Capitalist Globalism In Crisis
Part One: Boom and Bust
By Robin Hahnel
This is the first article in a three part series on the current global economic crisis.
Among economic systems capitalism is the manic-depressive patient: exuberance, unbridled optimism, and euphoriafollowed by gloom, listlessness, and depression. But no matter how often the cycle is repeated the patient always believes the latest boom will last forever, only to feel foolish again when the bubble bursts. And no matter how often the patient reverts to manic behavior when taken off medication, the economic psychiatric establishment eventually succumbs to the patients pleas to be taken off medication during the upsfreeing the exuberant economy from policy restraintsonly to insist on placing the patient back on meds re-application of necessary policy protectionswhen the unmedicated patient inevitably crashes.
The Latest Boom
The truth is that neither part of capitalisms manic-depressive boom and bust cycle is healthy. Like most capitalist booms, the benefits of global liberalization during the 1980s and 1990s were not all they were made out to be. In fact, most people in the world were worse off economically at the end of the latest boom than they had been when it beganthat is, even before the over-hyped boom metamorphosed into the global economic crisis of 1997-98. How is this possible you ask? We were told the world economy grew at 3 percent a year in the 1980s and 2 percent in the first half of the 1990s, and that low and middle income economies grew more rapidly, averaging 3.4 percent growth in the 1980s and 5 percent in the 1990s (World Bank, 1997). We were assured that growth in trade from increased trade liberalization that has gone hand in hand with increased private capital flows and financial integration, together with internal privatization and progressive dismantling of regulations and controls had produced a rising global economic tide that was lifting all but the most un-seaworthy boats (World Bank, 1997). And we were advised that since 43 percent of American households now own stocks, the spectacular increase in the U.S. stock market over the last decade had distributed generous benefits widely.
First, world output grew more rapidly in the period before the great experiment in deregulation and globalization. Second, world population grew along with GDP from 1980 to 1995. While world GDP grew at an annual rate of roughly 2.5 percent, world population grew at 1.6 percent per year over the same period, leaving less than a 1 percent annual increase in per capita GDP over the period. Third, GDP is a notorious over estimate of the benefits from economic activity. When depreciation of produced and natural capital is subtracted, and when environmental degradation is accounted for, what appeared to be a meager annual increase in economic well being per person becomes a decrease in average sustainable well being per year during our most recent stretch of good times. Fourth, corrections due to green accountingwhich simply apply the same treatment to natural capital as to human made capital, and to environmental amenities as to other goods and servicesdoes not account for adverse changes in the distribution of income nor increases in economic insecurity. Yet, along with the increased pace of environmental degradation, rising inequality of income and wealth, and increasing economic insecurity were far and away the most significant features of the good years we just enjoyed.
The share of income of the top 5 percent of households in the U.S. climbed from 16.6 percent of all income in 1973 to 21.2 percent in 1994. The share of the richest 20 percent rose from 43.6 percent to 49.1 percent, while the share of the poorest 20 percent fell from 4.2 percent to 3.5 percent. Worse still, not only has the relative share of income fallen among the bottom half of the income distribution in the U.S., but their absolute income has fallen as well. Not only do they have less compared to those above, but they have less compared to what they had in the past, themselves. The average income of the poorest 20 percent fell by 2.7 percent between 1973 and 1994 and that of the second poorest 20 percent fell by 3.8 percent, while that of the top 20 percent rose by 27.2 percent, and that of the top 5 percent rose by a dramatic 44.2 percent. A statistic called the Gini coefficient is the most commonly used measure of inequality. In any distribution perfect equality yields a Gini coefficient of zero while perfect inequality yields a Gini coefficient of one. The Gini coefficient measuring income inequality in the U.S. rose from .419 to .479 between 1975 and 1993 more than a 14 percent increase in inequality.
The increase in wealth inequality was even more dramatic during the good times. The share of total wealth owned by the top 1 percent almost doubled between 1976 and 1992. This was largely because the top 1 percent of wealth holders received 62 percent of the total gain in wealth between 1983 and 1989 while the bottom 80 percent got only 1 percent of the new wealth over that period. Worse still, the average wealth of the bottom 40 percent of wealth holders actually declined. Meanwhile, the average real wage in the U.S. fell by 11 percent between 1973 and 1993 despite continued increases in labor productivity, with the largest drops occurring in the lower wage brackets. In contrast, corporate profit rates in the U.S. in 1996 reached their highest level since these data were first collected in 1959. And while its true that 43 percent of U.S. households now own stocks, since most own very little, largely through 401(K) and other retirement accounts, the top 10 percent of households appropriated 86 percent of the stock market gains since 1989.
