The New about the Old and Old about the New:
SO THE “New Economy” really did not turn out to be that new. It seems to be plagued with the same old problems. Actually, that might not be a totally accurate statement, as there seems to be a “new” dimension to the old problems because, after all, it is the “New Economy”. So, what is new about the old and what is old about the new?
The ‘the old about the new’ is what was said more than 150 years ago “modern industry passes through the various phases of prosperity, overproduction, stagnation, crisis and completes its inevitable cycle.” Stagnation and crisis is what prosperity and overproduction culminates in. The manifestation of the stagnation and crisis is evident in the statistics about the “R” word that one has been bombarded with recently in all kinds of media. R, obviously, stands for recession.
THE AMERICAN economy has been slowing down tremendously in the last few months. In the US, industrial production has fallen fast as figures published on June 15th showed that in April it fell by 2.8% compared to a year earlier. The industrial capacity -- at just 77.4% -- was at its lowest level since 1983. The manufacturing industry has suffered a lot because there has been a drop in demand in many parts of the economy. The demand has been falling and inventories are rising, which in turn is leading to further production cutbacks, excess capacity, reduced capital investment and layoffs. Manufacturing has, therefore, seen acute layoffs with 113,000 jobs lost in June and 785,000 jobs lost in the last 12 months, with three fourths of these jobs lost since January.
For just June, the industries suffering the biggest losses were computer related with electronic equipment makers cutting 31,000 jobs and industrial machinery makers cutting 22,000 jobs. The temporary help industry has lost a total of 379,000 jobs in the last nine months. For the second quarter of 2001, job losses came to 271,000, the worst quarterly job loss since the 1990-91 recession. In tandem with the manufacturing industry, the service industry has also slowed down tremendously. The banking sector has started to see layoffs. The service sector, where most Americans work, was weak in June. Overall initial jobless claims, timely measure of labour market conditions, have risen at an annual rate of 50% over the past six months, a pace that in the past has been seen only in recessions. Economists are predicting that final figures will show that the economy barely grew in the recently ended April-June quarter. The Federal Reserve, the American central bank, has been slashing interest rates this year in order to try to prevent a full-scale recession. They have cut American interest rates six times, dropping it by 2.75% since January of 2001. This is the American crisis management machinery at work.
The bursting of the dotcom bubble has also contributed to the present crisis. Although, I think, this should not be considered the sole reason for the crisis, as has been portrayed in the media. The boom definitely created the euphoria of eternal prosperity, especially for people with high tech skills. Many dotcommers declined to sell their shares as they truly believed that their shares would soar even higher, maybe soar higher forever. For example, shares of Chemdex (later called Ventro), a spectacular Business-to-Business (B2B) burnout, plunged from $239 in February 2000 to 37 cents in April 2001. Overall, the market value of California tech firms set up since 1997 declined by nearly 70%.
All this news about the signs of recession comes with yet another bad news. America’s savings ratio, which measures savings as a percentage of personal income, has seen a sharp decline in the recent past. The ratio, calculated, from national accounts data, turned negative last year and is now –1.3%, suggesting that people are spending more than their after-tax income. This is startling if we compare it to savings ratio of the 1970s and 1980s when it averaged over 9%. It has turned negative only once before, during the Great Depression! There has been little impact on consumption patterns as of now from the $3.4 trillion (!) decline in household wealth over the year since March 2000 that was caused by the fall in share prices. The consumerist binge of the American consumer is something economists are praying for as it supposedly might salvage the American economy. When the reality sets in of the evaporation of paper money amongst the consumers, the spending patterns might also change.
WHEN MARX wrote about the modern industry passing through various phases, except for the little corner of the world, where he lived, the development of the bourgeois society was still in its ascendance and the historic task of bourgeois society was the establishment of the world market, at the least in its basic outlines, and a mode of production that rests on its basis. Since then capital has been tirelessly endeavoring to complete the task of establishing a global market very natural to its mode of existence. The establishment and integration of markets globally has also brought with it the globalisation of its troubles, to say the least.
To comprehend ‘the new about the old’ one need not look beyond Business Week, a publication for corporate America, which writes, “With the global economy increasingly integrated, there are signs that the business cycle has gone global as well. In the not-so-distant past, business investment, residential construction, and consumption were only slightly synchronised across countries. When one was weak, another was usually strong. As a result, global recessions were rare events, unless they were the result of major global shock such as the oil price increase of 1973. But in the Internet age, countries are becoming more and more connected – not only by trade but also by capital markets, by the flow of technology and ideas across national borders, and by psychology”. As an instance, in Europe, US and Japan the domestic demand grew only by 0.4%, 0.2% and 0% respectively in the first quarter of 2001. While this coordinated slowdown was not present as recently as 1986-87, when business investment declined in the US the slump did not spread to Europe, where capital spending grew in excess of 6% annually. Similarly, the US and Japan, the two biggest economies accounting for 46% of the world output, in the past decades, have not had a recession at the same time. A cover story in The Economist, a publication that considers its sacred duty to sermonise about the benefits of globalisation, warns that the world economy is starting to look remarkably, even dangerously, vulnerable. This is because the growth rate has slowed sharply. Worse, a nasty complication has emerged: just as growth has slumped, average inflation in the big rich countries has gone up to its fastest rate for almost eight years, kindling fears of stagflation, the disease that spread throughout the world in the 1970s might return.
