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Capitalism in Asia at the End of the Millennium :: Monthly Review

Prabhat Patnaik more on Asia, Economics

Prabh at Patn aik teach es at Jawah arlal Neh ru Un iversity in In dia. Two proposition s domin ated th e Marxist perspective in most Asian coun tries durin g th e period immediately followin g th e Secon d World War. First, capitalism h ad en tered th e period of its g en eral crisis. Wh ile n ot reducible to n arrowly econ omic terms, th is implied th at econ omic prog ress would h en ceforth be stymied. Secon d, th e kin d of diffusion of in dustrial capitalism th at h ad occurred from Britain to Europe, an d th en in th e Un ited States an d oth er temperate reg ion s of wh ite settlemen t in th e period leadin g up to th e First World War, could n ot be expected to occur in th e th ird world as well. It followed from th ese two proposition s th at th e developmen t of th e Asian coun tries required th eir tran sition , th roug h stag es of democratic revolution , to socialism, an d th at th e course of th is tran sition would be made smooth er wh en th eir proletarian comrades from th e advan ced coun tries march ed to socialism as well, as th ey even tually would. Subsequen t developmen ts made both th ese proposition s appear outdated. Th e lon g boom after th e Secon d World War, wh ich lasted un til th e early seven ties, was th e most pron oun ced in th e h istory of capitalism, an d broug h t about impressive improvemen ts in th e livin g con dition s of th e people in th e advan ced capitalist coun tries. Furth ermore, certain coun tries in th e th ird world made un believably rapid econ omic advan ces, despite remain in g with in th e orbit of capitalism. In deed, th e capitalist th ird world as a wh ole g rew much faster th an it h ad h istorically but, over much of it, th is was a result of a process of delin kin g from imperialism, an d h en ce did n ot create th eoretical problems for th e Marxist perspective. Marxist th eory h eld th at th is g rowth would h ave been even faster, more durable, more firmly rooted, an d more effective in improvin g th e lot of th e poor if th ese coun tries h ad been makin g a tran sition to socialism. Th is arg umen t could be supported by comparin g th e ach ievemen ts of th e socialist an d th e averag e capitalist th ird world coun tries. Wh at created problems for th e Marxist perspective, h owever, were th e dramatic ach ievemen ts of a few Asian th ird world coun tries th at were, to all appearan ces, clien t-states of imperialism. For a wh ile, th ey could be dismissed sin ce th e coun tries in volved (South Korea, Taiwan , Sin g apore, an d Hon g Kon g ) were too small to sig n ify much : th eir developmen t, despite th eir in volvemen t with imperialism, clearly could n ot be h eld up as a strateg y for all. But wh en a h ost of oth er, larg er coun tries in South east Asia also recorded dramatic ach ievemen ts despite th eir in teg ration with imperialism, th e Marxist perspective came un der a cloud. Th is secon d batch of coun tries was problematic for an oth er reason . For th e first batch , it soon became clear th atn otwith stan din g th eir political proximity to imperialism th ey h ad a stron g elemen t of econ omic n ation alism, as well as dirigisme, at work, th oug h of a kin d differen t from, say, Neh rus In dia. But in th e case of th e secon d batch (Th ailan d, In don esia, Malaysia, an d th e Ph ilippin es), even econ omic in teg ration with imperialism was more marked. Th is created th e impression th at, con trary to th e Marxist position , in teg ration with imperialism (as broug h t about by a strateg y of liberalization ) could produce dramatic econ omic advan ces. Successful diffusion of in dustrial capitalism could occur in th e th ird world as well; wh at preven ted it was th e th ird worlds own

stubborn n ess man ifested in its in sisten ce on delin kin g . Iron ically, at th e en d of th e millen n ium, wh en th e triumph of th e an ti-Marxist perspective appears complete, th e models wh ose successes un derlay th at triumph are in th e th roes of serious econ omic crisis. Th e cause of th is crisis, as of th e earlier successes of th ese models, h as to be examin ed as part of a wider Marxist un derstan din g . I Capitalisms ph en omen al postwar boom h as been explain ed in various ways by various writers. But few would den y th at an importan t factor un derlyin g it was state in terven tion in deman d man ag emen t, wh ich became common practice in th e postwar years. Th is, in turn , was made possible by th e particular correlation of class forces th at prevailed in th e advan ced capitalist coun tries after th e war: th e stren g th of th e workin g class vis vis th e capitalists was much g reater th an earlier an d, with in th e ran ks of th e capitalists, th e weig h t of th e fin an cial in terests h ad lessen ed. Th is last poin t is sig n ifican t but little appreciated. Th e opposition of fin an cial in terests to h ig h levels of econ omic activity is well kn own . Keyn es, in th e General Theory, called for th e euth an asia of th e ren tier as a mean s of restructurin g capitalism. Kalecki, wh ile n otin g th at capitalists in g en eral oppose full employmen t sin ce its prevalen ce makes workers g et out of h an d, also drew atten tion to th e fact th at th e price in crease in th e upswin g is to th e disadvan tag e of small an d big ren tiers an d makes th em boom-tired. Th e fact th at advan ced capitalist coun tries main tain ed h ig h employmen t for lon g in dicated, th erefore, th e ch an g ed correlation of class forces (in cludin g , in particular, th e declin e in th e weig h t of fin an cial in terests in th e aftermath of war an d decolon ization ). Decolon ization , wh ich sh ould h ave created problems for advan ced capitalist coun tries th roug h h ig h er raw material prices, if n ot th roug h th e loss of colon ial markets (wh ose impact for th e system as a wh ole could be obviated by state in terven tion ), h ad th e opposite effect. Th e n ewly in dustrializin g th ird world coun tries, in th eir eag ern ess to earn foreig n exch an g e for th eir developmen t effort, competed with on e an oth er to push out primary commodity exports so th at, con trary to th e prediction s of W. Arth ur Lewis an d oth ers, th e supplies of primary commodities to th e advan ced coun tries were main tain ed with out an y upward pressure (in deed, with down ward pressure) on th eir terms of trade. Th e postwar boom, in sh ort, was th e product of a un iquely favorable con jun cture. Th e subordin ation of fin an cial in terests was particularly marked in th e miracle econ omies of German y an d Japan an d, above all, in th e th ird world. In