Dick Nichols
The experience of the last round of crises and near-misses (from Mexico's 1994 crash through to the 2001 meltdown of the US "new economy" bubble) have made the guardians of the world capitalist economy very wary about the speed with which fair-weather economic and financial market conditions can turn nasty.
As the present economic cycle matures they are determined to address the underlying "global imbalances" that might allow financial market crashes to break through into the "real economy" — the rates of investment, consumption, growth and employment (see Green Left Weekly #680).
The ballooning US current account deficit (CAD) and the corresponding current account surpluses in the East Asian economies are the immediate concern, but are these are the main illness or imply a symptom of other underlying problems?
From the viewpoint of long-run capitalist development these "imbalances" simply reflect the trend towards increasingly integrated world economy. Within it there's increasingly less reason why the rates of investment and saving-especially of multinational corporations and financial institutions-should be in balance at the level of national economies.
Moreover, the existence of large imbalances (as a rising portion of domestic investment in CAD deficit economies like Australia is funded from savings elsewhere) wouldn't necessarily be a problem-provided a rate of profit high enough to convince the corporations to invest in production went with sufficient demand to absorb output across the system as a whole.
But this is not the case. In the present 25-year phase of rising global economic integration ("globalisation") the trend is not towards convergence of the fundamental variables of economic development, but towards differentiation and contradiction.
First, increasing economic integration would lead to a more uniform world market only if initial differences in productivity among the economic blocs were not so great. But given that the dominant multinational corporations are driven to produce with the cheapest labour qualified for the job, global competition operates as a permanent process of selecting which regions, industries, countries and classes are to be included in their "value chain".
Second, the most important markets for sale of output are still to be found in the advanced capitalist countries-where the greatest part of value added accumulates and wealth and income are highest.
Third, the corporations and financial institutions also make their "speculation decision" and "takeover decision" according to global criteria. The proportion of profits to be devoted to investment in production, in shares, commercial and government bonds and in acquiring existing assets increasingly takes place according to profitability expectations about all asset classes around the world.
As a result, the basic contradiction of capitalism (the need to combine the cheapest possible labour in production with high enough final demand for the sale of output produced) has never operated on such a global scale.
It can only be resolved by aggravating two potentially destabilising forces. As French economist Michel Husson explains: "Within each country, the consumption spending of wage and salary earners is restricted and the financial income of narrow social layers has to serve as a replacement outlet: contemporary capitalism is therefore marked by the intensification of inequalities, and suffers from a permanent loss of legitimacy. At the level of the world economy, contemporary imperialism looks to produce in the low-wage countries and sell elsewhere. The map of capital corresponds less and less to that of national territories."
Australia's two-speed economy is a reflection of this second reality. Western Australia's booming resource-based economy is part of "the Australian economy", but increasingly its rates of investment and growth shadow those in China. The impending closure of Bluescope's Port Kembla factory and the crisis in the vehicle components sector is the other face of this process, which has turned China into the main manufacturing hub of the world as 20 million enter the workforce every year.
However, while the rate of investment can readily exceed the rate of saving within a given national economic space, these imbalances captured by balance of payments statistics can be highly misleading when matched against the value flows driven by the corporations-especially with regard to the Third World economies whose labour they exploit.
China is a dramatic case in point. Take "Chinese exports" for 2005-worth $US 762 billion. Just under 60% was produced by foreign companies or joint ventures, with 22% the work of Chinese state enterprises and the remainder from the Chinese private sector. Likewise with "Chinese imports" for 2005-58.7% accounted for by inputs for foreign companies like electronics and computer manufacturers, 29.9% by state enterprises and 11.4% by others.
What about "China's" 2005 $200 billion trade surplus with the US, the occasion of endless xenophobic sermons from US legislators about the undervalued renminbi? This surplus was largely offset by "China's" $137 billion trade deficit with the rest of Asia, especially Japan, Taiwan and South Korea. This was the direct result of Japanese, Taiwanese and South Korean corporations shifting the labour-intensive assembly phase of production into China (where around only 15% of overall value added in production accumulates).
Given this reality, what effect would the 20%-40% revaluation of the renminbi being demanded by US legislators and patriotic economists have on the real-world "map of capital"? Firstly, it wouldn't just hurt Chinese exporters and Acer and Samsung, but also those US companies that have outsourced their manufacturing to China (even if a higher renminbi would reduce the price of their inputs from the US).
Secondly, US importers of cheap "made in China" consumer goods would be screaming, led by Wal-Mart, the world's biggest non-financial corporation and importer of $15 billion a year in goods from China (more than the whole Australian economy). And what might such a sudden leap in the prices of imported consumer goods do to US inflation and consumer confidence, critical to present world growth rates?
Thirdly, foreign corporations would look around for substitute sources of cheap labour as their sales fell. China's economy would suffer with unpredictable consequences for political stability.
Dangerous growth?
This scenario provides an insight into the unbalanced and potentially fragile underpinnings of today's high world economic growth. By contrast with the period of the post-war boom, it is not the result of generally high rates of investment and productivity growth in the main imperialist centres, but of an extremely high investment rate in China (44.1% of GDP in 2005!) matched by a high rate of consumption and credit growth (and low rate of household saving) in the US. It is accompanied by the high global level of speculative investment analysed in the previous article in this series.
As a result in 2005, year of 4.8% growth, the world economy displayed a very unusual configuration. Since 1980 it has not seen higher CADs, higher oil prices, a lower US personal savings rate and a lower real long-term interest rate (in Europe, Japan and the US). In 2005, US corporations were still saving an enormous 1.3% of GDP (the post-1980 record, 1.9% in 2003), as against their 1980-2004 average of -0.4%.
