Tuesday, 28 October 2008

Where We've Been, Where We Are and where We Are Going - Part II – Where We Are

A Multi-Podal World Economy

I remember back in the 1980’s the Economist ran a series of articles on a number of countries – Malaysia, Singapore, Taiwan amongst other Asian nations. They were what were to become known as the “Asian Tiger” economies. At the time I was working on a number of papers on the question of Imperialism and “sub-Imperialism”. I still have the articles somewhere in my archives. These were all countries, which only a few years before most Marxists would have had no difficulty in understanding within the context of the established theories of imperialism at the time, as oppressed nations, dependent upon some metropolitan centre. Indeed, not long before that they were classic, politically oppressed colonies. But, the Economist articles showed that even by the early 1980’s that model was no longer applicable. All of these economies were not only formally, politically independent, but they were rapidly industrialising, had a rapidly growing domestic bourgeoisie, arising out of that development, rapidly rising levels of education and culture for a growing number of their people, and indeed were not only exporting their manufactured goods around the world, but were also exporting Capital, often to other Asian economies whose wage levels were even lower than their own. In my opinion, today even the term “emerging economies” is no longer appropriate to most of these economies. Countries such as South Korea, Singapore etc. have already emerged. They are still young and dynamic, still capable of rapid growth (and by the same token rapid slowdown), but they are no more emerging in that context than was say the US at the beginning of the twentieth century. In some respects – as was the case with the US and Germany in the past – they have leapfrogged the developed nations. For example, Singapore has probably the best wired economy in the world in terms of access to broadband technologies. Some have such well developed systems that children can be taught at home on line over Video networking. Geoffrey Kay in his book “Development & Underdevelopment – A Marxist Analysis”, explains why. Capital will, despite low wage levels always have an incentive to exploit even cheap labour by using the most efficient, most modern means of production. That is why the Neo-Classical Development Economists were puzzled that that model failed to explain the actual development of such economies, why despite low wages high levels of unemployment was created. That is not to say, of course, that the kind of combined and uneven development seen and analysed by Lenin in Russia can’t be witnessed in these economies – China is a good example – but it is the more advanced that pushes out the less, and subjugates it to itself.

Lenin, in his “The Development of Capitalism in Russia”, not only produced a huge opus of statistical data showing how Capitalism was developing on Russian soil, but in doing so he took apart the ideas of the Narodniks. I think there has been a great deal of Narodism in post-war Marxist theories. The Narodniks believed that there was something unnatural about Capitalist development in Russia, that it was something foreign, transplanted on to their soil. In large part, of course, it was. The huge new factories often were foreign owned, or built with foreign Capital. But, as Lenin showed there was plenty of home grown Capital too, and as the market grew, as it inevitably did, increasing numbers of peasants and artisans found themselves producing for that market rather than themselves. The consequence was an increasing differentiation into bourgeois and proletarians. This was not something to be deplored as the Narodniks did, but welcomed as Marx had done. Moreover, as Lenin showed, in general, the more developed, the larger, the more capitalistic the business, the better the wages and conditions of the workers. The problem, Lenin proclaimed, in contrast to the Narodniks, the reason for the workers and peasants poverty, was not Capitalism as the Narodniks said, but “Not enough Capitalism”! Moreover, the Narodniks looked to the State as being the means by which the development of Capitalism could be held back, and instead measures pursued by which the Russian form of Socialism, based on the Village Commune, could evolve. But, Lenin pointed out, the State is a class state, the instrument of a ruling social class, and in Russia by the late 19th Century that class as Lenin pointed out was already the capitalist class.

Many of the Narodnik ideas can be seen in the positions of Marxists in the post-war period. Firstly, the very real existence of foreign Capital has emphasised the idea that the Capitalism that exists is in some way alien, and hostile to the development of the economy e.g. the notion of “the development of underdevelopment”. Even the term “underdevelopment” emphasises this notion. As I have written elsewhere this notion of “underdevelopment” is applicable in relation to Colonialism, as the overseas activity of merchant Capitalists – usually in conjunction with a ruling Landlord Class – whose method of extracting a profit – buying low and selling high – necessarily implies an impoverishment of the counter parties to such trades, and the political regimes established on the back of such economic and social relations reflect that. But, that is not true of Imperialism as the overseas expansion of industrial and financial Capital. Merchants’ Capital can buy and sell into any kind of economic and social system. The introduction of industrial Capital, of Capitalist production proper necessarily sets in motion the kind of development of market relations and thereby Capitalist relations described by Lenin in “The Development of Capitalism in Russia”. Moreover, this type of production necessarily brings with it the other things seen in any other Capitalist economy; the need for infrastructure, markets, a level playing field, Capitalist property laws, bourgeois freedoms etc. Increasingly, technological production requires educated workers, a middlec lass of technocrats and administrators. In short, it is as much required here to undertake its “civilising mission” – as Marx described it in the “Grundrisse” – of raising workers living standards, improving their education and culture etc. as it was in Britain and other developed economies.