fact, all n ewly in dustrializin g th ird world econ omies, n o matter wh at sh ade of dirig isme th ey were pursuin g , n o matter wh eth er th ey were delin ked from or con tin ued to be lin ked to imperialism, kept fin an cial in terests restrain ed for th e sake of rapid in dustrialization . If Japan main tain ed n eg lig ible or even n eg ative real rates of in terest durin g th e period of th e boom, coun tries as differen t from on e an oth er as In dia an d South Korea followed Japan s example in th is respect. Th e specific features of th e fin an cial system differed from coun try to coun try, but its g en eral ch aracterisitics were similar over th e wh ole ran g e of coun tries. Th ese were: an in sulation from in tern ation al fin an cial flows; ch eap credit; an d a con scious attempt to direct credit towards productive, rath er th an speculative, aven ues. Man y factors h ave been h ig h lig h ted, an d rig h tly so, as un derlyin g th e h ig h g rowth of th e East Asian tig ers (some of wh ich h old for South east Asia as well). Th ese are: lan d reforms; th e ach ievemen t of h ig h levels of literacy; th e econ omic con cession s (in th e form inter alia of allowin g substan tial market access) made by th e Un ited States, for g eopolitical reason s, to th ese coun tries, wh ich were seen to be con fron tin g commun ism; th e spillover of th e Japan ese miracle th roug h th e spread of Japan ese capital

(remin iscen t of th e earlier spread of European capital to th e n ew worldth oug h th e motives for th e spread in th e two cases were differen t); an d a specific kin d of n eomercan tilist dirigisme en tailin g state in terven tion s even in micro-level decision s of th e capitalists (wh ich th e extan t class con fig uration of th ese societies made possible). But an importan t addition al factor, seldom n oted, is th e restrain t placed on fin an cial in terests: th e exclusion of in tern ation al fin an cial flows an d th e subordin ation of th e domestic fin an cial system to th e n eeds of th e productive econ omy. Th is was in keepin g with wh at was h appen in g elsewh ere in th e th ird world, an d with th e reduced weig h t of fin an cial in terests in th e advan ced capitalist coun tries th emselves, wh ich un derlay th e postwar boom. II Several developmen ts followin g from th e postwar capitalist boom un dermin ed th e con jun cture wh ich h ad sustain ed it. Importan t amon g th ese was th e rise of fin an ce capital, in a n ew in carn ation , to a position of domin an ce. Th e story of th is rise n eed n ot detain us h ere. On e episode, h owever, con cern s th e larg e curren t U.S. accoun t deficits of th e fifties an d th e sixties wh ich , tog eth er with capital exports, resulted in an outpourin g of U.S. dollars, an d wh ich were decreed un der th e Bretton Woods system to be as g ood as g old. Th ey led to th e formation of th e Eurodollar market an d, even tually, to th e collapse of th e Bretton Woods system itself. An oth er episode was th e petro-dollar deposits followin g th e oil sh ocks, wh ich put en ormous fun ds at th e disposal of th e metropolitan ban ks, made th em th e key actors in th e recyclin g process, an d reduced th e In tern ation al Mon etary Fun d (IMF) to a mere g en darme of fin an ce capital. Th e poin t, h owever, is th at th roug h th ese episodes, g lobalized fin an ce capital rose to a position of pre-emin en ce. Th is fin an ce capital differs from wh at Len in wrote about in at least th ree ways. First, th e fin an ce capital in Len in s con ception was n ation -based an d h en ce n ation -state aided, wh ile th e n ew fin an ce capital was in tern ation al, both in th e sen se of suckin g in fin an ce from all over th e g lobe an d in in vestin g it all over th e g lobe. In stead of several con ten din g blocs of fin an ce capital, we h ave on e g ig an tic en tity, of wh ich fin an ce capitals of particular coun tries are so man y con stituen t elemen ts. To say th is does n ot n eg ate th e domin an t role of metropolitan fin an ce, but th is role is exercised th roug h domin ation over th is en tity. Secon d, th is fin an ce capital operates n ot in th e con text of in ter-imperialist rivalry, as in Len in s time, but of imperialist powers actin g in g reater un ison . Th is does n ot imply th at con tradiction s amon g th em do n ot exist, or th at th ey won t erupt in to major con flicts in th e future. At presen t, h owever, th ey h ave much g reater un ity, at least in con fron tin g th e th ird world, th an was th e case in Len in s time. A g lobalized bloc of fin an ce is on e con tributor to muted in ter-imperialist rivalry wh ich , in turn , g reatly weaken s th e th ird worlds ability to con fron t imperialism, as th e latter in stitution alizes its h eg emon y th roug h th e IMF, th e World Ban k, an d th e World Trade Org an ization (WTO). Th irdly, con temporary fin an ce capital is n ot capital con trolled by ban ks an d employed by in dustrialists (to use Hilferdin g s words quoted by Len in ). It is n ot th e coalescen ce of ban k an d in dustrial capital (as Bukh arin put it) of a particular imperialist coun try, but g lobalized fin an ce drawn from all over an d search in g for quick profits, usually in speculative activities. In sh ort, much of th is fin an ce capital operates in th e form of h ot mon ey flows. Th e rise to promin en ce of in tern ation al fin an ce capital con tributes to th e prolon g ed slowdown in th e advan ced capitalist world an d th e h ig h un employmen t rates th at prevail (on wh ich cyclical crises are superimposed). No doubt th e impact of th is slowdown h as been un even across th e advan ced capitalist coun tries, with Britain an d th e Un ited States doin g rath er better th an th e rest. No doubt th ere are oth er importan t factors th at con tribute to th e slowdown , but th e role

