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Capitalism in Asia at the End of the Millennium

Prabhat Patnaik teaches at Jawaharlal Nehru University in India.

Two propositions dominated the Marxist perspective in most Asian countries during the period immediately following the Second World War. First, capitalism had entered the period of its “general crisis.” While not reducible to narrowly economic terms, this implied that economic progress would henceforth be stymied. Second, the kind of diffusion of industrial capitalism that had occurred from Britain to Europe, and then in the United States and other temperate regions of white settlement in the period leading up to the First World War, could not be expected to occur in the third world as well. It followed from these two propositions that the development of the Asian countries required their transition, through stages of democratic revolution, to socialism, and that the course of this transition would be made smoother when their proletarian comrades from the advanced countries marched to socialism as well, as they eventually would.

Subsequent developments made both these propositions appear outdated. The long boom after the Second World War, which lasted until the early seventies, was the most pronounced in the history of capitalism, and brought about impressive improvements in the living conditions of the people in the advanced capitalist countries. Furthermore, certain countries in the third world made unbelievably rapid economic advances, despite remaining within the orbit of capitalism.

Indeed, the capitalist third world as a whole grew much faster than it had historically but, over much of it, this was a result of a process of delinking from imperialism, and hence did not create theoretical problems for the Marxist perspective. Marxist theory held that this growth would have been even faster, more durable, more firmly rooted, and more effective in improving the lot of the poor if these countries had been making a transition to socialism. This argument could be supported by comparing the achievements of the socialist and the average capitalist third world countries. What created problems for the Marxist perspective, however, were the dramatic achievements of a few Asian third world countries that were, to all appearances, client-states of imperialism. For a while, they could be dismissed since the countries involved (South Korea, Taiwan, Singapore, and Hong Kong) were too small to signify much: their development, despite their involvement with imperialism, clearly could not be held up as a strategy for all. But when a host of other, larger countries in Southeast Asia also recorded dramatic achievements despite their integration with imperialism, the Marxist perspective came under a cloud.

This second batch of countries was problematic for another reason. For the first batch, it soon became clear that—notwithstanding their political proximity to imperialism—they had a strong element of economic nationalism, as well as dirigisme, at work, though of a kind different from, say, Nehru’s India. But in the case of the second batch (Thailand, Indonesia, Malaysia, and the Philippines), even economic integration with imperialism was more marked. This created the impression that, contrary to the Marxist position, integration with imperialism (as brought about by a strategy of liberalization) could produce dramatic economic advances. Successful diffusion of industrial capitalism could occur in the third world as well; what prevented it was the third world’s own stubbornness manifested in its insistence on delinking.

Ironically, at the end of the millennium, when the triumph of the anti-Marxist perspective appears complete, the “models” whose successes underlay that triumph are in the throes of serious economic crisis. The cause of this crisis, as of the earlier successes of these models, has to be examined as part of a wider Marxist understanding.


Capitalism’s phenomenal postwar boom has been explained in various ways by various writers. But few would deny that an important factor underlying it was state intervention in “demand management,” which became common practice in the postwar years. This, in turn, was made possible by the particular correlation of class forces that prevailed in the advanced capitalist countries after the war: the strength of the working class vis à vis the capitalists was much greater than earlier and, within the ranks of the capitalists, the weight of the financial interests had lessened.

This last point is significant but little appreciated. The opposition of financial interests to high levels of economic activity is well known. Keynes, in the General Theory, called for the “euthanasia of the rentier” as a means of restructuring capitalism. Kalecki, while noting that capitalists in general oppose full employment since its prevalence makes workers “get out of hand,” also drew attention to the fact that “the price increase in the upswing is to the disadvantage of small and big rentiers and makes them boom-tired.” The fact that advanced capitalist countries maintained high employment for long indicated, therefore, the changed correlation of class forces (including, in particular, the decline in the weight of financial interests in the aftermath of war and decolonization).

Decolonization, which should have created problems for advanced capitalist countries through higher raw material prices, if not through the loss of colonial markets (whose impact for the system as a whole could be obviated by state intervention), had the opposite effect. The newly industrializing third world countries, in their eagerness to earn foreign exchange for their development effort, competed with one another to push out primary commodity exports so that, contrary to the predictions of W. Arthur Lewis and others, the supplies of primary commodities to the advanced countries were maintained without any upward pressure (indeed, with downward pressure) on their terms of trade. The postwar boom, in short, was the product of a uniquely favorable conjuncture.

