October 1998 Lead article

Russia's economic nose dive exposes roots of capitalism's global turmoil

By Peter Hudis and Andrew Kliman

In what looks like a topsy-turvy world, the global economic downturn, which began in East Asia in 1997, has become so severe that some of the biggest advocates of the "free movement" of capital have suddenly proclaimed the need for greater state intervention in the global economy. The London FINANCIAL TIMES of Sept. 18 called on the Japanese state to embark on "widescale nationalization" of its failing banks. Leading economic analysts in Asia, Europe and the U.S are calling for controls on the movement of capital and limits on the "free market"--views considered heretical only months ago. Even the leaders of the Group of Seven industrialized nations, due to meet later this month, are considering some form of capital and/or currency controls to stave off global economic meltdown.

These events show that the ideology of the pure, unrestricted "free market" as a panacea is dead.

- Malaysia, once a key proponent of the "free market," broke with it last month by introducing controls preventing investors from converting their holdings in Malaysia into other currencies. This limits the outflow of foreign capital.

- Hong Kong, the most renowned bastion of "free market" capitalism in Asia, has seen its government negate private investors' actions by buying up a massive block of stocks in an attempt to halt a plunge in its stock market.

- Japan is being pressured by world policy-makers to run up huge deficits in order to spend its way out of its most severe recession since World War II.

- Russia, where the fetish of the "free market" took off after the collapse of the Soviet Union in 1991, took the unprecedented step in August of defaulting on $446 million of its foreign debt--signaling that it no longer considers itself part of the post-Cold War global economy. The fall of its free market reformers from power and the ascendancy of Yevgeny Primakov as prime minister has led to a new emphasis on state intervention.

- In the U.S., Clinton indicated in a speech to the Council on Foreign Relations last month that the U.S. may favor coordinated multilateral central bank policy to lower global interest rates. If adopted, this would amount to international Keynesianism--a government-led effort to stimulate investment spending by cutting interest rates worldwide.

All of this flows from the depth of today's economic crisis. In the past two decades, controls on the movement of capital have been lifted around the world. As a result, the amount of capital flowing to developing countries quadrupled between 1988 and 1996. Yet this did nothing to either improve living conditions or enable capitalism to recover from the economic crisis of the mid-1970s.

According to the UN's Human Development Report for 1998, over a billion people have been left out of the growth of the past decade. Inequities between rich and poor have worsened: 20% of the global populace accounts for 86% of its consumption. The 225 richest people on earth have a combined wealth of $1 trillion--equal to the annual income of the poorest 47% of the world, or 2.5 billion people. Among the 4.4 billion in developing countries, three-fifths lack basic sanitation, one-third have no safe drinking water, one-quarter have inadequate housing, and one-fifth are undernourished.

Instead of resolving any of this, the free flow of capital led to a buying binge by corporate elites, who soaked up financial capital out of all proportion to what could be productively absorbed. The inflow of funds rapidly outpaced the growth in the production of value. When the resulting speculative bubble burst in East Asia, investors took their money and fled. This led to an economic meltdown, which has spread to Russia and Latin America. The default on Russia's debt so scared investors that they pulled their capital out of countries like Brazil. Between Sept. 1-4 $6.7 billion of capital fled Brazil, leaving it with depleted foreign currency reserves, skyrocketing interest rates, and falling output.

This meltdown now threatens to engulf the U.S. and Europe. Much of the growth in corporate profits in the U.S. over the last decade came from their investments in Third World nations. With this source of profit now eroded, corporate earnings and the stock market are declining. If the stock market drops far enough, it could lead to a drop in consumer spending and a severe recession. At the Federal Reserve's annual meeting of the world's central bankers at Jackson Hole, Wyo. last month, some admitted privately that global economic conditions are the worst they've ever seen.

Financier George Soros told Congress on Sept. 14: "The global capitalist system is coming apart at the seams." Allen Sinai, a prominent economic analyst, said: "This is off the radar screens in terms of severity. It is the single most negative economic event since the Great Depression in the U.S. It is laced with every type of financial crisis and instability that has ever shown up. While there are some brilliant minds working on it, no one can deal with it."

To see how threadbare is the response of the rulers to all this, we need to focus on the land which is in the most dire straits of all--Russia.

PRIMAKOV: RETURN OF THE OLD

Primakov became Russia's prime minister after the Communist-dominated parliament rejected Yeltsin's effort to appoint Viktor Chernomyrdin. Primakov says the state will play a greater economic role by printing rubles, propping up unprofitable industries and deferring payment on its foreign debt.

Primakov's entire career has been closely tied to a central pillar of the state apparatus--the secret police. After working as a KGB agent in the Middle East, he became an advisor to Gorbachev on Arab affairs. After the collapse of the USSR he became the head of a renewed KGB and Minister of Foreign Affairs under Yeltsin. He is close to genocidal rulers Saddam Hussein in Iraq and Milosevic in Serbia.

