October 28, 2008
That the world financial system is in a serious dire crisis is no more news both on the basis of news reeling out daily on the billions of dollars lost at the stock markets across the world, and the history of cyclical collapse of capitalist system. Also, that various critical analyses have been given by various commentators the world over on the current world financial crisis which condemn the free market financial crisis and in some cases call for another Keynesian pill to safe capitalism is not new. However, what has clearly manifested from these analyses is the pro-capitalist approaches which tend to portray the situation has a structural or managerial faults which can be corrected by taking the correct methodology to market system û governmental control or responsible management practices. Most commentators have refused to see or pretended not to see the link between the current financial crisis and the inherent contradiction in capitalism as a profit-oriented system which socialises productions but privatise profit.
What most bourgeois commentators tried to do is to criticize the system from inside the temple before the enemies of the system exploit the situation. Therefore, you find those same commentators (and journalists) especially in our third world countries, who some days ago praised neo-liberal programmes of privatization, commercialization, trade liberalization, labour flexibility, cut in social spending, etc - all of which are meant to hand over public resources to the almighty private sector, now criticising free market capitalism. To these same latter day preachers of regulated market, anybody who questions these policies is an advocate of big government, who want to throw the society backward. What these set of commentators are now advocating is government intervention in the financial sector while also supporting neo-liberal policies û another euphemism for free-market capitalism. The end result of this is the open robbery of the working poor in order to guarantee mega-profit of the super-rich few.
What this write-up then tried to achieve is to show that the current financial crisis is nothing but a clear expression of the inherent contradiction within the capitalist system which cannot be resolved by the so-called responsible management or governmental oversight but by total dethronement of the capitalism by the working poor themselves, in order to build a society on behalf of the majority. Furthermore, as against what has been portrayed to be the era of Africa, the current financial crisis will show that Africa and indeed the third world can never got out of the seemingly eternal under-development. It will also be vital to show the link between the future of world capitalist economic system at this crisis period and political development and the fate of the world working class in the coming period. Finally, it will be vital to draw a political task for the labour and working class movement in Nigeria and the Africa.
The Sins of Free Market Capitalism û The Mega Robbery of the Poor for the Rich
Information has revealed that, as a result of the financial crisis, over $65 billion has been withdrawn from the mutual fund while most banks in US, Europe and Asia have declared losses in their balance sheet. Several mortgage lending organizations and hedge funds have collapsed while many banks in the US, Europe and Asia have declared themselves bankrupt. As at now, three GCE executive, a big French bank, including the chairman have resigned over the failure of the bank. Of course, in defence of the free market capitalist system, the Western governments spent nothing less than $2.5 trillion û an amount that can provide water, education, public housing, electricity, good transport for majority of the poor countries û to bail out banks and financial institutions. The British government was the first to start what is being termed ôfinancial socialismö by bailing out Northern Rock Bank late last year. The US government has dumped $250billion into 9 major banks to shore up their liquidity base while several other billions are being budgeted to save stock market. Currently, the Dutch government has planned to inject over $13.4billion into one of its biggest bank, ING that is already in financial mess. Virtually everyday, horrible news continue to emerge from stock exchanges, losses of billions of dollars. According to data reeling out from government sources, US investors which gained over 25% in $500 billion investment in equity throughout the world in 2007 has already lost 60 percent in these investments, which clearly show the crisis in the capital market. Despite recent gains in the stock markets around the world (except Nigeria anyway), the monthly and yearly analyses continue to reflect deep crisis for quoted companies. The global financial crisis in the world has impacted on the commodity markets with prices of many commodities running down.