The subordination of financial interests was particularly marked in the “miracle” economies of Germany and Japan and, above all, in the third world. In fact, all newly industrializing third world economies, no matter what shade of dirigisme they were pursuing, no matter whether they were delinked from or continued to be linked to imperialism, kept financial interests restrained for the sake of rapid industrialization. If Japan maintained negligible or even negative real rates of interest during the period of the boom, countries as different from one another as India and South Korea followed Japan’s example in this respect.

The specific features of the financial system differed from country to country, but its general characterisitics were similar over the whole range of countries. These were: an insulation from international financial flows; cheap credit; and a conscious attempt to direct credit towards productive, rather than speculative, avenues.

Many factors have been highlighted, and rightly so, as underlying the high growth of the East Asian “tigers” (some of which hold for Southeast Asia as well). These are: land reforms; the achievement of high levels of literacy; the economic concessions (in the form inter alia of allowing substantial market access) made by the United States, for geopolitical reasons, to these countries, which were seen to be confronting communism; the spillover of the Japanese miracle through the spread of Japanese capital (reminiscent of the earlier spread of European capital to the new world—though the motives for the spread in the two cases were different); and a specific kind of neomercantilist dirigisme entailing state interventions even in micro-level decisions of the capitalists (which the extant class configuration of these societies made possible). But an important additional factor, seldom noted, is the restraint placed on financial interests: the exclusion of international financial flows and the subordination of the domestic financial system to the needs of the productive economy. This was in keeping with what was happening elsewhere in the third world, and with the reduced weight of financial interests in the advanced capitalist countries themselves, which underlay the postwar boom.


Several developments following from the postwar capitalist boom undermined the conjuncture which had sustained it. Important among these was the rise of finance capital, in a new incarnation, to a position of dominance. The story of this rise need not detain us here. One episode, however, concerns the large current U.S. account deficits of the fifties and the sixties which, together with capital exports, resulted in an outpouring of U.S. dollars, and which were decreed under the Bretton Woods system to be “as good as gold.” They led to the formation of the Eurodollar market and, eventually, to the collapse of the Bretton Woods system itself. Another episode was the petro-dollar deposits following the oil shocks, which put enormous funds at the disposal of the metropolitan banks, made them the key actors in the “recycling” process, and reduced the International Monetary Fund (IMF) to a mere “gendarme of finance capital.” The point, however, is that through these episodes, globalized finance capital rose to a position of pre-eminence.

This finance capital differs from what Lenin wrote about in at least three ways. First, the “finance capital” in Lenin’s conception was nation-based and hence nation-state aided, while the new finance capital was international, both in the sense of sucking in finance from all over the globe and in investing it all over the globe. Instead of several contending blocs of finance capital, we have one gigantic entity, of which finance capitals of particular countries are so many constituent elements. To say this does not negate the dominant role of metropolitan finance, but this role is exercised through domination over this entity.

Second, this finance capital operates not in the context of inter-imperialist rivalry, as in Lenin’s time, but of imperialist powers acting in greater unison. This does not imply that contradictions among them do not exist, or that they won’t erupt into major conflicts in the future. At present, however, they have much greater unity, at least in confronting the third world, than was the case in Lenin’s time. A globalized bloc of finance is one contributor to muted inter-imperialist rivalry which, in turn, greatly weakens the third world’s ability to confront imperialism, as the latter institutionalizes its hegemony through the IMF, the World Bank, and the World Trade Organization (WTO).

Thirdly, contemporary finance capital is not “capital controlled by banks and employed by industrialists” (to use Hilferding’s words quoted by Lenin). It is not the “coalescence of bank and industrial capital” (as Bukharin put it) of a particular imperialist country, but globalized finance drawn from all over and searching for quick profits, usually in speculative activities. In short, much of this finance capital operates in the form of “hot money” flows.

The rise to prominence of international finance capital contributes to the prolonged slowdown in the advanced capitalist world and the high unemployment rates that prevail (on which cyclical crises are superimposed). No doubt the impact of this slowdown has been uneven across the advanced capitalist countries, with Britain and the United States doing rather better than the rest.

