Jan 31, 1984
Starting at the end of 1979, the world economic crisis expressed itself in a real reduction in production as well as a drop in world trade. This is the second such reduction since the beginning of the crisis. The first one lasted nearly 2 years, in 1974-1975. Has the current recession reached its end? The most optimistic predictions respond affirmatively, given the signs of recovery which are seen in the United States since about the beginning of the year. Of course, the most optimistic, themselves, dare talk only of the end of the recession and not the end of the crisis since this recovery in production doesn’t signify a recovery in investments, since the monetary crisis continues and since the major crisis of the world monetary system becomes ever more menacing.
Assuming that the timid signs of economic recovery are confirmed in 1983 or 1984, the second recession of the decade will have attained its lowest point at the end of 1982. For the second time since the war, production in the industrialized countries went down (-0.2% in 1982; -0.7% in 1975). Utilization of productive capacity also went down; for example, in the United States from 85% in 1980 to less than 70% in 1982.
Along with the decrease in production, the volume of world trade also decreased for the second time (-2.5% in 1982; -3.5% in 1975). This recession, lasting a longer time than the preceding one and making the limits of the world market even more sensitive, has moreover brought with it a rebirth of protectionism: the bilateral commercial agreements between states, which are only disguised barter, have considerably augmented and represent at the present time barely 30% of world commerce. The Third World countries which export manufactured products are the first to be hit by protectionist measures. The industrial countries put “import quotas” on them or impose on them “voluntary restrictions” agreements or multiply standards like sanitary regulations, which penalize agri-business in the underdeveloped countries. Another form of aggressive protectionism consists of generalized subsidy by the Western governments for exports of capital goods.
The global incidence of mounting protectionism is difficult to evaluate because it takes multiple hypocritical forms; but the period, where international trade grew more quickly than production itself, and contributed to accelerating still more the growth of production, is finished. The economic war has definitively begun with new standards, cartelizations, protected markets, dumping and fluctuations in exchange rates ... against the background of a shrinking market.
The unemployment has increased brutally in Europe; since 1980 its growth has been incessant. In the U.S., during the recovery of 1976-79, the unemployment fell from 8% to 6% in 4 years. But from 1979 to 1982, it practically doubled, going from 6% to 11%. Since the beginning of 1983, unemployment has shrunk again but the number of unemployed is still larger than it was during the last recession.
In 1983, signs of a recovery could be seen in the United States, with an increase in industrial production on the order of 14%, according to Business Week. Unemployment diminished from the record level of 10.7% in December 1982 to 8.2% in December of 1983.
In Europe, however, production has increased only in the German Federal Republic with a rate of +2.1%. According to the experts of the OECD this increase is artificially inflated by the government’s temporary subsidy to investment, by its subsidies to construction and by several exceptionally large orders. For the moment no one predicts lasting German recovery. Domestic consumption showed a clear reduction as a result of a lowering of real wages for the last 2 years. Unemployment attained a record level in May of 1983 with 2,300,000 unemployed – three times more than what it was in 1980 – even if it has gone down slightly since.
In France, the figures for the first half of 1983 were lower than what was forecast. Industrial production has increased slightly by 1%, but the factory orders are the lowest since the recession of 1974-75. The National Institute of Statistics expects a decrease in industrial production of 2-3% for 1983; investments fell by 4.9% for the second quarter of 1983. For the first 8 months of the year the number of business failures already exceeded 13%, the number for the first 8 months last year. The OECD foresees a continuing increase in unemployment at least until the end of 1984.
In Great Britain as in the Netherlands, industrial production remained stagnant in the first half of the year. In Italy it shrank by 3.3%.
The forecast for Europe thus remains somber. Unemployment will reach nearly 20 million people, close to 12% of the active population, by the end of 1984. Industrial production in Japan maintained itself more or less in 1982, shrunk in the first half of 1983, before going up again, it seems, in the second half.
Therefore it’s only the American economic recovery which inspires hopes for a recovery in the rest of the world economy.