Locked into a mechanical view of Trotsky’s “Permanent Revolution” or afraid to admit that a Capitalism that was supposed to be in its death throes was capable of any objectively progressive role – clearly Imperialism was not and is not subjectively progressive; it didn’t/doesn’t act consciously to improve the lives of workers and peasants in these countries, did not and does not act out of some moralistic quest to spread freedom and democracy around the world as the AWL, for example, seem to believe; it acted and acts out of pure self-interest and greed for profit that has led and will lead it to install dictators just as readily as democracy when that suits its interest; but overall the consequences of the development it brought were progressive – they denied the reality, refused to recognise any independent national development, branding such nations as neo-colonies and so on. And like the Narodniks, who placed misguided faith in the Russian bourgeois State, post-war Marxists have placed faith in various bourgeois-nationalist states rather than in the workers in opposition to those states. A good example now is Venezuela.

Does the fact of the emergence and subsequent development of these economies during the 1980’s and 90’s contradict the notion of the Long Wave downturn during that period? Not at all. Firstly, the concept of the Long Wave as explained in Part I does not involve ABSOLUTE declines during the downturn, just below average trend growth. Secondly, its necessary to look at the underlying reasons for the downturn, the consequences of the response of Capital to them.

The conditions which lead to the rise of the Long Wave are essentially these. Raw materials and foodstuffs prices have fallen to their lows, as new long-term supplies have been maintained/extended whilst demand has been falling either relatively or absolutely. Wages have fallen due to the weakened position of workers viz a viz Capital. Some developments of the Innovation Cycle have been introduced raising Labour productivity, thereby reducing Labour and input costs further. The rate of profit rises. There is often a blow-off of debt which leaves available productive assets which can be bought up cheap and used by more dynamic entrepreneurs. The causes of the Long Wave downturn are essentially an unwinding of these. Raw materials and foodstuffs prices are forced up rapidly at the beginning of the new upswing as Supply cannot keep up with demand. There is a scramble for resources, and an explosion of exploration and development as we have seen since the late 90’s. High prices force attempts to find new more efficient means of using energy and materials, which again we have seen during that period. As most traders will tell you, a Commodity Bull Market runs for around 20 years. This corresponds to the fact that it takes time to carry out exploration, and around seven years to bring on stream new production. Food production can usually be increased more rapidly. Driving around Europe recently I have noted how many fields are now given over to Maixe compared to previous tours. But, bringing on stream entirely new sources of food production can take longer. Potential areas have to be identified, land cleared, drainage installed, infrastructure built to take products away and for fertilisers and equipment to be brought in. In Africa, there are now some huge programmes being developed along these lines as one benefit of high food prices that makes such investment profitable. Angola is engaging in a Programme worth around $6 billion to develop agriculture on its highly fertile lands, and again reasserting the point made earlier, it is seeking to do so not by extending inefficient small-scale peasant production, but by encouraging foreign multinationals to invest in the development of large high-tec industrial farming.

Eventually, all of this new production exceeds demand, its lower marginal costs arising from the larger scale production, the new techniques and higher proportion of Constant Capital employed ensures that prices fall. Falling prices for these primary producers is one component of the slowing of the expansion, both in respect of their own very large investments, and in potential markets for industrial goods producers. Meanwhile, the expansion has raised the demand for Labour, strengthened workers position and militancy, and thereby eaten into the Surplus Value of Capital, slowing accumulation. The period of expansion of Constant Capital (exacerbated by the rise in the input prices of raw materials component of C) together with relatively rising wages means a falling Rate of profit, a phenomenon noted by Glyn and Sutcliffe during the period of the last Long Wave boom in the 1960’s. Alongside the diminishing potential arising from the slowdown of the primary producer economies, Capital also faces problems realising Surplus Value, and a problem of over-production. But, as Marx pointed out, this overproduction is not an overproduction of Use Values, but of Capital. There may be a great need of Use Values, of articles of consumption, the problem for Capital is not producing too much, but producing more than can be sold profitably. The trick for capital appears to be to reduce the cost of production in order that goods sold at the price the market will bear, create a profit. In fact, this is one of the reasons that such crises escalate. Competition ensures that each tries to expand and undercut the others.

