Asia: the Coming Fury

21 03 2009

By: WALDEN BELLO

Published: 12/02/2009 at 12:00 AM
Newspaper section: News

As goods pile up in wharves from Bangkok to Shanghai and workers are laid off in record numbers, people in East Asia are beginning to realise that they are not only experiencing an economic downturn but are living through the end of an era.

For over 40 years now, the cutting edge of the region’s economy has been export-oriented industrialisation (EOI). Taiwan and South Korea first adopted this strategy of growth in the mid-1960s, with Korean dictator Park Chung-Hee coaxing his country’s entrepreneurs to export by, among other measures, cutting off electricity to their factories if they refused to comply.

The success of South Korea and Taiwan convinced the World Bank that EOI was the wave of the future. In the mid-1970s, then-bank president Robert McNamara enshrined it as doctrine, preaching that “special efforts must be made in many countries to turn their manufacturing enterprises away from the relatively small markets associated with import substitution toward the much larger opportunities flowing from export promotion”.

EOI became one of the key points of consensus between the World Bank and Southeast Asia’s governments. Both realised that import-substitution industrialisation could only continue if domestic purchasing power were increased via a significant redistribution of income and wealth, and this was simply out of the question for the region’s elites. Export markets, especially the relatively open US market, appeared to be a painless substitute.

Japanese Capital Creates an Export Platform

The WB endorsed the establishment of export processing zones, where foreign capital could be married to cheap (usually female) labour. It also supported the establishment of tax incentives for exporters and, less successfully, promoted trade liberalisation. Not until the mid-1980s, however, did the economies of Southeast Asia take off, and this was not so much because of the WB but because of aggressive US trade policy.

In 1985, in what became known as the Plaza Accord, the United States forced the drastic revaluation of the Japanese yen relative to the dollar and other major currencies. By making Japanese imports more expensive to American consumers, Washington hoped to reduce its trade deficit with Tokyo. Production in Japan became prohibitive in terms of labour costs, forcing the Japanese to move the more labour-intensive parts of their manufacturing operations to low-wage areas, in particular to China and Southeast Asia. At least $15 billion worth of Japanese direct investment flowed into Southeast Asia between 1985 and 1990.

The inflow of Japanese capital allowed the Southeast Asian “newly industrialising countries” to escape the credit squeeze of the early 1980s brought on by the Third World debt crisis, surmount the global recession of the mid-1980s, and move onto a path of high-speed growth. The centrality of the endaka, or currency revaluation, was reflected in the ratio of foreign direct investment inflows to gross capital formation, which leaped spectacularly in the late 1980s and 1990s in Indonesia, Malaysia and Thailand.

The dynamics of foreign investment-driven growth was best illustrated in Thailand, which received $24 billion worth of investment from capital-rich Japan, Korea and Taiwan in just five years, between 1987 and 1991. Whatever might have been the Thai government’s economic policy preferences – protectionist, mercantilist or pro-market – this vast amount of East Asian capital coming into Thailand could not but trigger rapid growth. The same was true in the two other favoured nations of northeast Asian capital: Malaysia and Indonesia.

It was not just the scale of Japanese investment over a five-year period that mattered, however. It was the process as well. The Japanese government and keiretsu or conglomerates, planned and cooperated closely in the transfer of corporate industrial facilities to Southeast Asia. One key dimension of this plan was to relocate not just the big corporations like Toyota or Matsushita but also the small and medium enterprises that provided their input and components. Another was to integrate complementary manufacturing operations that were spread across the region in different countries. The aim was to create an Asia-Pacific platform for re-export to Japan and export to third-country markets.

This was industrial policy and planning on a grand scale, managed jointly by the Japanese government and corporations and driven by the need to adjust to the post-Plaza Accord world. As one Japanese diplomat put it rather candidly: “Japan is creating an exclusive Japanese market in which Asia-Pacific nations are incorporated into the so-called keiretsu [financial-industri al bloc] system.”

China Masters the Model

If Taiwan and South Korea pioneered the model and Southeast Asia successfully followed in their wake, China perfected the strategy of export-oriented industrialisation.