No doubt there are other important factors that contribute to the slowdown, but the role of this particular factor should not be underestimated. It restricts the scope for demand management by the nation-state, undermining Keynesianism directly. Financial interests within any country, as Keynes and Kalecki argued, tend to be hostile to demand management; when finance is international, this hostility acquires a spontaneous effectiveness. Any effort by the state to expand economic activity makes speculators apprehensive about inflation, exchange rate depreciation and, more generally, of political radicalism and finance flows out of the country; this precipitates actual depreciation and inflation, forcing the state to curtail activity so that speculators feel comfortable. State intervention presupposes a “control area” of the state, over which its writ can run; globalization of finance tends to undermine this control area.

If, from Mitterrand to Schröder, a host of left-wing governments in the advanced capitalist countries (elected on the promise that they would increase employment) have failed to do so, the reason lies in this objective constraint on state intervention rather than, necessarily, in bad faith or betrayal. It also explains the decline of all ideologies of social change, from social democracy to Keynesianism to third world nationalism, even to old communism (which lost its immunity to capital flights): since all of them see the nation-state as the agency of intervention, globalization of finance, by restricting the state’s capacity to intervene, has undermined their coherence.

The levels of activity and employment in the advanced capitalist world as a whole would not be so low, even without state intervention in demand management in individual countries, if the U.S. state could boost aggregate demand for all of them. One would normally expect, with the dollar as the strongest currency (even without the imprimatur of the Bretton Woods system), that the United States would play a leadership role for the capitalist world as a whole by enlarging its fiscal and current account deficits. Paradoxically, the United States is not free of the need to appease international finance capital. It has curtailed its fiscal deficit and, to a lesser extent, its current account deficit in real terms. As a consequence, finance has flowed into the United States and Britain (the Anglo-Saxon world, in any case, is the traditional home of finance), causing some expansion in these economies through finance-related activities. The rest of the capitalist world has been doomed to stagnation. This may have consequences for the United States and Britain, converting the current protracted but partial stagnation into a generalized one.

The current imperialist offensive against the third world, in the form of the imposition of liberalization, has to be understood in this context. Prying open third world markets to goods and services helps overcome metropolitan stagnation. Doing so, moreover, is particularly advantageous, for two reasons: first, it keeps state intervention in demand management at bay, and with it any threat of political radicalism; second, by deindustrializing the third world and forcing it into greater reliance on primary production, it keeps inflationary pressures in the metropolis in check.

Of even greater importance, however, is the prying open of the third world to the unrestricted movement of international finance capital. This not only expands the area over which speculative gains can be made, but also brings a wealth of mineral resources and major industrial enterprises (especially public sector enterprises, which are forced to be privatized for a song) under the potential control of finance capital.

Liberalization, in short, is a mechanism for centralization of capital on a world scale: metropolitan capital-in-production ousts third world producers, while metropolitan capital-as-finance (which is the dominant component of globalized finance) gets control over third world resources and enterprises (built up earlier at public cost) at throwaway prices.

The emergence of international finance capital, therefore, is associated with a new epoch, in which both the assumptions underlying Marxist theory in the aftermath of the war (which appeared to have been invalidated by the postwar boom) acquire fresh validity. Not only does capitalism in general become enmeshed in stagnation and crisis, as “enterprise” gets snuffed out by “speculation” (to borrow Keynes’ language), but this stagnation afflicts third world economies with particular severity (whether these were delinked from or linked to imperialism), even as their assets get denationalized. The latter phenomenon, which was noticeable everywhere else in the third world, has revealed itself somewhat belatedly (but dramatically) in East and Southeast Asia. The crises of these economies is not a temporary aberration due to some policy failures; it is a more basic phenomenon reflective of a change in conjuncture associated with the rise to prominence of international finance capital. The stagnation in world capitalism and the opening up of these economies to global financial flows—both trends being the result of the ascendancy of international finance capital—underlie their crisis.


There was a wave of financial liberalization in the East and Southeast Asian economies at the beginning of the 1990s, which permitted domestic financial agents to approach international financial markets directly for funds. Of course, Indonesia and Malaysia had open capital accounts for a long time, but their external capital transactions had been de facto state-controlled; in the 1990s, private access to external capital markets increased greatly.

