Focus on Trade #47

by Walden Bello*

(On 26 February, 2000, the Japanese newspaper Asahi Shimbun carried an interview with the author on the US economic boom's impact on Asia. This article is an expansion of the points made by the author in that interview, in a question-and answer-format.)

What is behind the US economic expansion?

As the US enters its ninth year of expansion, there is a lot of triumphalist talk among many American economists and officials, who speak about a "New Economy" where the business cycle has been abolished. There are reasons to be skeptical about this claim, however, and one major reason is that the expansion has been driven largely by hyperactivity in Wall Street. And this hyperactivity is largely due to frenzied trading in Internet shares, which has led to a tremendous overvaluation of Internet stocks. In other words, the economic boom is now being fuelled largely by the financial, speculative sector, and within that sector by just one group of firms.

There is, in fact, a contrast between the performance of "new economy" and "high economy" firms, with a widening gap between the skyrocketing share values in the former and the increasingly stagnant situation in the latter. Now, there is simply no way one can defy the laws of gravity, even in economics. What goes up must come down, or, if you prefer, the higher they go, the harder they fall. Once Wall Street values go too far ahead of the real economy, then the stage is set for the fall. Indeed, there is evidence, according to Larry Elliot, the economic analyst of the Guardian, that the American boom is being sustained by artificial means, with the rise in the Nasdaq index being underpinned by Internet firms borrowing money to buy each other's shares--the equivalent, he notes, "of taking in each other's washing."

You mean the expansion is less a sign of health than a symptom of disease?

If you put it that way, yes--in the same way Wall Street's exuberance in the twenties was the advanced state of a disease. If the financial sector is marked by frenzied activity, that's because the real sectors of the economy, especially manufacturing, are underperforming in terms of profitability. Despite brutal downsizing cum wage repression of the US labor force, it was only in 1995-96, according to Robert Brenner, that rate of profit in the manufacturing sector exceeded its 1973 level. Yet this figure was still 30 per cent below its level in the late sixties!

A sure sign of stagnation of the traditional sectors of the US economy is the recent wave of mergers and acquisitions (M&As). Giant mergers have shaken up the automobile industry, the energy industry, and all other key sectors of the economy. Indeed, monopolistic moves such as Microsoft's predatory moves, America Online's takeover of Netscape, and lately AOL's swallowing of the already bloated Time Warner Corporation indicate that the Internet economy is moving quickly form its competitive, "creative destruction" phase, where medium-sized agile upstarts can thrive, to its monopolistic phase, where conglomerate T-Rexes are completely in control. Mergers are to a great extent a response to crises of profitability, with monopolistic control being instituted in an industry to prevent the market from further eroding profit margins.

So what is the fundamental problem?

There is tremendous overcapacity all around, and this is what led to the Daimler Benz-Chrysler union, the Renault takeover of Nissan, the Mobil-Exxon merger, the BP-Amoco-Arco deal, and increased monopolistic coordination in the global airline industry---pace the "Star Alliance." US computer capacity is rising at 40 per cent annually, far above expected increases in demand. In the auto industry, worldwide supply is expected to 80 million in the period 1998-2002, while demand will rise to only 75 per cent of the total, and this estimate in the increase in demand is likely to be an overestimate since it was made before the Asian financial crisis! Overcapacity is responsible for the buyout by foreign interests of our key cement producers in the Philippines. The drive is to consolidate the cement industry globally so as to control global output. As economist Gary Shilling puts it, there are "excessive supplies of almost everything."

Now, overcapacity is another way of saying there is overproduction or that there is under-consumption. Overproduction relative to demand. Now, demand is dependent on consumer purchasing power, which is another way of saying that it is greatly a function of the distribution of income. Now, there is a lot of news about how tight the labor market is and unemployment is down to record levels in the US. But it was only around 1997 that real wages registered a slight rise after years of decline or stagnation.

As Robert Brenner has pointed out, the massive restructuring to regain profitability that marked the 16 year period 1979-1995 forced the bottom 60 per cent of the US labor force to work for progressive lower wages, so that by the end of the period, their wages were 10 per cent lower than they were in the beginning. The restructuring that is supposed to have made the US economy supercompetitive has also burdened it with the worst distribution of income among the major advanced countries. And income distribution in the US is now worse than it was 10 years ago.

But we need to look at this on a global scale since US corporations operate with the global market in mind and they are at the cutting edge of the technoeconomic revolution known as globalization. The gap between capitalism's tremendous productive capacity and the limited purchasing power of most of the participants in this system is even more stark at a global level. The number of people living in poverty globally increased from 1.1 billion in 1985 to 1.2 billion in 1998, and is expected to reach 1.3 billion this year. If you exclude China, where statistics are not reliable, the proportion of the population of the developing world classified as poor had remained broadly constant since 1987, according to the United Nations University-WIDER survey. And based on the proportion of the population living in great poverty, there are now 48 countries classified as least developed (LDC)--three more than a decade ago.