Primakov has appointed Yuri Maslyukov, former head of the USSR's central planning bureau, as deputy prime minister in charge of the economy, and Leonid Albalkin, Nikolai Petrakov and Oleg Bogomolov as his economic advisors. They first got to know each other when they were brought together by Yuri Andropov, Russia's leader from 1982 to 1985.

Andropov tried to combat Russia's low labor productivity by combining greater "labor discipline" with some mild market reforms. His efforts, as well as those of Gorbachev, failed to put a dent in the problem. Yeltsin proved an even greater failure. Low productivity remains the central problem afflicting Russia's economy. Having run out of ideas about what to do next, its rulers have returned full circle to figures who predominated in Andropov's era!

Though no one is proposing a return to the state- directed economy which prevailed before 1991, Primakov is abandoning the approach imposed on Russia by the U.S. and the International Monetary Fund (IMF). The IMF demanded that Russia cut government spending, sell off public assets, and raise interest rates to attract foreign investors. This only contributed to a massive economic breakdown.

Since 1991, Russia's gross domestic product (GDP) has dropped by 55%--nearly double the contraction that occurred in the U.S. during the Great Depression. Three-fourths of the populace lives on less than $100 a month, and a quarter live below subsistence levels. Half of the labor force receives its wages late, in kind, or not at all. Many workers have not been paid in years. The government owes 77 billion rubles to its employees--a third of all the money in circulation.

This is leading to growing unrest. Coal miners have camped out in Moscow demanding that wages be paid and working conditions be improved. Doctors and teachers have also gone on strike; they were last paid in February. Workers from the nuclear industry have also joined in the growing protests.

The Communists are trying to take advantage of this by calling for major protests on Oct. 7. Yet many independent unions are refusing to participate in the protests so long as they are dominated by the Communists and their national chauvinist bedfellows--which include monarchists, anti-Semites, and outright fascists. As Andrei Isayev, a leader of an independent union, said of the Communists, "Their deputies have failed to adopt a single socially significant law in the interests of the workers."

The growth of unions independent of the government and the Communists represents a major threat to all sectors of the ruling class. In many cases its members openly denounce capitalism. They are beginning to make the idea of revolution once again thinkable in Russia.

To stem the tide, Primakov promises to print more rubles to pay workers' wages. Yet the Russian state is so fractured and crisis-ridden that it lacks the power or resources to do much about the situation.

The reason lies in the complexities of Russia's economy. The pundits say that workers are not being paid because the government fails to collect taxes. In fact, it collects plenty of taxes. Government revenue is equivalent to 33% of GDP, a figure higher than in the U.S. The problem is not that taxes aren't collected, but that they are paid in kind instead of in cash. In 1997 40% of all taxes paid to the government were in nonmonetary form. Major industries report that 70% of their transactions are through barter. Most workers who do receive wages get most of them in the form of goods, which they then have to exchange for food and clothing.

The reason for this descent into a largely noncash economy is that enterprises are not creating enough value. Production has declined so much that Russia is not producing enough exports to obtain the hard-cash currency needed to run the economy on a monetary basis. Instead of producing additional value, much of industry produces less value than it uses up in the process of production. This leaves enterprises unable to pay taxes or wages.

In a word, the failure to pay wages and taxes is not the cause, but the result of a deeper problem: the productivity of labor is so low that more value is consumed in production than is created!

There is no more striking indication of this than the decline in capital investment. Capital investment fell 92% between 1991 and 1997. NET productive investment is NEGATIVE. This means the amount of new capital being invested is not enough to replace worn-out plants and equipment. Deterioration of such magnitude and persistence has never occurred before in an industrial society.

To stem this downward plunge Russia would need to obtain huge amounts of hard currency through vastly increased exports, massive private loans, or Western aid on the scale of the Marshall Plan. None of this is remotely feasible given the present state of the world economy. The decline in capital investment will not only continue, but is likely to deepen even further.

PROFIT AND LOSS IN RUSSIA

What explains this incredible process of decomposition? To answer this, we must probe into the continuities as well as discontinuities in the conditions which prevailed before and after the Communists were forced from power in 1991.

As Raya Dunayevskaya showed, Stalinist Russia was part of a new stage of capitalism which arose in the 1930s--state-capitalism. Despite the regime's claims of being "socialist," she showed through a rigorous analysis that Stalinist Russia operated according to the law of motion of capitalism. Nevertheless, she noted that some features of Russian state-capitalism were unique to it. One key difference centered on the meaning of profit.

She wrote in "The Nature of the Russian Economy," "Profit...does not at all have the same meaning in Russia as it does in classical capitalism. The light industries show greater profit not because of the greater productivity of labor, but because of the state-imposed turn-over tax which gives an entirely fictitious 'profit' to that industry." In Russia's centrally state-planned economy, she said, "capital does not migrate where it is most profitable, but where the state directs it."