The immediate provocation for this shift varied across countries: in Thailand and the Philippines, it was the decline in direct foreign investment inflows; in Indonesia and Malaysia, it was to meet the financial needs of a boom; in South Korea, it was to sustain a domestic financial system, turning more fragile because of the large credit extended to the chaebols facing difficulties on the world market. Behind these immediate considerations, however, there were two basic factors. One was the easy availability of external finance: foreign funds, whose inflows were actively encouraged by the IMF, were available at rates of interest that were below domestic rates. The other was the emergence, from the interstices of the old system, of a new class of speculators and financial operators, who became the principal link with external capital markets and arranged for international finance capital inflows; financial liberalization served their interests and strengthened their position.

This was a neocomprador class which, to begin with, did not necessarily own capital but consisted inter aliaof functionaries of financial institutions in the old system, where such institutions were meant to serve the needs of state-sponsored industry. (In India, members of this new financial class emerged even from the ranks of executives and managers of state-owned banks themselves). In its effort to promote liberalization and in its quest to broaden international links, this neocomprador class, with the blessings of the Bretton Woods institutions, opposed the old dirigismeand (since the latter usually had been associated with authoritarian and corrupt structures against which the radical and democratic elements in society had been struggling) often made common cause with these radical elements.

The period, up to 1996, saw three consequences of capital account liberalization in the East and Southeast Asian economies: first, there was a significant increase in the magnitude of net external financial flows; second, there was a dramatic shift in the mix between short- and long-run funds in favor of the former; and third, most of the increase in foreign borrowing was on account of the private sector.

Private recourse to foreign loans was partly at the expense of domestic loans but, significantly, also to finance a host of non-manufacturing projects: investment in real estate (such as office blocks and housing projects), investment in certain types of infrastructure, and in development of financial services. The old dirigiste regimes, in their keenness to promote export-oriented manufacturing activity, had accorded a lower priority to these types of investment and had directed less credit to them. Burgeoning foreign borrowing now made up for this.

Macro-level end-use of external finance went partly for enlarging foreign exchange reserves but also, notably, for stepping up investment ratios—above very high existing levels. The average investment ratios for 1986 to 1990 and 1991 to 1995 were 23.4 percent and 39.1 percent respectively for Malaysia, 26.3 and 27.2 for Indonesia, 33.0 and 41.1 for Thailand, 19.0 and 22.2 for the Philippines, and 31.9 and 37.4 for South Korea. The higher investment ratios entailed higher current account deficits, which the increased inflows of external finance covered.

To be sure, this was better than what inflows of foreign finance had done in some other third world countries where, by causing the exchange rate to appreciate (or merely by enabling the substitution of foreign goods for domestic—even at given exchange rates), they had precipitated domestic deindustrialization in the context of a liberal trade regime. These countries had been made to borrow from abroad, using short-term funds, to finance their own deindustrialization!

Compared to them, at least, the East and Southeast Asian countries made better use of their external loans by stepping up investment ratios (and, consequently, growth rates) while keeping their exchange rates stable. This made foreign funds even more forthcoming. Nonetheless, a crisis was immanent in the situation.

First of all, using short-term funds for long-term investment, or “borrowing short to invest long,” exposed private sector borrowers to the risks of illiquidity. And since, in all such situations, the country as a whole has to bear the burden of the consequences of private decisions, it exposed the people to the dangers of a drastic squeeze on their living standards, in the event of a loss of confidence by the lenders. Second, quite apart from this maturity mismatch, there was an additional mismatch, in that foreign currency was borrowed to finance projects which did not earn foreign currency. The Bretton Woods institutions are usually vehemently opposed to the idea of third world governments enlarging fiscal deficit to finance investment or welfare expenditure, even when there are excessive foreign currency reserves. This policy is rooted in the idea that government expenditure that is financed by foreign currency but does not earn foreign currency exposes the country to a foreign exchange crunch. In East and Southeast Asia, however, they actively encouraged the private sector to borrow foreign currency, even when the object was to invest in the non-tradeables sphere.

