The global financial crisis: implications for Asia

By Reihana Mohideen

The Wall Street crisis seems light years away from the side streets of Manila’s urban poor slums. For the labouring masses in the Philippines the capitalist system has been in crisis for some time now, unable to deliver life’s basic necessities: jobs and a living wage; affordable quality healthcare and education; and food security.

According to official National Statistics Office data poverty levels have increased between 2003 and 2006, and 2008 is expected to be the worst year since the 1998 Asian economic crisis. Between April 2007 and April 2008 the labour force grew by only 81,000, while the number of unemployed rose by 249,000, i.e. triple the increase in the labour force. In 2008 the number of employed persons fell by 168,000 and there was no employment generation in April of this year. Jobs were being lost at a time when prices and inflation were skyrocketing.

The global financial crisis, however, now threatens to affect the Philippines economy such that it impacts on the higher income families as well. It could threaten the employment of Filipino overseas workers whose remittances, amounting to a staggering US$14 billion-plus in 2007, have been the backbone of the economy at a time when foreign direct investment (FDI) has shrunk to almost nothing. According to Bangko Sentral ng Pilipinas 2007 data, some $1.5 billion was remitted from Asia, $2 billion from the Middle East, $2.3 billion from Europe and more than 50% of all remittances, amounting to $7.5 billion, came from the US.

Rumours are also rife that the state pension fund, the Government Service Insurance System, is heavily exposed to the US sharemarket and had invested in the now collapsed Lehman Brothers. Despite public concern, GSIS is refusing to release a detailed financial statement.

Decoupling debunked

The wild swings in the Asian financial markets in response to the events in the US have shattered any lingering myths that the Asian economies are decoupled from the US economy, i.e. are safe havens relatively unscathed by the problems in the US economy.

The 70% decline in the Shanghai composite index from its October 2007 peak, the recent failures of Philippine and Indonesian bond auctions, the downward pressure on Asian currencies as varied as the Indonesian rupiah, the Korean won, the Thai baht, the Vietnamese dong and the Indian rupee are just some highlights of the collapse of the "decoupling theory". And news of the bailout rejection by the US congress sent many Asian sharemarkets plunging, with Japan's Nikkei 225 sinking more than 4 per cent,

When big US banks are collapsing can Asian banks survive?  Or will they follow?

On September 24 worried depositors lined up to withdraw their money outside East Asia Bank, Hong Kong’s third largest bank with $51 billion in assets. The panic was triggered by text-message rumours that the bank was in distress. Depositors who lined up said that after the failure of Lehman Brothers they no longer fully trusted any financial institution.

Standard & Poor’s and Moody’s both lowered their credit outlooks for Bank of East Asia to negative, from stable, after the bank was forced to restate its earnings for the first half of this year and announce reduced first-half profit by $16.8 million. The bank attributed the loss to a rogue trader, not global credit problems.1]

Reports in India that depositors were beginning to pull out their money from the nation's largest private bank, ICICI Bank Ltd promoted the Reserve Bank of India to reassure the public about adequate cash reserves.

Asia is extremely anxious, and with good reason. More Asian money is now invested in the US and other Western economies than at any point in history. As much as 30% of Asian stocks are foreign owned and linkages through bond, loan and derivative markets, while smaller, are also significant. And while Asia may not be directly exposed to the sub-prime mortgage crisis, the indirect impact on Asian economies could be significant.  Already in the first eight months of this year capital outflows from Asia reached $38 billion.

The Asian Development Bank (ADB) -- which pushed hard for the elimination of capital controls thus leaving Asian economies dangerously exposed and vulnerable to the massive swings in capital flows during the 1998 Asian financial crisis -- in its usually upbeat Asian Development Outlook updates for 2008, warns that due to the Asia’s heavy reliance on the US, Europe and Japan (G3) for its major export markets, slower growth in the G3 will spill over into the Asian economies.  According to the bank’s chief economist: “Uncoupling is a myth. Our study shows that the region still depends on industrial countries to fuel its growth. If the global slowdown extends beyond 2009, the repercussions for the region could be severe.”

As for the prospect of trade within Asia picking up the slack, according to the report, this too could deteriorate as final demand for the region’s exports diminishes. Aggregate GDP growth in South-East Asia is now expected to decelerate to 5.4% in 2008, significantly slower than the 6.5% growth achieved in 2007 (the ADB for 2007 predicted “robust growth in 2007-2008”). Growth projections for the Philippines, Singapore and Vietnam are revised down significantly. Inflation forecasts are the highest in a decade, and the rates are expected to rise particularly fast in countries such as Vietnam.

The report also assesses that the risks of a second Asian crisis have “abated, but not disappeared”. If the sub-prime crisis in the US worsens, Asia is bound to suffer much more serious financial effects, including an abrupt reversal of the capital inflows. If the Western economies get the flu, not only will Asia sneeze, but it could catch a fever.

The political implications for the labouring masses

The instability in the global financial markets, the rise in inflation and the rise in commodity prices such as food and oil indicate that the main pillars of the neoliberal capitalist economic order are breaking up. Some left-wing economists argue that the neoliberal economic order has exhausted itself and that the capitalist system is unable to continue to function in this manner. Economic policies based on low wages and stimulated consumption (via easy credit) are no longer viable. This global crisis today also has a crucial environmental dimension: that of climate change and global warming.

As Marxists we understand that economic crises are a consistent feature of the capitalism system and are rooted in the major contradictions underlying capitalism: the contradiction between imperialism and underdevelopment; of capital and labour. A more recent phenomenon linked to post-WWII industrialisation is the contradiction between capitalism and nature. This global crisis also has a crucial environmental dimension: that of climate change and global warming. Marxists have also predicted that in its attempt to solve these periodic crisis, capitalism deepens these contradictions and raises them to a higher level, thus paving the way for deeper and sharper crisis the next time round.

Governments around the world have no clear strategies to resolve the crisis. Even the partial solutions they put forward to solve one aspect or a particular manifestation of the crisis, exacerbates another aspect of the crisis. For example, industrialised countries converted agricultural food production to producing biofuels to deal with the potential shortages in oil resources. This has now contributed to a shortage in food production and a huge increase in food prices. Attempts to intensify oil exploration and conventional fuels such as coal will exacerbate the environmental crisis that threatens the very survival of the planet.

Struggle for power

Despite the severity of the problems facing global capitalism today, there is no inevitability about the ``automatic’’ collapse of the system. It would be a dangerous illusion to think that capitalism will simply collapse and that a socialist alternative will take its place.

The capitalist system is still extremely resilient. Previous forecasts of its inevitable collapse have simply never materialised and have been proven to be wrong. The system will struggle to survive and keep itself alive – at whatever cost.

The capitalistsolutions to resolve the crisis will be at the expense of the labouring masses and the consequences of the ``solutions’’ that it will impose on us will be truly horrendous. Social movements alone, struggling around particular issues, are inadequate to face the challenge and defend working people and the poor against their assaults. We need to build political movements, which struggle for power and system change, such as the advanced movements in Latin America today.

[Reihana Mohideen is the chairperson of Transform Asia, a Philippines-based institute specialising in labour and gender studies. She is a political activist and a founding member of Laban ng Masa, a broad left political coalition in the Philippines. She is also a board member of the Institute of Political Studies, which focuses on  progressive political education and the training of young activists in the Philippines.]

[1] “Anxious Depositors Withdraw  Cash from Asian Banks”, by Keith Bradsher and Heather Timmons, New York Times, September 25, 2008