But the experts aren’t in agreement concerning at least its depth and its possible duration. The sudden increase in production at the beginning of 1983 had at the same time a technical and speculative character. The most spectacular figures were reflected in the 52% increase in residential housing starts in the first quarter of 1983, after having gone down 10.2% at the end of 1982. This is obviously a speculative investment by the capitalists who want to put their money in real estate. For the moment the American recovery has barely touched capital goods (with the exception of those designed for military goods production), nor exporting companies. But the experts of the OECD observe that the present recovery remains more modest and slower than those of preceding recoveries, and that it would be necessary for the industrialists to have confidence in the future (which no one can be sure of) in order for productive investments to take place. And the most pessimistic of the American economists think that a new recession could happen in the U.S. in 1985!
Thus it isn’t at all certain that today’s American recovery will last. There is even less reason to believe that it will have the power to carry along with it the rest of the world economy. For the increase in the American economy could be nothing more than a byproduct of the current world crisis, particularly of the financial crisis.
The threat of bankruptcy continues to hover over the world financial system. In this situation loans and short term investments in the U.S., the sanctuary of capitalism, remain a refuge. Several years ago, when the mass of floating capital was looking for promising speculation, it didn’t hesitate to play against the dollar. Today that same capital is brutally drained in an irresistible flow towards America. With the second world recession, the dollar again became the most sought after money in the world, and supplanted gold as the most prized refuge.
And the American recovery today could be the result of this flow of European and Latin American dollars put onto the American financial markets. The state loans or business investments in the U.S. are less risky than loans and investments in their own countries. The current American recovery can be an alarming symptom of a general flight of capital towards the United States. For example, Mexican capitalists have invested this year in choice real estate in Manhattan, Miami, Houston or Los Angeles, amounts which represent up to half of the Mexican loans from abroad for the last 3 years.
For this reason, the American recovery, far from being a measure automatically inducing a world recovery, could simply be depriving the rest of the world of capital. In the rest of the world the governments worsen the policies of austerity in order to permit immobilized national capital to continue to earn profits which then immediately go to nourish the speculative boom of the American financial markets.
The capitalist system seemed to have conjured up the worldwide recession of 1974-75 by means of an easy-money policy and the unlimited extension of credit. In the industrialized countries bank loans and state subsidies to the companies prevented a wave of bankruptcies. The massive loans to the least poor of the underdeveloped countries made them consumers of capital goods, and enlarged the industrial markets of the richest countries which were able to continue increasing their exports. Thus, during nearly 6 years, it seemed that the banking and financial system – more perfect, more powerful and united than before the war, moreover with guarantees from the large imperialist states and their central banks – was able to amortize the shock wave of a world recession and even stimulate an economic take-off.
But, retrospectively, these several years of moderate economic recovery seem above all to have accumulated new contradictions without having resolved the old ones. In every capitalist economic crisis there is a phase ordinarily ephemeral, where the money market is a beneficiary of the general stagnation, before slumping in its turn. The speculative and financial prosperity between the two recessions seems to have been just such a phase. The difference this time being that this phase was spread our for several years.
It is in the course of the last decade, in fact, that the whole capitalist class began to judge that is was more profitable to speculate in the financial markets than to invest in production.
In the underdeveloped countries themselves where the level of profit remained high in contrast to what happened in the industrialized countries, investments weren’t carried out directly, but essentially through bank loans (most often guaranteed by state organs) or in industrial contracts handed over and guaranteed by the imperialist states. For 6 years, the loans to certain countries of the Third World proved extremely lucrative, assuring the large Western banks regular and sure income which compensated for the more or less uncertain loans they were holding in companies at home.
The indebtedness of private companies doubled in the U.S. and without doubt increased in similar proportions in Europe. The budget deficits increased considerably. At the same time the rate of growth of production in the rich countries fell from 5% in the ‘60s to 3% in the ‘70s on average. And the rate of growth of investments fell from 6% in the ‘60s to 1.59% on average for the ‘70s. It was in the heart of the industrialized world that economic indebtedness nourished itself, resulting in a huge enlargement of the world financial apparatus, compared to production and real commercial transactions. This financial hypertrophy took a supplementary dimension with the massive increase in loans to a part of the Third World (+20% per year). These loans financed a growth there, particularly fragile and vulnerable because of its total dependence on Western markets. This world financial network, inflated following the first recession of the decade, was forced to face its own hour of truth with the recession of the ‘80s.
