China’s neo-colonialism

Gene Zhang under a CC Licence

On 1 January 2010, the China-ASEAN (Association of Southeast Asian Nations) Free Trade Area went into effect. Touted as the world’s biggest Free Trade Area, CAFTA is billed as having 1.7 billion consumers, with a combined gross domestic product of $5.93 trillion and total trade of $1.3 trillion.

Under the agreement, trade between China and six ASEAN countries (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) has become duty-free for more than 7,000 products. By 2015, the newer ASEAN countries (Vietnam, Laos, Cambodia and Burma) will join the zero-tariff arrangement.

The propaganda mills, especially in Beijing, have been trumpeting this new free trade deal as ‘bringing mutual benefits’ to China and ASEAN. A positive spin on CAFTA has also come from President of Philippines, Gloria Arroyo, who hailed the emergence of a ‘formidable regional grouping’ that would rival the US and the European Union.

The reality, however, is that most of the advantages will probably flow to China. At first glance, it seems like the bilateral relationship has been positive. After all, demand from a Chinese economy growing at a breakneck pace was a key factor in Southeast Asian growth beginning around 2003, after a period of low growth following the 1997/1998 Asian financial crisis.

Counting on China

During the current international recession, ASEAN governments are counting on China, whose GDP in the fourth quarter of 2009 rose 10.7 per cent, to pull them out of the doldrums.

Yet the picture is more complex than that of a Chinese locomotive pulling the rest of East Asia along with it on a fast track to economic nirvana.

Low wages, many in Southeast Asia fear, have encouraged local and foreign manufacturers to phase out their operations in relatively high-wage Southeast Asia and move them to China. There appears to be some support for this. China’s devaluation of the yuan in 1994 had the effect of diverting some foreign direct investment (FDI) away from Southeast Asia.

For Chinese officials, the benefits to China of free trade with ASEAN are clear. The aim of the strategy, according to Chinese economist Angang Hu, is to more fully integrate China into the global economy as the ‘center of the world’s manufacturing industry’

The trend of ASEAN losing ground to China accelerated after the 1997 crisis. In 2000, FDI in ASEAN shrank to 10 per cent of all investment in developing Asia, down from 30 per cent in the mid-1990s. The decline continued in the rest of the decade, with the UN World Investment Report attributing the trend partly to ‘increased competition from China’.

Trade has been another, perhaps greater, area of concern. Massive smuggling of goods from China has disrupted practically all ASEAN economies. For instance, with some 70-80 per cent of shops selling smuggled Chinese shoes, the Vietnamese shoe industry has suffered badly.

Now there are fears that CAFTA will simply legalize smuggling and worsen the already negative effects of Chinese imports on ASEAN industry and agriculture.

For Chinese officials, the benefits to China of free trade with ASEAN are clear. The aim of the strategy, according to Chinese economist Angang Hu, is to more fully integrate China into the global economy as the ‘center of the world’s manufacturing industry’.

Luijaizeri Financial and Trade Zone in Shanghai, China.

Hank LeClair under a CC Licence

A central part of the plan was to open up ASEAN markets to Chinese manufactured products. In light of growing popularity of protectionist sentiments in the US and European Union, Southeast Asia, which absorbs only around 8 per cent of China’s exports, is seen as having tremendous potential to absorb more Chinese goods. China’s trade strategy is described by Hu as a ‘half-open model’ that is ‘open or free trade on the export side and protectionism on the import side’.

Worrying trends

Despite brave words from Arroyo and other ASEAN leaders, it is much less clear how their countries will benefit from the ASEAN-China relationship.

Certainly, the benefits will not come in labour-intensive manufacturing, where China enjoys an unbeatable edge by the constant downward pressure on wages exerted by migrants from a seemingly inexhaustible rural work force that makes an average of $285 a year. Certainly not in high tech, since even the US and Japan are scared of China’s remarkable ability to move very quickly into high-tech industries even as it consolidates its edge in labour-intensive production. Will agriculture in ASEAN be a net beneficiary? China is clearly super-competitive in a vast array of agricultural products, from temperate crops to semi-tropical produce and in agricultural processing.

Moreover, even if under CAFTA, ASEAN were to gain or retain competitiveness in some areas of manufacturing, agriculture and services, it is highly doubtful that China will depart from what Hu calls its ‘half-open’ model of international trade.

What about raw materials? Yes, of course, Indonesia and Malaysia have oil that is in scarce supply in China; Malaysia does have rubber and tin and the Philippines has palm oil and metals.