Throughout the reign of Stalin and his successors, the state directed capital to the manufacturing sector. Yet because of low labor productivity this sector did not generate profit sufficient to warrant such massive investment. The result is that the growth of the manufacturing and military sector was obtained by eating up assets procured from other, more profitable sectors of the economy. That explains how Russia could emerge as such a "mighty" industrial-military power while being so backward in agriculture and basic consumer goods.

So what changed with the collapse of Communism? Central planning is gone, so the state no longer directs capital investment to various sectors. Meanwhile, manufacturing remains an unprofitable, low-productivity industry, in part because of the exorbitant costs and risks that would be needed to modernize it. As a result, to the extent that capital can now migrate through the mechanism of the market, it does not end up in production. This helps explain the incredible decline in net capital investment in Russian industry.

All this is bad enough, but the situation is compounded by the fact that the collapse of Communism did not involve any basic change in class or production relations. The Communist ruling class simply announced its conversion to the "free market" retained its control over industry, and became heads of the "privatized" enterprises. As a result, a new financial oligarchy arose which, along with the state, controls key sectors of the economy.

Through this web of connections between the state and private oligarchs enough revenue is shifted over to manufacturing to keep factories from closing. Though workers are not being paid, most are not being laid off; unemployment remains at basically its 1991 level.

But why do they do this? In any "normal" capitalist society, unprofitable industries are simply allowed to go under. So why not in Russia?

One reason is spoken to in one of the most important insights of the Marxist-Humanist theory of state-capitalism--its contention that the low productivity of Russian labor is not a sign of the workers' "backwardness," but rather of their revolt. Because they are so exploited, whether under the Communist or the "free market" system, the Russian workers resist by holding back on production. The prospect of resistance is never far from the minds of the rulers. They fear that if they close down unprofitable industries the resulting mass unemployment will set off a social upheaval beyond their control. Therefore, the rulers continue to prop up the manufacturing sector from complete collapse--even though it consumes more value than it creates.

Fearful of revolt, but unwilling to "throw good money after bad," Russia's rulers have been buying time by gutting its fixed capital--factories, machines and the like. The value of commodities normally includes a portion that enables the capitalist to replace the fixed capital that has depreciated, worn out, in the process of production. But due to the decrepit state of Russian industry, the value of its products is commonly too low to cover their costs of production. Not enough value is being produced to replace, much less expand, the capital stock. These losses are being dealt with, and covered over in part, through the device of strip mining the productive stock of the country instead of maintaining it.

In a word, even though they operate at a loss, the rulers keep the factories running because the magnitude of capital in manufacturing is high enough to enable them to make money by effectively selling off the productive stock of the country.

Primakov can print more rubles to pay salaries, but that will only lead to hyperinflation in the absence of new production. He can crack down on criminals and the bank accounts of the rich, but that can be only a temporary solution. Without redressing the crisis in value production, the system will sink deeper and deeper into crisis. No Russian ruler from Stalin on has managed to redress this, and there is every reason to think things will only get worse under Primakov and his successors.

FOR THE ABOLITION OF CAPITAL

Russia is in many ways a special case, as many of its conditions do not exist elsewhere. But the events there contain many lessons for us.

That some rulers now talk of capital controls, state intervention, and even international Keynesianism after all the hoopla about free markets and open borders should come as no surprise, since the underlying state-capitalist character of the world economy has not changed over the past decade. Capitalism has often turned to the state to try to resolve its problems, and will surely do so again.

The danger is that those opposing capitalism will mistake the turn back to the state as a "progressive" one. We now see this in some leftists who are quietly rejoicing over the chaos in Russia on the grounds that it proves the emptiness of the free market.

That the free market is empty there is no doubt. But what many fail to notice is that those promoting a state-directed policy are even more reactionary than the free marketeers. Free market advocates in Russia like Gaidar are pretty awful, but the Communists, generals, and outright fascists waiting to take over are even more reactionary. The same is true of those promoting national-capitalist solutions in the U.S., as seen in the likes of Pat Buchanan.

As Rohini Hensman said at a recent meeting on globalization in India, "Given the current degree of integration of the world economy, delinking it in order to pursue a path of national capitalist development would only be achievable, if at all, by a terrifyingly authoritarian state subscribing to all the jingoistic jargon of the far right." Of course, as Pinochet's Chile showed, the "free market" is also no stranger to an authoritarian state.

Given that the far Right in Russia will have access to 20,000 nuclear warheads, this is no time to fall for the illusion that statism is an alternative to the market. Instead of arguing over whether capital should be distributed through the market or the state, it is high time to project perspectives for the ABOLITION of capital. That is not only the one way to get out of the crisis, it is the only way to ensure the survival of the planet.

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