A new economic recession was bound to happen. Investments were able to grow a little during the ‘70s only in the Third World. A fraction of Western capital in search of a level of profit higher than that which is available to it in return for productive investments in the imperialist countries, took advantage of easy credit in order to invest in the zones of the planet where the workforce is underpaid, and where thus a super profit is possible. But this growth didn’t create comparable new mass consumer markets. The pseudo-industrialization of one or two dozen countries of the Third World was only a vast sub-contracting venture. The branches of Western companies, the prefabricated factories, the assembly lines, the subsidiaries of the electronics industry, the big projects to install and infrastructure of questionable use – all swarmed to Latin America, to Asia, to the Middle East, to Africa, while the populations of these same countries were impoverished. This pretended economic growth of the poor countries, entirely turned towards exports, only created openings for Western industries of capital goods. It worsened more, on the scale of the planet, the fundamental contradiction between the expansion of the productive capacity and the limit of the available consumption.
The only mode of true economic regulation that the capitalist system knows is adjustment a posteriori of its productive capacities to the limited absorption capacities of the market in the form of a massive and brutal devaluation of capital (chain reaction of bankruptcies, a complete breakdown in some areas of production). Up until now, none of the state and financial expedients have ever succeeded, except in pushing back the date of this destructive and dramatic adjustment; and this could only lead in the end to an even more formidable crisis.
The first recession of 1974-75 didn’t play this regulatory role. The world economy painfully recovered on the back of the Third World while worsening its monetary, financial, and productive disequilibrium. Several years later, the market artificially enlarged by a frantic recourse to credit, found itself saturated anew, and this time the indebtedness had attained a level such that the most adventurous bankers began to be frightened themselves and limit credit.
For 2 years now, the Western banks have been worried above all about the companies’ bankruptcy announcements. The domestic business loans which are no longer producing interest (the “non-performing assets”) accumulate and deteriorate the bank balances. In the middle of the recession of 1982, the amount of domestic loans definitively lost has doubled, even tripled, depending on the country.
The mounting number of bankruptcies, real of potential, as much in the private sector as in the state sector, is becoming an obsession for the bankers of the entire world. And they hesitate to loan. The epoch of easy credit is finished.
With the second recession of 1980-82, the economic world crisis entered its second phase: the financial euphoria began to doubt itself. Not only did the holders of capital not invest in production, but they looked askance at loaning. All liquid capital went in search of investments which were more sure and profitable.
We have entered the phase of the economic crisis where the banking and financial superstructure of the capitalist economy is no longer in a state to profit from the stagnation but wants only an assurance against any risk. Each one dreams only of saving his own skin.
All the conditions have come together for a financial crash. With the first threatening shock, the whole fantastic international financial house of cards could collapse.
The first shock happened with the successive defaults in payments of the most indebted underdeveloped countries. After Poland, there were Brazil, Argentina, Chile, Nigeria, and several others which were forced to postpone their repayments. The summer of 1982 blew a wind of panic on the world of international banking. Mexico, whose oil and natural gas resources are enormous and whose solvency no one would have doubted up until then, closed its money market and declared itself incapable of paying the service on its foreign debts which were estimated at 80 billion dollars. (The total debt of the underdeveloped countries had then risen to 700 billion dollars). In reality, the ensemble of loans to the Third World, as large as they were, represented only 5% of the total loans of all the Western banks, and 10% of the loans of the principal major international banks. But the combination of domestic loans, which were becoming less and less sure and the inability of the underdeveloped countries to make good on their obligations, put a certain number of large banks in a state of virtual bankruptcy.