of th is particular factor sh ould n ot be un derestimated. It restricts th e scope for deman d man ag emen t by th e n ation -state, un dermin in g Keyn esian ism directly. Fin an cial in terests with in an y coun try, as Keyn es an d Kalecki arg ued, ten d to be h ostile to deman d man ag emen t; wh en fin an ce is in tern ation al, th is h ostility acquires a spon tan eous effectiven ess. An y effort by th e state to expan d econ omic activity makes speculators appreh en sive about in flation , exch an g e rate depreciation an d, more g en erally, of political radicalism an d fin an ce flows out of th e coun try; th is precipitates actual depreciation an d in flation , forcin g th e state to curtail activity so th at speculators feel comfortable. State in terven tion presupposes a con trol area of th e state, over wh ich its writ can run ; g lobalization of fin an ce ten ds to un dermin e th is con trol area. If, from Mitterran d to Sch rder, a h ost of left-win g g overn men ts in th e advan ced capitalist coun tries (elected on th e promise th at th ey would in crease employmen t) h ave failed to do so, th e reason lies in th is objective con strain t on state in terven tion rath er th an , n ecessarily, in bad faith or betrayal. It also explain s th e declin e of all ideolog ies of social ch an g e, from social democracy to Keyn esian ism to th ird world n ation alism, even to old commun ism (wh ich lost its immun ity to capital flig h ts): sin ce all of th em see th e n ation -state as th e ag en cy of in terven tion , g lobalization of fin an ce, by restrictin g th e states capacity to in terven e, h as un dermin ed th eir coh eren ce. Th e levels of activity an d employmen t in th e advan ced capitalist world as a wh ole would n ot be so low, even with out state in terven tion in deman d man ag emen t in in dividual coun tries, if th e U.S. state could boost ag g reg ate deman d for all of th em. On e would n ormally expect, with th e dollar as th e stron g est curren cy (even with out th e imprimatur of th e Bretton Woods system), th at th e Un ited States would play a leadersh ip role for th e capitalist world as a wh ole by en larg in g its fiscal an d curren t accoun t deficits. Paradoxically, th e Un ited States is n ot free of th e n eed to appease in tern ation al fin an ce capital. It h as curtailed its fiscal deficit an d, to a lesser exten t, its curren t accoun t deficit in real terms. As a con sequen ce, fin an ce h as flowed in to th e Un ited States an d Britain (th e An g lo-Saxon world, in an y case, is th e tradition al h ome of fin an ce), causin g some expan sion in th ese econ omies th roug h fin an ce-related activities. Th e rest of th e capitalist world h as been doomed to stag n ation . Th is may h ave con sequen ces for th e Un ited States an d Britain , con vertin g th e curren t protracted but partial stag n ation in to a g en eralized on e. Th e curren t imperialist offen sive ag ain st th e th ird world, in th e form of th e imposition of liberalization , h as to be un derstood in th is con text. Pryin g open th ird world markets to g oods an d services h elps overcome metropolitan stag n ation . Doin g so, moreover, is particularly advan tag eous, for two reason s: first, it keeps state in terven tion in deman d man ag emen t at bay, an d with it an y th reat of political radicalism; secon d, by dein dustrializin g th e th ird world an d forcin g it in to g reater relian ce on primary production , it keeps in flation ary pressures in th e metropolis in ch eck. Of even g reater importan ce, h owever, is th e pryin g open of th e th ird world to th e un restricted movemen t of in tern ation al fin an ce capital. Th is n ot on ly expan ds th e area over wh ich speculative g ain s can be made, but also brin g s a wealth of min eral resources an d major in dustrial en terprises (especially public sector en terprises, wh ich are forced to be privatized for a son g ) un der th e poten tial con trol of fin an ce capital. Liberalization , in sh ort, is a mech an ism for cen tralization of capital on a world scale: metropolitan capital-in -production ousts th ird world producers, wh ile metropolitan capital-as-fin an ce (wh ich is th e domin an t compon en t of g lobalized fin an ce) g ets con trol over th ird world resources an d en terprises (built up earlier at public cost) at th rowaway prices. Th e emerg en ce of in tern ation al fin an ce capital, th erefore, is associated with a n ew epoch , in wh ich both th e assumption s un derlyin g Marxist th eory in th e aftermath of th e war (wh ich appeared to h ave been in validated by th e postwar boom) acquire fresh validity. Not on ly does capitalism in g en eral become en mesh ed in stag n ation an d crisis,

as en terprise g ets sn uffed out by speculation (to borrow Keyn es lan g uag e), but th is stag n ation afflicts th ird world econ omies with particular severity (wh eth er th ese were delin ked from or lin ked to imperialism), even as th eir assets g et den ation alized. Th e latter ph en omen on , wh ich was n oticeable everywh ere else in th e th ird world, h as revealed itself somewh at belatedly (but dramatically) in East an d South east Asia. Th e crises of th ese econ omies is n ot a temporary aberration due to some policy failures; it is a more basic ph en omen on reflective of a ch an g e in con jun cture associated with th e rise to promin en ce of in tern ation al fin an ce capital. Th e stag n ation in world capitalism an d th e open in g up of th ese econ omies to g lobal fin an cial flowsboth tren ds bein g th e result of th e ascen dan cy of in tern ation al fin an ce capitalun derlie th eir crisis. III Th ere was a wave of fin an cial liberalization in th e East an d South east Asian econ omies at th e beg in n in g of th e 1990s, wh ich permitted domestic fin an cial ag en ts to approach in tern ation al fin an cial markets directly for fun ds. Of course, In don esia an d Malaysia h ad open capital accoun ts for a lon g time, but th eir extern al capital tran saction s h ad been de facto state-con trolled; in th e 1990s, private access to extern al capital markets in creased g reatly. Th e immediate provocation for th is sh ift varied across coun tries: in Th ailan d an d th e Ph ilippin es, it was th e declin e in direct foreig n in vestmen t in flows; in In don esia an d Malaysia, it was to meet th e fin an cial n eeds of a boom; in South Korea, it was to sustain a domestic fin an cial system, turn in g more frag ile because of th e larg e credit exten ded to th e chaebols facin g difficulties on th e world market. Beh in d th ese immediate con sideration s, h owever, th ere were two basic factors. On e was th e easy availability of extern al fin an ce: foreig n fun ds, wh ose in flows were actively en courag ed by th e IMF, were available at rates of in terest th at were below domestic rates. Th e oth er was th e emerg en ce, from th e in terstices of th e old system, of a n ew class of speculators an d fin an cial operators, wh o became th e prin cipal lin k with extern al capital markets an d arran g ed for in tern ation al fin an ce capital in flows; fin an cial liberalization served th eir in terests an d stren g th en ed th eir position . Th is was a n eocomprador class wh ich , to beg in with , did n ot n ecessarily own capital but con sisted inter aliaof fun ction aries of fin an cial in stitution s in th e old system, wh ere such in stitution s were mean t to serve th e n eeds of state-spon sored in dustry. (In In dia, members of th is n ew fin an cial class emerg ed even from th e ran ks of executives an d man ag ers of state-own ed ban ks th emselves). In its effort to promote