Many commentators have placed the crisis in the financial sector on rabid quest for profit by business people and lack of regulation by governments. While this might have actually contributed to the crisis as businesses are made more powerful than ever, but actually the foundation of the world economy itself is fundamentally flawed. In the real sense, free market capitalism is generally senseless in all ramifications. The business class is allowed to make as much profits as they can from any business, no matter how messy, inasmuch as big profits are declared on the stocks. Governments make the world to believe that generalized prosperity depend on profits from the corporate world. To this end, public resources are used to develop private business under the guise of incentive for business. In the Western World, governments give extensive tax cut to the rich while working class are asked to pay more; public utilities and social services like public housing, health, education, pension, etc, are privatized while workersÆ future is damned. In the third world countries, the International Monetary Fund (IMF) and World Bank always rate countriesÆ economies û as AA, AA+, AAA, AAA+, etc û based on their abilities to privatize public institutions to private hands (both local and foreign), commercialize and under fund social services, reduce labour power for bargaining, deregulate major stake of the economy like oil and gas sector so as to give unprecedented wealth to the already rich few, among others.
In Nigeria, we are witnesses to how Nigerian government that refused to utilize public resources for social services and infrastructural development every other day give Nigerian and foreign banks access to make huge profits from foreign reserves and issuance of treasury bills. When workers and the poor people cry out, they are asked to tighten their belts in the short terms for the elusive economic prosperity; they are told government cannot do everything, yet the government continue to subsidize big private business. In most African countries where economies have been declared sound and healthy, there has been increased decline in the living standards while poverty and unemployment continue leading to social disintegration. For instance, despite the so-called emerging market status given to countries like South Africa, there has been increased misery with more people complaining with over 40 percent officially in poverty and over 25 percent jobless, while a tiny clique are more prosperous, which has led to growing social crisis as witnessed in increased crime and recent racial bigotry (itself a product of the lack of a viable working class political alternative). Even in China where there has been unprecedented growth, there has also been class polarization leading to over 83, 000 (mostly localized) protests last year alone.
How Current Crisis Emerged
The immediate result of these policies is the massive exploitation of the working class and expansion of the horizon for big business profit, more money are now available to the big business and the world which are channelled to financial speculation. It is more ridiculous that while there are less capital investment in the energy (oil and gas) industry which has led to increase in crude oil prices, oil corporations and oil speculators have seen increased exceptional increase in profits. Added to this is the wealth of the oil producing countries that goes to the pockets of the rapaciously corrupt ruling and business classes in these countries. This is just a part of the contradiction in the world economy. More of these profits are invested in the financial markets, especially in US and Europe. In the US, as a result of the growing housing need, these huge wealth were invested in mortgage business credit and loans given to the many Americans even at a very ridiculous interest rate. The result of this is the increase in the prices of these houses which by beginning of 2007 had increased by over 70 percent on average and over 100percent in some big cities. Mortgage funds, hedge funds, construction companies and banks relied on this to speculate with mortgage houses buying up houses, construction companies embarking on ambitious construction of houses and hedge funds, banks and insurance companies speculating in loans credits using various complex financial instruments like collateralized debt obligation.