Two years ago the disparity between official figures indicating steady economic growth and surveys revealing that most Americans feared more for their economic futures that at any time since the Great Depression, gave rise to a surprising seven part series in the New York Times on downsizing. The Times series kindled so much interest that other major dailies like The Washington Post and The Los Angeles Times scurried to print their own imitations. As layoffs extended from blue collar workers to middle management and from rust belt industries to financial services, as the number of Americans with no health care insurance climbed to 43.4 million, as temporary and part time jobs replaced permanent full time jobs, as low skill, low wage jobs replaced high skill, high wage jobs, as hours worked per family climbed while most family incomes stagnated, the discrepancy between rising economic fortunes for the few and declining economic conditions for most had finally became impossible for even the NY Times and fellow travelers to ignore completely. But two more years of low unemployment and inflation, combined with a spectacular run on the U.S. stock market allowed the media to replace stories about family tragedies from downsizing with exhilarating stock market updates, effectively silencing the alarm bell. Only recently, as clouds have appeared on the international economic horizon threatening the Wall Street bubble have pundits begun to ask themselves if it was wise to ignore earlier warnings.
Not only was the boom limited largely to the very wealthiest in the U.S., it by no means extended to all regions of the world. Economists Walter Park and David Brat of American University calculated that the Gini coefficient for GDP per capita in 91 countries for which data were available rose steadily throughout the time period. Certainly Latin America did not share in the boom during the lost decade of the 1980s as those countries suffered through their debt crisis. The boom bypassed the Middle East and Northern Africa as oil prices sagged. It completely passed over Sub-Saharan Africa as their terms of trade deteriorated along with their natural capital. Even before the latest debacle in Russia, the boom did not reward those who embraced capitalism in Eastern Europe and the countries of the former Soviet Union after the fall of the wall. Listed alphabetically, annual average growth rates for those economies from 1990 through 1995before the recent crisis in emerging marketswere as follows: Armenia: -21.2 percent, Azerbaijan: -20.2 percent, Belarus: -9.3 percent, Bulgaria: -4.3 percent, Czech Republic: -2.6 percent, Estonia: -9.2 percent, Georgia: -26.9 percent, Hungary: -1.0 percent, Kazakstan: -11.9 percent, Kyrgyz Republic: -14.7 percent, Latvia: -13.7 percent, Lithuania: -9.7 percent, Poland: +2.4 percent, Romania: -1.4 percent, Russian Federation: -9.8 percent, Slovak Republic: -2.8 percent, Tajikistan: -18.1 percent, Turkmenistan: -10.6 percent, Ukraine: -14.3 percent, Uzbekistan: -4.4 percent (World Bank, 1997).
The case of Russia is the best known. Unemployment rates are meaningless since millions of workers who are officially employed are not being paid. But we know that a majority have fallen into poverty, and life expectancy for males had dropped from 65.6 years to 57 years in only five years even before the latest collapse of the ruble, government and private sector default, and consequent stoppage of IMF loan disbursements.
In fact, besides helping the most wealthy in the U.S., the benefits of deregulation and globalization passed over pretty much every country except East Asia. And since the largest economy in East Asia, Japan, was stagnant throughout the 1990s, the boom was actually much more specific to a few East Asian countries. The first figure is the annual average growth of GDP from 1980 through 1989, the second is the annual average growth of GDP from 1990 through 1995 for the East Asian tigers:
China: +10.2 percent, +12.8 percent, Hong Kong: +6.9 percent, +5.6 percent, Indonesia: +6.1 percent, +7.6 percent, Korean Republic: +9.4 percent, +7.2 percent, Malaysia: +5.2 percent, +8.7 percent, Singapore: +6.4 percent, +8.7 percent, Thailand: +7.6 percent, +8.4 percent (World Bank 1997).
This is not only a remarkable performance, but a remarkable list. With the single exception of China, every East Asian success storywhich along with the reconcentration of wealth within some advanced economies is, essentially, the boom we were supposed to be awed byis now on the endangered economy species list of the bust of 1997-1998.
At this point a slight digression on China is necessary. There is little doubt that China has so far been spared the fate of fellow East Asian tigers in the crash of 1997-1998 largely because its totalitarian political regime resisted international pressure to make the yuan a convertible currency, and to remove all controls on international capital flows even while the Chinese leadership hastened the spread of capitalism internally and aggressively pursued an export lead growth strategy. But I dont believe the numbers. If true, 16 years of annual growth rates of well over 10 percent in an economy of a billion people would be a remarkable economic success story. It would be remarkable even if accompanied by significant environmental deterioration and by the most dramatic increase in economic inequality in any country in modern world historywhich is likely the case. But while the figures on growth of output are published by the World Bank, the raw numbers, as is the case for all countries, are provided by the government of the country. Chinese government economic statistics have long been subject to political manipulationmore so than in the case of any other country of which I am aware. There were times when Chinese Communist leaders so mistrusted their own government figures on Chinese agricultural production, for example, that they used CIA data collected from spy satellites instead for making policy decisions. Moreover, the political allies of former party boss, Deng Psiao Peng, who have run China throughout this period, are the most notorious falsifiers of information for political expediency from the old Communist Party. But the reported growth rates are so big, how could they possibly be making the whole thing up? I dont think the figures are entirely fictitious, but I suspect they are very misleading even when not fictitious. I suspect that the prices used to evaluate the output of goods and services whose output has stagnated or declinedsuch as basic grainsare seriously under valued, while the prices of goods whose output has increasedlike meat, garden vegetables, and commercial real estateare greatly over valued. I also suspect that many goods and services provided to employees and their families by state enterprises were not counted before, but now are being counted as they are run for profit. I mention these doubts because, if I am correct, much of what appears to be an economic miracle in China may have never happened. In which case the miracle of deregulation and globalization from 1980 to 1996 reduces to what has proven to be short lived success stories in a hand full of smaller East Asian economies along with a regressive redistribution of wealth and income in a handful of advanced economies.
