given country or region. A 25% fall in share prices reflects a fall in the real value of capital, and in the wealth of the capitalists. More precisely it is a dramatic closing of the gap between what the capitalists think their firms are worth, and what they are worth.
The over-investment affecting the Asian economies hit Japan’s exports – previously the only dynamic sector of the economy. This will prove very damaging to Japan as 44% of the country’s exports go to the rest of Asia. PC sales fell in September 1997 and car sales crashed 13% in October. Japanese companies started to go bankrupt at an alarming rate: October 1997 saw a 15% increase, the highest level since 1986.
Japan was faced first with industrial contraction and second with falling value of capital. This inevitably fed through to the sickly banking sector. Industrial profits faltered, exposing bad loans. This came on top of the damage done by the collapse in South Korea, Hong Kong, Thailand and Indonesia, where Japanese banks were the main lenders to now insolvent companies. It was as if a mortgage company lent money on some crumbling council flats and offset the risk by lending against a plush country mansion – only to find that the owner of the mansion had gone bust.
By mid-November the crisis burst on Japan. Some 18 of the top 20 banks had unsustainably bad debts. The 7th largest securities broker, Sanyo Securities, went bust – the first such Japanese firm to do so since the Second World War. Then came Yamaichi and the Mr Nozawa’s public tears.
And worse is to come in 1998. Japan sells 30% of its exports to South East Asia and a further 7% to South Korea. These markets are being choked off and at the same time they are launching an export offensive based on devaluation. Japan faces a further year of recession in 1998.
Will the crisis spread to the USA?
Alan Greenspan – head of the world’s largest central bank, the US Federal Reserve–has tried to calm the fears of US companies. But even he conceded on 14 November that the effects of the Asian crisis on the USA “can be expected not to be negligible”.
In the 1990s, US capitalism has built on two decades of real wage decline and low-wage job creation to sustain a significant revival in profitability and growth. In 1996 many corporations regularly reported double-digit profits every quarter. Profits as a share of GDP have recovered from a late 1980s low of 6% to 10%, which compares favourably with the post-war high of 12% in the 1960s.
The crisis of the “tiger” economies with only 7% of world output would not, on its own, have a major effect on demand for US products – even though 16% of US exports go to South East Asia. A 10% fall in the region’s imports as a result of the tigers’ coming recessions would only result in a 0.2% fall in US GDP.
The dangers for US capitalism in 1998 come from two other interconnected developments. First and most immediately, the crisis has massively devalued the tigers’ currencies against the US dollar. The Philippines peso has been marked down 36%, the Indonesian and Malaysian currencies by similar amounts. The South Korean won has devalued by 17%.
At a stroke, this makes their exports more competitive in US and Japanese markets. It means that a Walkman or a VCR made in Malaysia could cost only 60% of the price of the same item made in the USA. This could, in the course of 1998, burst the bubble of rising capitalist profits as US domestic and export firms are squeezed. This would then hit the overvalued shares of these companies.
Second and potentially more damaging, could be the impact of Japan’s crisis on the US economy. Japan holds 25% of the $250bn of US government bonds as well as many Wall Street shares. If Japanese companies start to sell these in order to get their hands on needed cash (to pay worried bank depositors, to cover bad loans), then Wall Street could crash.
The stock market is the weak link in the US economic chain. It has boomed like never before over the last three years on expectations of ever increasing growth in profits. The collapse of the Asian markets did dent Wall Street in late October: the Dow Jones fell 7%. But it rallied shortly afterwards. Nevertheless, the stock market in New York is, by historical standards, highly overvalued – some suggest as much as 40%. The Economist lamented that Wall Street was still “dangerously high” even after the October crash.
Capitalists measure the value of shares against real value through looking at dividend yields (profits per share)and the replacement value of their assets. Measured against both, the price of shares are way too high. At 1.6% the dividend yield in New York is the lowest this century.
A blow to company profits could dent the confidence of the share dealers enough to start panic selling in New York.
Yet even here it is necessary to be cautious about the ultimate effect. On the one hand, the US has very wide share ownership and many more people rely upon dividend income to boost their consumption than in Europe. Because a stock market crash would impact upon domestic demand the US government would probably take measures to boost demand and lower the cost of credit – for example by lowering interest rates or issuing unsecured loans to bankrupt firms.
On the other hand, a stockmarket crash is not likely to have the same effect upon US companies and banks as in South East Asia. US companies have not borrowed so precariously and the banks are not carrying as many unsupportable loans. The Financial Times estimated that even if Wall Street were to fall by half it would still “not expose the level of bad banking debt as seen in Japan in 1990.” In addition, US banks are not allowed to own shares in US companies (ever since the 1929 crash) and this decreases their exposure too.
The fault lines in the world economy will be tested via another route; namely, what can the multilateral agencies, like the World Bank and IMF do in the face of a collapse of the Japanese banking system?