However, with increasing prices of fuel and food, coupled with neo-liberal policies, more people, especially the middle class found it difficult to observe their debt obligations and this sparked off the current financial mess as many hedge funds and mortgage firms that borrowed from banks were finding it difficult to pay up while the banks in response, were requesting for more collateral. The end result is the bankruptcies of not only hedge funds and mortgage firms, but also banks and insurance companies across the US and Europe. Responding to this is the speculators who withdrew money from their capital markets which led to liquidity crisis while banks stopped lending even to themselves on hourly basis. This had ripples across the world as most companies having connections with US and Europe suffered confidence and thus stock markets û the volatile and parasitic sub-structure of capital û collapsed. Responses of governments are already known. Beyond Free Market Madness û Exploitation of Labour for Capital is the Basis of Current Capitalism Crisis
Looking at this scenario, there is clearly playing out the nature of capitalism since the early 1980Æs which was commended by most pundits since then (except just now), even after the early 1990Æs and dotcom crashes. But the current crisis is actually a product of the unfolding events since the early 80Æs when free market/neo-liberalism was accepted as a replacement to Keynesian economic doctrine by most western leaders and subsequently, third world nations. The neo-liberal economic doctrine meant breaking the power of the working class and thus reducing the share of the working class in the world profits while increasing the power of the capital. With governmentsÆ efforts, working class power was weakened and capitalists given more power to increase workersÆ exploitation. Furthermore, with the collapse of the Stalinist Soviet Union and Stalinism û a monstrous distortion of genuine idea of Marxism, the capitalist class and governments used unparalleled propaganda to increase workersÆ exploitation, while most working class organizations and social democratic parties, with pro-capitalist leaders but were at least sympathetic to socialism and governmentÆs intervention in the economies swung fully to the right thus denying workers of fighting power to restore post-war world 2 living standard. This process led to increasing wealth for the big business while the living standards of the working class that constituted a huge population in the Western World plummeted. In G7 plus (including Japan, Euro-12, Britain, US and Canada) countries, between 2001 and 2006, workersÆ share of the world GDI (Gross Domestic Income) û despite huge increase in working class population by over 900 million û has reduced from 56% to 53.7%. This led to reduced purchasing power, reduction in industrial capacity of the manufacturing sector and consequently lowers capital expenditure by firms. Rather than invest in capital expenditure to boost production and purchase in especially third world countries, most of these firms diverted their profits and wealth to the financial sector investing in stocks and speculative businesses like hedge funds, while others are kept in tax havens by billionaires. In US, manufacturing share of GDP fell from 25%to 12% while financial share increased from 12% to 20.5% (with 5% of the increase accounted for by mortgage boom) between 1973dand 2008. Similar situation occurred in Britain and other European countries. This is not unexpected as firstly, capitalism means profit maximization at any rate and secondly investing in backward economies like Africa will require huge investment including development of huge middle class and relatively averagely-paid working class, which is too expensive for the capitalist class that is looking for short term profits to offset profit lost to the welfare state during the Keynesian era. But, it is a trite fact that financial business does not create new wealth but rather redistribute already made wealth in the manufacturing which brought the name real economy. The over-capitalisation of the company stocks without corresponding real economic value led to the roguish dotcom crash of the 2000Æs.
The collapse of the dotcom boom, as is being witnessed now saw governmentsÆ direct interventions in rescuing the financial market and the world economy. This is despite the fact that working class purchasing power and living standards were being squeezed around the world under the excuse that governments must balance the economy in order to avoid inflation. This action of governments was repeated in post-September 11, 2001 credit crisis when there was rundown on stocks as a result of the anxiety that the terror attack will affect the world economy. All this provided some more money for the capitalist class to gamble upon. Since the 1990Æs, there was investment in the Chinese economy (and later Indian, Russian, Vietnamese and Brazilian economies, among others) but this investment was based on the already made infrastructures that were the legacies of nationalized economy under Maoism. Furthermore, the investment was based on cheap labour power available in China as the Chinese government subsidized foreign big business with 20 percent labour cost cut, meaning increased wealth. While over 900 million workers have been added to the labour force, it is also a reality these workers are paid fraction of what is paid in US, Europe and Japan. Thus, as workers in the so-called emerging markets continue to make more values for capitalism, they only get lesser which means production in these economies could not be consumed by the producers in those countries; therefore, it had to be exported back to the US economy which consuming market itself is shrinking as a result of the effect of neo-liberal economic policies that had eroded public purchasing power. With huge wealth still available, especially in the financial sector, issuance of credit of minimized rate was used to boost the consuming market. This led to huge debt for the US economy as the general debt increased from $11 trillion in 1987 to $44 trillion in 2007.