But, here in part at least is the explanation for the development of the Asian Tigers. Not only does the globalising nature of Capitalism – its low prices that break down all Chinese walls as Marx put it – mean that all economies are forced to begin producing Capitalistically – and hence those with large untapped Labour forces tend to have a competitive advantage through lower labour costs, go straight to the latest machines, techniques etc. as did US, Germany, Russia Japan – progressively spread Capitalist production and thereby create ever new capitalist and proletarian classes, but at a certain point industrial Capital from developed countries naturally sees the answer to its need to produce at lower cost as being to locate its production in such low wage economies. As Marx pointed out, this is not straightforward. In the developed economy there is decades of development, infrastructure, trained workforces, and so on that reduces the unit labour cost. It is only profitable for capital to relocate if some at least of these things exist. By the early 1980’s that was true of these Asian economies.

As Keynes and other economists noted, wages are “sticky” downwards. In other words, workers having established a certain standard of living are loathe to have it reduced. Even in dire economic conditions it is difficult for Capital to force wages down below a certain point. This is similar to the idea of a “historical” or “cultural” component of the value of Labour Power referred to by marx. In the 1930’s living standards did not fall to that of the 19th century, nor in the 1974-99 downturn did wages fall even to that of the 1950’s. The social and political costs for Capital are simply too great, especially as the working class has shown on several occasions what the consequences for it must be if it pushes too hard – for it to attempt such a catastrophic reduction. Rather it seeks to manage the decline in workers living standards, to effect it by Salami tactics, and through a prolonged relative decline.

That is the strategy Capital has adopted over the last 30 years. That is the context within which “De-industrialisation” took place – for a discussion from the time of De-industrialisation see the book produced by the NIESR, “De-industrialisation”. There is no reason other than the ability to exploit cheaper labour for Capital to locate manufacturing in certain countries – apart in some cases from the costs and problems associated with pollution. There is a certain logic arising from the Harvard School Model of the product Cycle as to why products in their mature phase can be more profitably produced in a low wage, low skill economy, but as India and other Asian economies are demonstrating the supply of highly educated, highly skilled workers does not remain a constraint for long. Indeed, even the “De-industrialising” economies can only pursue this course up to a point. The US retains considerable manufacturing capability though concentrated at the high end e.g. aerospace (although it retains large auto production it is pretty much all loss-making except for the Japanese and other foreign owned plants). It has been able to de-industrialise to the extent it has due to a number of factors. First, because of its large service sector, secondly because of its high-tec base and other high-value export industry, thirdly because of its huge agricultural sector, and finally due to the role of the dollar as reserve currency, which has enabled the US to both pay for its imports in devalued currency, and to borrow huge sums from foreigners. At the other extreme Japan was less able to de-industrialise. It has no sizeable agriculture or raw material production. It has to produce in order to import absent the role of the Yen as a reserve currency like the dollar.

The development of the Asian Tigers and other “emerging markets” then from the 1980’s does not at all contradict the idea of this being a period of Long Wave downturn, but in fact is a consequence of it, as Capital seeks strategies to deal with it, to maintain the Rate of profit in the face of “sticky” wages, by relocating to economies where wage rates are a fraction of even the depressed levels in developed economies. In so doing it is able through prolonged unemployment and the removal of these large scale enterprises to shift labour towards lower-paid, casualised employment etc., and thereby effect over a period of years the necessary adjustments.

Some time ago I wrote about the wage cuts etc, imposed on US auto workers. For example at GM and Delphi where workers saw wages cut by up to a staggering 60%, and saw entitlements to Health Insurance slashed.

The world can no longer be seen in the terms that Lenin viewed it when he wrote “Imperialism”, or even that viewed by Trotsky in the 1930’s. The world is no longer made up of a handful of very powerful economies. Indeed, increasingly, national economies have formed natural geographical associations – the EU, North America and Asia. It is increasingly these economic blocs (which trade more and more within themselves forming increasingly coherent common markets) that confront each other on the world stage to push their particular interests. The latest Nobel Laureate for Economics Paul Krugman won for his work on analysing trade patterns. He asked the question why was it that trade cannot be theorised in the terms of Ricardian Comparative advantage, why is it that some countries produce essentially the same products, but trade these similar products between them? His answer was simple – economies of scale. It does not make sense to produce at a single car plant small batches of 5 different models. It makes sense to produce a large number of one model. It then makes sense to produce the other 4 models at 4 other plants, and these can just as easily be in say Canada as in the US, resulting in trade between the two.