As best I can tell, for every NIC (Newly Industrializing Country) there were ten FEBs (countries Falling Evermore Behind). And for every wealthy benefactor of rising stock prices, rising profit shares, and rising high end salaries, there were ten victims of declining real wages, decreased job security, and lost benefits. The recent experiment in deregulation and globalization was indeed both the best of times and the worst of times. But unfortunately it was the best of times for only a few, and the worst of times for most. At least that is what had been happening until the bubble burst in July 1997.
The Latest Bust
There is no need to listen to traditional doomsayers about the global economic crisis. The Washington Post began its front-page article covering the opening of the annual meetings of the International Monetary Fund and World Bank on October 5 saying: Forget about the Asian miracle, the Latin America revival, the Russian transformation, the mighty American economy and the triumph of free markets. The annual meeting this week of central bankers, finance ministers and private financiers at the IMF and World Bank is about holding the line and forestalling global economic disaster. In his speech to the assembled dignitaries Paul Volcker, former chair of the Federal Reserve Board said: Suddenly, it all seems in jeopardy. All that real growth all the trillions in paper wealth creation is at risk. What started as a blip on the radar screen in Thailand about as far away from Washington or New York as you can get has somehow turned into something of a financial contagion.
While the blush on the boom is seldom as bright as reported, the human consequences of the bust are almost always far worse than revealed by the capitalist media. The view from Bangkok (Thailand), Kuala Lumpur (Malaysia), Jakarta (Indonesia), Seoul (South Korea), and even from Singapore and Hong Kong is bleak beyond belief. Forget stock markets that have lost well over half their value: Since September 1997 the composite stock index has fallen 83 percent in Indonesia, 69 percent in South Korea, and 65 percent in Thailand. Forget currencies that have depreciated dramatically: Since September 1997 the Indonesian rupiah has depreciated by 73 percent, the South Korean won by 33 percent, and the Thai baht by 12 percent. Forget multi-billion dollar IMF bailouts that have entirely left the country within weeks leaving no discernible effect on economic prospects. In exchange for promises of fiscal austerity, price liberalization that more than double the prices of staples such as rice, and further elimination of any restrictions on movements of foreign capital in or out of their countries, the IMF has promised a $58.2 billion bailout for Indonesia, a $42.3 billion bailout for South Korea, and a $17.2 billion bailout for Thailand. Forget hundreds of billions of dollars of hard currency reserves that took decades to build up, wiped out in a matter of months. Forget the transfer of ownership of banks, factories, utilities, and natural resourcesprized productive assets once valued in the trillions of dollarsto foreign ownership at fire sale prices. Forget all this because most of the people living in these East Asian tigers suddenly turned water buffaloes with stripes, never owned stocks, resources, or foreign exchange in the first place. What the lucky ordinary East Asian had gained from their economic miracle was a low paying job in perhaps a modern factory, but more likely a dangerous sweat shop, in exchange for under employment as seasonal laborers or share croppers in an unproductive agricultural sector. Only a tiny Asian elite gained substantial wealth from the flood of international capital into their countries. To gauge the human impact of the Asian crisis, we have to look at changes in employment, changes in output and therefore income, changes in real wages, and yes, changes in death rates. Because, with no hope of recovery in sight, things have already reached the point where consequences of the East Asian economic collapse may have to be measured in death rates.
The effect of the Asian crisis on output is still difficult to measure. Figures for GDP in 1997 include both pre and post crash months, and of course figures for 1998 will not be ready until after the year is over. But sometimes it doesnt take a weatherman to know which way the wind blows. In Thailand where the crash hit earlier, GDP growth for calendar year 1997 was already negative, after being a positive 6 percent in 1996. GDP in Thailand is predicted to shrink by 8.3 percent in 1998. In Indonesia, where the crash came a little later, the gowth rate for 1997 was only half the growth rate for 1996, and GDP is projected to shrink by 14 percent in 1998. In South Korea the crash came late enough in 1997 to have little effect on that years figures, but GDP is projected to shrink by 6 percent during 1998. Every new projection from the IMF or World Bank for 1999 and beyond is more pessimistic than the last for these, and other fallen tigers, but all such projections are fairly meaningless since a great deal will depend on whether the crisis spreads to China, Japan, Brazil, or Europe and the U.S., and what measures different governments and international organizations do or do not adopt.