liberalization an d in its quest to broaden in tern ation al lin ks, th is n eocomprador class, with th e blessin g s of th e Bretton Woods in stitution s, opposed th e old dirigismean d (sin ce th e latter usually h ad been associated with auth oritarian an d corrupt structures ag ain st wh ich th e radical an d democratic elemen ts in society h ad been strug g lin g ) often made common cause with th ese radical elemen ts. Th e period, up to 1996, saw th ree con sequen ces of capital accoun t liberalization in th e East an d South east Asian econ omies: first, th ere was a sig n ifican t in crease in th e mag n itude of n et extern al fin an cial flows; secon d, th ere was a dramatic sh ift in th e mix between sh ort- an d lon g -run fun ds in favor of th e former; an d th ird, most of th e in crease in foreig n borrowin g was on accoun t of th e private sector. Private recourse to foreig n loan s was partly at th e expen se of domestic loan s but, sig n ifican tly, also to fin an ce a h ost of n on -man ufacturin g projects: in vestmen t in real estate (such as office blocks an d h ousin g projects), in vestmen t in certain types of in frastructure, an d in developmen t of fin an cial services. Th e old dirig iste reg imes, in th eir keen n ess to promote export-orien ted man ufacturin g activity, h ad accorded a lower priority to th ese types of in vestmen t an d h ad directed less credit to th em. Burg eon in g foreig n borrowin g n ow made up for th is. Macro-level en d-use of extern al fin an ce wen t partly for en larg in g foreig n exch an g e

reserves but also, n otably, for steppin g up in vestmen t ratiosabove very h ig h existin g levels. Th e averag e in vestmen t ratios for 1986 to 1990 an d 1991 to 1995 were 23.4 percen t an d 39.1 percen t respectively for Malaysia, 26.3 an d 27.2 for In don esia, 33.0 an d 41.1 for Th ailan d, 19.0 an d 22.2 for th e Ph ilippin es, an d 31.9 an d 37.4 for South Korea. Th e h ig h er in vestmen t ratios en tailed h ig h er curren t accoun t deficits, wh ich th e in creased in flows of extern al fin an ce covered. To be sure, th is was better th an wh at in flows of foreig n fin an ce h ad don e in some oth er th ird world coun tries wh ere, by causin g th e exch an g e rate to appreciate (or merely by en ablin g th e substitution of foreig n g oods for domesticeven at g iven exch an g e rates), th ey h ad precipitated domestic dein dustrialization in th e con text of a liberal trade reg ime. Th ese coun tries h ad been made to borrow from abroad, usin g sh ort-term fun ds, to fin an ce th eir own dein dustrialization ! Compared to th em, at least, th e East an d South east Asian coun tries made better use of th eir extern al loan s by steppin g up in vestmen t ratios (an d, con sequen tly, g rowth rates) wh ile keepin g th eir exch an g e rates stable. Th is made foreig n fun ds even more forth comin g . Non eth eless, a crisis was imman en t in th e situation . First of all, usin g sh ort-term fun ds for lon g -term in vestmen t, or borrowin g sh ort to in vest lon g , exposed private sector borrowers to th e risks of illiquidity. An d sin ce, in all such situation s, th e coun try as a wh ole h as to bear th e burden of th e con sequen ces of private decision s, it exposed th e people to th e dan g ers of a drastic squeeze on th eir livin g stan dards, in th e even t of a loss of con fiden ce by th e len ders. Secon d, quite apart from th is maturity mismatch , th ere was an addition al mismatch , in th at foreig n curren cy was borrowed to fin an ce projects wh ich did n ot earn foreig n curren cy. Th e Bretton Woods in stitution s are usually veh emen tly opposed to th e idea of th ird world g overn men ts en larg in g fiscal deficit to fin an ce in vestmen t or welfare expen diture, even wh en th ere are excessive foreig n curren cy reserves. Th is policy is rooted in th e idea th at g overn men t expen diture th at is fin an ced by foreig n curren cy but does n ot earn foreig n curren cy exposes th e coun try to a foreig n exch an g e crun ch . In East an d South east Asia, h owever, th ey actively en courag ed th e private sector to borrow foreig n curren cy, even wh en th e object was to in vest in th e n on -tradeables sph ere. Th e immediate provocation for th e crisis, wh ich first surfaced in Th ailan d an d th en spread to oth er coun tries in th e reg ion , was th e supposedly excessive Th ai curren t accoun t deficit, but immediate provocation s are h ardly sig n ifican t: Th ailan d itself h ad experien ced even larg er curren t accoun t deficits (relative to GDP) in 1990, with n o adverse effects on its curren cy; an d th roug h out th e 1990s, th e curren t accoun t deficits of th ese coun tries h ad been in creasin g with out an y adverse effects on in vestor con fiden ce, as th e coun terpart to burg eon in g foreig n capital in flows. Th e crisis imman en t in th e situation h ad to break some time, an d it did. Th e n ature of th e crisis, h owever, was remarkable. It was n ot a simple story of a collapse in curren cy values caused by a loss of in vestor con fiden ce in th e curren cy. Th ere was a meldin g of foreig n curren cy markets with asset markets, wh ich made th e crisis both un ique an d in tractable. En terprises accessed foreig n curren cy loan s of in creasin g ly sh orter maturity, eith er directly or th roug h th e in termediation of ban ks. Such a situation is marked by th ree importan t features. First, a crisis can be set off by expectation s of a price declin e, eith er in th e asset market or in th e foreig n exch an g e market. Secon d, expectation s of a price declin e in on e market stimulate expectation s of a declin e in th e oth er, an d vice versa. Th ese expectation s, th erefore, can feed on e an oth er in a vicious circle, causin g en ormous drops in actual prices in both markets, drivin g firms to ban kruptcy, an d totally disruptin g production . As firms seek to pay off th eir foreig n exch an g e oblig ation s by sellin g assets, th ey drive down both th e exch an g e rate an d th e price of assets in to a bottomless abyss with out ever reach in g spon tan eous equilibrium, sin ce every down ward movemen t in eith er price causes furth er excess supply in both markets. Th ird, all th e usual in strumen ts prescribed by th e Bretton Woods in stitution s for dealin g with a foreig n exch an g e crisis, quite apart from bein g an ti-