The most vulnerable variable is US consumption. As the share of wages in total output continues to fall (the general pattern in the advanced capitalist economies) consumption increasingly depends on more intense work effort, spending out of financial income, and rising credit to households (and the asset values on which that is based) . In 2005 "home equity withdrawal"-borrowing against the value of housing-reached a record 8% of personal income.
Hence the rising nervousness in the US about rising oil prices and interest rates and the arrival of the long-feared US housing bust, marked by falling prices and the biggest inventory of unsold homes in 13 years. The worst-case scenario is that of a recession-inducing crash in US consumer spending that is not offset by increases in investment in the US or consumption and/or investment within the other economic blocs.
In this context trying to "cure" the US CAD could readily end up worse than the disease. Is a smaller CAD worth the price of slump, higher US unemployment and increased popular fury with the powers that be? Moreover, the last time the US achieved CAD "adjustment"-at the end of the 1982-1991 business cycle when it narrowed to 0.8% (from 3.4% of GDP in 1987)-growth in the other main advanced capitalist economies slowed from 5.3% to 2.2% and from 5.2% to 2.5% in the rest of the world.
Solutions?
Such is the minefield on which any plan to "unwind global imbalances" without triggering recession has to tread. Given global economic interdependence such packages have to be multilateral and have been summarised by the IMF in its September 2005 World Economic Outlook and the Bank for International Settlements in its latest annual report.
" The US and other CAD countries must increase their national savings rates, mainly by eliminating the federal budget deficit as quickly as possible
" In the Asian economies, especially China, exchange rates must be allowed to appreciate and investment rates increased and savings rates reduced; and
" In the euro area and Japan product and labour market competition and flexibility must be boosted to allow faster growth without risking inflation.
It would be a brave punter who would bet serious money that this recipe for a global "soft landing" will work, for economic reasons but also because of vested imperialist interests and national political conflicts.
For the US, given the small weight of exports in total output, even a small reduction of the CAD requires a big devaluation. To date the gradual devaluation of the dollar since 2002 has been more than offset by the rate of fall in manufactured import prices. But a higher rate of depreciation would increase the risk of a destabilising flight from dollar assets.
Attacking the savings-investment imbalance directly by adding to government savings means reduced spending and/or increased taxes. This road to "fiscal balance" is littered with potential for political struggle and crisis-fights over a consumption tax and health and social security system funding being the main ones.
In Asia, there's a huge gap between how much Asian policymakers are prepared to allow their currencies to appreciate (generally below 5% against the dollar) and the numbers being aired by economists posing an "optimal rebalancing". For example, US economist William Kline's ideal scenario would see the renminbi appreciate by 43%,the yen by 62% and the Venezuelan bolivar by 73%!
Just as fraught is convincing East Asia's capitalists to run the risk of the sort of overinvestment that produced the 1997-98 crash, attracting foreign investment when Asian currencies are likely to appreciate, and persuading Asian governments to reduce their budget surpluses (that is, their room to manoeuvre in case of recession).
In "Euroland" the main obstacle is what the IMF politely calls "reform fatigue"-spectacularly demonstrated in April by the successful French revolt against laws that would have made it easier for young workers to be sacked, but also by slow progress in dismantling barriers to an integrated European economy.
All of which helps explains why, despite the huge furore about global imbalances and increasingly impatient IMF urging, there's so little sign of action in the rival imperialist centres. The incentives for the main players to go along with the status quo are very strong, especially when there's no way any one of the major economies can begin adjustment without first incurring pain at home. Much easier to demand that virtue begin elsewhere-so far the big players give full support to the IMF agenda except for the little bit that applies to themselves.
The underlying reality is that of interimperialist competition. IMF and BIS recipes may represent the best treatment for capitalism as a global system, but they entail the "restructuring" of the least efficient producers and the sacrifice of hard-won areas of competitive advantage (e.g., Asian-based exports) in the name of the dubious benefits of "global balance".
Conclusion
So is the global economy headed towards Armageddon? That vision, which has its supporters on the left, is too categorical. Yes, it would be silly to rule out abrupt readjustment and recession (the "bang" scenario) when the main capitalist agencies worry so much about it. Also, asset-price collapse and recession are more of a possibility in those smaller CAD economies that have most depended on high real interest rates to attract short-term inflows (for example, New Zealand). However, it's also mistaken to rule out the possibility of a soft landing (the "whimper" scenario), or semi-crashes where even big financial market meltdowns are countered by rapid loosening of monetary and fiscal policy (the "bang-whimper" scenario).
As always, important to the final outcome will be what happens to corporate investment in the main blocs. The longer this is retarded (i.e., the more growth depends on the present configuration of US-based demand plus Chinese investment) the greater the possibility of crash. However, if investment picks up in the US and Europe and the Japanese recovery finally takes hold, a rebalancing of global growth can't be ruled out.
In the end those socialists who are certain they know the trajectory of world economy should make a beeline for the nearest hedge fund. But betting on Armageddons or soft landings is not a serious course of action if we want to use the actual shifts of world and national economies to take the anti-capitalist struggle forward as best we can.
Surely the key point to grasp is that the system's chance of shock-proofing itself depends most critically on two points: inflicting ongoing defeats on working people through imposing the recipes of neo-liberalism, and deluding workers that their problems are generated by workers elsewhere.
The more working people resist that double bind, the more unstable global capitalism will be, the greater the stress levels of its policymakers and the greater the chances for abrupt "adjustment. But the greater, too, the potential to convince millions of its horrendous illegitimacy and the need to struggle for the socialist, human-centred, alternative.
[Dick Nichols is the managing editor of Seeing Red. For sources used in this article contact <dicknichols@greenleft.org.au>. Previous articles in this series appeared in GLW #671, #672, #674 and #680.]