© Immanuel Wallerstein 1998.
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(paper given at International Studies Association meetings, Minneapolis, March 17-21, 1998)
Politicians, journalists, and too many scholars are repeatedly overwhelmed by the latest headlines. This is unfortunate because it leads to curious and unsatisfactory analyses of the meaning and importance of even large events. Thus it has been with the collapse of the Communisms; thus it has been with the geopolitical challenge of Saddam Hussein; and thus it is with the so-called Asian financial crisis. To make sense of this "event," it is useful to have recourse to the multiple social times which Fernand Braudel insisted is the crucible within which we may be able to analyze reality realistically.
Let me start with an interesting editorial comment from the Financial Times (Feb. 16, 1998, p. 15) on the situation:
Why have [the east Asian countries] sunk now? A big part of the explanation has to do with the fickleness of external investors, who first behaved as if east Asian economies could do nothing wrong and, shortly thereafter, as if they could do nothing right....
Panic-stricken lenders. The inflows offered more temptation than inexperienced businessmen, guaranteed financial institutions, or corrupt and incompetent politicians could resist. The outflows worsened the subsequent punishment; a domestic asset bubble can be managed by domestic institutions. As the capital flooded out, exchange rates collapsed and bankruptcy engulfed the private sector, countries found themselves at the mercy of panic-stricken private lenders and demanding official ones....
This is a world of panic. Once panic begins, each investor rationally wants to escape before all the others. Vastly more damage is then done than the underlying economic situation would warrant....
There are several things to be noted about this analysis. The financial slump in east Asia is looked at from the point of view of investors, primarily external investors, and the editorial suggests that a prime consideration in explaining the extent of the problem was their panic. If one reads closely, one sees that we are talking especially of comparatively smaller investors, who have the least political clout and the most reason to need "to escape before all the others." The second thing to note is that geopolitical considerations do not seem to enter the analysis. The third thing to note is the almost left-wing policy conclusion of the Financial Times:
The wisdom of over-hasty integration of emerging economies into global financial markets must be reconsidered. Foreign direct investment is invaluable. But easy private-sector access to short-term borrowing can be lethal. Only the prepared and skillful can navigate this ocean. Lacking a true global lender of last resort, fragile emerging economies should stay close to shore.
First, the article attacks recent neoliberal wisdom by speaking of "over-hasty integration of emerging economies into global financial markets...." Then it suggests that the world-economy (always? only at present?) is an "ocean" that only "the prepared and skillful can navigate...." Beware, I suppose, the "inexperienced businessmen, guaranteed financial institutions, or corrupt and incompetent politicians." Perhaps the corrupt politicians need to be more competent. Finally, the conclusion notes the absence of a "true global lender of last resort," an allusion (I would suggest) to the structural financial weakness of the United States which, far from being a global lender of last resort, is a global borrower dependent currently on Japan.
For all its limitations, this editorial is sounder than many a prognostic on the current situation, since it is bereft of the
illusions that all that is needed is a little more IMF mercurochrome, and because, above all, it underlines the issue of
"panic." Panic is never an issue of the so-called real economy. Panic occurs when there is speculation, that is to say, when
large groups of people are making money not primarily out of the profits from production but out of financial
manipulations. The alternating or cyclical relationship between an emphasis on profits derived from production and one on
profits derived from financial manipulations is a basic element of the capitalist world-economy,[1] and reminds us that the
first place we should look for an explanation of what is going on is in the fact that we are located within a B-phase of a
Kondratieff cycle, one that has in fact been going on since 1967/73.
[1. This has been long discussed by economic historians and recently spelled out in great detail by Giovanni Arrighi in The
Long Twentieth Century (London: Verso, 1994).]