When the US and IMF rescued the Mexican financial system in 1994, it took $50bn—a record sum. Then came South Korea. Meanwhile, Brazil’s banks have started to look worried: only a doubling of interest rates and a pre-emptive austerity package on spending saw off the speculators and so avoided the IMF being called into Brazil.
It is highly doubtful that the IMF has the resources to simultaneously bail out Brazil and South Korea, still less prop up the Japanese financial system.
There is no mystery to the IMF, despite its dark reputation among workers in the countries it has visited with demands for privatisation, cuts and unemployment. The IMF is a collective pot for bailing out capitalists, and the holder of the money is the USA. But as the Financial Times points out:
“Investors are putting great faith in the IMF to help extinguish Asia’s flames. But the IMF is not a bottomless pit. Its principal source of funds is membership fees or ‘quotas’ from its 181 member countries. These amount to a relatively impressive $200bn. But only about $50bn can be used. The rest is either already committed – over $40bn including recent loans to Thailand and Indonesia – or held in soft currencies nobody wants to borrow. IMF members have agreed a 45 per cent increase in their quotas, but these funds will not be available for another year . . . As a last resort the IMF could borrow in the markets . . . It is still highly unlikely that the IMF will run out of money, but not inconceivable if further countries are dragged into the maelstrom.” (Financial Times 25 November 1997)
The IMF could run out of cash; it could borrow on the markets to stabilise the markets – like taking out a mortgage to pay off another one. These possibilities should banish any thought that capitalism has reached a new, stable paradigm. At the top it is full of the anxiety of crisis.
Who will suffer?
A simultaneous crisis that emptied the IMF pot would cause such a contraction of world trade that economic protectionism would be unleashed, leading in turn to further contraction and, inevitably, to those tricky events that no insurer will insure against: civil unrest, revolution and war.
The effect of the triple whammy – currency, banking and stock market crises – on South East Asia will be dramatic. Growth rates will at least halve in 1998. Thailand will be lucky to avoid a full-scale recession. The US will seek to take advantage of the crisis to use the IMF to prise open the closed banking and industrial conglomerates of South East Asia, restructure them and pick off the best for US companies and banks. The US will put immense pressure on Japan to take on the burden of resolving this crisis by reflating its economy with public money, thereby helping the tigers grow and acting to pull the world economy along. On the other hand, Japan could devalue the yen and seek to trade blows with the tigers in export markets, further aggravating relations with the US in the process.
But if the IMF-loyal governments of the region get their way the main losers will be workers throughout South East Asia and Japan. Everywhere the governments will try and force through all the reactionary social and political consequences of agreeing to austerity packages with the IMF.
Welfare programmes, already meagre, will be slashed to the bone. Jobs will be threatened. In the region’s blighted financial sector, one estimate suggests that revenues from stock exchange dealing will be reduced by 70% and this translates into 30% cut in jobs.
In the space of few days in November 1997 alone, 3,000 jobs went in a Japanese-owned Hong Kong department store as the company folded; and Nippon Credit Bank announced it would cut staff by one third in Tokyo. In South Korea the government predicts a doubling of unemployment to 6% in 1998.
Halla, the country’s fourth largest shipbuilder said in November that it intended to sack half its 6,000 employees over the following weeks. In the age of globalisation not even Europe goes unaffected. Sanyo, the South Korean multinational, has already announced the closure of its UK construction machinery plant.
There are two kinds of response in the face of this. For their part, the ruling regimes will use every trick in the book to divert attention from the profit system, the true cause of their ills. Nationalism will be the chief weapon. The Korean opposition speaks of the “national shame” over the IMF; the Malaysian Prime Minster blames foreigners and Jews for conspiring to bring down the national economy. Faced with internal rebellion and in some cases strong workers’ movements, military adventures cannot be ruled out by one or more of the region’s powers. And unlike in the Middle East, the Balkans and the Aegean – where wars are fought with second hand US and Soviet equipment – Asia is the one war-threatened region that has its own industrial-military powerhouses.
But there is a progressive alternative – a determined working class attempt to make the bosses pay for the crisis of their system. In South Korea in September thousands of workers went on strike against the threat of possible closure of a factory. Time and again since 1988 the Korean trade unions have responded militantly to the threats to peg their wages or undermine their trade union rights.
They will resist any major restructuring of banks and industry that leads to job losses. In October 10,000 Indonesian workers at the IPTN aircraft factory went on strike after a threat not to pay their wages.
This crisis, which has not yet run its course, did not occur because of the “lack of regulation” of the banking system, “racist” and over-powerful market speculators, or corrupt politicians.
All these exist. But the crisis is happening because capitalism is a system that is based on an unrestricted search for profits by producing and investing without any regard for markets or the ability to consume.
Only by putting an end to the system will future crises be averted and there is no better time for doing that than in the middle of this crisis.