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11th September 2001
Global Economy - Sinking Together
THE UNITED Nations estimates that the effects of September's terror attacks are likely to cost the global economy £230 billion and slow it down by 1%. But, stresses PER OLSSON of the Committee for a Workers International (CWI) the roots of this recession go back long before the horrific events of 11 September.
Why is the world economy heading towards a serious crisis?
A CRISIS never has just one cause - there are always a combination of factors, economic as well as political, which, at a certain stage, act as a brake on economic growth.
Today's economic crisis is very much a classical crisis of capitalism, described by Karl Marx in the volumes of Capital, with overcapacity and overproduction, or "excess capacity" as the capitalists call it, as factors together with contracting or falling profits.
With the crisis in SE Asia in 1997 and, in its wake, the collapse of many other so-called "emerging markets" in 1997-98, global capitalism entered a drawn-out process of stagnation and crisis.
At the time, under the headline of 'The threat of deflation' the US magazine Business Week commented: "Today for the first time in years there is worldwide overcapacity in industries, from semiconductors to auto. And the excess supply will get even worse as Asia tries to export its way out of the crisis".
And it got worse, although for a time it seemed that the expanding US market would absorb all goods produced around the world as the US economy became the buyer of last resort during 1998.
That made the process of crisis much more protracted, and global capitalism also became dangerously dependent on US capitalism remaining willing to spend beyond its means.
It is impossible to predict how deep and how long-lasting this crisis will be. But the latest boom created serious structural problems within global capitalism which could pave the way for a long period of stagnation, as happened in Japan after the bubble burst in the early 1990s.
So it was not the terror attack on the US that ended the boom of the 1990s?
NO. THE horrifying attacks on New York and Washington DC have speeded up the process of crisis. But the world was already on the brink of recession - defined as two quarters of negative growth - before 11 September.
Global industrial production fell at an annual rate of 6% in the first half of 2001 and growth in the volume of world trade was falling at its fastest rate for 20 years. Business investment has fallen at an annualised rate of 15% in the US and 18% in Japan.
Furthermore, unemployment was simultaneously rising in Europe, Japan and the US. Well before 11 September all indicators pointed to a serious downturn in the US while in the world's second largest economy Japan, second-quarter gross domestic product (GDP) figures were even more worrying than expected.
Nominal GDP fell at an annual rate of 10%. On top of that, Germany's economy, the world's number three, has stopped growing. This synchronised sinking shows that further integration and interdependence in the wake of globalisation works both ways. Capitalist countries may swim together when the world economy is booming, but they also sink together when the boom is over.
The global nature of the present crisis reflects the downward side of globalisation.
But what is the economic impact of 11 September and its aftermath?
THE FALL-out in economic terms has to be seen in the context that this shock came as US capitalism has run of steam. The events of 11 September therefore tended to reinforce and aggravate the worldwide downturn.
It is almost certain that the US is now in a recession. Growth for the year to the fourth quarter of 2001 is expected to be minus 0.5% in the US, according to the latest forecast from JP Morgan in New York.
The terror attacks, the call for a "long war on terrorism", gave an added twist to widespread uncertainty, which tends to undermine business and consumer confidence even further.
This, together with higher unemployment and the collapse in share prices will reduce US consumer spending, which accounts for two-thirds of the US economy and has up to now not been affected by the downturn.
Moreover, the world's financial and currency markets have become even more unpredictable and short-sighted after the attack. In the week following the attacks, central banks around the globe were forced to inject at least $208 billion into the financial system to avoid a meltdown and protect the dollar.
But shares are generally still overvalued. This is despite more than $11 trillion (equivalent to one-third of global GDP) having been knocked off world share prices since their peak last year - prices could plunge even further.
Another important effect of the attacks is that the US's image of being an 'economic safe haven' has been shattered. Time Magazine commented (1 October): "Foreign investors, who lately ploughed $500 billion a year into the US economy, no longer view the dollar as the safe haven as it was".
The value of the dollar is bound to come down with supplementary turmoil on Wall Street as investors and speculators convert their part of US assets into other holdings.
A sharp fall in the dollar's value following a capital outflow from the US would mean that US capitalism could not sustain its huge deficits. The obvious way to avoid falling into the trap is an increase in US exports and a cutback in imports. But instead of increased exports, US exports are falling.
So US capitalism is compelled to look for other means of protection, maybe even some kind of capital controls.
Even before the attacks, global foreign investment (FDI) was set to fall by 40% this year. The climate for investment has deteriorated further after the attacks and the capital flow will continue to slow, particularly to so-called emerging economies and indebted countries. All these act as a brake on the process of globalisation.
Why all the layoffs following the atrocities?
THE ATTACKS had their most immediate impact on the airline and travel industries. In the weeks following 11 September, 120,000 jobs were lost in the US and European aviation industry. The bosses across the world have used the tragedy as a pretext to brutally get rid of the "excess capacity" built up over years in the airline industry.
Even before the attacks, the global economic slowdown had significantly cut the numbers of passengers. The US carriers were already facing their worst year in a decade and many big airline companies were making huge losses. Some companies, such as Swissair, were $10.5 billion in debt - 40 times the size of its market capitalisation - and struggled to survive.
However, after 11 September, workers in the airline industry and industries directly linked to airline travel - airports, aircraft manufacturing, hotels, restaurants etc. - are in a catastrophic situation.
Millions of workers will be laid off, while the bosses try to save their skins. The Hotel and Restaurant union in the US reports that 40% to 60% of its membership has been laid off in the past few weeks. Trade unions in the US have been forced to hand out food packages to hotel workers who have lost their jobs.