With its reserve army of cheap labour unmatched by any country in the world, China became the “workshop of the world,” drawing in $50 billion in foreign investment annually by the first half of this decade. To survive, transnational firms had no choice but to transfer their labour-intensive operations to China to take advantage of what came to be known as the “China price,” provoking in the process a tremendous crisis in the labour force in the advanced capitalist countries.

This process depended on the US market. As long as US consumers splurged, the export economies of East Asia could continue in high gear. The low US savings rate was no barrier since credit was available on a grand scale. China and other Asian countries snapped up US Treasury bills and loaned massively to US financial institutions, which in turn loaned to consumers and homebuyers.

But now the US credit economy has imploded, and the US market is unlikely to serve as the same dynamic source of demand for a long time to come. As a result, Asia’s export economies have been marooned.

The Illusion of “Decoupling”

For several years China has seemed to be a dynamic alternative to the US market for Japan and East Asia’s smaller economies. Chinese demand, after all, had pulled the Asian economies, including Korea and Japan, from the depths of stagnation and the morass of the Asian financial crisis in the first half of this decade.

In 2003, for instance, Japan broke its decade-long stagnation by meeting China’s thirst for capital and technology-intensiv e goods. Japanese exports shot up to record levels. Indeed, China had become by the middle of the decade “the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia and Australia”.

Even though China appeared to be a new driver of export-led growth, some analysts still considered the notion of Asia “decoupling” from the US locomotive to be a pipe dream. For instance, research by economists CP Chandrasekhar and Jayati Ghosh underlined that China was indeed importing intermediate goods and parts from Japan, Korea and Asean, but only to put them together mainly for export as finished goods to the United States and Europe, not for its domestic market. Thus, “if demand for Chinese exports from the United States and the EU slow down, as will be likely with a US recession,” they asserted, “this will not only affect Chinese manufacturing production, but also Chinese demand for imports from these Asian developing countries.”

The collapse of Asia’s key market has banished all talk of decoupling. The image of decoupled locomotives – one coming to a halt, the other chugging along on a separate track – no longer applies, if it ever had. Rather, US-East Asia economic relations today resemble a chain gang linking not only China and the United States but a host of other satellite economies. They are all linked to debt-financed middle-class spending in the United States, which has collapsed.

China’s growth in 2008 fell to 9% from 11% a year earlier. Japan is now in deep recession, its mighty export-oriented consumer goods industries reeling from plummeting sales. South Korea, the hardest hit of Asia’s economies so far, has seen its currency collapse by some 30% relative to the dollar. Southeast Asia’s growth in 2009 will likely be half that of 2008.

The Coming Fury

The sudden end of the export era is going to have some ugly consequences. In the last three decades, rapid growth reduced the number living below the poverty line in many countries. In practically all countries, however, income and wealth inequality increased. But the expansion of consumer purchasing power took much of the edge off social conflicts.

Now, with the era of growth coming to an end, increasing poverty amid great inequalities will be a combustible combination.

In China, about 20 million workers have lost their jobs in the last few months, many of them heading back to the countryside where they will find little work. The authorities are rightly worried that what they label “mass group incidents”, which have been increasing in the last decade, might spin out of control.

With the safety valve of foreign demand for Indonesian and Filipino workers shut off, hundreds of thousands of workers are returning home to few jobs and dying farms. The loss of their remittances will drive millions of their dependents below the poverty line.

Suffering is likely to be accompanied by rising protest, as it already has in Vietnam, where strikes are spreading like wildfire. South Korea, with its tradition of miltant labour and peasant protest, is a ticking time bomb. Indeed, East Asia may be entering a period of radical protest and social revolution that went out of style when EOI became the fashion three decades ago.

* Walden Bello is professor of sociology at the University of the Philippines, president of the Freedom from Debt Coalition, and senior analyst at the Bangkok-based research and advocacy institute Focus on the Global South.