If you move from poverty to income inequality as an indicator of purchasing power, the picture is even clearer. A study of 124 countries representing 94 per cent of the world's population shows that the top 20 per cent of the world's population raised its share of total global income from 69 to 83 per cent. And in 1998, the income of the world's top three billionaires--Bill Gates with 90 billion, Warren Buffet with 36 billion, and Microsoft co-founder Paul Allen with 30 billion--was greater than the combined income of the 600 million that live the 48 least developed countries. Tremendous wealth among the few at the top, tremendous poverty among the billions at the bottom, and a middle stratum whose incomes are eroding or are stagnant--this is the contradiction that is responsible for the overproduction, overcapacity, and underconsumption that is wracking the US-dominated global economy.

But let's focus on Asia. Doesn't Asia benefit from the US economic expansion?

This is the conventional explanation. That is, US demand for Asian goods is said to be the factor pulling East Asia out of the financial crisis. Now the reality is more complex. If you look at the Asian financial crisis from a historical perspective, it becomes clear that its origins were linked to the dynamics of the US economy. Over the eighties and nineties, a large part of the prosperity of top 20-25 per cent of the US population was funnelled into mutual funds, hedge funds, and other investment juggernauts. Owing to the low levels of profitability, American industry was overall not an attractive investment area, and the Internet Revolution had not yet occurred. Looking for higher rates of return with a quick turnaround time, these funds, in the form of bank credit or portfolio investment, went first to Mexico and Latin America, then when the Mexican economy collapsed in 1995, to East Asia. US funds fuelled the stock market and property boom from Seoul to Bangkok to Jakarta.

Overinvestment was the natural result, and when the current account, exchange rate, and other macroeconomic indicators started going haywire, US funds led the pullout from the region, a panic that was deliberately exacerbated by George Soros and other hedge fund artists in order to profit from exchange rate differentials triggered by rush for dollars as investors dumped the peso, rupiah, baht, and ringgit. The herd behavior of US fund managers was--and there is now a consensus on this--central to the Asian financial debacle.

The Asian financial crisis, in fact, stems from natural dynamics of a global economy which is driven mainly by the dynamics of the US financial sector. Diminishing returns to key industries have led to capital increasingly being shifted from the real economy to squeezing "value" our of already created value in the financial sector. The result is essentially a game of global arbitrage led by US financial operators, where capital moves from one financial market to another seeking to turn a profit from the exploitation of imperfections of globalized markets via arbitrage between interest-rate differentials, targetting gaps between nominal currency values and "real" currency values, or short-selling in stocks, that is, borrowing shares to artificially inflate share values then selling. Not surprisingly, volatility, being central to global finance, has become as well the driving force of the global capitalist system as a whole.

Since differences in exchange rates, interest rates, and stock prices are much less among the more integrated developed country markets, movements of capital from North to the so-called "Big Emerging Markets" of the South and Asia have been much more volatile. Thus while crises are endemic to the finance-driven global capitalist system, the crises of the last few years have been concentrated in emerging markets like those in Asia.

But hasn't the US economy been largely a positive factor in the Asian recovery?

First of all, I have doubts about the strength of this so-called recovery. But assuming there is a recovery, I would say that the US has played a positive role only in the very restricted sense of being a market for Asian exports. But if you survey the situation more broadly, it is hard to contend that the US role is, on balance, positive. For using the IMF as a battering ram for trade and investment liberalization in the industrial and financial sectors, US transnational industrial and financial interests have been leading the takeover of Asian industrial and financial assets from Seoul to Bangkok.

Sure, foreign investment has been pouring into some economies, but the greater part of this is not "greenfield" investments that add new capacity to an economy like Japanese investment, but American and to some extent European investment that is directed at acquiring radically depreciated Asian assets. In other words, much of the industrial and financial structure built up over a generation by Asian entrepreneurs is passing to Northern TNC's at firesale prices. And, in many cases, the objective of the buyer is not to add to productive capacity but simply to strip firms of their assets or to reduce their capacity in line with a global production plan to up profitability by bringing down supply to meet stagnant global demand.

It's time to stop mouthing the stock phrases about how the US economy is a rising tide that is raising Asian boats. The reality of the US-Asia economic relationship during the crisis has been best expressed by none other than Jeff Garten, President Bill Clinton's former Undersecretary of Commerce, who said: "Most of these countries are going to go through a deep and dark tunnel...But on the other end there is going to be a significantly different Asia in which American firms have achieved much greater market penetration, much greater access."

* Walden Bello is the Executive Director of Focus on the Global South, an international policy research and advocacy organisation based in Bangkok.