But a second look makes one wonder if the relationship with China is not reproducing the old colonial division of labour, whereby low-value-added natural resources and agricultural products were shipped to the centre while the Southeast Asian economies absorbed high-value added manufactures from Europe and the US.

These trends are likely to accelerate under CAFTA, but with a difference: China will beat out the country’s ASEAN neighbours in achieving control of the domestic market.

To sum up, the trade agreement is likely to disadvantage ASEAN. Even with the temporary exemptions of certain areas from full trade liberalization, ASEAN would be locked into a process where the only direction that barriers to super-competitive Chinese industrial and agricultural goods will go is downwards.

Copyright IPS 2010

Walden Bello is a member of the Philippines’ House of Representatives, president of the Freedom from Debt Coalition and senior analyst at Focus on the Global South.

Deglobalization - reflections of a Filipino MP

Over the last two years the international financial crisis has deepened into a crisis of the real economy. With the collapse of demand in the US and other markets in the North, the export-oriented economy – the ‘globalized’ model that has reigned for the past 30 years – has begun to unravel.

This has brought stagnation and recession to the model’s most successful examples: the economies of East Asia. Singapore’s economy is expected to have contracted by two per cent in 2009; South Korea, the ‘Asian Tiger’ par excellence, to register zero growth. Japan has not snapped out of nearly two decades of stagnation. In China, millions of jobs in export-oriented industries continue to be lost, even as the economy is said to be on the path to economic recovery.

According to the Economist: ‘The integration of the world economy is in retreat on almost every front.’ While the magazine, one of the prime avatars of neoliberal globalization, says that corporations continue to believe in the efficiency of global supply chains, ‘like any chain, these are only as strong as their weakest link. A danger point will come if firms decide that this way of organizing production has had its day.’

In response to the collapse of the export-oriented global economy, many governments have fallen back on their domestic markets, revving them up via stimulus programmes that put spending money into the hands of consumers. But instead of an opportunity to strike out on a different economic path, many governments see only a temporary expedient, to be abandoned once demand in export markets picks up again.

Daunting challenge 

Why do illusions persist? And why the continuing resistance to alternative paradigms, like deglobalization, when this should be a time for thinking outside the box?

The daunting challenge of translating the guiding principles of the alternative into reality is part of the problem. In a place like the Philippines the starting point appears very unfavourable. Thirty years of structural adjustment have de-industrialized the country, with textile and garment firms, for instance, reduced from 200 in the 1970s to 10 today. World Trade Organization-imposed liberalization has converted the country from a net food-exporting country into a net food-importing one. The main pillar of the economy is now the export of labour, with some 10 per cent of the country’s 90 million people working and living outside the country.

There is, in short, no tabula rasa, no virgin soil on which one can impose blueprints.

Moreover, the blocks to transformation are not only material but ideological. True, the recent collapse of the global economy has eroded the credibility of the neoliberal economics that provided its intellectual underpinnings. Nevertheless, neoliberalism continues to exercise a strong influence on economists and technocrats.

The longer humanity takes to confront the crisis, the greater are the odds against peaceful and democratic solutions

For instance, at the recent hearings on the budget at the Philippine House of Representatives that I, as an MP, participated in, trade liberalization was defended as leading to greater ‘competitiveness’. Raising the prospect of renegotiating our foreign debt was discouraged because it would allegedly give us a bad name in global capital markets. Globalization continued to be extolled as the wave of the future.

Why this continuing invocation of neoliberal mantras, when the promise of neoliberalism has been contradicted by reality at almost every turn?

Let me hazard a few guesses. Though I draw mainly from my experience in the Philippines, I suspect that they are valid elsewhere.

Mantra 1

Corruption discourse continues to be pervasive in explaining Philippine underdevelopment. In this discourse, the state is the source of corruption, so having a greater state role in the economy – even as a regulator – is viewed with scepticism. Neoliberal discourse ties in very neatly with corruption discourse, minimizing the role of the state in economic life and assuming that a more dominant market will reduce the opportunities for ‘rent-seeking’ by both economic and state agents. 

For many Filipinos the corrupt state, not the inequality spawned by the market, or the erosion of national economic interests by liberalization, continues to be the main block to the greater good.

Mantra 2

Despite the deep crisis of neoliberalism, there has been no credible alternative discourse that has emerged either locally or internationally. There is nothing like the challenge that Keynesian economics posed to market fundamentalism during the Great Depression. Star economists like Paul Krugman, Joseph Stiglitz and Dani Rodrik continue to pose their challenges within the confines of neoclassical economics. The fact of the matter is that Filipino intellectuals generally look for guidance from abroad, including from critics of the establishment.