The Coming Capitalist Consensus

10 01 2009

Published on Wednesday, December 24, 2008 by Foreign Policy in Focus

Washington, DC

by Walden Bello*

Not surprisingly, the swift unraveling of the global economy combined with the ascent to the U.S. presidency of an African-American liberal has left millions anticipating that the world is on the threshold of a new era. Some of President-elect Barack Obama’s new appointees – in particular ex-Treasury Secretary Larry Summers to lead the National Economic Council, New York Federal Reserve Board chief Tim Geithner to head Treasury, and former Dallas Mayor Ron Kirk to serve as trade representative – have certainly elicited some skepticism. But the sense that the old neoliberal formulas are thoroughly discredited have convinced many that the new Democratic leadership in the world’s biggest economy will break with the market fundamentalist policies that have reigned since the early 1980s.

One important question, of course, is how decisive and definitive the break with neoliberalism will be. Other questions, however, go to the heart of capitalism itself. Will government ownership, intervention, and control be exercised simply to stabilize capitalism, after which control will be given back to the corporate elites? Are we going to see a second round of Keynesian capitalism, where the state and corporate elites along with labor work out a partnership based on industrial policy, growth, and high wages – though with a green dimension this time around? Or will we witness the beginnings of fundamental shifts in the ownership and control of the economy in a more popular direction? There are limits to reform in the system of global capitalism, but at no other time in the last half century have those limits seemed more fluid.

President Nicolas Sarkozy of France has already staked out one position. Declaring that “laissez-faire capitalism is dead,” he has created a strategic investment fund of 20 billion euros to promote technological innovation, keep advanced industries in French hands, and save jobs. “The day we don’t build trains, airplanes, automobiles, and ships, what will be left of the French economy?” he recently asked rhetorically. “Memories. I will not make France a simple tourist reserve.” This kind of aggressive industrial policy aimed partly at winning over the country’s traditional white working class can go hand-in-hand with the exclusionary anti-immigrant policies with which the French president has been associated.

Global Social Democracy

A new national Keynesianism along Sarkozyan lines, however, is not the only alternative available to global elites. Given the need for global legitimacy to promote their interests in a world where the balance of power is shifting towards the South, western elites might find more attractive an offshoot of European Social Democracy and New Deal liberalism that one might call “Global Social Democracy” or GSD.

Even before the full unfolding of the financial crisis, partisans of GSD had already been positioning it as alternative to neoliberal globalization in response to the stresses and strains being provoked by the latter. One personality associated with it is British Prime Minister Gordon Brown, who led the European response to the financial meltdown via the partial nationalization of the banks. Widely regarded as the godfather of the “Make Poverty History” campaign in the United Kingdom, Brown, while he was still the British chancellor, proposed what he called an “alliance capitalism” between market and state institutions that would reproduce at the global stage what he said Franklin Roosevelt did for the national economy: “securing the benefits of the market while taming its excesses.” This must be a system, continued Brown, that “captures the full benefits of global markets and capital flows, minimizes the risk of disruption, maximizes opportunity for all, and lifts up the most vulnerable – in short, the restoration in the international economy of public purpose and high ideals.”

Joining Brown in articulating the Global Social Democratic discourse has been a diverse group consisting of, among others, the economist Jeffrey Sachs, George Soros, former UN Secretary General Kofi Annan, the sociologist David Held, Nobel laureate Joseph Stiglitz, and even Bill Gates. There are, of course, differences of nuance in the positions of these people, but the thrust of their perspectives is the same: to bring about a reformed social order and a reinvigorated ideological consensus for global capitalism.

Among the key propositions advanced by partisans of GSD are the following:
Globalization is essentially beneficial for the world; the neoliberals have simply botched the job of managing it and selling it to the public;

It is urgent to save globalization from the neoliberals because globalization is reversible and may, in fact, already be in the process of being reversed;

Growth and equity may come into conflict, in which case one must prioritize equity;

Free trade may not, in fact, be beneficial in the long run and may leave the majority poor, so it is important for trade arrangements to be subject to social and environmental conditions;

Unilateralism must be avoided while fundamental reform of the multilateral institutions and agreements must be undertaken – a process that might involve dumping or neutralizing some of them, like the WTO’s Trade-Related Intellectual Property Rights Agreement (TRIPs);

Global social integration, or reducing inequalities both within and across countries, must accompany global market integration;

The global debt of developing countries must be cancelled or radically reduced, so the resulting savings can be used to stimulate the local economy, thus contributing to global reflation;

Poverty and environmental degradation are so severe that a massive aid program or “Marshall Plan” from the North to the South must be mounted within the framework of the “Millennium Development Goals”;

A “Second Green Revolution” must be put into motion, especially in Africa, through the widespread adoption of genetically engineered seeds.

