The world economy – facing war and recession

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FRFI 171 February / March 2003

The United States of America, the dominant world economic and military power, is on the verge of another and this time, it believes, decisive war against Iraq. The purpose of this war is not simply to remove Saddam Hussein and his brutal Ba’ath regime in order to take control of the second largest oil reserves in the world. It goes much further. The aim is to ensure that US imperialism’s economic interests are paramount not only in the Middle East but throughout the world.

The US economic juggernaut is grinding slowly to a halt. US imperialism needs to pre-empt the rival economic claims from the other two powerful imperialist blocs, the European Union and Japan, as well as Russia and a rapidly expanding China before the global economy implodes. The Bush administration has made it clear it will not allow any power to challenge US global economic and military domination. The massive force being built up in the Gulf to crush Iraq is there to reinforce this and the US is determined to go to war with or without the go ahead from the other imperialist regimes.

The crisis of global capitalism is forcing the most powerful economic countries into a renewed struggle for control of the world’s raw material sources and markets for trade and investment – into a new process to redivide the world according to economic power. War is redivision by military means and the US is threatening to use its armed might to redraw the map of the whole Middle East, changing regimes and even borders if necessary, to serve the interests of US imperialism. A war will almost certainly exacerbate the global economic crisis, however long it lasts, but it is not its cause.

Globalisation – a redivision of the world by imperialism [1]
In a series of articles on the global economy, FRFI has consistently argued that capitalism suffers from long-term structural contradictions that threaten its destruction. Far from being something dynamic and new, the frenetic international expansion of capital underlying neo-liberal globalisation is the product of the overproduction of capital in the heartlands of capitalism. Globalisation is a sign of economic decay and increasing instability in a world of obscene and growing inequality. It is a return to those unstable features of capitalism, which characterised imperialism before the First (Imperialist) World War, producing those dramatic shocks to the international economy, which led to the Russian revolution. It is precisely now, after the international expansion of capital has been drastically cut back and stock markets are tumbling, with much of the imperialist world stagnating and on the brink of deflation, that US imperialism has made a decisive military move to impose its economic interests on the Middle East.

Many now recognise the seriousness of the economic and social crisis of global capitalism. The attack on the World Trade Centre on 11 September 2001 and the developments that followed began to drive this point home. In a article in the Financial Times (4 September 2002), Martin Wolf, a prominent Financial Times commentator and advocate of neo-liberal globalisation, raised the question whether the global expansion of capitalism has come to a halt and is about to be reversed. Will the second era of global capitalist integration end like the first, which went into reverse, between 1914 and 1945, after inter-imperialist rivalries led to war and socialist revolution in Russia? Wolf's answer is no. Conditions are very different this time.

Firstly. he argues, the anti-globalisation movement is not rooted in a powerful social force such as the organised working class. It does not seek power, has contradictory objectives, and largely rejects organised politics. Its protest is unlikely to triumph.

The second cause of disintegration of the earlier globalisation was trade protectionism especially in the US. Wolf believes contemporary economic developments have largely tamed those interests.

The third cause was the economic instability resulting from the financial and exchange rate crises of the 1930s. Although Japan is still struggling with the aftermath of its ‘bubble economy’ and the US bubble is now ‘painfully deflating’, he argues that the outcome will not be another 1930s. Japan has avoided a depression and so will the US. The fiscal and exchange rate crises in ‘emerging market economies’ like Brazil and Argentina are being contained. Despite such crises no significant country has reversed the commitment to liberal trade.

The fourth cause of the breakdown of the last liberal world order was ‘great power’ or inter-imperialist rivalry. Today, Wolf argues, there is little chance of a war between the imperialist powers in the near future because the world has an ‘undisputed hegemon’, the US. The exception might be between China and the US, but for now China is not a strategic rival of the USA. All the ‘great powers’, he tells us, have abandoned the ‘notion that prosperity derives from territorial gains plus plunder, rather than internal economic development plus peaceful exchange’.