Mantra 3

Neoliberal economics continues to project a hard-science image because it has been thoroughly mathematized. In the aftermath of the recent financial crisis, this extreme formalization has come under criticism from within the economics profession itself, with some contending that methodology rather than substance has become the end of economic practice. As a result, the discipline is losing contact with real-world trends and problems. 

John Maynard Keynes, with a mathematical mind himself, opposed the mathematization of the discipline precisely because of the false sense of solidity this gave to economics. As his biographer Robert Skidelsky notes, Keynes was ‘famously sceptical about econometrics’. For him, numbers were ‘simply clues, triggers for the imagination’.

Be that as it may – getting over neoliberalism will involve moving beyond the scientism that masks itself as science.

Though the challenges may seem daunting, the deepening crisis of globalization – especially in the context of the climate crisis – will lead to economies that are much less globalized. It is, of course, far preferable that this historic transition should take place peacefully and via democratic means. But history provides no guarantees. And, as in the pre-World War Two period, the longer humanity takes to confront the crisis, the greater are the odds against peaceful and democratic solutions.

Walden Bello is a member of the House of Representatives of the Republic of the Philippines, representing Akbayan (Citizens’ Action Party). He is also president of the Freedom from Debt Coalition and senior analyst at the Bangkok-based research and advocacy institute Focus on the Global South. He is the author or co-author of numerous articles and 15 books, the latest of which is Food Wars (Verso, London, 2009).

Deglobalization – 11 prongs of an alternative

The times would seem to be especially propitious for alternative strategies for development. One is ‘deglobalization’, which my colleagues and I at Focus on the Global South have been developing for over a decade.

The key aspects, which we elaborated mainly for developing countries, are as follows:

  1. Production for the domestic market must again become the centre of gravity of the economy, rather than production for export markets.
  2. The principle of ‘subsidiarity’+ should be enshrined in economic life by encouraging production of goods at the community and national level, if this can be done at reasonable cost, in order to preserve community.
  3. Trade policy – quotas and tariffs – should be used to protect the local economy from destruction by corporate-subsidized commodities with artificially low prices.
  4. Industrial policy – including subsidies, tariffs and trade – should be used to revitalize and strengthen the manufacturing sector.
  5. Long-measures of income and land redistribution (including urban land reform) can create a vibrant internal market that would serve as the anchor of the economy and produce local financial resources for investment.
  6. De-emphasizing growth, emphasizing the quality of life and maximizing equity will reduce environmental disequilibrium.
  7. The development and diffusion of environmentally congenial technology in both agriculture and industry should be encouraged. This would include the transformation of energy systems from centralized fossil-fuel-based systems into decentralized systems based on renewable energy sources such as solar, wind and geothermal.
  8. Strategic economic decisions cannot be left to the market or technocrats. Instead, the scope of democratic decision-making in the economy should be expanded so that all vital questions – such as which industries to develop or phase out, or what proportion of the government budget to devote to agriculture – become subject to democratic discussion and choice.
  9. Civil society must constantly monitor and supervise the private sector and the state, a process that should be institutionalized.
  10. The property complex should be transformed into a ‘mixed economy’ that includes community co-operatives, private enterprises and state enterprises, and excludes transnational corporations.
  11. Centralized global institutions, like the International Monetary Fund and the World Bank, should be replaced with regional institutions built not on free trade and capital mobility but on principles of co-operation that, to use the words of Hugo Chávez in describing the Bolivarian Alternative for the Americas, ‘transcend the logic of capitalism’.

+ ‘subsidiarity’ simply suggests that nothing is done centrally that can be done as well, or better, at a less central level. For more information visit

The end of an era

As the US recession drags Asia down there has been much speculation about a regional response to the crisis. Seemingly lending substance to this have been a trilateral summit of the leaders of China, Japan and South Korea last December and a flurry of bilateral talks between Japan's Taro Aso and Korea's Lee Myung-bak – all of which had economic cooperation at the top of the agenda. 

The swift transmission to Asia of the collapse of their key market has banished all talk of ‘decoupling’. The more accurate term for US-East Asia economic relations today might be a chain gang...

On the face of it, coordinated action by the three could be significant. They account for about three-quarters of East Asia's GDP and two-thirds of its trade. And each is among the other two's leading trading partners. There are, however, reasons to be sceptical of recent declarations of cooperation. 
First, the idea of Northeast Asian cooperation in the form of a regional trading area has been kicked around for the last 15 years in different formulations, with little movement at all in terms of implementation. 