Huge investments must be devoted to push the global economy along more environmentally sustainable paths, with government taking a leading role (“Green Keynesianism” or “Green Capitalism”);

Military action to solve problems must be deemphasized in favor of diplomacy and “soft power,” although humanitarian military intervention in situations involving genocide must be undertaken.

The Limits of Global Social Democracy

Global Social Democracy has not received much critical attention, perhaps because many progressives are still fighting the last war, that is, against neoliberalism. A critique is urgent, and not only because GSD is neoliberalism’s most likely successor. More important, although GSD has some positive elements, it has, like the old Social Democratic Keynesian paradigm, a number of problematic features.

A critique might begin by highlighting problems with four central elements in the GSD perspective.

First, GSD shares neoliberalism’s bias for globalization, differentiating itself mainly by promising to promote globalization better than the neoliberals. This amounts to saying, however, that simply by adding the dimension of “global social integration,” an inherently socially and ecologically destructive and disruptive process can be made palatable and acceptable. GSD assumes that people really want to be part of a functionally integrated global economy where the barriers between the national and the international have disappeared. But would they not in fact prefer to be part of economies that are subject to local control and are buffered from the vagaries of the international economy? Indeed, today’s swift downward trajectory of interconnected economies underscores the validity of one of anti-globalization movement’s key criticisms of the globalization process..

Second, GSD shares neoliberalism’s preference for the market as the principal mechanism for production, distribution, and consumption, differentiating itself mainly by advocating state action to address market failures. The kind of globalization the world needs, according to Jeffrey Sachs in The End of Poverty, would entail “harnessing…the remarkable power of trade and investment while acknowledging and addressing limitations through compensatory collective action.” This is very different from saying that the citizenry and civil society must make the key economic decisions and the market, like the state bureaucracy, is only one mechanism of implementation of democratic decision-making.

Third, GSD is a technocratic project, with experts hatching and pushing reforms on society from above, instead of being a participatory project where initiatives percolate from the ground up.

Fourth, GSD, while critical of neoliberalism, accepts the framework of monopoly capitalism, which rests fundamentally on deriving profit from the exploitative extraction of surplus value from labor, is driven from crisis to crisis by inherent tendencies toward overproduction, and tends to push the environment to its limits in its search for profitability. Like traditional Keynesianism in the national arena, GSD seeks in the global arena a new class compromise that is accompanied by new methods to contain or minimize capitalism’s tendency toward crisis. Just as the old Social Democracy and the New Deal stabilized national capitalism, the historical function of Global Social Democracy is to iron out the contradictions of contemporary global capitalism and to relegitimize it after the crisis and chaos left by neoliberalism. GSD is, at root, about social management.

Obama has a talent for rhetorically bridging different political discourses. He is also a “blank slate” when it comes to economics. Like FDR, he is not bound to the formulas of the ancien regime. He is a pragmatist whose key criterion is success at social management. As such, he is uniquely positioned to lead this ambitious reformist enterprise.

Reveille for Progressives

While progressives were engaged in full-scale war against neoliberalism, reformist thinking was percolating in critical establishment circles. This thinking is now about to become policy, and progressives must work double time to engage it. It is not just a matter of moving from criticism to prescription. The challenge is to overcome the limits to the progressive political imagination imposed by the aggressiveness of the neoliberal challenge in the 1980s combined with the collapse of the bureaucratic socialist regimes in the early 1990s. Progressives should boldly aspire once again to paradigms of social organization that unabashedly aim for equality and participatory democratic control of both the national economy and the global economy as prerequisites for collective and individual liberation.

Like the old post-war Keynesian regime, Global Social Democracy is about social management. In contrast, the progressive perspective is about social liberation.

Copyright © 2008, Institute for Policy Studies

Walden Bello is a columnist for Foreign Policy In Focus, a senior analyst at the Bangkok-based Focus on the Global South, president of the Freedom from Debt Coalition, and a professor of sociology at the University of the Philippines.

(note: this article is also in INQUIRER)