Only Africa and parts of Latin America stand outside this framework, and increasingly they too are being drawn into the globalised industrial economy, just as Asia was in its turn.

An Economy on Steroids

Viewing the world economy and the relations within it simply on the basis of a superficial look at the economic statistics for each nation can only lead to error. Simply basing yourself on those statistics for the US, for instance, over the last 20 years would have led you to believe that this monster economy also remained vibrant, increasingly productive etc. But, such a view would have been false as the present crisis is demonstrating. The crisis is financial, but the roots of that finacial crisis have been spreading over the last 20 years from their heart within a fundamentally weak US economy, and they have done so as a result of the measures taken over that period to mollify that economic weakness. The US economy during that period has been like a Tour De France cyclist, always suspect to those with a critical eye, and wholly revealed when the results of the drug test comes in.

The rise of a multi-podal world economy has fundamentally changed the nature of trade and economic relations within it. The dependence of the US on Chinese, Russian and Middle Eastern creditors for its survival is just one part of that. These relations are often seen as still giving a whip-hand to the US. The quote, “if you owe a thousand pounds to the Bank then you have a problem, if you owe a million pounds to the Bank then the Bank has a problem”, is frequently used to describe the problems the US’s creditors have in withdrawing their support. The argument only stretches so far. The economic consequences of actions are always multi-faceted at this level in a way that does not apply to the Bank and its customer – and let’s not forget that Banks DO foreclose on people even when they owe very large amounts of money. For as long as China wanted to sell huge quantities of goods to the US the dollar-peg was useful. It would not want to force a dramatic fall in the dollar. However, the US now only accounts for a minority of China’s exports. The majority goes to the rest of Asia, as intra-Asia trade (particularly with Japan) expands. Europe is the next largest market for China’s exports with the US third. Additionally, the Chinese dometic market accounts for around a third of all Chinese production and is growing rapidly. Over the last few years rising oil and raw materials prices have hit hard at economies pegged to the dollar. The falling dollar meant that these commodities prices rose much more quickly, and as the Authorities sought to maintain the peg, they were forced to import inflation through the increase in liquidity needed to sell RMB and buy dollars. Chinese and other Asian economies began to suffer high rates of inflation. It was against this backdrop that the Authorities decided to relax the peg, allowing the value of the RMB to float higher, and the dollar to fall. In fact, the idea that the dollar could not be allowed to fall rapidly has been disproved several times. It lost 50% of its value against the Deutschmark for instance, and since 2002 has lost 50% against the Euro. Now Chinese spokesmen have openly stated that the time has come for the role of the dollar as reserve currency, and the US’s unique position stemming from it to end.

Its true that if the dollar falls then its Creditors get paid back in devalued currency, but much depends on what they do with those dollars. For instance, if its creditors cut off support not only would the dollar fall dramatically, but the consequence would also be a huge falls in US Stock Markets, and the market capitalisation of its companies, alongside a similar fall in other asset prices, for example, property, in anticipation of a big reduction in economic activity. Under those circumstances, all of those dodgy dollars could be used to snap up these cheap assets in effect exchanging worthless paper for physical assets. By that means the effect of the devalued currency is mitigated if not neutralised. The current events demonstrate just how many such deflated assets may be available to purchase with these dollars. Indeed, it is probably the prospect of all these dollars finding their way back home for the purpose of such purchases – together with the effects of forced liquidation of foreign assets by US financial companies in need of cash – which has prompted the current short term rise in the dollar.

World Trade Relations

A clear indication of the Long Wave can be seen by looking at the graph of world trade over this last cycle. Such a graph was provided in the World Economy Supplement of the FT on 10th October on Page 7. Between 1980 and 1990 global trade rose from around $4,000 billion to around $6,000 billion, remaining flat until around 1994. Between 1994 and 2000 it rose from around $6,000 billion to $12,000 billion. But, the sharpest rise has most notably been since 2002 where it rose from around $12,000 billion to around $28,000 billion by 2007. (Source: WTO Thomson Datastream) The FT article here shows another aspect of this multipodal economic order. The seven years of unresolved discussions over the Doha Round demonstrate these increasing economic interests coming to play and the inability of the US to simply impose its will. The intervening period has been one in which these contending economic powers have sought advantage by establishing multifarious bilateral trade agreements. China, thirsty for raw materials, has been highly active in this regard developing deals in latin America and Africa for its foodstuffs and raw materials in return for infrastructure, training and manufactures, and has not been slow to use such deals to further its strategic and political goals in the bargain. The fact that the world economy is divided into these three main competing blocs does not mean that they are free of internal frictions, as the recent attempts to obtain a common strategy, across Europe, to deal with the financial crisis, showed. And, as the FT says, “China and Japan are engaged in what appears to be a competition to make themselves the dominant hub in a hub-and-spoke pattern of agreements.”