It would be worthwhile to remind ourselves of some recent economic history of the world-system. We can look at what has happened since 1967/73 in two zones: on the one hand, in the core countries, which are the United States, western Europe (collectively), and Japan (Japan, not east Asia); and, on the other hand, in the semiperipheral and peripheral areas, which includes the so-called East Asian tigers, China, and southeast Asia. Let us start with the core zone. The basic meaning of a Kondratieff B-phase is that there is too much production for the available effective demand, so that the rate of profit from production is down. An immediate global solution might be to reduce production. But who wants to put himself forward as the sacrificial loser? The real reaction ordinarily, since the rate of profit is down, is for aggressive producers either to seek to increase production (thus maintaining their overall real profit, albeit at a reduced rate of profit) or to relocate to an area of lower real wage rates, thereby increasing their rate of profit. Increasing production (the first solution) is of course globally counterproductive and collapses after a while, but relocation (the second solution) does solve the global problem for longer than increasing production, but only until it too leads to increasing the global production without simultaneously increasing the effective demand, or at least increasing it sufficiently.
This is of course what has been happening over the past thirty years. Global production of all sorts (automobiles, steel, electronics among others, and more recently computer software) has been relocating from North America, western Europe, and Japan) to other areas. This has led to considerable unemployment in the core zones. The unemployment however does not need to be evenly spread. Indeed, a typical feature of a Kondratieff downturn is the effort of governments in core zones to export unemployment to each other. If we look at the pattern of the past thirty years, the U.S. suffered most at the beginning, in the 1970's and especially the early 1980's; then it was Europe's turn and still is; and only recently has it been that of Japan, whose difficulties since 1990 have permitted the U.S. employment rates to go up again.
In the meantime, investors everywhere have been engaged in all kinds of financial speculations. The OPEC oil price rises
of the 1970's led to global accumulations that were recycled as loans to Third World countries. These loans eventually
impoverished the borrowers but, for a decade or so, they did maintain core zone incomes globally, until the Ponzi game
finally gave out with the so-called debt crisis of the early 1980's. This manipulation was followed by a second game, the
combination in the 1980's of borrowing by the U.S. government (the military Keynesianism of Reagan) and by private
capitalists (junk bonds), until that Ponzi game also gave out with the so-called crisis of the U.S. deficit.[2] The Ponzi game
of the 1990's has been the inflows of global capital via "short-term borrowing" to east and southeast Asia in the 1990's
which, as the Financial Times says, "can be lethal."
[2. I have analyzed this whole process both in "Crisis as Transition," in S. Amin et al., Dynamics of Global Crisis, New
York: Monthly Review Press, 1982, 11-54; and in Geopolitics and Geoculture: Essays in World-Economy, Cambridge:
Cambridge Univ. Press, 1991, esp. Part I.]
In all of this, of course, some people have made a lot of money (and others have lost their shirts). And one level down from the great capitalists, there is the level of overpaid yuppies who have also done very well, provided they were in the right country in the right decade. The point is however that, by and large, most of the profit has been made from financial manipulations. Probably the only arena in which significant profits have been made out of production has been in computers, a "new" industry, and even here we are reaching the point of overproduction and hence of a falling rate of profit, at least in hardware.
If we turn to the peripheral and semiperipheral countries as a group, a Kondratieff B-phase offers both disaster and opportunity. The disastrous side is the reduction of market for their exports, especially their primary products, because of the reduction in global production that occurs. The oil price increase, too, affected them severely, in that, while it resulted in reduced world production, it also resulted in increased costs of imports for non-core countries. The combination of decreased exports and increased costs of imports created acute balance of payments difficulties for most of these countries, especially in the 1970's, which made their governments receptive to loans (the recycling of the OPEC superprofits) and led within a decade to the so-called "debt crisis."