We do know that since September 1997 roughly 2,000 people have lost their job each day in Thailand where there are now over 2 million people out of work as the unemployment rate has climbed from 2.1 to 7.3 percent. In Indonesia 20 million people have lost their jobs since September 1997 as the unemployment rate has risen from 4.7 to 13.2 percent. In South Korea there are 2 million newly unemployed, and the unemployment rate has risen from 2.6 to 8.3 percent. And this doesnt count foreign guest workers who have been sent packing: 50,000 have already been sent home by South Korea, and 250,000 have been sent home by Thailand.
In Indonesia UNICEF estimates that infant mortality may increase by 30 percent by years end. 250,000 clinics have closed down for lack of medicines and volunteers are left to scratch out a living for themselves and their families as best they can. The Indonesian minister of education estimates that 2.7 million children have dropped out of school since the economic crisis began, lowering the enrollment rate from 78 to 54 percent. There is every reason to believe that many of those school drop outs have gone to work in the 3.3 billion dollar Indonesian child prostitution industry.
It is hard to believe things could get worse in Russia than they already were by spring of 1998. But the collapse of the Russian economy this August will further reduce production, income, employment, and no doubt life expectancy. Stanley Fischer, Deputy Managing Director for the IMF describes the scene in a special report presented to the recent IMF/World Bank sponsored meetings in Washington, DC in October 1998:
Ever since 1992 the IMF has been the worlds main vehicle for assisting Russia and promoting economic reform. This was difficult from the start, for reformers never had full control over economic policy. Nevertheless, the worlds stake in Russian reform was too critical not to make the effort. [Good old noblesse oblige!] Some progress was made... but the extent of Russias problem is hard to overestimate.... Since 1996 the Russian government has been in a race between its need to collect more taxes and a rising interest bill on its growing debt. In the second quarter falling oil and commodity prices reduced export revenues, interest rates rose, and the government had to roll over $1 billion a week of GKOs, or short-term rouble-denominated debt. In July the international community faced a hard choice: whether to help Russia try to prevent devaluation. The adverse effects of a devaluation were clear and the reformist Kiriyenko government was making progress on taxes and in other areas. So the decision was made to help, recognizing that this was a calculated risk. An official package of $22 billion was assembled, on condition that the Russians undertake major tax reforms and a voluntary debt restructuring scheme for GKO holders to switch to longer-term dollar obligations was introduced. The take up of this offer was, however, small. The program could still have been viable if GKO holders had been ready to roll over their maturing holdings. But after the Duma rejected two tax measures, and with doubts about the ability of the government to deliver on policy commitments growing, this did not happen. So the government was faced with an unenviable choice between devaluation, debt restructuring or both. It chose both: the rouble was devalued, the GKO restructuring was imposed unilaterally and a temporary moratorium was put on private debt payments. The contagion following Russias actions has been serious. The realization that Russia was, after all, not too big to fail shook investor confidence, although it is hard to believe that sophisticated investors who had earned an average of 50 percent a year on GKOs since 1994 really believed these investments were safe.
In other words, Russia has temporarily abandoned further useless attempts to placate the IMF and the creditors it represents and the IMF has now abandoned Russia. There is every reason to expect the effects for Russians, beginning this winter, may be catastrophic.
At this point the Asian flu has not spread to China. The jury is still out on whether Japan can jump start its economy or is destined to sink deeper into recession. (If Japan does slip deeper into recession it will be primarily because of lost export markets in the rest of Asias collapsing economies, not because of some supposed flaw in the Japanese banking system, as is widely insinuated in Western circles. It takes real chutzpah for Western bankers who gave U.S. the Savings and Loan crisis to wag their fingers at Japanese bankers who engineered the Japanese economic miracle of the 1950s, 60s, 70s, and early 80s) And no Latin American dominomost importantly Brazilhas yet to fall. Moreover, jitters in Europe and the U.S. remain only that so far, and have been largely confined to swings in the stock markets which have not yet affected the real side of the economy, i.e. production, income, and employment. Much hinges on whether the bust continues to spread or whether contagion stops here.
Next month: how and why the crisis occurred, why the values of currencies and stock markets plummeted in formerly successful Asian economies, why IMF policies aggravated the crisis, and how the crisis in Asia and Russia threatens to affect both finance markets and economic production and income in other emerging markets as well as in Japan, Europe, and the United States.