Against all of that has also to be placed the emergence of economies in latin America. Many of these like emerging economies in Africa are prospering on the back of soaring raw material prices. Yet, that once was true of Asian economies. Other, for example Brazil, have rapidly industrialised and diversified their economies. Even in Africa a number of Lion economies are emerging with the potential for rapid growth and industrialisation provided they are able to divert earnings now into the necessary industrial development, capital accumulation etc. Angola, as mentioned earlier, not only benefits from huge mineral wealth, but is looking to make a huge investment in developing agriculture on an industrial scale, using the latest technology etc. other economies such as Kenya are developing rapidly, whilst as I said in a blog some time ago even places like Mauritania have very high growth rates. See:here. China has a huge bilateral deal with Congo (not to be confused with the Democratic Republic of Congo which is currently in Civil War) for the supply of raw materials in return for the building of roads, railways, hospitals, schools, Universities and the training of technicians.

If the world does not blow itself up in a new imperialist war at the end of this cycle, then in 50 years these countries are likely to be the equivalent of today’s Asian Tigers.

Not unusually then the picture of the world economy at the present time is one that is racked with contradictions. We have a financial crisis rooted in the Long Wave downturn, that manifests itself a third of the way into the Long Wave upturn. That financial crisis is if anything worse than that which erupted in 1929. Yet, as I have written in another blog the two cannot be compared. The 1929 Crash came in a period when the Long Wave downturn was already more than 10 years old, when Europe had been in recession throughout the 1920’s. The current financial crisis at a period of strong and continuing world economic growth. That financial crisis began in the early Summer of 2007, yet more than one year later its effects are only just beginning to be felt in the real economy. The US is probably now in recession, but we will not know fopr some months. France is in recession, and Britain will probably be in recession by the end of the year. Growth in germany has slowed rapidly. Yet, as the FT stated on 10th October, “Contraction Likely, But Decline May be Overstated”. (World Economy Supplement p10) Chinese economic growth has slowed from around 12% to 9%, but as a spokesman said some of that was due to natural disasters, earthquakes and floods earlier in the year, and is also partly due to industry being closed down prior to and during the Olympics. But 9% growth for the world’s fourth largest economy cannot be sneezed at, and now the State has cut interest rates and introduced other monetary measures to stimulate growth.

Despite all the talk about China as a Capitalist Market economy it has to be remembered it remains in general a centrally planned and directed economy as the Olympics demonstrated. One economist declares,

“Third, the Chinese production structure is all the more unbalanced since the investments of local companies have been mostly financed by the state-owned Chinese banking system, in which credit is allocated according to the aims of an industrial policy and not according to profitability expectations (even in companies belonging to the private sector which represent 45% of the total) [3]. This explains that depending on the source (Morgan Stanley, Moody's, etc.), the share of nonperforming loans is estimated at over 50% of total loans [Pei, Shirai, 2004]. According to Rawski [2001], the share of interest paid on interest owed stood at 84% in 1994, below 60% between 1996 and 1998 and under 50% in 1999. As a result, when they develop an industrial project, companies in China worry less about projected profitability or the competitive environment than about the State policy in favor of regions, fiscal incentives, or access to public credit [Huan &alii, 1999].”


It retains huge scope for using its reserves for internal development as the announcement today of a huge multi billion dollar railway programme illustrates, and may need to do so to buy off internal social problems if the recent demonstrations of sacked workers from a toy factory and elsewhere are a prelude.

For a Marxist, the notion of decoupling – the idea that some economies are unaffected by problems elsewhere, usually in the US – is a nonsense. If anything, for a Marxist, globalisation and the cloer integration of all economies is a desirable inevitability. Yet, that does not mean that the severe problems being experienced by the US necessarily means severe problems for the whole world economy. It is the very fact of the development of a multi-podal world economy, and globalisation that means such a development is not inevitable. Certainly, a severe US slowdown in US consumer spending will have a consequence for world growth. But, US consumer spending is not going to cease. Far too much attention in media coverage of the current crisis has been on the effects in the US, as though the US WERE the World economy. Its not, and in Part III I shall seek to set out where I think we are going, and the consequences.

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