In Germany, the euro zone’s largest economy, until April the forecast for growth this year was a healthy 2.7%. This was revised down to 2% and, recently, Ifo, an influential Munich-based research institute, announced that it expects growth to be no more than 1.2% this year. Werner Muller, the German minister, himself has said there may have been no growth at all this quarter. Since the German economy is very integrated with the world economy as the exports account for nearly a fifth of German GDP might make The Economist’s hunch of a German recession become a reality. As the economists at Moody’s, a credit rating agency, have estimated, for Japan, EU-15 and America taken together, the industrial output fell by 0.5% in the three months that ended in May this year, after growing by 6.3% in the same period last year. This, they say, is the deepest such plunge in a 12-month span on record.
Asia, especially East Asia, is exposed to the severe downturn in the advanced capitalist countries. According to Andy Xie, at Morgan Stanley in Hong Kong, IT equipment accounts for well over half of Taiwan’s and South Korea’s exports to the US and 80% of Malaysia’s. Recent data suggests that the region’s exports of IT equipment to the US have already fallen by 15% over the past year. In non-Japan Asia, exports account for 37% of regional GDP. This exposure has the potential to bring back the days of the 1997-98 Asian economic crisis. The symptoms of this happening are already surfacing, as almost every country in East Asia, except China, has experienced a sharp slowdown in the first quarter of this year. Singapore, Asia’s star economy, shrank by an annualized 10.1% in the second quarter of this year.
TRADITIONALLY TRADE links constituted a large part of the dependence amongst economies. These links were the channels through which the booms and busts spread. In the globalising world, other channels have also become important, like foreign direct investment (FDI), stock and currency exchange markets, and global supply chains. The correlation between changes in US and European share prices has risen from 0.4 in the mid-1990s to 0.8 last year. A recent study, conducted by IMF economists, has analyzed around 5,500 firms in 21 developed and 19 emerging economies, covering nine-tenths of these countries’ total stock market capitalisation. They have found that there has been a big increase in the importance of global factors in explaining movements in share prices since the mid-1990s. Worldwide $10 trillion of paper wealth has been destroyed over the past year, accounting for about 30% of world GDP. Never has so much disappeared so quickly!
The new global form of production of goods and services has created global supply chains. The supply chains were not as global and complex just a decade ago. A combination of factors including FDI, new information and communication technologies, cheap labour, economies of scale have made the ‘global outsourcing’ of supply chain activities common place. Since these chains are integrated using new information technologies, the good information travels in almost real time. The opposite, bad information, like financial contagion, also seems to be traveling in real time. So, are we about to see a global recession in Internet time? Certainly a first!
In Beyond Capital, already being hailed as a classic, Istvan Mezaros has written “There is nothing special, of course, in linking capital to crisis. On the contrary, crises of varying intensity and duration happen to be capital’s natural mode of existence: ways of progressing beyond its immediate barriers, and thus extending with ruthless dynamism, its sphere of operation and domination.” Briefly, the historical novelty of today’s crisis is manifest under four main aspects:
· Its character is universal, rather than restricted to one particular sphere;
· Its scope is truly global (in the most threateningly literal sense of the term) rather than confined to a particular set of countries (as all major crises have been in the past);
· Its time scale is extended, continuous – if you like: permanent – rather than limited and cyclic, as all former crises of capital happened to be;
· Its mode of unfolding might be called creeping – in contrast to the more spectacular and dramatic eruptions and collapses of the past.
The new mode of global capitalist production for old reasons – profits – brings about a crisis with both old and new symptoms. This demands new ways of organizing people to realize an old dream for a new world.
1. Marx, K. “On the Question of Free Trade”, Public Speech before the Democratic Association of Brussels, January 9, 1848.
2. The Economist Global Agenda, “Fighting off Recession”, The Economist, June 25, 2001.
3. The Economist Global Agenda, “Signs of a Slowdown”, The Economist, June 22, 2001.
4. Associated Press, “Unemployment Rate Rises to 4.5 Percent”, The New York Times, July 6, 2001.
5. The Economist Global Agenda, “Caught in the Jaws”, The Economist, June 23, 2001.
6. Associated Press, “Unemployment Rate Rises to 4.5 Percent”, The New York Times, July 6, 2001.
7. The Economist Global Agenda, “Running out of Steam”, The Economist, July 5, 2001.
8. The Economist Print Edition, “Easy.com Easy.gone”, The Economist, June 14, 2001.
9. The Economist Global Agenda, “Saved!”, The Economist, June 23, 2001.
10. Marx, Letter to Engels, 8 October, 1858.
11. Article, “In a One-World Economy, a Slump Sinks All Boats”, Business Week, June 25, 2001.
12. The Economist Global Agenda, “Caught in the Jaws”, The Economist, June 23, 2001.
13. The Economist Global Agenda, “Running out of Steam”, The Economist, July 5, 2001.
14. The Economist Global Agenda, “Signs of a Slowdown”, The Economist, June 22, 2001.
15. The Economist Global Agenda, “Running out of Steam”, The Economist, July 5, 2001.
16. The Economist Global Agenda, “Signs of a Slowdown”, The Economist, June 22, 2001.
17. The Economist Print Edition, “Highly Contagious”, The Economist, May 22, 2001.
18. The Economist Global Agenda, “Asia’s Lion Loses its Roar”, The Economist, July 10, 2001.
19. The Economist Print Edition, “Dancing in Step”, The Economist, May 22, 2001.
20. Brooks, R. and Catao, L. “The New Economy and Global Stock Returns”, IMF Working Paper 216, December 2000.
21. The Economist Print Edition, “Highly Contagious”, The Economist, May 22, 2001.
22. Meszaros, I., Beyond Capital: Towards a Theory of Transition, 1995, Merlin Press, UK.