The immediate provocation for the crisis, which first surfaced in Thailand and then spread to other countries in the region, was the supposedly excessive Thai current account deficit, but immediate provocations are hardly significant: Thailand itself had experienced even larger current account deficits (relative to GDP) in 1990, with no adverse effects on its currency; and throughout the 1990s, the current account deficits of these countries had been increasing without any adverse effects on investor confidence, as the counterpart to burgeoning foreign capital inflows. The crisis immanent in the situation had to break some time, and it did.

The nature of the crisis, however, was remarkable. It was not a simple story of a collapse in currency values caused by a loss of investor confidence in the currency. There was a melding of foreign currency markets with asset markets, which made the crisis both unique and intractable. Enterprises accessed foreign currency loans of increasingly shorter maturity, either directly or through the intermediation of banks. Such a situation is marked by three important features. First, a crisis can be set off by expectations of a price decline, either in the asset market or in the foreign exchange market. Second, expectations of a price decline in one market stimulate expectations of a decline in the other, and vice versa. These expectations, therefore, can feed one another in a vicious circle, causing enormous drops in actual prices in both markets, driving firms to bankruptcy, and totally disrupting production. As firms seek to pay off their foreign exchange obligations by selling assets, they drive down both the exchange rate and the price of assets into a bottomless abyss without ever reaching spontaneous equilibrium, since every downward movement in either price causes further excess supply in both markets. Third, all the usual instruments prescribed by the Bretton Woods institutions for dealing with a foreign exchange crisis, quite apart from being anti-people, also become singularly ineffective in such a situation. Deflating the domestic economy, in the hope of curtailing the net excess demand for foreign exchange, aggravates the problem of debt deflation for the firms and increases the desire of foreign lenders to take their capital out; it has the opposite effect of increasing the net excess demand for foreign exchange. This is exactly what happened: pursuit of the IMF prescription, as some economists from the Bretton Woods institutions themselves admit, palpably aggravated the crisis.

The fact that the IMF nonetheless persisted with its usual prescription has been generally attributed to its faulty understanding—its inability to appreciate the fact that the Southeast Asian crisis was qualitatively different from the debt crisis in Latin America in the 1980s or the Mexican crisis of 1995. That it insisted on fiscal restraint, even though the crisis was a result of private borrowing; that it insisted on deflation, even though this entailed debt deflation (which aggravated the crisis); that it asked for a government guarantee of private loans, even though this encouraged “moral hazard,” or reckless lending; that it asked for further financial liberalization to remedy the crisis, even though controls over capital flows were the obvious need of the hour—these have all been adduced as evidence of its intellectual failure.

Nothing could be further from the truth. The IMF’s role is to promote the interests of metropolitan capital, and in particular the metropolis-dominated international finance capital, not to solve Southeast Asia’s crisis. It is an agency of imperialism, not a humanitarian organization (though the hegemony of the ideology of imperialism is so complete at the moment that even radical third world intellectuals often fail to see this point). From this perspective, the IMF’s intervention in East and Southeast Asia promises to be highly successful: it has systematically destroyed the basis of the old dirigiste development strategy in South Korea by dismantling the chaebols and weakening the links between the state and industry; it has protected foreign lenders by extracting government gurantees for private debt, at least in Thailand and South Korea; it has forced these two countries to permit full foreign ownership of financial institutions; and it has, despite all adverse reactions, successfully held out in favor of financial liberalization. To be sure, it has still not managed to “crack” Malaysia and Indonesia; but if the crisis persists in its acute form, it may tame even these two giant economies.

Thus, the acuteness of the crisis, instead of signifying a failure of the IMF, represents its success, since this creates precisely the occasion for it to “roll back” all vestiges of dirigisme and open these economies to domination by metropolitan capital. The fact that it has the same agenda for all countries, irrespective of the precise nature of the crisis afflicting them, illustrates that its agenda is not solving the crisis but promoting metropolitan capital, whose requirements are independent of the nature of the crisis.

Meanwhile, the crisis has hit the people hard. Poverty has risen, undoing the progress of the preceding decades. In Indonesia and Thailand alone, an estimated twenty-five million people are likely to fall back into poverty in 1999. And for those already in poverty, the crisis has been devastating. The East Asian crisis has also triggered a chain reaction in which Russia and Latin America, notably Brazil, have also fallen victims to crises on account of loss of investor confidence. The developing countries as a whole are expected to witness 0.4 percent per capita income growth in 1999, compared to 3.2 percent for the previous year. Thirty-six countries (which account for over 40 percent of the developing world’s total GDP and more than a quarter of its population) experienced negative per capita income growth in 1998; this had been the fate of only twenty-one countries in 1997 (which accounted for 10 percent of the developing world’s GDP and 7 percent of its population).