people, also become sin g ularly in effective in such a situation . Deflatin g th e domestic econ omy, in th e h ope of curtailin g th e n et excess deman d for foreig n exch an g e, ag g ravates th e problem of debt deflation for th e firms an d in creases th e desire of foreig n len ders to take th eir capital out; it h as th e opposite effect of in creasin g th e n et excess deman d for foreig n exch an g e. Th is is exactly wh at h appen ed: pursuit of th e IMF prescription , as some econ omists from th e Bretton Woods in stitution s th emselves admit, palpably ag g ravated th e crisis. Th e fact th at th e IMF n on eth eless persisted with its usual prescription h as been g en erally attributed to its faulty un derstan din g its in ability to appreciate th e fact th at th e South east Asian crisis was qualitatively differen t from th e debt crisis in Latin America in th e 1980s or th e Mexican crisis of 1995. Th at it in sisted on fiscal restrain t, even th oug h th e crisis was a result of private borrowin g ; th at it in sisted on deflation , even th oug h th is en tailed debt deflation (wh ich ag g ravated th e crisis); th at it asked for a g overn men t g uaran tee of private loan s, even th oug h th is en courag ed moral h azard, or reckless len din g ; th at it asked for furth er fin an cial liberalization to remedy th e crisis, even th oug h con trols over capital flows were th e obvious n eed of th e h ourth ese h ave all been adduced as eviden ce of its in tellectual failure. Noth in g could be furth er from th e truth . Th e IMFs role is to promote th e in terests of metropolitan capital, an d in particular th e metropolis-domin ated in tern ation al fin an ce capital, n ot to solve South east Asias crisis. It is an ag en cy of imperialism, n ot a h uman itarian org an ization (th oug h th e h eg emon y of th e ideolog y of imperialism is so complete at th e momen t th at even radical th ird world in tellectuals often fail to see th is poin t). From th is perspective, th e IMFs in terven tion in East an d South east Asia promises to be h ig h ly successful: it h as systematically destroyed th e basis of th e old dirigiste developmen t strateg y in South Korea by disman tlin g th e chaebols an d weaken in g th e lin ks between th e state an d in dustry; it h as protected foreig n len ders by extractin g g overn men t g uran tees for private debt, at least in Th ailan d an d South Korea; it h as forced th ese two coun tries to permit full foreig n own ersh ip of fin an cial in stitution s; an d it h as, despite all adverse reaction s, successfully h eld out in favor of fin an cial liberalization . To be sure, it h as still n ot man ag ed to crack Malaysia an d In don esia; but if th e crisis persists in its acute form, it may tame even th ese two g ian t econ omies. Th us, th e acuten ess of th e crisis, in stead of sig n ifyin g a failure of th e IMF, represen ts its success, sin ce th is creates precisely th e occasion for it to roll back all vestig es of dirigisme an d open th ese econ omies to domin ation by metropolitan capital. Th e fact th at it h as th e same ag en da for all coun tries, irrespective of th e precise n ature of th e crisis afflictin g th em, illustrates th at its ag en da is n ot solvin g th e crisis but promotin g metropolitan capital, wh ose requiremen ts are in depen den t of th e n ature of th e crisis. Mean wh ile, th e crisis h as h it th e people h ard. Poverty h as risen , un doin g th e prog ress of th e precedin g decades. In In don esia an d Th ailan d alon e, an estimated twen ty-five million people are likely to fall back in to poverty in 1999. An d for th ose already in poverty, th e crisis h as been devastatin g . Th e East Asian crisis h as also trig g ered a ch ain reaction in wh ich Russia an d Latin America, n otably Brazil, h ave also fallen victims to crises on accoun t of loss of in vestor con fiden ce. Th e developin g coun tries as a wh ole are expected to witn ess 0.4 percen t per capita in come g rowth in 1999, compared to 3.2 percen t for th e previous year. Th irty-six coun tries (wh ich accoun t for over 40 percen t of th e developin g worlds total GDP an d more th an a quarter of its population ) experien ced n eg ative per capita in come g rowth in 1998; th is h ad been th e fate of on ly twen ty-on e coun tries in 1997 (wh ich accoun ted for 10 percen t of th e developin g worlds GDP an d 7 percen t of its population ). IV Th ere h as been a systematic attempt from th e very beg in n in g to camouflag e th e real cause of th e Asian crisisth e fact th at such crises in th e periph ery are imman en t in

con temporary imperialism. Stag n ation pun ctuated by acute crises, such as we h ave seen , is th e fate of th e periph ery in th e era of g lobalized fin an ce. Camouflag in g th is fact becomes n ecessary because in teg ration in to imperialism is bein g promoted assiduously. Th us, th e common est explan ation for th e Asian crisis emph asises th e cron y capitalism prevalen t in th ese coun tries: it blames th eir own in stitution s, an d n ot th eir in teg ration in to g lobalized fin an ce. Th is explan ation is obviously in adequate: first, th is con trast between cron yism an d th e so-called imperson al disciplin e of th e market sh ould n ot be overdrawn . All capitalism is cron y capitalism: promotin g son s an d daug h ters in stead of th ose with old sch ool ties con stitutes a differen ce more in th e n ature of th e cron ies th an in th e n ature of th e capitalism. Secon dly, th e g lobal fin an cial markets th emselves were respon sible for exten din g h ug e loan s to th ese coun tries with out an y th oug h t of wh eth er pruden t n orms were bein g main tain ed. Cron y capitalism can n ot be sin g led out for blame, an d th e extern al len ders can n ot be exon erated, wh en th e fact is th at loan s were offered plen tifully an d th e IMF en courag ed th ese econ omies an d oth ers to borrow abroad. No on e cared about cron y capitalism th en . Th ird, th e so-called cron y capitalism in each coun try (an d, of course, its n ature differed across coun tries) was th e in evitable outcome of th e kin d of developmen t strateg y, especially th e kin d of dirigisme, th at th e coun try experien ced. But th is very dirigisme also con tributed to th e rapid in dustrialization of th ese econ omies, wh ich was h ailed as a miracle. It is n ot cron y capitalism th en , but th e ch an g ed con text in wh ich it h ad to operate, wh ich un derlay th e crisis. It was in evitable th at, even with out th e ch an g es in th e g lobal con text associated with th e rise of in tern ation al fin an ce, th ese particular kin ds of dirig isme h ad to en d, as th e auth oritarian ism an d th e corruption associated with th em in creasin g ly became th e object of popular an g er. But a crisis was n ot in evitable in th e tran sition to democracy an d accoun tability. To sug g est th at th e crisis is th e result of cron y capitalism, th erefore, is misleadin g . It is remin iscen t of th e view (popular for a lon g timeun til it became palpably ludicrous) th at th e on g oin g econ omic crisis in Russia