The underdeveloped countries, like the countries of Eastern Europe which were strongly indebted in the preceding decade, have been the first and most brutally struck by the new world recession. They have been doubly affected by it. On the one hand, their exports decreased, both in volume and value; the flow of basic products other than fuels has fallen to its lowest level since the Second World War – without even talking about the price of oil which has been falling since the recession began and has put in difficulty those which up until now were considered to be privileged. The protectionist measures of the imperialist countries have above all worked against the manufactured products coming from the Third World. In 1982, the 4 largest borrowers which were forced to defer their repayments had to pay amounts which were greater than 50% of their exports.
On the other hand, they have been hit by the high dollar and by the high interest rates which have artificially and dramatically increased the service on their debt. In effect, since 1980, the big imperialist states following the lead of the U.S. have financed their budget deficits less by inflation as they did in the preceding period, than by an increase in the public debt, that is to say, the systematic issuing of state loans which has brought with it a general increase in the rate of interest and the end of the depreciation of the dollar. The underdeveloped countries were the first forced to pay for the worsening of the Western budget deficits and particularly the American ones.
Besides, since the beginning of the recession, the international banks made loans less easily and with harsher conditions. (In 1982, they even loaned less to the countries of the Third World than they received in the form of the repayment on principal.) This contributed to worsening even more, if that were possible, the difficulty of making payments for the underdeveloped countries. It is thus that in 2 years a good number among them found themselves on the edge of bankruptcy.
In reality, it is not in itself the delay of payments from the underdeveloped countries which put the Western banks at the edge of bankruptcy. That simply acted to reveal all the potential bankruptcies within the world of the Western banks.
When a poor country asks for an extension on its debt, the debt doesn’t disappear. If it doesn’t refuse to pay its debts (and no one has done this yet), it will have to accept harsher conditions put down by the banks. Up until now if the banks have had to wait patiently, (especially, since the recession of 1980-82) they have never lost assets because of the underdeveloped countries, as the World Bank has said. By contrast, this is not the case with the 53,000 American companies which failed in 1982, the bulk of whose obligations were written off by the banks. Nor is it the case, for example, with the insolvent steel trusts in Europe where the banks (which are nationalized in France) had to convert the debt owed them into capital. It means the banks had to renounce definitely all interest payments while at the same time becoming jointly responsible for the losses, present and future.
Austerity plans were imposed in the states of the poor countries on the verge of bankruptcy, but not on the well-to-do families who control the large insolvent Western companies and who are supported by their respective states. These families personal fortunes remain untouchable.
As more and more payments were delayed by the large debtors of the Third World, or by the Eastern European countries considered up until then without risks, a generalized crisis of confidence was unleashed in the world of the international banking community. In August 1982, the problem came less from Mexico which after all had demanded only a moratorium, than from the consortium of large banks involved in Mexico which threatened to refuse to restructure the loans (contrary to all past practice). Such a refusal could have brought a halt to all loans to Third World countries, and thus a chain of bankruptcies and an international banking crash.
It is difficult to disentangle the role of blackmail and that of real panic in these threats. In the same fashion that failing companies turn towards the state in each country, the international banks which financed the international loans turned towards the IMF and the World Bank, the resources of which come from the big imperialist states. On their side, the leaders of the international financial institutions, beginning with the leaders of the IMF, began to be afraid of the fear of the banks. They mobilized their efforts (and their resources) to reestablish the minimum of confidence necessary and to convince the banks to restructure the Third World debts and thus assure the continuity of the flow of international payments.
The IMF played the role of fireman for international finance, in advancing money, certainly, but above all in imposing as a condition of the new loans, draconian austerity plans, on Mexico, and on Brazil and on all the other countries which asked for a restructuring of their debt. It was acting to save the investment of the commercial banks by politically reassuring them that the interest from the restructuring would be paid. Just as the American fleet, based around the shores of Central America, gave its military guarantee that the Latin American states would hesitate before refusing definitively to pay their debts, as was done by the Russian workers state shortly after the revolution of 1917.