All these points are important and significant but underlying them is a great deal of partial analysis and wishful thinking. As the crisis of global capitalism deepens, as inequality grows and poverty and deprivation spread, the material conditions are being created not only for renewed rivalry between the imperialist powers but for popular mass working class opposition to capitalism. The US/ British-led bombing and occupation of Afghanistan, the brutal subjugation of the Palestinian people by the US-backed Zionist regime, US/British imperialism’s preparations for war against Iraq, alongside the wholesale attack on the civil rights of millions of people under the guise of ‘fighting terrorism’ point to a future not of ‘internal economic development plus peaceful exchange’ but of wars, conflict and social revolution.

How deep, then, is the crisis of global capitalism and what trends and developments seem to be emerging from this crisis and with what consequences? It is to this we now turn.

The US economy is grinding to a halt
In 2001, the dominant three economic powers produced some 72% of world gross national income – the US with 31.5%, the EU 26% and Japan 14.5%. With the Japanese and European economies stagnant, the US economy has been the driving force behind world economic growth. In 2002, according to the OECD, it was expected to have generated some 52% of the increase in world demand. However, provisional figures show that US economic growth dramatically slowed in the fourth quarter of 2002 to 0.7%, down from 4% in the previous quarter. It was only a large 4.6% increase in government spending that prevented the economy falling back into recession. The outlook is poor as the US economy confronts an unsustainable ‘triple debt trap’ [2] – rapidly rising personal (household), government and external debt.

In previous articles we have pointed to three potential crises facing the US economy which would drive it into recession. The first arose from the fact that share prices were rising dramatically faster than the underlying profits of companies on which, in the final analysis, they are based. At some point, we argued, an alignment had to take place. The bubble has now burst with the broad-based S&P 500 share index having fallen nearly 45%, the Dow Jones Industrials 32% and the Nasdaq (high technology shares) 74% from their 2000 peaks. The stockmarket fall has wiped some $8,000bn off household wealth since early 2000 and the $2,500bn rise in housing wealth over the same period cannot compensate. With over 50% of US households owning shares, this fall in the stockmarket has curbed the rise in consumer spending – the driving force behind US economic growth.

The second potential crisis is the unprecedented levels of debt – private (business and household) and, more recently, public sector. Businesses confronting falling profitability and tumbling stock values have already slashed spending and cut investment. As a result the corporate financial deficit has fallen from a peak of 3.6% of GDP in 2000 to balance this year, significantly contributing to the slow down in economic growth. However household debt is still growing, driven by interest rates of 1.25%, the lowest level for 40 years, and mortgage equity withdrawal based on the rapidly rising value of houses. Household debt has now reached an unsustainable 131% of disposable income. The personal sector deficit is still around 2% of GDP as opposed to an historic post-war surplus of between 2 and 3%.

In addition, the federal (government) budget has a substantial deficit. It has moved from having a surplus of 2.3% of GDP in the first quarter of 2000 to a deficit of 1.8% of GDP by the third quarter of 2002. The additional fiscal stimulus of $674bn tax cuts over 10 years, announced by Bush in early January this year, the major part being a windfall for the rich from scrapping the tax on dividends, can only add to the federal deficit. So far, therefore, it has taken a rapidly rising government deficit alongside an unprecedented household debt to prevent the US economy from falling back into recession.

The third potential crisis is a consequence of the others. Real demand in the US economy has grown consistently faster than real output. The US is spending nearly 5% of GDP, some $500bn more than it is earning. The difference is expressed by an ever-growing current account deficit and with it a progressive rise of the US net external debt to the rest of the world. Latest estimates put that debt at around $2,700bn, greater than the foreign debt of all underdeveloped countries put together.

The US economy needs to grow by over 3.5% a year simply to prevent unemployment rising from the present 6% level. Given the low levels of business investment, to sustain such a level of growth would necessitate even faster rising personal, government, and external debt. This is simply not possible.

To finance the rising external deficit the US economy needs to attract around $1.9bn a day, making the US increasingly dependent on foreign lenders. There are already an estimated $6,500bn foreign owned assets in the US. Overseas investors now own more than 18% of the market value of long-term US securities and 42% of outstanding US Treasury bonds.[3] The balance of economic power is changing.