is th e leg acy of commun ism. Lately, h owever, such in tern ation al fin an ce is ben ig n but th e problem lies with th e borrowers views h ave receded somewh at. An altern ative g en re of explan ation s takes th eir place; it recog n izes th e problems associated with fin an cial liberalization an d, with in th is con text, puts th e blame for th e actual crisis on wron g policiesboth of th e domestic g overn men ts an d th e IMF. We h ave discussed th e IMFs mistakes earlier an d arg ued th at th ey con stitute a part of th e modus operan di of in tern ation al fin an ce capital; let us n ow look at th e domestic policy mistakes. Th e propon en ts of th e view th at mistakes were made arg ue th at most of th ese coun tries faced crisis because th ey allowed th eir curren t accoun t deficits to become too larg e; th at is, th ey sh ould n ot h ave allowed th e excess of private in vestmen t over private savin g s to become so larg e. Th is view, h owever, fails to un derstan d th e dyn amics of an econ omy with fin an cial liberalization . In such an econ omy, th e g overn men t can do precious little to keep out spon tan eous capital in flows: th e in terest rate is th e ch ief in strumen t available, an d lowerin g it to discourag e in flows (if th e exten t of lowerin g is to be sig n ifican t en oug h to make a differen ce) run s th e risk of startin g a capital flig h t an d trig g erin g a crisis. Th e mag n itude of in flows th erefore is more or less auton omous. Given such spon tan eous in flows, th e on ly way to con trol th e curren t accoun t deficit is to add to th e coun trys foreig n exch an g e reserves. But addin g to reserves, wh ich earn little or n oth in g , is silly, sin ce it implies deployin g fun ds borrowed at h ig h er in terest rates for uses wh ich fetch lower, even zero, rates. On th e oth er h an d, if reserves are n ot added

to (so th at th e curren t accoun t deficit h as to expan d), th en deficit con trol can h appen eith er th roug h an in crease in domestic private in vestmen t or a decrease in domestic private savin g s, sin ce in creases in fiscal deficit are avoided in a liberalized econ omy. Th e decrease in private savin g s can occur eith er th roug h a foreig n exch an g e-in ten sive con sumption splurg e or, if th e exch an g e rate is allowed to appreciate in th e face of capital in flows, th roug h domestic dein dustrialization . It follows th at wh en spon tan eous capital in flows occur in a liberalized econ omy, th ere are on ly four option s available to it: addin g to reserves wh ich are barren in creasin g in vestmen t, wh ich en tails borrowin g sh ort to in vest lon g in creasin g con sumption , wh ich en tails splurg in g on borrowed sh ort-term fun ds; or dein dustrializin g th e econ omy. Each of th ese aven ues eith er con stitutes, or lays th e g roun dwork for, a crisis. Of course, if in vestmen t in creases in quick-yield projects in th e tradeables sector, th en th is particular option may be th e least h armful of all. But in a liberalized econ omy wh ere th e g overn men t itself is with drawin g from in vestmen t, an d h as n o con trol over th e aven ues of private in vestmen t (such con trol is th e h allmark of th e much -reviled dirigiste reg imes), it can n ot en sure in vestmen t in such projects. Th e criticism of Asian g overn men ts for policy mistakes is th us misplaced an d represen ts on ly a camouflag e. No doubt much was wron g with th e Asian reg imes, but th e crisis was th e con tribution of fin an cial liberalization assiduously promoted by th e Bretton Woods in stitution s an d th e advan ced capitalist coun tries. V Th e crisis in East an d South east Asia is superimposed, h owever, on a deeper ph en omen on th e fact th at th e h ig h g rowth rates on ce en joyed by several coun tries on th e periph ery are n o lon g er possible for th em, let alon e for th e oth ers. Th e curren t ph ase of imperialism en tails a ten den cy towards stag n ation , n ot on ly g en erally but in particular in th e th ird world, wh ere th e distin ction between th e lin ked an d th e delin ked econ omies (vis vis imperialism) h as prog ressively disappeared. Exclusive preoccupation with th e crisis h as in deed diverted atten tion from th is deeper ph en omen on , but th e delayed recovery from th e crisis clearly poin ts to it. Th e Bretton Woods in stitution s an d th e Western g overn men ts are g en erally ag reed th at restorin g in vestor con fiden ce h olds th e key to recovery; an d th e IMF h as explicitly based its prescription on th is diag n osis. But in several of th ese coun tries, of wh ich Th ailan d is th e prime example, th is restoration of in vestor con fiden ce itself h as proved to be elusive, promptin g a World Ban k official for Th ailan d to remark th at ten years will pass before th e structural reforms take effect an d prosperity can be measured for th e vast majority of th e people. Even wh ere, judg in g by th e scale of capital in flows an d th e g rowth in reserves, in vestor con fiden ce h as apparen tly been restored, e.g ., in South Korea, th e real econ omys con traction n on eth eless h as actually in creased: even as South Koreas usable foreig n reserves rose from less th an n in e billion dollars in December 1997 to over forty billion dollars in Aug ust 1998, its quarterly GDP g rowth rates were -3.9, -6.8 an d -6.8 percen t, respectively, for th e first th ree quarters of 1998. Th e reason for th e dismal performan ce of th e real sector lies partly in th e fact th at th e very mean s adopted to restore in vestor con fiden ce, n amely domestic deflation , also h urts g rowth . But it is also partly a result of low export g rowth rates, in th e case of South Korea, to th e developin g coun tries in particular, sin ce all of th em are experien cin g deflation an d stag n ation . Both of th ese factors h old for th e en tire th ird world an d for th e en tire curren t epoch . With econ omies bein g open ed up to speculative capital movemen ts, retain in g in vestor con fiden ce acquires overridin g importan ce everywh ere; moreover, sin ce capital, wh eth er of th e metropolis or th e periph ery, feels more con fiden t movin g to th e metropolis wh ich is its bastion , th ere is a ten den cy for capital, all else bein g equal, to flow out of th e periph ery; to coun ter th is, it h as to make stren uous efforts to retain in vestor con fiden ce. It h as to offer h ig h er real in terest rates th an th ose th at prevail in th e metropolis (wh ich