There has been a systematic attempt from the very beginning to camouflage the real cause of the Asian crisis—the fact that such crises in the periphery are immanent in contemporary imperialism. Stagnation punctuated by acute crises, such as we have seen, is the fate of the periphery in the era of globalized finance. Camouflaging this fact becomes necessary because integration into imperialism is being promoted assiduously. Thus, the commonest explanation for the Asian crisis emphasises the crony capitalism prevalent in these countries: it blames their own institutions, and not their integration into globalized finance.

This explanation is obviously inadequate: first, this contrast between cronyism and the so-called impersonal discipline of the market should not be overdrawn. All capitalism is crony capitalism: promoting sons and daughters instead of those with old school ties constitutes a difference more in the nature of the cronies than in the nature of the capitalism.

Secondly, the global financial markets themselves were responsible for extending huge loans to these countries without any thought of whether prudent norms were being maintained. Crony capitalism cannot be singled out for blame, and the external lenders cannot be exonerated, when the fact is that loans were offered plentifully and the IMF encouraged these economies and others to borrow abroad. No one cared about crony capitalism then.

Third, the so-called crony capitalism in each country (and, of course, its nature differed across countries) was the inevitable outcome of the kind of development strategy, especially the kind of dirigisme, that the country experienced. But this very dirigisme also contributed to the rapid industrialization of these economies, which was hailed as a miracle. It is not crony capitalism then, but the changed context in which it had to operate, which underlay the crisis. It was inevitable that, even without the changes in the global context associated with the rise of international finance, these particular kinds of dirigisme had to end, as the authoritarianism and the corruption associated with them increasingly became the object of popular anger. But a crisis was not inevitable in the transition to democracy and accountability.

To suggest that the crisis is the result of crony capitalism, therefore, is misleading. It is reminiscent of the view (popular for a long time—until it became palpably ludicrous) that the ongoing economic crisis in Russia is the legacy of communism.

Lately, however, such “international finance is benign but the problem lies with the borrowers” views have receded somewhat. An alternative genre of explanations takes their place; it recognizes the problems associated with financial liberalization and, within this context, puts the blame for the actual crisis on wrong policies—both of the domestic governments and the IMF. We have discussed the IMF’s mistakes earlier and argued that they constitute a part of the modus operandi of international finance capital; let us now look at the domestic policy mistakes.

The proponents of the view that mistakes were made argue that most of these countries faced crisis because they allowed their current account deficits to become too large; that is, they should not have allowed the excess of private investment over private savings to become so large.

This view, however, fails to understand the dynamics of an economy with financial liberalization. In such an economy, the government can do precious little to keep out spontaneous capital inflows: the interest rate is the chief instrument available, and lowering it to discourage inflows (if the extent of lowering is to be significant enough to make a difference) runs the risk of starting a capital flight and triggering a crisis. The magnitude of inflows therefore is more or less autonomous.

Given such spontaneous inflows, the only way to control the current account deficit is to add to the country’s foreign exchange reserves. But adding to reserves, which earn little or nothing, is silly, since it implies deploying funds borrowed at higher interest rates for uses which fetch lower, even zero, rates. On the other hand, if reserves are not added to (so that the current account deficit has to expand), then deficit control can happen either through an increase in domestic private investment or a decrease in domestic private savings, since increases in fiscal deficit are avoided in a liberalized economy. The decrease in private savings can occur either through a foreign exchange-intensive consumption splurge or, if the exchange rate is allowed to appreciate in the face of capital inflows, through domestic deindustrialization. It follows that when spontaneous capital inflows occur in a liberalized economy, there are only four options available to it: adding to reserves which are “barren” increasing investment, which entails “borrowing short to invest long” increasing consumption, which entails splurging on borrowed short-term funds; or deindustrializing the economy. Each of these avenues either constitutes, or lays the groundwork for, a crisis. Of course, if investment increases in quick-yield projects in the tradeables sector, then this particular option may be the least harmful of all. But in a liberalized economy where the government itself is withdrawing from investment, and has no control over the avenues of private investment (such control is the hallmark of the much-reviled dirigiste regimes), it cannot ensure investment in such projects.