But a Kondratieff B-phase also offers opportunities. Because one major effect is the relocation of industries from the core countries, non-core countries are the beneficiaries of this relocation, that is, some non-core countries. It is crucial to bear in mind that there is just so much relocation possible, and that all non-core countries are in competition with each other as to be the site. In the 1970's, a new term was invented. We began to speak of NIC's, that is, of "newly-industrializing countries." The literature of the time gave four major examples: Mexico, Brazil, (South) Korea, and Taiwan. By the 1980's, Mexico and Brazil tended to disappear from the lists, and we began to speak of the Four Dragons (Korea, Taiwan, Hong Kong, and Singapore). By the 1990's, there were indications of further relocation, beyond the Four Dragons to Thailand, Malaysia, Indonesia, Philippines, Vietnam, and (mainland) China. And now, there is a so-called financial crisis, first of all in this last group, but in the Four Dragons as well. Of course, Japan has been experiencing some economic difficulties since the early 1990's, and the pundits suggest that the current crisis might "spread" to Japan, and then possibly elsewhere, for example, to the United States.
Into this picture has stepped the IMF, supported strongly by the U.S. government, with its "solution" invented for the debt
crisis of the early 1980's: the recommendation that governments in crisis practice a combination of fiscal austerity and
opening the market for investors even more widely. As the chief economist of the Deutsche Bank in Tokyo has pointed out,
and as cited approvingly by no less than Henry Kissinger, the IMF is acting "like a doctor specializing in measles [who]
tries to cure every illness with one remedy."[3]
[3. Henry Kissinger, "How U.S. Can End Up as the Good Guy," L.A. Times, Feb. 8, 1998.]
Kissinger points out that the Asian countries had in fact been doing exactly what "conventional wisdom" had recommended, and that neither the countries nor the world's financial centers "had foreseen the current crisis." Who then is to blame? It's a combination, says Kissinger, of "domestic shortcomings and exuberant foreign investors and lenders, [who had been making] large windfall profits...[via] unsound investments." In any case, Kissinger warns that the IMF remedies, forcing "the complete crippling of the domestic banking system [in countries] which have no social safety net" is disastrous, causing what is in essence a "political" crisis with potentially very negative impact on the U.S. position in the world-system. Kissinger draws this lesson for the powerful of this world:
[I]t is clear that world leaders need a better understanding of global capital flows and their potential impact on the economies of both industrialized and developing countries. And they must become more aware of the potential international impact of decisions often taken largely for domestic reasons.
Kissinger is speaking at this point as a political economist, concerned with maintaining the stability of the capitalist world-economy as an historical system, and well aware of the limitations of the degree of polarization that is politically tolerable, especially when the immediate cause of increased suffering can be traced to financial speculations. But, of course, he is operating also as a plumber advising how to stop the leak, and in this capacity, he is not making a long-term analysis.
Let us look at the so-called east Asian crisis in three temporalities, two of them conjunctural, and one structural. We have just recounted the story as a story of the current Kondratieff cycle, one still not quite terminated. In the Kondratieff B-phase, for some reason (to be suggested shortly), the east/southeast Asian region of the world-system was the major beneficiary of the relocation caused by the Kondratieff downturn. This meant that, unlike other parts of the periphery and semiperiphery, the countries of the region had a major growth spurt and seemed to be prospering, until the effects of the downturn hit even them. In this sense, there is nothing unusual or unexpected about what has happened. Of course, to appreciate this, we have to put aside all the glowing explanations of east Asia's virtues, which have now given place to all the sour and reproving clucking about "crony capitalism." East Asia did do exactly the right things in the 1970's and 1980's to attract to itself the relocation of world industry. What the recent crisis proves is that, even doing all of this is not enough to sustain a long-term fundamental improvement in their comparative economic status in the world-system.
But there is another conjunctural cycle, one that is longer-term than the Kondratieff. This is the cycle of hegemony. That cycle goes back in the present instance not to 1945 but to circa 1873, and traces the rise and now the decline of U.S. hegemony in then world-system. It started with a long competition between the U.S. and Germany to become the successor hegemonic power to Great Britain. This struggle culminated in the Thirty Years' War between the two contenders that went on between 1914 and 1945, a war that the U.S. won. The period of true hegemony followed, from 1945-1967/73. True hegemony however cannot last. Its base, which is economic productive superiority, must inevitably be undermined by the entry into a strong competitive position of other powers, in this case of western Europe and Japan. The relative economic decline of the U.S. has been going on apace since then, to the advantage of its economic competitors. The U.S. has been able, up to a point, to contain them politically, primarily by using the menace of the Cold War to keep its allies in line. This weapon, however, disappeared with the collapse of the Soviet Union in 1989-91.
