World financial volatility
Addis Ababa – When an Indian-based network of dissident economists – the International Development Economics Associates (http://www.networkideas.org) – recruited critical African intellectuals for two dozen seminar sessions last week, the stability of world capitalism naturally came up for debate. The Council for the Development of Social Science Research in Africa and the Ethiopian Economics Association mainly lamented the structural conditions in world markets which have left African cash-crop exporters ever poorer and more vulnerable.
Is a different, inward-oriented strategy appropriate? I think so, but perhaps a prior question is whether the world financial power center, in Washington, might weaken sufficiently to make a progressive approach more politically attractive, technically feasible and economically rewarding.
To answer affirmatively requires adding more meat to the bones of my last column, ‘Crunch time for U.S. capitalism’ (ZNet Commentary, December 4). I argued that the economic slowdown since the 1970s generated falling corporate profit rates and speculative investment bubbles. But the ‘displacement’ not resolution of these problems meant they actually get worse: through, for example, volatile financial markets, ineffectual Third World structural adjustment imposed by the World Bank and IMF, and more desperate, brutal imperialist looting methods.
It is a good time to think outside the neoliberal box, these economists agreed, since the Washington Consensus universally failed the masses of Ethiopians and billions of other Third World people. In addition, financial volatility has been evident not just in the dollar price, but in other markets across the world, even after the dust settled in East Asia following the 1997-98 meltdown. While the Clinton Treasury Department managed to pass the costs of these problems elsewhere, the chickens have recently been coming home to roost in the U.S. itself.
The main organizer of our gathering, Jayati Ghosh of Nehru University in New Delhi, is one of the sharpest critics of bourgeois macroeconomics, combining robust anti-imperialism with a Keynesian concern for consumption and equity: ‘Financial liberalization that successfully attracts capital flows increases vulnerability and limits the policy space of the government. Unfortunately, the dominance of finance globally has meant that such debilitating flows occur even when individual developing countries or developing countries as a group have no need for such flows to finance their balance of payments or augment their savings.’
Concludes Ghosh, ‘The real benefit of such flows is derived by the U.S. government, which, being the home of the reserve currency, can resort to large scale deficit financing which it opposes in developing countries.’
This isn’t merely a government dilemma. Consumer credit is also expanding the bubble, as U.S. household debt (as a percentage of disposable income) ratcheted up from below 70% prior to 1985, to above 100% fifteen years later.
To be sure, on the one hand, financial product innovations and advanced technology permit a somewhat greater debt load without necessarily endangering consumer finances. On the other hand, during the same period, U.S. individual savings rates fell from a range of 7-12% of income to below 3%.
Moreover, household assets are mainly in real estate, in the wake of the 2000-02 stock market crash. But the property market began inflating out of proportion to underlying values following the 1998 drop in interest rates (the Fed’s response to the Asian crisis), which spurred a dramatic increase in mortgage refinancings.
As a result of the huge rise in property prices that followed, the difference between the real cost of owning and of renting soared to unprecedented levels, according to the left’s guru on this issue, Dean Baker of the Center for Economic and Policy Research in Washington. With the housing sector contributing roughly a third of U.S. economic growth since the late 1990s, this bubble is particularly important. Overpriced property is also a severe threat in cities in nearly every country.
Yet another speculative investment route has opened up in financial instruments called ‘derivatives’ (because they are not direct claims on underlying property – instead, gambles on price movements). Interest rate futures and options are especially hot trades, soaring by 41% in dollar activity last year.
Likewise, energy-related derivatives are a popular Wall Street gamble, resulting in huge price fluctuations in immature markets such as electricity, gas and oil. Thanks to U.S. dependence on imported oil, which has increased in price from $12/barrel in 1999 to more than $50/barrel a few weeks ago, such speculation-driven price swings have exacerbated Washington’s trade deficit, already vast at 5% of GDP.
The point, as Ghosh reminds us, is that U.S. financiers can place these sorts of bets in new markets because they receive vast loans from East Asia, money otherwise unavailable to the rest of the world for investment. This is especially unfair, given that Washington was the main beneficiary of the region’s currency crash in 1997-98. Massive capital flows entered the U.S. banking system, and imports from East Asia were acquired at much lower prices by U.S. consumers, in turn lowering what might otherwise have been credit-fuelled inflation.
Still, more than $2 billion of overseas money is required by the U.S. each work day to cover imports and international debt repayments. As a result, foreign ownership of all outstanding Treasury bills has soared from 20% to 40% over the course of the past decade. Warns Ghosh, ‘The problem now is that the willingness of private investors and governments to hold more dollar denominated assets is waning. If that continues, a crisis at the metropolitan centre of global capitalism is a possibility.’
The U.S. dollar’s value is in the midst of a deep plunge, from a peak of $0.87 to the euro in 2001 to below $1.30/euro. But it may need to fall to as low as $1.56/euro in the short term before equilibrium is reached, according to some experts, with 10% annual declines thereafter.
Hence, perhaps aside from China, Japan and Taiwan – whose exporters need to keep liquidity flowing to U.S. buyers of their goods – it is sensible for most international investors to ditch the dollar. Not surprisingly, new international debt securities issued in dollars have been substantially lower than those denominated in euros since 2001.