it h as been doin g ) an d keep th e econ omy even more deflated, wh ich causes it to become even more markedly afflicted by stag n ation . But th at is n ot all. In a liberalized econ omy, th e rate of g rowth ultimately depen ds on th e rate of g rowth of exports, wh ich , for th e th ird world as a wh ole, depen ds on th e rate of g rowth of its exports to th e metropolitan coun tries. Now, on e of th e remarkable aspects of th e East an d South east Asian developmen t experien ce is th at th eir exports, as far as modern man ufacturin g products are con cern ed, are con fin ed to on ly a limited ran g especifically, mach in ery an d tran sport equipmen t, an d office mach in ery an d telecom equipmen t. Th e diffusion of modern man ufacturin g activities to th is reg ion h as been con fin ed to a limited n umber of activities. Wh en South east Asia en larg ed its exports, it in evitably h urt East Asia, an d wh en Ch in a en larg ed its exports of th ese commodities, it h urt th e South east Asian econ omies export performan ce. Given th e rig idity of th e ran g e of activities, an d h en ce th e fact th at n ewer activities are n ot g ettin g diffused from th e metropolis to th e periph ery, th e rate of g rowth of exports of th e latter depen d ultimately on th e rate of g rowth of th e metropolitan coun tries. Sin ce, as arg ued earlier, th e era of g lobalized fin an ce en tails a slowin g down of g rowth in th e metropolitan coun tries taken tog eth er, coun tries th at were h ith erto successful exporters from th e th ird world will be less successful from n ow on an d will experien ce slower g rowth th an th ey h ave. Th e miracle econ omies, an d th e th ird world as a wh ole, will experien ce a slowdown in g rowth , sin ce th ey are liberalizin g as metropolitan econ omies slow down . Two addition al factors stren g th en th is con clusion . First, th e slowdown in metropolitan coun tries is makin g th em adopt protection ist measures, even as th ey impose liberal trade on th e th ird world. Th is is particularly visible in th e area of textiles an d cloth in g , wh ich still con stitute a major ch un k of th ird world exports, in cludin g th at of th e East an d South east Asian coun tries. Secon dly, th e declin e of commun ism h as reduced th e g eopolitical importan ce of th e East an d South east Asian coun tries, an d of man y oth ers. Th e market access th at such coun tries en joyed in th e metropolis in th e past is n o lon g er available to th em. In deed, even in th e matter of bailout followin g th e crisis, th e toug h position adopted by th e IMF vis vis th e East an d South east Asian coun tries provided a con trast to th e position adopted vis vis Mexico earlier, an d in dicated th e reduced strateg ic importan ce of th ese econ omies for imperialism. Th is fact must affect th eir g rowth rates. In sh ort, we are witn essin g a n ew ph ase in th e h istory of capitalism. Not on ly will th e metropolitan coun tries, taken as a wh ole, experien ce lower g rowth an d h ig h er un employmen t th an was averag e durin g th e postwar period, but th e wh ole th ird world will h ave lower g rowth th an in th e past. Poverty will in crease in th e th ird world as a result of th e deflation -in duced rise in th e rate of surplus value, an d assets will keep passin g in to th e h an ds of metropolitan fin an ciers. VI Th is n ew ph ase also en tails th e en d of bourg eois econ omic n ation alism as a practical project in th e th ird world, i.e., of th e attempt of th e th ird world bourg eoisie to carve out a space for itself an d build a capitalism th at is relatively auton omous of imperialism. With in Asia th ere were two very differen t models of th is attempt: In dia an d South Korea. In dias was th e classic case of bourg eois econ omic n ation alism. Th e bourg eoisie was more developed as a class at th e time of in depen den ce from colon ial rule th an its coun terparts elsewh ere in Asia: it h ad a stron g er productive base, owin g to g reater in dustrialization in th e colon ial period, an d a g reater social weig h t because of th is, as well as its association with th e an ticolon ial strug g le. Correspon din g ly, h owever, it also faced a more org an ized proletariat, a more vocal petty bourg eoisie an d salariat, an d a peasan try made militan t by Depression -in duced impoverish men t. It used th e state for relatively auton omous capitalist developmen t, an d asserted itself both politically an d

econ omically vis visimperialism: protection ag ain st foreig n g oods an d capital (even wh ile collaboratin g with th e latter), n on -alig n men t, a democratic polity, an d a stron g state capitalist sector were th e h allmarks of th e In dian dirigiste strateg y. But th e absen ce of th oroug h g oin g lan d reforms, a result of th e bourg eoisies compromise with lan dlordism, kept productive forces in ag riculture arrested. Th e market for mass con sumption g oods remain ed restricted an d g rew slowly for th is reason . Moreover, th e ability of th e state capitalist sector to keep expan din g , an d th ereby to keep en larg in g th e market for th e private capitalist sector, g ot prog ressively un dermin ed: th e low ag ricultural g rowth put a ceilin g on th e rate at wh ich public in vestmen t could g row with out squeezin g th e livin g stan dard of th e masses to an exten t in tolerable in a democracy; in addition , th e rulin g classes en rich ed th emselves from th e public exch equer, a form of primitive accumulation of capital, wh ich furth er curtailed th e g rowth of public in vestmen t. Th e dirigiste strateg y of capitalist developmen t, depen den t on expan din g public in vestmen t, en tered a cul-de-sac an d lost social support even as metropolitan capitalan d, in particular, fin an ce capitalstepped up its offen sive ag ain st th is strateg y th roug h th e Bretton Woods in stitution s, an d later th e WTO, in a world wh ere th e crucial support comin g from socialist coun tries h ad disappeared. Th e n ature an d con tradiction s of South Korean dirigisme were differen t. Th e state, formed th roug h th e imposition of a partition by imperialism, was politically a clien tstate. Th e bourg eoisie owed its very formation to state support, wh ich was more direct, with in an auth oritarian structure th at sn uffed out an y stron g ch allen g e from oth er classes. Non eth eless, th is dirigisme (wh ich more directly in terven ed in th e micro-level decision s of th e capitalists) was also an imated by a certain econ omic n ation alism. It used its very closen ess to imperialism, th e leverag e it obtain ed as a fron tlin e fig h ter ag ain st commun ism, to g ain market access an d carve out an econ omic space for th e in dustrial bourg eoisie it promoted. Its con tradiction s arose because of th e slower g rowth of th e metropolitan econ omies, th e emerg en ce of th e South east Asian coun tries an d Ch in a, wh ich moved in to th e same n arrow ran g e of export activities, an d its loss of