Second, government coordination of economic policies in the face of a crisis does not have a good track record. It was not just the US that vetoed the Asian Monetary Fund (AMF) proposed by Japan during the 1997 financial crisis. China also did for fear it could become a vehicle of Japanese hegemony. 

Third, these meetings have been a case of a mountain giving birth to a mouse. The concrete measures agreed – to expand bilateral swap facilities under the ten-member Association of Southeast Asian Nations (ASEAN) plus China, Japan and South Korea, and a call for infusion of more capital into the Asian Development Bank (ADB) – were timid compared to the gargantuan task at hand. None of the three named a specific amount they would commit to the ADB. And for nearly a decade the institutional evolution of the ‘ASEAN Plus Three’ formation has been stuck at the level of bilateral swap arrangements to prop up regional currencies subject to speculative attack. 

One reason economic cooperation among the Northeast Asian giants has become a hot topic is that it was Chinese demand that pulled the Asian economies, including Korea and Japan, from the depths of stagnation and out of the Asian financial crisis in the first half of this decade. Japan's first sustained recovery following its collapse into recession in the early 1990s was fuelled by record exports of capital and technology-intensive goods to China. Indeed, China became the main destination for Asia's exports. One analyst pointed out that by the middle of the decade China had become ‘the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia and Australia.’

This positive role of the Chinese ‘locomotive’ earlier this decade sparked optimistic talk in academic and policy circles about ‘decoupling’ economic growth in East Asia from the US when the latter was threatened with the subprime mortgage crisis in 2007/08. Others were less optimistic. Economists CP Chandrasekhar and Jayati Ghosh, for instance, stressed that China was indeed importing intermediate goods and parts from Japan, Korea and ASEAN; but it was for assembly as finished goods for export to the United States and Europe, not for its domestic market. Thus, ‘if demand for Chinese exports from the US and the EU slows down, as will be likely with a US recession, this will affect not only Chinese manufacturing but also Chinese demand for imports from these Asian developing countries.’

The swift transmission to Asia of the collapse of their key market has banished all talk of ‘decoupling’. The more accurate term for US-East Asia economic relations today might be a chain gang, linking not only China and the US, but a host of other satellite economies, all of whose fates are tied to the deflating balloon of debt-financed, middle-class spending in the United States. China's growth in 2008 fell to nine per cent from eleven per cent a year earlier provoking widespread unemployment and discontent. Japan is now in deep recession, its mighty export-oriented consumer goods industries reeling from plummeting sales. South Korea, the hardest hit, has seen its currency collapse by some 30 per cent relative to the dollar. 

The current downturn, many now realise, is no simple recession. For East Asia, there is the added significance that this is the end of an era of export-oriented industrialisation that began in the 1960s when Korea and Taiwan embarked on a development process that tied their growth to the US market. Encouraged by the World Bank to make ‘special efforts’ to turn their manufacturing enterprises away from the relatively small markets associated with import substitution toward the much larger opportunities flowing from export promotion, the Southeast Asian countries followed suit in the 1970s and 1980s. 
Everybody's export market was the US where a consumer binge over the last 15 years, fuelled by massive international credit – much of it from China and Japan – extended a boom past its natural life and appeared to portend a never-ending demand for Asian imports.

Now that Alan Greenspan's ‘New Economy’ has fallen victim to the law of gravity, it will not be easy to reorient the export machines that the Asian economies have become into economic engines serving the domestic market. Income and asset redistribution will be central to that reorientation – and national elites will fight tooth and nail to avoid that.

Regional integration or the joining of national markets by bringing down tariffs against one another while keeping them up against non-member countries is another remedy for the decline of the US market. However, economic elites are very jealous of their national markets. And government technocrats, who have been promoting the dream of a 1.9 billion East Asian market, have not demonstrated an eagerness to take them on. The current crisis may embolden them to take some first steps. But the distance between the rhetoric of regionalism and the reality of separate markets and independent economic policies will continue to be considerable. ©IPS

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.

A new, green, democratic deal

*Susan George:* We are in the midst of simultaneous crises. We have the social crisis of increasing poverty and inequalities. We have the financial crisis. And we have the ecological crisis, which in my view is the most serious of all. These different crises reinforce each other. As all three are structurally linked, their solution can also be structurally linked.

*Walden Bello:* The dynamics of both climate change and the financial crisis stems from the drive of the system to create tremendous wealth as well as tremendous inequality, especially over the last 25 years. We have to confront the fact that this goes to the heart of the system that is dominant globally, which is global capitalism. ‘Neoliberalism’ has spurned the type of regulation that would have achieved more equality among countries and within countries, as well as a greater and a more sane equilibrium between the environment and society. This unregulated mode of production and consumption has basically led to the dead-end that we’re in now.