And in fact, the renegotiation of the debts of the biggest debtors of the Third World in difficulty is proving itself an operation of extreme profitability. The restructuring is granted for shorter and shorter duration (5 to 7 years maximum at present) and is accompanied by substantial bank commissions. Beyond this, the debtor must pay much higher interest then on the old debts. According to the OECD, if one takes into account the bank commissions, the restructured debt yields to the banks a yearly increase about 2% higher than the financial return initially expected. The consequence of the delayed payments on the banks has thus largely been alleviated by the toughening of the means of restructuring which took place over the last 3 years.
But the situation in the underdeveloped countries is becoming critical. In Latin America, the GNP could fall by 15%, imports by 30%. The per capita income for 1982 decreased for the third year in a row. The World Bank predicted a supplemental 10% lowering in income for 1983. This doesn’t prevent the IMF from demanding supplementary adjustments to the austerity plan in 1983, in exchange for new loans. In order to pay, the states must reduce their imports, paralyze their economy, and starve their poor populations. The Brazilian state achieved this year a surplus in the balance of trade of 6 billion dollars, at the price of serious cutbacks in imports; moreover this 6 billion still leaves it unable to meet its repayments. The situation is similar for Mexico and Argentina. The gearing up of usury is accelerating. The banks recoup their money with supplementary interest, but continue on the whole to reduce their loans. The future remains too uncertain for them. And the impoverishment of the underdeveloped countries in turn worsens the world crisis.
In 1982, we saw the so-called “solidarity” of the international bankers. Rather, the refloating of the banks by the American state and the big European states was achieved, at the price of strangling the underdeveloped countries. But solidarity between the imperialist usurers won’t necessarily hold up against a second shock: the bankruptcies will be not only in the poor countries this time, but also in a certain number of the industrialized countries which are all the more in debt since they had never come out of the economic recession.
Most of the European countries are now finding themselves in the same situation of foreign indebtedness as the underdeveloped countries. For 2 years, the ratio between their foreign debt and their domestic public debt has grown considerably. The United States, itself, may be able to finance its budget deficit cheaply with the capital of the whole world which comes into the U.S. to convert itself into dollars and look for a refuge. But the other imperialist countries have to pay a high price for the indebtedness.
At the present time, the foreign debt of a good number of industrial countries has reached an irreversible stage where it is necessary for them more and more to borrow in foreign currency, and above all in dollars, for repayment. The situation is particularly worrisome for the countries which are plunging over deeper into recession and whose currency is hardly used in international payments. Portugal, Spain, Italy, Belgium (whose foreign debt has reached a figure of 24% of its GNP as against 8% at the end of 1980), Denmark, perhaps even the Netherlands, must today execute the ordered austerity from the IMF like any underdeveloped country. They were ordered to lower real wages, to cancel cost of living clauses, to economize on the social budgets. To assure the service of the debt, they are forced to reduce their imports. This may allow them to issue communiques of victory about their trade balance, but these are nothing more than communiques of defeat for the standard of living of the population.
The situation in France, also, is becoming somewhat critical. Even without counting the enormous international debt of the EDF (Electricite de France) the SNCF (Societe Nationale de Chemin de Fers) and the other nationalized companies, the French state is, presently, the second largest debtor in the world, after the U.S., but certainly it’s not in the same situation. (The EDF, like the SNCF, was forced this year to reduce its investments in order to pay the service on an already too heavy debt).
The foreign debt of France has grown by at least 35 billion dollars in less than 2 years. The total foreign debt of France is estimated at 70 billion dollars, that is to say a debt which puts France not far behind Brazil and Mexico, the two biggest debtors of the Third World. Converted into francs it would equal 600 billion, that is to say more than two thirds of the annual state budget.
According to predictions recently made by the newspaper Le Monde, the annual repayment on the debt will be such that by 1985, France will be forced to use its whole annual borrowing capacity simply to pay it. Said otherwise, France will have to borrow simply to repay its earlier debts.
Some experts say that by the beginning of 1985, the question of restructuring this debt will be posed because the annual service and repayment on principal is going to be untenable. This signifies that a state like France risks bankruptcy in one or two years, if there isn’t an economic recovery between now and then. And the credit of the French debtors (the state, the nationalized companies and the private ones) on the international financial market can completely disappear just exactly as it did for Brazil or Mexico, countries to whom the international banks had been ready to give new loans without restrictions just 18 months before.