The criticism of Asian governments for policy mistakes is thus misplaced and represents only a camouflage. No doubt much was wrong with the Asian regimes, but the crisis was the contribution of financial liberalization assiduously promoted by the Bretton Woods institutions and the advanced capitalist countries.


The crisis in East and Southeast Asia is superimposed, however, on a deeper phenomenon—the fact that the high growth rates once enjoyed by several countries on the periphery are no longer possible for them, let alone for the others. The current phase of imperialism entails a tendency towards stagnation, not only generally but in particular in the third world, where the distinction between the linked and the delinked economies (vis à vis imperialism) has progressively disappeared.

Exclusive preoccupation with the crisis has indeed diverted attention from this deeper phenomenon, but the delayed recovery from the crisis clearly points to it. The Bretton Woods institutions and the Western governments are generally agreed that restoring investor confidence holds the key to recovery; and the IMF has explicitly based its prescription on this diagnosis. But in several of these countries, of which Thailand is the prime example, this restoration of investor confidence itself has proved to be elusive, prompting a World Bank official for Thailand to remark that “ten years will pass before the structural reforms take effect and prosperity can be measured for the vast majority of the people.” Even where, judging by the scale of capital inflows and the growth in reserves, investor confidence has apparently been restored, e.g., in South Korea, the real economy’s contraction nonetheless has actually increased: even as South Korea’s usable foreign reserves rose from less than nine billion dollars in December 1997 to over forty billion dollars in August 1998, its quarterly GDP growth rates were -3.9, -6.8 and -6.8 percent, respectively, for the first three quarters of 1998.

The reason for the dismal performance of the real sector lies partly in the fact that the very means adopted to restore investor confidence, namely domestic deflation, also hurts growth. But it is also partly a result of low export growth rates, in the case of South Korea, to the developing countries in particular, since all of them are experiencing deflation and stagnation.

Both of these factors hold for the entire third world and for the entire current epoch. With economies being opened up to speculative capital movements, retaining investor confidence acquires overriding importance everywhere; moreover, since capital, whether of the metropolis or the periphery, feels more confident moving to the metropolis which is its bastion, there is a tendency for capital, all else being equal, to flow out of the periphery; to counter this, it has to make strenuous efforts to retain investor confidence. It has to offer higher real interest rates than those that prevail in the metropolis (which it has been doing) and keep the economy even more deflated, which causes it to become even more markedly afflicted by stagnation.

But that is not all. In a liberalized economy, the rate of growth ultimately depends on the rate of growth of exports, which, for the third world as a whole, depends on the rate of growth of its exports to the metropolitan countries. Now, one of the remarkable aspects of the East and Southeast Asian development experience is that their exports, as far as modern manufacturing products are concerned, are confined to only a limited range—specifically, machinery and transport equipment, and office machinery and telecom equipment. The diffusion of modern manufacturing activities to this region has been confined to a limited number of activities. When Southeast Asia enlarged its exports, it inevitably hurt East Asia, and when China enlarged its exports of these commodities, it hurt the Southeast Asian economies’ export performance. Given the rigidity of the range of activities, and hence the fact that newer activities are not getting diffused from the metropolis to the periphery, the rate of growth of exports of the latter depend ultimately on the rate of growth of the metropolitan countries. Since, as argued earlier, the era of globalized finance entails a slowing down of growth in the metropolitan countries taken together, countries that were hitherto successful exporters from the third world will be less successful from now on and will experience slower growth than they have. The miracle economies, and the third world as a whole, will experience a slowdown in growth, since they are liberalizing as metropolitan economies’ slow down.

Two additional factors strengthen this conclusion. First, the slowdown in metropolitan countries is making them adopt protectionist measures, even as they impose liberal trade on the third world. This is particularly visible in the area of textiles and clothing, which still constitute a major chunk of third world exports, including that of the East and Southeast Asian countries. Secondly, the decline of communism has reduced the geopolitical importance of the East and Southeast Asian countries, and of many others. The market access that such countries enjoyed in the metropolis in the past is no longer available to them. Indeed, even in the matter of bailout following the crisis, the tough position adopted by the IMF vis à vis the East and Southeast Asian countries provided a contrast to the position adopted vis à vis Mexico earlier, and indicated the reduced strategic importance of these economies for imperialism. This fact must affect their growth rates.