The financial crisis is a huge challenge, but we can go back and fix it. You can’t do that with nature

*Susan George:* What I am proposing is that we use these crises to get the banks under control. Also, that we get something in return for the trillions of dollars that the banks are receiving, with commitments that they must devote a certain proportion of their loans to green projects. The object is to transform the economy, using a kind of green Keynesianism (see box overleaf). Use the banks as public services – to invest in research and development in clean energy; in construction which is energy neutral; in retrofitting homes… a whole range of ecological activities.

I believe that it’s also the moment to talk about international taxation of currency transactions and corporate profits, closing down tax havens; to get rid of the debt of the South once and for all. All of these things have been proposed for about a decade by the organization in France of which I’m honorary President – the Association for the Taxation of Financial Transactions to Aid Citizens (ATTAC). At least until a couple of months ago, about $3.2 trillion [in currency] was being traded every day. You could start by taxing just those transactions involving the Euro, for instance. Say you tax them at a tenth of one per cent – nobody is asking for the moon here. When I worked it out once the revenue came to about $700 billion a year. The idea then is to apply those funds to protecting countries from the climate-change catastrophes that they’re likely to face. These are large Keynesian redistribution programmes: exactly what was done in the Second World War and the New Deal, which pulled the United States out of the Depression.

*Walden Bello:* This is a time when we have to combine principle with pragmatism and go beyond the old ‘isms’. A variety of systems should come out of this, with government regulation backed up by pro-environment and pro-equity coalitions in power. A private sector that’s decorporatized and relies on small and medium industries instead of those gigantic transnational corporations (both financial and industrial) that I think need to be dismantled. And then you really need, at both the national and the global level, a very active civil society that monitors and impacts on both government and the private sector. This third actor – civil society – is really the key. It is the force for democratization, both for politics and for the economy. Now, what do we call this? Do we call this ‘economic democracy’?

*Susan George:* ‘Revolution’ has too many connotations. Everyone immediately thinks 1917. Please tell me who is the Tzar that we’d have to overthrow and I’ll go with you. But I don’t see it. I certainly don’t want some command economy.

*Walden Bello:* Basically, I don’t think the title or the name is important. What we’re going to need – in both the advanced industrial world and the South – is electoral coalitions that bring into power people-supported groups and coalitions that would undertake this new agenda. We would bring citizens in to very active day-to-day decision-making over not only politics but key decisions affecting the economy.

*Susan George:* Let me introduce a word of caution here. The last financial crisis in 1929 eventually led to fascism and to war. Unless the Left is bold, gets its act together and, as Walden says, forms broad alliances and coalitions, we don’t know what’s going to happen – it’s uncharted territory. That’s why I’m trying this idea of green Keynesianism. Now, purists who have ‘isms’ on their agenda will not like this. They will say that this is giving capitalism a new lease on life. I plead guilty. That’s what it would do.

John Maynard Keynes

The British economist was the intellectual force behind the Bretton Woods conference in 1944. This conference (dominated by the US) attempted to sort out the worldwide economic chaos of the Great Depression during the 1930s and the World War that followed. Keynes argued that governments have a ‘counter-cyclical’ responsibility to regulate the ‘business cycle’ of economic bubbles and slumps. This meant stimulating ‘demand’ in a slump by redistributing wealth. To some extent, President Roosevelt’s ‘New Deal’ in the US (together with its ‘war economy’) had put related principles into practice. After 1944, The International Monetary Fund (IMF) and World Bank were intended to apply them internationally. However, when ‘deregulation’ began in the 1970s, these institutions came to see their role as promoting rather than restraining ‘free markets’. By the time they were finally joined by the World Trade Organization in 1995, corporate globalization and trade liberalization were an established economic orthodoxy. Today, with the economic meltdown and the threat of climate change, there’s revived interest in ‘green Keynesianism’ and a ‘Green New Deal’.±

± To view the Green New Deal from the New Economics Foundation visit **

We have to think much more seriously about the market. The market can provide useful services. I don’t want to have an argument every time I go out and buy a loaf of bread as to what the price of it is. But there’s other things that it shouldn’t be asked to do – health, education, water and probably pharmaceutical research and a certain number of things which are now considered to be sources of profit for a very few individuals and major corporations. The market is unable to think about the future in any long-term way. But my main point is, let’s not have preconceived models but let’s have a lot of economic democracy, so that out of people’s interaction inside their own enterprises, in their towns, in their regions, we come up with a model which would probably be very different from one place to another. I’m not at all sure that in the Philippines you should have exactly the same models that you have in France.

