Tuesday, 12 May 2009

The great recession

Who now would dispute that world capitalism is facing its worse economic crisis since the 1930s?

Previous slumps, like 1974-75 and 1980-82, mainly affected the advanced capitalist countries, and overall growth in the world economy remained positive. Now, for the first time since 1945, there is a synchronised global downturn, with an absolute decline in world output (aggregate GDP) and trade. The Organisation for Economic Co-operation and Development (OECD) is predicting a fall in global output of 2.7% in 2009, with a 4.3% fall in the OECD area (made up of 30 of the most developed economies). It projects a further fall of 0.1% in OECD area output during 2010 and a modest 2.3% growth in the global economy. However, it warns that there is a serious risk of continuing negative growth rates.


The US economy, according to the OECD, is likely to contract by 4% this year, Japan's by 6.6%, and the euro area of the European Union (EU) by 4%. It would not be surprising if the actual figures turn out to be even worse.

In recent years, world trade grew two or three times faster than global output. Since last year, however, the volume of world trade (worth around $13 trillion annually) has fallen sharply. The World Trade Organisation predicts a 9% fall in trade (by volume). However, the OECD predicts an even worse decline of 13%. (World trade grew by 8.5% in 2006 and 6% in 2007.)

Exports have been hit by a generalised, world-wide collapse of demand and the seizing up of export credit normally used to finance about 90% of the international shipping of goods. Major exporters have suffered falls of between 15% and 40% in their exports. China, for instance, relied in recent years on exports of consumer goods to the US and EU. As these exports have been cut back, China's manufacturers have cut their orders for producer goods (for example, machine tools, motors, and other equipment), hitting manufacturing exporters such as Japan and Germany and raw material exporters like Brazil.

At the various summits of the major capitalist states – G8, EU, G20, etc – the leaders have all declared themselves in favour of free trade and continued globalisation, warning of the dangers of protectionism. But according to the World Bank, since the November 2008 G20 meeting, 17 members of the group have taken a total of 47 trade-restricting steps.

Given the greatly increased integration of world trade and investment over recent years, there is unlikely to be any return to the virtual seizing up of trade that occurred in the 1930s. Depression-era protectionism was a very blunt instrument, with the US imposing nearly 900 import duties, which provoked widespread retaliation from its competitors. Today, tighter licensing requirements, import bans, anti-dumping measures and environmental protection rules are more likely to be used.

Obama has promised to revive world trade talks. But the Doha round negotiations were stalled even before the financial crisis, and finally broke down in July last year. Now, the US is itself adopting protectionist measures. For instance, Obama's Keynesian stimulus package includes a 'Buy American' clause that forbids spending on public works "unless all of the iron, steel, and manufactured goods used in the project are produced in the US." An amendment in the Senate to remove this clause was defeated 65-31 (no Democrat voted for its removal). It was softened by an additional clause that called for the Buy American clause to be implemented in ways that are compatible with WTO rules. But this is far from ruling out protectionist measures.

"That clause sends a terrible message to our trading partners", comments Edward Glaeser. "We are embracing an industrial policy that encourages other countries to bolster their own domestic industries and shut out foreign producers". (International Herald Tribune, 7 March) The US's NAFTA partners, Canada and Mexico, also fear that the Obama administration will use labour and environmental protection rules to exclude some of their exports from the US.

Neither free trade nor protectionism will provide an easy way out for capitalism. Sheltered by protectionist measures, big corporations will raise their prices, squeeze wages, increase their profits, and postpone investment in new technology.

The global downturn was triggered by the financial crisis. In turn, the sharp fall in production and trade, and the world-wide surge in unemployment, has exacerbated the financial crisis. Governments have injected trillions in order to bail out the banks and other financial institutions. In contrast to 1929-30, they have prevented a catastrophic collapse of the core banking system and the financial infrastructure. One estimate puts the total cost of the US bank bailout (cash injections together with loan guarantees) to be a staggering £11.6 trillion. (Observer, 29 March)

Yet the crisis is far from over. As the downturn deepens, banks are being hit by defaults in prime loans, commercial property mortgages, credit card debt, student loans, etc. The IMF has now released an updated estimate of losses for the world financial system. Total losses are now expected to be a phenomenal $4.1 trillion. Last October, US losses on loans and securities were estimated at $1.4 trillion; they are now expected to be $2.7 trillion. The IMF expects losses of $1.2 trillion in Europe and $150 billion in Japan.

Most of the US losses arise from securitised loans linked to sub-prime housing loans. The losses of European banks, especially in Sweden, Austria and Belgium, are linked to loans to East European countries (like Hungary, Estonia, Romania, etc), formerly referred to as 'emerging markets'. Capital flows to these economies have plummeted, throwing Eastern Europe into crisis – with a major knock-on effect on Western European banks. East European governments are among those in the queue for IMF loans to avert collapse.

After the London G20 summit in early April, it was announced that the IMF and World Bank would inject $1.1 trillion into the world economy through loans to governments. However, the New York Times comments: "Some of the money has yet to be pledged, some is double counted and some would be counted as a 'synthetic currency' [special drawing rights] that is not actually real money". (How Much is the $1.1 Trillion in Aid from the G20 Really Worth? 9 April)

Around $500 billion of the $1.1 trillion is supposed to be direct funding of the IMF by major contributors, like the EU, Japan, and the US. So far, less than half has been forthcoming, and the US contribution depends on Congressional approval. The $250 billion of trade credits is not all new money; much of it will simply be rolled over from previous trade loans that have been repaid. The $250 billion of special drawing rights (credit against which governments can borrow) will be allocated to IMF members, and it is then up to them to extend loans to the poorest countries.

Obama recently said he saw "glimmers of hope" for the US economy. Capitalist leaders everywhere are desperately searching for the 'green shoots' of recovery. But this is premature. The rate of decline has slowed. This undoubtedly reflects the massive sums used by governments to bail out the banks and finance huge stimulus packages. Central banks in the US, Japan and Britain have reduced interest rates to near zero and resorted to 'quantitative easing', effectively printing money.

But this is not the same as a recovery. A sustainable recovery will be held back by several things that will not be easily overcome. There is massive overcapacity in the world economy, and this may well give rise to deflation, a general decline in the prices of manufactured goods (which will depress investment). There is a huge overhang of debt. Households, businesses and governments will all be forced to try to reduce their debt burden in the coming years.

Through the bailouts, for instance, a mountain of debt has been transferred from the banks to governments. Keynesian-type deficit spending is also increasing government debt. The OECD-wide fiscal deficit will reach about 8.7% of GDP next year (11.9% in the US). Protectionism will impede the revival of world trade. This is not a normal cyclical recession. It is likely to be much longer than previous post-1945 recessions, with a slow recovery. Some commentators are calling it the 'Great Recession' and, although not likely to be on the scale of the 1930s, it will have depression-like features.

The burden of the crisis inevitably falls on workers, poor labourers and small farmers. Unemployment means poverty and suffering for many millions. G7 unemployment is projected to rise to 37 million by the end of this year (and official figures always underestimate the true numbers). According to the ILO there were 190 million unemployed world-wide in 2008, and another 50 million will join their ranks this year. Globalisation, it was claimed, was reducing poverty, but the ILO now admits that "poverty reduction is unravelling". There are 1.4 billion people living in extreme poverty, on less than $1.25 a day.

Lynn Walsh, CWI

May 2009

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