strateg ic importan ce with th e collapse of commun ism. Th e chaebols started takin g a beatin g in th e world market. Ban ks th at h ad loan ed h eavily to th em started g ettin g weig h ed down by n on -performin g assets, an d turn ed to extern al sources of fin an ce for th eir own viability, creatin g con dition s for th e crisis. Th e days of both forms of dirigismeassociated, each in its own way, with th e bourg eois n ation alist projectare n ow over. Th e rise to promin en ce of in tern ation al fin an ce capital, th e con sequen t slowdown in metropolitan coun tries taken as a wh ole, an d th e collapse of commun ism, tog eth er h ave created a n ew ph ase of world capitalism, wh ere th e opportun ity for a th ird world bourg eoisie to pursue a relatively auton omous trajectory of developmen t n o lon g er exists. Th is collapse of th e bourg eois n ation alist project un derlies th e curren t pervasiven ess of eth n ic, commun al, an d fun damen talist con flicts all over th e th ird world. If th e days of bourg eois n ation alism are over, th is does n ot mean th at th e an tiimperialist project in th e th ird world h as lost its relevan ce; on th e con trary, its n ecessity is g reater today th an at an y time in th e last h alf-cen tury. But it h as to take an altog eth er differen t form. VII Th ere is a view th at restriction s on capital flows an d reg ulatory oversig h t on fin an cial sector liberalization are adequate for combattin g th e dan g er of g ettin g caug h t in th e vortex of in tern ation al fin an ce capital. Th is view is a facile on e. If th ese restriction s were part of an in tern ation al un derstan din g , so th at all coun tries imposed th em, th en n o sin g le coun try would face an y h ardsh ip arisin g from capital flig h t. But g lobalized fin an ce capital would oppose such restriction s tooth an d n ail. Th e advan ced capitalist states, wh ich (as a surrog ate for th e n on existen t sin g le g lobal imperialist state) act in

un ison to provide support for such capital, would buttress its opposition . Th e Bretton Woods in stitution s would fall in lin e, n o matter h ow man y well-mean in g econ omists th ey h ave on th eir staff. If, perch an ce, some un derstan din g were reach ed, it would be too qualified to be of much sig n ifican ce to th e th ird world. On th e oth er h an d, if restriction s were imposed by particular coun tries un ilaterally, th ose coun tries would certain ly face immediate h ardsh ips as capital flig h t occurred or as fin an cial flows bypassed th em. In sh ort, th e trag edy of th e presen t predicamen t of th e th ird world is th at if g ettin g caug h t in th e vortex of g lobalized fin an ce is pain ful, g ettin g out of it is equally pain ful. Gettin g out, th erefore, must be supported by th e people. Th is mean s th at even restriction s on in tern ation al fin an ce h ave to be accompan ied by an altern ative econ omic prog ram, brin g in g palpable ben efits to th e people, an d an altern ative political ag en da en tailin g th oroug h g oin g democratization of society an d th e polity. People must be directly in volved in decision -makin g an d h en ce remain politicized an d able to con fron t imperialism. Th e precise con tours of th is prog ram would vary from coun try to coun try. But lan d reforms (wh ere th ey h ave n ot been carried out); a revival of public in vestmen t, especially in rural in frastructure an d employmen t g en eration prog rams, fin an ced by taxes on th e rich ; a reduction of in come in equalities to g en erate domestic deman d for a ran g e of simple an d n on -import-in ten sive commodities; decen tralization of resources an d decision -makin g to directly elected bodies at th e local level; th e stren g th en in g of democratic in stitution s an d en forcemen t of g reater accoun tability of th e state, would con stitute some of th e essen tial in g redien ts of such an altern ative prog ram. Th ere would, of course, h ave to be con trols over capital flows, over th e fin an cial sector (especially in cludin g political con trol over th e cen tral ban k) so th at it serves th e n eeds of developmen t, an d over trade, so th at domestic food availability is n ot reduced th roug h ag ricultural exports, an d domestic in dustry is n ot destroyed th roug h in discrimin ate imports or dumpin g . With bourg eois n ation alism in a cul-de-sac, an altern ative an ti-imperialist n ation al strug g le based on th e workers an d peasan ts is th e order of th e day; such an altern ative prog ram would facilitate th is. For socialists to talk of a n ation al ag en da ag ain st g lobalization wh ich , after all, represen ts a form of in tern ation alismalbeit of th e bourg eois varietymay seem odd. But th ere is n o escape from th e fact th at th e n ation still remain s th e on ly practical poin t of in terven tion in th e strug g le ag ain st imperialism. In th e tran sition from th e bourg eois in tern ation alism, sig n ified by th e curren t g lobalization , to a n ew in tern ation alism based on th e un ity of th e workin g people, th ere h as to be an in terim an ti-imperialist n ation al ag en da carried forward by th e workers an d peasan ts. A n ew in tern ation alism is n ot mere wish ful th in kin g . Sin ce th e workers an d peasan ts are bein g adversely affected all over th e th ird world (an d th e former socialist coun tries), an objective basis clearly exists for un ity amon g th em ag ain st th e h eg emon y of in tern ation al fin an ce capital; an d th is un ity can also, in due course, in clude th e workin g class in th e first world, wh ich is losin g out th roug h stag n ation , un employmen t, welfare cuts, an d attacks on trade un ion s. But th e route towards such in tern ation alism lies in an an ti-imperialist n ation al ag en da. Th is route is n ot easy. Th e collapse of actually existin g socialism over larg e tracts of th e g lobe, an d th e fact th at in ter-imperialist rivalries are relatively muted, implies th at imperialism will h ave an easier job sn uffin g out an y ch allen g e moun ted ag ain st it in some particular corn er of th e world. But if th e ch allen g e eman ates from a larg e en oug h coun try or g roup of coun tries, if it is based on broad popular support, an d if it is accompan ied by a stren g th en in g of democratic in stitution s th roug h wh ich th e people can remain politically active (un like un der old socialism, in wh ich th ey became rapidly depoliticized an d power was exercised in th eir n ame by wh at, in effect, was a dictatorsh ip

of th e Party), th en it may well prove a h arbin g er of a ren ascen t socialism.* *Notes for th is article are available from th e MR office. Con tact th e assistan t editor usin g our con tact form.