The world financial system has been operating in favour of the U.S. and European players, and to the detriment not only of the poorest countries, but also roughly two dozen ‘emerging markets’ (in addition to Japan) which are suffering from severe capital outflows. These larger, relatively wealthier Third World countries had received more international investments than they repaid in profit repatriation and other outflows until 1999. But from 2000-03, a massive $550 billion flooded away.
Some countries – China, India and Malaysia – maintained stronger exchange controls and hence did far better during this period. But given the outflow, most large Third World economies were hit by extreme stock market and currency crashes, especially Argentina, Brazil, South Africa and Turkey. (Their subsequent recoveries have to be put into context of how far they fell from 1998-2003.)
Other risky countries – Nigeria, Bulgaria, Ecuador, Panama, Peru, Russia and Venezuela – are today paying extremely high rates of interest to attract foreign funds and also local finance, while the required returns are stratospheric in Argentina, Uruguay, the Ivory Coast and the Dominican Republic.
Worse, because of banking deregulation mainly imposed by the World Bank and IMF, these countries’ own domestic financial markets can be easily upset. The rating agency Moody’s lists the world’s dozen most fragile banking systems: Argentina, Uruguay, Bolivia, Venezuela, Indonesia, Pakistan, China, Japan, Thailand, the Philippines, South Korea and Ukraine.
Naturally, China’s impressive economic growth dominates the data and complicates matters. In spite of attracting – uniquely in the Third World – $40-50 billion in new foreign investments each year, the Chinese banking system is in such bad shape that, like Japan since the early 1990s, enormous amounts of worthless loans must be very gingerly written off.
Indeed, Central Bank deputy governor Li Ruogu resisted Washington’s pressure to upwardly revalue the Chinese currency a few weeks ago, arguing that ‘What we are trying to do is create the conditions for a market-based exchange rateâ€¦ China needs to reform its banking sector first before it can change its exchange rate policyâ€¦ How long it will take to get there, I don’t know.’
Adding to all these problems is Third World foreign debt, which rose from $580 billion in 1980 to more than $2.5 trillion today. Most of it remains simply unrepayable. Moreover, who can disagree with the activist network Jubilee South that in many different ways, including the North’s ecological debt to the South, it has already been repaid. In 2002 alone, the Third World lost a net outflow of $340 billion to service foreign debt, compared to measly overseas development aid of $37 billion.
Instead of repaying the foreign debt – which in so many cases was borrowed by odious, undemocratic regimes from corrupt commercial bankers without any input by (and benefit for) the citizenry – is there a default option? Here in Addis at a meeting of African presidents a few months ago, even the orthodox Columbia University economist Jeffrey Sachs recommended debt repudiation, and redirection of resources to health and education. The response was a frightened silence.
Tellingly, in three prior epochs of financial globalization – the 1830, 1880s and 1930s – similar conditions of international volatility and Third World overindebtedness led to defaults by at least a third of all countries.
The situation today is different mainly because of centralised creditor power. By rescheduling the debt and writing off a tiny trickle of it, the World Bank and IMF now make sovereign defaults against individual lenders or investors more difficult, unlike in the earlier epochs when the creditors were not so well cartelized, and less able to call on imperial military power to collect the collateral.
This is the story, in short, of amplified uneven development, reflected most starkly in these divergent patterns of financial volatility. It is also crucial to bear in mind the imperialist agenda, which today mainly links petro-military interests in the White House to those of Wall Street and its fraternal financial centers, via the Treasury, Fed and U.S. Trade Representative, with codification by the main multilateral agencies.
But the situation is not entirely dire. With capitalist vulnerability comes the potential for countervailing progressive strength, as the Argentine comrades have shown through sustained pressure against structural adjustment.
There is also renewed campaigning to urgently limit the power of – and indeed defund and decommission – the World Bank and IMF. The World Bank Bonds Boycott continues to be a pain in the neck to outgoing president James Wolfensohn. If, as rumoured, he is soon replaced by the thoroughly nasty U.S. Trade Representative, Robert Zoellick, the Bank’s legitimacy will deteriorate yet further.
Indeed, without Wolfensohn’s disingenuous charm, ventures like the Bank/NGO ‘Joint Facilitation Committee’ – a gimmick heartily condemned during a debate between activists and the Civicus NGO leadership in Lusaka at the Africa Social Forum last week – will be harder for even opportunistic civil society groups to endorse (as discussed by Michael Dorsey and myself in this space on September 11).
The Bank is trying now to bounce back from attacks by principled eco-social movements and NGO allies. Its International Finance Corporation private investment subsidiary was systematically boycotted in a series of scheduled October-November consultative meetings in Rio, Washington, Berlin, Manila, Tokyo, Nairobi, Paris and London because ‘the whole process is a sham,’ as a Friends of the Earth staffer put it.
Yet more encouragingly, last week the Bank was also defeated by an Indonesian labor-consumer initiative to prevent electricity privatization. In spite of arm-twisting and an added loan offer by the Bank’s Jakarta representative, the country’s supreme court was convinced by international evidence that the dangers outweighed alleged benefits, and it struck down Bank-promoted privatization legislation.
These are very good signs, but moving from defensive to offensive measures will be crucial in coming years. Meantime, you readers will be encouraged about the feisty tone of the Africa Social Forum, in preparation for next month’s Porto Alegre gathering. More on that, next time.