*Walden Bello:* I agree. So, in this world that we’re moving into, there will be a great deal of diversity, and diversity is good. It’s precisely the kind of ‘one shoe fits all’ mentality that brought us both the centralized socialism that collapsed in the late 1980s and early 1990s, and the free-market model that has just collapsed after so many years of crisis.

*Susan George:* I was born before the Second World War. I remember very well a Sunday when I was with my father and we were going out to get an ice cream. And he heard on the radio about the the bombing of Pearl Harbor and he went absolutely white. This is my first historical memory. After that, kids like me were very much engaged in what was happening. They were buying war stamps to finance the military effort. The conversion of our economy took place in less than two years. It was absolutely astonishing. I lived in an industrial town which produced rubber goods and automobile tyres. Within a year it had completely converted to producing vehicles for the military at Detroit. The lipstick factory became a cartridge factory. It was done through a kind of social solidarity that the US hasn’t seen since and probably had never seen before. It was also the New Deal that contributed to this solidarity between people. I believe that to rein in climate change we need something on a similar scale.

*Walden Bello:* What we’re talking about is more and more popular control over many different aspects of the economy. Not only the public goods but also energy industries, aircraft industries, car industries – the kind of industries that are very central to the economy. As much as possible, bring into the arena of popular decision-making more and more areas of economic activity, and do not just leave them to the market.

*Susan George:* Let me point to one very tiny disagreement between us. I don’t know how far economic democracy can go; for instance, having ordinary people decide if we need a car industry and what it should produce. Oscar Wilde said: ‘Socialism is all very well but it takes too many evenings.’ Sometimes I wonder if people would really be prepared to go to all of the meetings that would be required of them if they were to take a serious interest in everything that they ought under this new system. Universal participation in everything? I don’t think so, because it would simply take too many evenings.

*Walden Bello:* My point is that people have been excluded from the whole economic sphere.

*Susan George:* I agree completely. And I would simply add that the financial crisis is a huge challenge, but we can go back and fix it. You can’t do that with nature. If nature is going off the track then it’s off the track, and humans have absolutely nothing to say about that. So I think that’s the most urgent thing we must address. That’s why I keep talking about using the financial crisis in order to get the ecological crisis under control. I don’t say it’s going to work. But I still have hope and I think that through publications like _New Internationalist_, little by little we can make this the obvious solution.

This is an edited version of an interview that *NI* co-editor *Chris Richards* recorded with *Susan George*, Chair of the Transnational Institute, and *Walden Bello*, a Senior Analyst with a Thai-based NGO Focus on the Global South – both prolific commentators on the negative impacts of globalization. Hear their fuller discussion in the _Cool Change_ series of interviews at **

A meltdown primer

Is the worst over?

No. There’s no strategy to deal with the crisis, just tactical responses. It’s like the fire department’s response to a conflagration. The recent multi-billion bail-outs are mainly desperate efforts to shore up confidence in the system and to avoid a massive bank run such as the one that triggered the Great Depression of 1929.

Did greed cause the collapse of global capitalism’s nerve centre?

Good old-fashioned greed certainly played a part.

Was this a case of Wall Street outsmarting itself?

Definitely. Financial speculators outsmarted themselves by creating more and more complex financial contracts like derivatives that would securitize and make money from all forms of risk – including such exotic futures instruments as ‘credit default swaps’ that enable investors to bet on the odds that the banks’ own corporate borrowers would not be able to pay their debts! This is the unregulated multi-trillion dollar trade that brought down US insurance giant AIG.

Was it lack of regulation?

Yes. Everyone acknowledges by now that Wall Street’s capacity to innovate and turn out more and more sophisticated financial instruments had run far ahead of government’s regulatory capability. This wasn’t because government was incapable of regulating but because the dominant neoliberal, laissez-faire attitude prevented government from devising effective regulatory mechanisms.

But isn’t something more systemic happening?

Well, George Soros, who saw this coming, says that we are going through a crisis of the ‘giant circulatory system’ of a ‘global capitalist system that is… coming apart at the seams’. To elaborate, we’re seeing the intensification of one of the central crises or contradictions of global capitalism: the crisis of overproduction, also known as over-accumulation or over-capacity. In other words, capitalism has a tendency to build up tremendous productive capacity that outruns the population’s capacity to consume, owing to social inequalities that limit popular purchasing power, thus eroding profitability.