In the summer of 2002, we argued that the US economic situation was precarious and contradictory. To attract more capital to finance a rising external deficit and maintain the level of the dollar, interest rates would need to rise, slowing down economic growth as the overall burden of debt increased and private sector spending fell. If, on the other hand, interest rates were to be lowered even further to prevent the economy stagnating, then the dollar would fall rapidly, reducing US imports from the rest of the world. Foreign investors would withdraw their capital as the value of their returns in depreciating dollars fell. The global economy would slow down and there could be another recession.[4]

The latter process is what has been set in train, with the Federal Reserve cutting interest rates in November 2002 to 1.25%. The dollar has lost 20% of its value against the euro since July 2001. 10% of that fall took place in a six-week period from December 2002. Foreign investors are cutting back their investment and in some cases withdrawing funds.

Latest figures show that net foreign inflows to US equities have now fallen to almost zero. In 2000 there was a net inflow of foreign direct investment to the US of around $130bn. In the first three quarters of 2002 there was an outflow of $66bn. Inflows in the corporate and US treasury bond markets have more or less held up and are taking on much of the strain of financing the external deficit.

Overall, it is estimated that between 2000 and the first three quarters of 2002, foreign private purchases of US assets fell from $978bn to $560bn.[5] The dollar will need to fall further. The extent of the fall needed to reverse the US current account deficit, of the order of 30%, could turn this slowdown in the inflow of foreign capital into an actual withdrawal of existing capital assets – capital flight. The US economy would be driven into deep recession with devastating consequences for the global economy. Such a development would dramatically increase tensions between the major imperialist powers.

Changing balance of economic power
It is now clear how vulnerable the US economy is to any major shock to the global economic system. For nearly two decades, it has depended on foreign investors, mainly from other imperialist nations, financing its current account deficit. This has produced a changing balance of economic power between and within the Triad – the US, EU and Japan.[6]

Multinational corporations (MNCs) are the principle vehicle in imperialism’s drive to divide the world according to economic power. Over the last decade there has been an unprecedented export of capital by the imperialist countries, ever greater mergers and acquisitions (M&As), and a strengthening of economic domination over the underdeveloped nations, as the imperialist powers have positioned themselves internationally to consolidate and defend their global investments. In 2001, ‘global capitalist integration’ slowed down due to a recession in the three largest imperialist economies – US, Japan and Germany. There was a dramatic decline in global foreign direct investment (FDI) flows for the first time for a decade. FDI outflows fell by 55%, from $1,379.5bn in 2000 to $620.7bn in 2001, reflecting an equally significant fall in cross-border M&As of 48%, from $1,143.8bn to $594bn, over the same period.[7] FDI flows fell as a proportion of global GDP from 4.8% in 2000 to 2.3% in 2001, slightly below the level of 2.4% for 1998. This fall will continue. Provisional estimates for 2002 show that FDI has fallen by a further 27% and cross-border M&As by an even larger 45%. Globalisation has gone into reverse.

The US regained its position as the leading outward investor with FDI outflows of $114bn (a decline of 30% on 2000), replacing the UK, which had been in top position in both 1999 and 2000. The UK fell to sixth place behind the US, France, Belgium/ Luxemburg, Holland and Germany. The EU was responsible for 59% of world FDI outflows. France was the leading outward investor of the EU in 2001.

The accumulated stock of outward investment gives a more authentic picture of the changing balance of power between the imperialist countries. The US with over $1,381.7bn accumulated FDI, 21.1% of the outward global stock of FDI, is still dominant, followed by Britain (14.4%), France (7.87%) and Germany (7.84%). Following more than a decade of stagnation and recession, Japan’s share of the global outward stock at 4.6% is now far less than the 11.7% it had accumulated in 1990. The EU with $3,440.9bn FDI outward stock, accounts for 52.5% of the total, nearly 2.5 times that of the US. In 1980 the US and EU had almost equal shares. Over the period 1980-2001, the US share of the global total has halved (see table). This indicates how economically significant the EU has become in the battle between the imperialist regional blocs over the last two decades. It is no surprise that many countries in the EU, led by Germany and France, want to establish their own regional defence force independent of NATO and are opposing US plans to redraw the map of the Middle East. Inevitably Britain, second only to the US in its accumulated global direct investments, is pulled two ways between a European imperialist bloc and a North Atlantic one. For the present, the Labour imperialists, led by warmonger Blair, are prepared to use the military alliance with the US to enable Britain to punch above its weight in the world relative to France and Germany. There is a lot at stake, and it is not just oil.