With huge profit coming from these emerging markets, coupled with huge surplus wealth from China, oil-producing countries of Middle East, Africa, etc and Japan (through trading in US dollar) being stored in US, there was huge money for the US economy to provide credits for US consumers . It is this debt-financed but unsustainable consumption that is providing the fake and abstract resources for speculation and gambling at the stock, commodity, money and equity markets not only in the US but throughout the world. While China and other South East Asia depend on US consuming markets, it is the same wealth realised from the US that is borrowed to the US citizens and governments to buoy the production. The European economies also depended on the Chinese (and other economies like IndiaÆs and RussiaÆs) economy as they not utilized the cheap labour but also export capital goods, including motor cars, to these emerging markets. The third world economies like Africa have also depended on the world economy as supplier of primary goods like oil, minerals and agricultural goods. It is this fragile, speculative and unsustainable economic system that produced the exceptionally irrational financial system where everything including agricultural goods is gambled upon. Therefore, a crisis in any part or section of the world economy, especially in major economies will rebound on not only other sections of the world but also every other sector of the world economy.
Where is the Financial Crisis leading to?
It is worth stating that, the financial meltdown has resulted in many financial corporations declaring unprecedented losses which reflected in the finances of manufacturing sectors which depend on the financial sector either to increase their stock values or to borrow money to undertake long term projects even when they earn exceptional profits. It is even ridiculous that financial (and some manufacturing) organizations that claim to use stock values to know the health of their businesses bought back their stocks, mostly with borrowed funds (estimated by Dow Jones Industrial Average at over $370 billion in 2006) in order to increase their face values in order to give unprecedented profits to big investors of these corporations. This is coming even at a time when production and consumption is shrinking and sustained by credit! It is also worth mentioning that the value of commodities and even currencies are not determined by their demand but by the speculative markets that utilises dealing in expected future contracts to hiked the values of these commodities. At various times, crude oil and gas prices and agricultural goods get unwarranted hike in prices as a result of stock gambling. The immediate effect is that most common people especially in the third world countries could not afford the cost of energy and food, while millions of small farmers, as a result of neo-liberal policies that had privatise public institutions and social services, rather than gaining from the hiked commodity prices, are worse off. The huge wealth accruing to third world governments rather than being used to fund social services and develop the economic through direct governmentsÆ investment in capital and industrial projects, are handed over to the private sector both locally and internationally through various guises û Public/Private Partnership, treasury bill issuance, storage of money in foreign accounts, over-bloated contracting and patronage, ridiculously inflated salaries and allowances for corrupt political class, dubious and fraudulent pension policies, and through direct looting of the public treasury by political.
The consequence of this is generalised poverty and inequality amidst growing wealth. In the advanced and resource-deficient economies, speculation-spiked hike in crude oil and food prices lead to reduction in purchasing power as most working class spend more on food and fuel. While this increases the profits of speculators, oil corporations and sheiks, politicians in third world economies; it also lead to increased dependence on credits by American citizens (which leads to over $800 billion yearly trade deficit) and increase retrenchment in Europe. With this situation, only a small spark is needed to throw the world economy in total disarray as exemplified by the current crisis.
Impact of the Economic Meltdown of Third World Poor
The effect of the financial crisis is being felt by third world countries which produced primary commodities. Prices of mineral commodities like Diamond, Nickel, Iron are plummeting as a result of the shrinking market for capital and industrial goods (which are produced by Europe but sold majorly to China). This is as a result of declining market in US in reaction to the credit crunch which has led to collapse of over 3,400 small and medium scale industries in China and huge sale reduction for major corporations. Expectedly, this will mean retrenchment and huge unemployment in China and thus a declining living standard. The end result is the fall in economic growth in China which as at today is estimated at around 9.8 percent as against 10 percent some months ago. Also, in the South East Asia, Russia and India, despite Singh governmentÆs efforts, the economies growth will fall drastically. Of course, G7 economies and Japan hold over 60 percent of worldÆs stocks, their economic survival in terms of markets, cheap labour sources, cheap credit and wealth, depend on emerging and third world markets, more than ever before. With declining prices of commodities in the world, most third world economies are in deep crisis. Even when there are huge surpluses, poor people hardly get anything.
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