But what does the crisis of overproduction have to do with recent events?

Plenty. But to understand the connections, we must go back in time to the so-called Golden Age of Contemporary Capitalism, the period from 1945 to 1975.

This was a time of rapid growth that was partly triggered by the massive reconstruction of Europe and East Asia after the devastation of World War Two, and partly by the new socio-economic arrangements institutionalized under the new Keynesian state. Key among the latter were strong state controls over market activity, aggressive use of fiscal and monetary policy to minimize inflation and recession, and a regime of relatively high wages to stimulate and maintain demand.

So what went wrong?

This period of high growth came to an end in the mid-1970s, when the centre economies were seized by stagflation, meaning the coexistence of low growth with high inflation, which wasn’t supposed to happen under neoclassical economics.

Stagflation, however, was but a symptom of a deeper cause: the reconstruction of Germany and Japan and the rapid growth of industrializing economies like Brazil, Taiwan, and South Korea added tremendous new productive capacity and increased global competition. Meanwhile social inequality limited the growth of purchasing power, thus eroding profitability. This was aggravated by the massive oil price rises of the 1970s.

How did capitalism try to solve the crisis of overproduction?

Capital tried three escape routes from the conundrum of overproduction: neoliberal restructuring, globalization and financialization.

What was neoliberal restructuring all about?

This took the form of Reaganism and Thatcherism in the North and ‘structural adjustment’ in the South. The aim was to invigorate capital accumulation by first removing state constraints on the growth, use and flow of capital and wealth; and second, redistributing income from the poor and middle classes to the rich on the theory that the rich would then be motivated to invest and reignite economic growth. This formula gutted the incomes of the poor and middle classes. It thus restricted demand while not necessarily inducing the rich to invest more in production. In fact, neoliberal restructuring had a poor record in terms of growth: global growth averaged 1.1 per cent in the 1990s whereas it averaged 3.5 per cent in the 1960s when state interventionist policies were dominant.

How was globalization a response to the crisis?

The second escape route global capital took to counter stagnation was ‘extensive accumulation’ or globalization. This was the rapid integration of semi-capitalist, non-capitalist, or pre-capitalist areas into the global market economy to shore up the rate of profit in the metropolitan economies. It did this by gaining access to cheap labour, new markets and new sources of cheap agricultural and raw material products; and by bringing into being new areas for investment in infrastructure. Integration is accomplished via trade liberalization, removing barriers to the mobility of global capital and abolishing barriers to foreign investment.

Why didn’t globalization surmount the crisis?

This escape route from stagnation has exacerbated the problem of overproduction because it adds to productive capacity. A tremendous amount of manufacturing capacity has been added, for example, in China over the last 25 years and this has had a depressing effect on prices and profits. Not surprisingly, by around 1997, the profits of US corporations stopped growing. According to one index, the profit rate of the Fortune 500 went from 7.15 per cent in 1960-69 to 5.3 per cent in 1980-90 to 2.29 per cent in 1990-99 to 1.32 per cent in 2000-02.

What about financialization?

The third escape route – financialization – became very critical. In the ideal world of neoclassical economics, the financial system is the mechanism by which the savers or those with surplus funds are joined with the entrepreneurs who have need of their funds to invest in production. In the real world of late capitalism, with investment in industry and agriculture yielding low profits owing to overcapacity, large amounts of surplus funds are circulating and being invested and reinvested in the financial sector. The financial sector has thus turned on itself.

The result is an increased bifurcation between a hyperactive financial economy and a stagnant real economy. As one financial executive notes, ‘there has been an increasing disconnect between the real and financial economies in the last few years. The real economy has grown… but nothing like that of the financial economy – until it imploded.’

What this observer doesn’t tell us is that the disconnect between the real and the financial economy isn’t accidental. The financial economy has exploded precisely to make up for the stagnation owing to overproduction of the real economy.

What were the problems with financialization as an escape route?

Investing in financial sector operations is tantamount to squeezing value out of already created value. It may create profit, yes, but it doesn’t create new value. Only industry, agriculture, trade, and services create new value. Because profit is not based on value that is created, investment operations become very volatile and the prices of stocks, bonds, and other forms of investment can depart very radically from their real value. Profits depend on taking advantage of upward price departures from the value of commodities, then selling before reality enforces a ‘correction’. Corrections are really a return to more realistic values. The radical rise of asset prices far beyond any credible value is what is called the formation of a bubble.

Why is financialization so volatile?