The Independent reports: "Since many hotel workers lead precarious existences anyway - living from pay cheque to pay cheque and struggling to pay the rent and feed their families - the mass lay-offs could easily have the sort of consequences previously associated with the Great Depression - food queues, emergency homeless shelters, starving children".
This gives a dire warning of the horrifying social consequences of the crisis because the present generation of workers are less protected than the generation before. That is particular true in the US, but also in Europe after years of cutbacks in social services.
What is different about this crisis compared to the previous crisis?
FIRST OF all, it is a more synchronised crisis than at any time since the 1930s. Europe, Japan and the US are going down together and there is now no major region providing support to world output.
In the recession of 1990-91, Japan was still booming, so was part of Europe thanks to German unification and the so-called emerging markets. That is not the case today so this is truly a world recession.
"The next two years will be the worst for the world economy for a generation", writes Hamish McRea in the Independent [3 October].
Secondly, the global crisis reflects itself in overcapacity, lack of demand, debt overhang and huge imbalances in the world economy. All these point to a prolonged period of stagnation.
The Economist [25 August], warns: "America's long expansion in the 1990s encouraged rosy expectations about future growth and profits, encouraging overinvestment financed by heavy borrowing.
"When there is excess capacity and an overhang of debt, interest rate cut demands tend to be less effective in reviving demand. Investment led recessions, which were common before the Second World War, tend to be deeper and to last longer because it takes longer to purge financial excesses and overcapacity than it does to tame inflation."
Is there anything governments can do to avoid or cushion the effects of the crisis?
THERE IS in fact very little governments and central banks can do to change the direction in which global capitalism is moving. But, of course, they will have to respond and inject more money into the economy.
Governments worldwide have already taken steps to increase demand and make cheap money accessible for companies and consumers, eg. cutting interest rates. The Federal Reserve, the US central bank, has cut interest rates nine times so far this year. Key interest rates in the US are at the lowest level since 1962 and they are close to zero (0.1%) in Japan.
However, these cuts have had little impact on economic activity, because even if cheap cash is provided to companies they have no reason to invest when many industries have excess capacity and investment spending is falling. The same goes for consumers who are likely to spend less and save more, instead of going further into the red.
An important outcome of recent events and rising unemployment in the US is that the right-wing Bush administration has been compelled to stimulate the economy. Bush has already announced a stimulus package of $130 billion.
But more Keynesian measures to prop up the economy will come as the government tries to avoid the social crisis which tears society apart (unemployment could hit 6% in the US early next year). These will not only include further hand-outs to the airline and travel industries, tax cuts and money to rebuild New York, but also public investments in infrastructure and social spending.
One effect of the tragedy is a widespread feeling in the US that the administration has an obligation to all who suffer, including workers who have been laid off.
Bush has no choice than to give up the old neo-liberal aims of "sound money", of a budget in balance and paying off the national debt. This is particularly the case when the Bush administration is expected to increase military spending from $316 billion this year to as much as $400 billion next year (4% of GDP).
But this policy of tax cuts and spending is like giving a patient in desperate need an aspirin instead of surgery, as the example of Japan has shown. Since 1992 the Japanese government has tried ten spending packages to stimulate the economies, yet in nominal terms Japan's economy is no larger than in 1995 and the country's public debt is now the biggest in the world.
Nevertheless, it is an irony that the Bush administration is moving in the direction of Keynesianism while the so-called centre-left governments in Europe still try to operate within the limits set by the so-called Growth and Stability pact.
If the Euro zone "insists on a rigid interpretation of the Growth and Stability pact, then it will act to intensify recession, and Europe could end up being even weaker then the US", commented a banker in International Herald Tribune on 24 September.
But as the recession start to bite and with more people on the dole, even Europe's governments will have no choice other than trying to stimulate and protect their economies.
So it cannot be excluded that countries within the Euro-zone including Germany, who ironically saw the Growth and Stability pact as a mean of enforcing fiscal discipline on others, in practice will abandon the pact. This in turn, will put enormous strain on the EMU and the Euro in the years to come.
How will the working class react to the crisis and what are the political repercussions?
IT IS too early to say how massive lay-offs, after 11 September and the start of the "long war against terrorism", will affect the consciousness of workers and young people. Recent events have added to a mood of uncertainty and anxiety. This mood is reinforced by widespread fear of another terrorist attack.
For a time this could hold back workers from entering the arena of struggle, although it cannot act as complete brake on struggle as shown in many places across Britain where workers have recently voted in favour of strike actions.
Nevertheless, the present mood has given trade union leaders in Britain and the US a pretext to make an unilateral declaration of social peace, while the bosses axe jobs and make cutbacks in investment and production.
The capitalist establishment has also used the spectre of terrorism to step up its campaign against the anti-globalisation movement in general and its socialist part in particular.
A Financial Times editorial even said: "One of the less remarked consequences of the US terrorist attacks has been to halt in the tracks the mass movement against globalisation".
But neither the anti-capitalist mood nor the anti-globalisation movement has gone away, nor have the reasons why such a mood developed. The anti-war movement will give a new dimension to this mood and movement.
The political, social, economic and military fall-out of 11 September have resulted in a politicisation, particularly amongst sections of the youth, as well as a polarisation within society.
This process of politicisation will become deeper as it becomes more obvious that society's elite is using the "war against terrorism" as a guise for attacks on workers' standards and jobs, civil liberties and against those who challenge the horrors of global capitalism.
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