If the recession lasts in Europe, even if the recovery is confirmed in the U.S., it will no longer be simple. Brazil or Mexico will go knocking at the IMF’s door; there will also be Belgium, Italy, the Netherlands, Denmark, and who knows, even France, announcing that they can no longer pay their debts. In this situation it isn’t clear that the American state will agree to refloat the IMF in order to make the necessary advances. Especially, since in 1982 to meet the restructuring of the debts of those states in difficulty and begin to play the role of lender of last resort, the IMF haggled with the American and the European states in order to have the possibility of borrowing capital like any other bank. But if a great many countries ask to profit from the new terms, the fund will likely exhaust its own resources before 2 years are up; it will have loaned all its hopes to receive. The world could then have to reckon with a borrower in even greater difficulty, and one can’t see who would be able to save the IMF.
In 1983, one year after the Mexican panic, the economists were uneasily saying that in the absence of a vigorous world recovery, a new financial crisis was in the process of ripening. They were asking if it will not carry the whole system away with it this time.
During the recession of 1980-82, the world experienced a decrease in production for the second time since World War II. But this is the first time since the war that the standard of living of the workers has been substantially lowered in most of the industrialized countries.
At the time of the first recession in 1974-75, all the Western governments, social democratic or conservative, followed the same policy of maintaining consumption by way of unemployment payments and social programs while letting wages follow inflation. This time the governments, conservative or social democratic, have also lined up together but this time behind the same austerity policies.
In the U.S., even with the current recovery, the nominal wage increases in 1983 were the most feeble in 15 years, very inferior to the increase in the cost of living (many collective bargaining contracts negotiated in these last months include actual cuts in wages, or wage freezes).
As for the countries of Europe, they are still evidently far from the dire situation of the underdeveloped countries. But the different governments are attacking the income of the population and the social programs.
The Belgian government is planning new increases in social contributions and local taxes which will cause a fall of 1% in disposable household income. In the Netherlands, household consumption is going to be cut back for the fifth consecutive year and the new budget will lower wages of government workers and the minimum wage.
In France, without there having been spectacular measures since the 3 month wage freeze in 1982, the government continues to exert multiple pressures (starting with the wages in the public sector) so that inflation outdistances wages. A stagnation in household buying power is foreseen for 1983, and even a decrease of 1% for 1984.
The official justification of all these austerity policies is to relaunch exports. But since each country contracts its own consumption and domestic markets, it is hard to see how any country will find another one to export to.
In reality the economic war for the conquest of a better place on the world market starts by the economic war waged by the different governments against their respective populations.
Moreover the real problem for the leaders of the imperialist states isn’t so much to induce an economic recovery as it is to permit their national capitalists to continue to earn more profits, during the recession itself. Even if each individual capitalist sees no way to make profits other than by speculation, for the capitalist system as a whole the speculation in which it has trapped itself is not a way to make additional profit. And the only way to earn more profits in a period of recession is to diminish the compensation to the workforce.
By lowering wages, certainly, but it isn’t the only way. In the industrialized countries, wages represent only a part of the income of the workforce. A good part is socialized and distributed more by the way public services are structured (education, health, public transportation). It is through austerity budgets, which weigh on the social programs that the governments try to take from the working class a part of its resources, to put them at the disposal of capital.
The future will tell if, with the help of a certain recovery, the bourgeoisie can prevent a generalized financial collapse.
What is certain is that to avoid such a banking collapse means either that the banking system must recover, if necessary, by force, its enormous debts, interest and profits included; or that the states, directly or through the IMF, must intervene to bail out the banks from their bad debts.
In other words, the bankers will be able to save their profits and the bourgeoisie to save the financial system from collapse only at the cost of worsening the conditions of exploitation which are already intolerable for the poor masses of the Third World countries, and at the cost of a new fall in the standard of living of the working class in the imperialist countries.
It remains to be seen what will be the reactions of the working class in the poor countries, as in the rich ones, faced with the open war which the imperialist bourgeoisie has declared on them.