With profitability depending on speculative coups, it’s not surprising that the finance sector lurches from one bubble or one speculative mania to another. And because it’s driven by speculative mania, finance-driven capitalism has experienced scores of financial crises since capital markets were deregulated and liberalized in the 1980s.

What about the current bubble? How did it form?

The current Wall Street collapse has its roots in the technology-stock bubble of the late 1990s, when the price of the stocks of Internet startups skyrocketed, then collapsed in 2000 and 2001, resulting in the loss of $7 trillion worth of assets and the recession of 2001-02. The Fed’s loose money policies under Alan Greenspan encouraged the technology bubble. When it collapsed into a recession, Greenspan, to try to counter a long recession, cut the prime rate to a 45-year low of one per cent in June 2003 and kept it there for over a year. This had the effect of encouraging another bubble – in real estate.

As early as 2002, progressive economists such as Dean Baker of the Center for Economic Policy Research were warning about the real estate bubble and the predictable severity of its impending collapse. However, as late as 2005, Ben Bernanke, now Chair of the Federal Reserve Board, attributed the rise in US housing prices to ‘strong economic fundamentals’ instead of speculative activity. Is it any wonder that he was caught completely off guard when the sub-prime mortgage crisis broke in the summer of 2007?

And how did it grow?

Let’s hear it from key market player George Soros: ‘Mortgage institutions encouraged mortgage holders to refinance their mortgages and withdraw their excess equity. They lowered their lending standards and introduced new products, such as adjustable mortgages (ARMs), “interest-only” mortgages, and promotional teaser rates.’ All this encouraged speculation in residential housing units. House prices started to rise in double-digit rates. This served to reinforce speculation, and the rise in house prices made the owners feel rich; the result was a consumption boom that has sustained the economy in recent years.’

The sub-prime mortgage crisis wasn’t a case of supply out-running real demand. The ‘demand’ was largely fabricated by speculative mania on the part of developers and financiers who wanted to make great profits from their access to foreign money that has flooded the US in the past decade. Big-ticket mortgages were aggressively sold to millions who could not normally afford them by offering low ‘teaser’ interest rates that would later be readjusted to jack up payments from the new homeowners.

But how could sub-prime mortgages going sour turn into such a big problem?

Because these assets were then ‘securitized’ with other assets into complex derivative products called ‘collateralized debt obligations’ (CDOs). The mortgage originators worked with different layers of intermediaries who understated risk so as to offload them as quickly as possible to other banks and institutional investors. These institutions in turn offloaded these securities onto other banks and foreign financial institutions.

When the interest rates were raised on the sub-prime loans, adjustable mortgage, and other housing loans, the game was up. There are about six million sub-prime mortgages outstanding, 40 per cent of which will likely go into default in the next two years, Soros estimates. And five million more defaults from adjustable rate mortgages and other ‘flexible loans’ will occur over the next few years. Trillions of dollars of these securities have already been injected, like a virus, into the global financial system.

But how could Wall Street titans collapse like a house of cards?

For Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac and Bear Stearns, the losses represented by these toxic securities simply overwhelmed their reserves and brought them down. And more are likely to fall once their books are corrected to reflect their actual holdings.

Many others will join them as other speculative operations such as credit cards and different varieties of risk insurance seize up. The American International Group (AIG) was felled by its massive exposure in the unregulated area of credit default swaps, derivatives that make it possible for investors to bet on the possibility that companies will default on repaying loans. According to Soros, such bets on credit defaults now make up a $45 trillion market that is entirely unregulated. It amounts to more than five times the total of the US Government bond market. The huge size of the assets that could go bad if AIG collapsed made Washington change its mind and intervene after it let Lehman Brothers collapse.

What’s going to happen now?

There will be more bankruptcies and government takeovers. Wall Street’s collapse will deepen and prolong the US recession. This recession will translate into an Asian recession. After all, China’s main foreign market is the US, and China in turn imports raw materials and intermediate goods that it uses for its US exports from Japan, Korea, and Southeast Asia. Globalization has made ‘decoupling’ impossible. We are like prisoners bound together in a chain-gang.

In a nutshell...?

The Wall Street meltdown is not only due to greed and to the lack of government regulation of a hyperactive sector. This collapse stems ultimately from the crisis of overproduction that has plagued global capitalism since the mid-1970s.

The key questions now are: How deep and long will this recession be? Does the US economy need another speculative bubble to drag itself out of this recession? And if it does, where will the next bubble form?

Walden Bello is President of Freedom from Debt Coalition, Senior Analyst at Focus on the Global South and Professor of Sociology at the University of the Philippines.

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