Shares in total FDI stock of major imperialist powers 1980-2001
($bn and % of world total)

Country       1980       %        1990       %       2001       %

France        24.3       4.7       120.2      7.0     515.5     7.9
Germany    43.1       8.3       148.5      8.6     513.8     7.8
Japan         19.6       3.8       201.4    11.7     300.1     4.6
UK               80.4    15.4       229.3    13.3     942.8   14.4
US             220.1    42.2       430.5    25.0   1381.7   21.1
EU             215.6    41.3       798.5    46.4   3440.9   52.5


Although FDI inflows into developing countries (including the ex-Soviet bloc) actually fell by 13% from $264.5bn in 2000 to $232bn in 2001, the share of global FDI going to the underdeveloped nations rose from to 17.7% in 2000 to 31.6% in 2001. That share rose again in 2002. The share of global FDI in the underdeveloped countries always rises during periods of recession or low growth in the main imperialist nations, as corporations are forced to export surplus capital to areas of potential expansion and growing markets. FDI is highly concentrated in a small number of underdeveloped countries to achieve not only a high rate of return but also an adequate flow of profits through access to unexploited resources and key global markets. In 2001, five underdeveloped countries received 62% of the total inflows and the ten largest received 75%. In times of crisis the MNCs of the dominant imperialist powers tighten their grip on the most productive and profitable resources and markets in the underdeveloped countries.

Grinding down its citizens
Neo-liberal globalisation has been a devastating process for the vast majority of the world.[8] Extraordinary wealth for a small minority of the world’s population has accompanied untold misery and desperation for much of the rest. Inequalities between rich and poor countries and between rich and poor in all countries have reached unprecedented levels and are still growing. This is creating the material basis for a new anti-capitalist movement based on the oppressed and dispossessed – the working class. The facts speak for themselves.[9]

• Average income in the richest 20 countries is now 37 times that in the poorest 20. This ratio has doubled in the last 40 years.
• The richest 1% of the world’s people receive as much income as the poorest 57%. The richest 10% of the US population has an income equal to the poorest 43% of the world or, put another way, 25 million US citizens have an income equal to that of almost 2bn people.
• In 1999, 2.8bn people lived on less than $2 a day with 1.2bn people barely surviving on the margins of subsistence on less than $1 a day. 11 million children die of preventable causes every year, that is some 30,000 a day. Of the 680 million children of primary school age, 113 million are not in school. 97% of them live in underdeveloped countries.

Inequalities within countries have been increasing for 30 years. Among 73 countries with data containing 80% of the world’s people, 48 have seen inequality increase since the 1950s, 16 have experienced no change and only 9, with just 4% of the world’s population, have seen inequality fall.

Some of the worst inequalities exist in the US and Britain under governments that are prepared to spend billions waging a brutal war against Iraq. In the US between 1979 and 1997, real GDP per capita grew by 38%, but income of a family on median earnings (the level of earnings which splits the population into two equal groups) grew by only 9%. The income of the richest 1% grew by 140%. The income of the top 10% of families was 10 times that of the median in 1979 and 23 times it in 1997. Inequality has continued to grow since that time. According to a report from the US Federal Reserve, the difference in median net wealth between the top 10% income group and the bottom 20% dramatically increased by 70% between 1998 and 2001. Over the same period the gap between whites and minority ethnic groups grew by 21%.[10]

