Socialist Worker

Are the Brics on the brink?

Many look to developing economies such as China to come to the rescue of Western capitalism—but these countries aren’t immune from the instability of whole system, argues Dave Sewell

Issue No. 2288

The US and the eurozone are the world’s largest two economies by some margin. Both are in the throes of a deep economic crisis. But could China, their nearest competitor, and other emerging economies pick up the slack and keep global capitalism going?

This is the hype that surronds the economies of Brazil, Russia, India, China and South Africa—often collectively referred to as the “Brics”.

There are many reasons why one might think the baton of capitalism is being passed to these emerging economies. Who could have predicted that eurozone countries—former colonial masters of the world—would have to go begging to China for a bailout?

Many economic commentators point to the Brics to argue that we shouldn’t worry too much about the future of capitalism on a global level.

Bosses in the West like to use these arguments to convince workers to accept worse pay and conditions—or risk being overwhelmed by competition from China or India.

But sections of the left are also attracted to the idea that the Brics are on the rise, seeing this as an opportunity to undermine Western dominance.

They argue that developing countries are better able to resist pressure from the US if they go to Brics countries such as China for their loans.

It’s true that US influence in Latin America has waned since governments in the region have been able to borrow money from Venezuela and Brazil.

Price

But these loans also come at a political price. Brazil’s national development bank has been the driving force behind the superhighway construction project that provoked mass protests in Bolivia last year.

The fact is capitalism necessarily involves ruthless expansion and exploitation wherever it is based. The Foxconn factory in Wuhan, China, became notorious in 2010 when it installed “suicide prevention nets” and forced workers to sign contracts promising not to kill themselves.

Now Foxconn workers have elevated the threat of mass suicide to a negotiating tactic. Some 300 of them climbed onto the factory roof on 2 January and threatened to throw themselves off in a dispute over pay.

This shocking story tells us something else about capitalism in China. Foxconn workers make products for Apple, Dell, Hewlett-Packard, Motorola, Nintendo, Sony and Nokia.

These companies are based outside China and mainly sell outside China. Some 40 percent of the country’s economy is based on exports, especially to Western markets.

Large sections of China’s manufacturing sector are foreign owned. Much of the work consists of assembling components manufactured elsewhere.

So China’s growth has actually served to bind it more closely to the rest of the world economy. And if the eurozone moves into recession this year it will dramatically hit exports from the Brics countries.

Today this process is known as “globalisation”—but in fact it has existed for centuries. The development of a national economy is shaped by the economies of the nations it has contact with.

This was the basis of the theory of “combined and uneven development” developed by the Russian revolutionary Leon Trotsky in the early 20th century (see below).

For example, the 1990s saw a lot of hype about the “tiger” economies of south east Asia such as Thailand and Singapore. Money poured in from the financial centres of the West to fuel the boom in these regions.

Uneven

But it was grossly uneven. Many people remained peasants, even as skyscrapers rose above them. And it didn’t last. By 1997 the bubble had burst. Projects funded on cheap credit were unable to bring in a profit.

For example housing speculation pushed prices up until there were too many new apartments at prices too high for people to afford. The money flowed back out—sparking slowdowns and recessions.

In Thailand huge numbers of laid-off workers abandoned the new cities to return to the villages. In Indonesia the result was a mass revolt, forcing out the dictator Suharto.

A similar danger now confronts China, stemming from its government’s response to the crisis in the West.

The US economy is very different to that of China. But the crisis that started in the US in 2007 soon spread. Exports from China to the US and Europe fell. This rapidly pushed China’s GDP growth below 10 percent for the first time in three years.

So while Western governments were taking on “toxic” debts in their banking sector, China’s government was forced to embark on a bailout of its own.

It poured £400 billion into an economic stimulus programme. That’s almost as much as the US’s bailout in absolute terms—and about three times larger as a proportion of GDP.

The real amount flooding into the economy was much higher still, since Chinese banks increased their loans to local governments and firms.

This was enough to compensate for the loss of exports. But it meant that much of China’s growth since 2008 has been in projects that are only profitable because of government subsidies and cheap credit.

Up to 40 percent of state firms are believed to operate at a loss. Local governments borrow heavily to build white elephant infrastructure projects.

This “overheating” is most evident in construction. A new study by Barclays Capital examined the trend for building skyscrapers in China and India. It warned that both displayed the classic pattern of a credit-fuelled property boom that is nearing its crash.

The Chinese government knows that this situation is unsustainable. Since 2011 it has tried to gradually slow things down in the hope of a “soft landing”. It has increased interest rates and tried to restrict access to credit.

Shadow

But the demand for credit is such that a vast black market of “shadow banking” has developed. This unstable sector already suffers from high default rate.

And just like the US’s toxic subprime mortgages, these shadow loans are repackaged and sold on as investment bonds. If they lose their value, the effects will ricochet into the heart of the official banking sector.

When China’s credit crunch comes, its government could be forced into a confrontation with workers much more quickly than in eurozone governments, given that China’s businesses are much more reliant on the state.

And China’s workers are already fighting back. Estimates suggest the number of protests, strikes and riots has more than doubled since 2005.

Any crisis in China will quickly spread to resource economies such as Australia, which have boomed off the back of Chinese demand.

Other Brics are already feeling the pinch. The last quarter saw Brazil’s economy start to stagnate. India’s industrial sector has also recently shrunk.

The economies of these countries are very different to those of Europe and the US. But they are part of the same global system—and are inexorably being drawn into the same crisis.

And that means that workers from New York to New Delhi will rapidly find themselves fighting the same battle.


Trotsky theory of capitalism’s development

The Russian socialist Leon Trotsky noted that countries that developed at different times also developed in different contexts. This gave rise to what he called “combined and uneven development”.

Trotsky described one aspect of this process as the “privilege of historical backwardness”. Countries that industrialised later could overtake ones that had been more advanced by skipping stages of development. The “backwards” countries could adopt the latest technology straight away.

This was how Germany and the US overtook Britain as the “workshops of the world” in the late 19th century, Trotsky argued.

But he also described how this combination of old and new, of local and global, created conflicts and crises in developing economies.

So as capitalism began to develop in Russia, it found itself drawn into the economic and political maelstrom of its more advanced neighbours.

Russia’s unique situation—vast factories producing the most advanced technology, ruled over by the Tsar’s feudal dictatorship—meant that its experience of Europe’s crises and wars was among the most extreme.

But this situation also opened up the possibility of what Trotsky called “permanent revolution”. Despite the relatively small working class in Russia, he argued that a revolution could still win socialism there.

Russia’s 1905 revolution had shown that advances such as parliamentary democracy could be won. And the confidence gained through these victories could inspire workers to press on towards a socialist revolution.

Other sections of society, such as the peasantry, would then be drawn in behind them. Furthermore, Trotsky argued that such an uprising could inspire workers in other, more advanced, countries to revolt.

Trotsky’s ideas helped Russia’s revolutionaries see how their struggles could join with those of workers in very different countries such as Germany. And his ideas can help us today to understand the relationship between developing and advanced economies.


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Features
Sat 4 Feb 2012, 00:00 GMT
Issue No. 2288
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