For various reasons, Japan has been able to do even better than western Europe in this period, in part because its economic
apparatuses were "newer" (the Gerschenkron effect) and in part because U.S. firms seemed more interested in making
long-term arrangements with Japan than with western Europe. Whatever the explanation, Japan, which as late as the 1960's
was being compared by U.S. scholars with Turkey,[4] became an economic superpower. The ability of the Four Dragons
and later Southeast Asia to perform so well in the 1980's is due to their geographical and economic linkage with Japan (the
so-called flying geese effect).
[4. See Robert E. Ward & Dankwart A. Rustow, eds. Political Modernization in Turkey and Japan, Princeton: Princeton
Univ. Press, 1964.]
In five years, Thailand may look no better than Venezuela, and Korea no better than Brazil, but Japan will continue to be an economic superpower, and will probably emerge in the early twenty-first century, in the wake of the next Kondratieff upturn, as the leading locus of capital accumulation in the world-system. How large a role a resurgent China will play in this economic centrality of Japan/East Asia is one of the great uncertain factors of this geoeconomic, geopolitical restructuring, the start of a new hegemonic cycle, and of competition between Japan or Japan/China with western Europe for the new top role. From this perspective, the so-called East Asian financial crisis is a minor, temporary event of limited importance, which will probably change nothing of the underlying rise of Japan or Japan/China or Japan/East Asia.
If the east Asian crisis forces a serious world depression, the U.S. is likely to be the worst hit of all. And even if everyone comes out of the final subphase of the Kondratieff B-phase and into a new A-phase, it will probably be the start of a secular deflation, such as the world-economy saw in the seventeenth and nineteenth centuries.
Finally, there is the structural temporality. The capitalist world-economy has been in existence as an historical system since
the long sixteenth century. Every historical system has three moments: the moment of genesis, the moment of normal life or
development, the moment of structural crisis. Each must be analyzed separately. There is much reason to believe that the
modern world-system, the one in which we all live, has entered into its structural crisis.[5] If this is so, we are unlikely to
see the full acting out of another hegemonic cycle. Japan may never have its moment in the sun, as the historic successor to
the United Provinces, the United Kingdom, and the United States. To be sure, we may have one more Kondratieff cycle,
but its glorious A-phase would no doubt only make more acute the structural crisis, rather than annulling it.
[5. See the analysis in Terence K. Hopkins & Immanuel Wallerstein, coord., The Age of Transition: Trajectory of the
World-System, 1945-2025, London: Zed Press, 1996.]
In this case, we may consider ourselves to be in what the scientists of complexity call a "bifurcation," during which the world-system will be "chaotic," in the technical sense that there will be many simultaneously possible solutions to all the equations of the world-system, and therefore no predictability about the short-term patterns. But out of this system will come some new "order," absolutely indeterminate (in the sense than it is impossible to predict), but subject to much agency (in the sense that even small pushes may have enormous impact on the path of the system in crisis).
From this point of view, the east Asian crisis is an annunciatory sign. It is not the first. The first was the world revolution of 1968. But insofar as the neoliberals claimed to have found the secret of restabilizing the system, the east Asian crisis will have demonstrated how barren is their ideology and how irrelevant. This is what is panicking those who, like the Financial Times and Henry Kissinger, are worrying about the political impact of the "panic" of the financial investors. The sages are right in their critiques of the IMF but they in turn have little to offer us, because they feel they have to argue that the historical system in which we live is immortal, and thus they must foreswear analyzing its dilemmas. No system, however, is immortal, and certainly not the one that has generated the greatest economic and social polarization in the history of humanity.
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