In Britain, between 1979 and 2000/01 the share of total income of the top 10% of households rose from 21% to 28%, while that of the bottom 10% fell from 4% to 2%. Around five million people lived in poverty in 1979, in households with below half average income. By 2000/01 this had risen to 13.7 million. 4.1 million children lived in poverty in 2000/01 a rise of 2.7 million on 1979. As in the US, there is a strong racial as well as class character to poverty in Britain. In 2000/01 while 18% of white people lived in households in the bottom 20% of the population ranked by income, 29% of black Caribbeans, 47% of black non-Caribbeans, 27% of Indians and 62% of Pakistanis/Bangladeshis lived in such households. Many households have only avoided slipping into poverty by working long and unsocial hours. The numbers of people working more than 60 hours a week has grown to one in six from one in eight only two years ago. One in three fathers say they routinely work more than the 48-hour standard set by an EU directive. One in seven mothers and one in six fathers work night shifts and almost four in ten mothers and half the fathers work at least one Saturday a month.

Finally world unemployment has increased to 180 million at the end of 2002: 20 million more than two years ago and the highest level since reliable figures began in 1990. The situation is deteriorating rapidly. It is highest in the Middle East and north Africa at 18%. It has risen 0.8% in the industrialised countries in 2 years to 6.9%. There are 500 million working poor, people who have jobs but who live on less than $1 a day.[11]

From anti-war to anti-capitalism
The world is on the brink of recession. The US economy is grinding to a halt. Stock markets worldwide are tumbling. Globalisation has gone into reverse. A large proportion of the world’s population face desperate and unyielding poverty. This is the context in which the US, the world’s leading imperialist power, in alliance with British imperialism is preparing for a devastating and brutal war against Iraq.

The movement to war is an expression of the global crisis of capitalism. The divisions between the main imperialist powers over the preparations for war are divisions based on different global interests. They will intensify as the war approaches and inter-imperialist rivalries will become an important factor in the developing situation. This offers opportunities for a new anti-imperialist movement to be created.

Opposition to neo-liberal globalisation has grown significantly over the last decade as environmental, anti-poverty, anti-debt campaigners and other radicals have come together with anti-capitalists to fight neo-liberal globalisation. 11 September 2001 initially set back this movement but it has now regained momentum. Other important developments have given it greater impetus. In Argentina new forms of working class power have appeared on the streets. In Venezuela the poor and oppressed workers have taken on the oil managers, the wealthy and a business class in alliance with the labour aristocratic trade unions, to defend President Chavez against an US-promoted coup and they are winning. Landless peasants and rural workers are organising against the dictates of the World Trade Organisation and the IMF. Anti-privatisation campaigns, for example in South Africa, are steadily gaining ground throughout the world and much more beside.

Opposition to the war is drawing all these forces together with millions of others who are joining campaigns against the war in every corner of the world. It is vital opportunity to turn this opposition to war into an opposition to imperialism and the capitalist system that underlies it.

David Yaffe

1 This was the title of David Yaffe’s first contribution to the discussion of ‘globalisation’ in Fight Racism! Fight Imperialism! (FRFI) 131 June/July 1996. See our website www.rcgfrfi.easynet.co.uk, Marxism section. Other articles can be found in FRFI 137 June/July 1997 (Marxism section of website), FRFI 150 August/September 1999, FRFI 158 December 2000/January 2001 and FRFI 168 August/September 2002.
2 Martin Wolf Financial Times 18 December 2002.
3 Financial Times 17 January 2003.
4 See FRFI 168 op cit.
5 Financial Times 28 January 2003 and 8 January 2003.
6 See FRFI 158 for a detailed discussion of these developments.
7 See UNCTAD World Investment Report 2002 United Nations 2002 for these and the following statistics. The estimates for 2002 come from a UNCTAD Press Release 24 October 2002.
8 See ‘Globalisation equals poverty’ in FRFI 150 op cit.
9 Statistics are from Human Development Report 2002 OUP 2002 and World Development Report 2003 World Bank and OUP 2003 unless stated otherwise.
10 The Guardian 24 January 2002.
11 See Households Below Average Income DSS various years. Financial Times 15 August 2002, The Guardian 25 September 2002 and Financial Times 24 January 2003.