In short, we are witnessing a new phase in the history of capitalism. Not only will the metropolitan countries, taken as a whole, experience lower growth and higher unemployment than was average during the postwar period, but the whole third world will have lower growth than in the past. Poverty will increase in the third world as a result of the deflation-induced rise in the rate of surplus value, and assets will keep passing into the hands of metropolitan financiers.


This new phase also entails the end of bourgeois economic nationalism as a practical project in the third world, i.e., of the attempt of the third world bourgeoisie to carve out a space for itself and build a capitalism that is relatively autonomous of imperialism. Within Asia there were two very different “models” of this attempt: India and South Korea.

India’s was the classic case of bourgeois economic nationalism. The bourgeoisie was more developed as a class at the time of independence from colonial rule than its counterparts elsewhere in Asia: it had a stronger productive base, owing to greater industrialization in the colonial period, and a greater social weight because of this, as well as its association with the anticolonial struggle. Correspondingly, however, it also faced a more organized proletariat, a more vocal petty bourgeoisie and salariat, and a peasantry made militant by Depression-induced impoverishment. It used the state for relatively autonomous capitalist development, and asserted itself both politically and economically vis à visimperialism: protection against foreign goods and capital (even while collaborating with the latter), non-alignment, a democratic polity, and a strong state capitalist sector were the hallmarks of the Indian dirigiste strategy.

But the absence of thoroughgoing land reforms, a result of the bourgeoisie’s compromise with landlordism, kept productive forces in agriculture arrested. The market for mass consumption goods remained restricted and grew slowly for this reason. Moreover, the ability of the state capitalist sector to keep expanding, and thereby to keep enlarging the market for the private capitalist sector, got progressively undermined: the low agricultural growth put a ceiling on the rate at which public investment could grow without squeezing the living standard of the masses to an extent intolerable in a democracy; in addition, the ruling classes enriched themselves from the public exchequer, a form of “primitive accumulation of capital,” which further curtailed the growth of public investment. The dirigiste strategy of capitalist development, dependent on expanding public investment, entered a cul-de-sac and lost social support even as metropolitan capital—and, in particular, finance capital—stepped up its offensive against this strategy through the Bretton Woods institutions, and later the WTO, in a world where the crucial support coming from socialist countries had disappeared.

The nature and contradictions of South Korean dirigisme were different. The state, formed through the imposition of a partition by imperialism, was politically a client-state. The bourgeoisie owed its very formation to state support, which was more direct, within an authoritarian structure that snuffed out any strong challenge from other classes. Nonetheless, this dirigisme (which more directly intervened in the micro-level decisions of the capitalists) was also animated by a certain economic nationalism. It used its very closeness to imperialism, the leverage it obtained as a frontline fighter against communism, to gain market access and carve out an economic space for the industrial bourgeoisie it promoted. Its contradictions arose because of the slower growth of the metropolitan economies, the emergence of the Southeast Asian countries and China, which moved into the same narrow range of export activities, and its loss of strategic importance with the collapse of communism. The chaebols started taking a beating in the world market. Banks that had loaned heavily to them started getting weighed down by non-performing assets, and turned to external sources of finance for their own viability, creating conditions for the crisis.

The days of both forms of dirigisme—associated, each in its own way, with the bourgeois nationalist project—are now over. The rise to prominence of international finance capital, the consequent slowdown in metropolitan countries taken as a whole, and the collapse of communism, together have created a new phase of world capitalism, where the opportunity for a third world bourgeoisie to pursue a relatively autonomous trajectory of development no longer exists. This collapse of the bourgeois nationalist project underlies the current pervasiveness of ethnic, communal, and fundamentalist conflicts all over the third world.

If the days of bourgeois nationalism are over, this does not mean that the anti-imperialist project in the third world has lost its relevance; on the contrary, its necessity is greater today than at any time in the last half-century. But it has to take an altogether different form.


There is a view that restrictions on capital flows and regulatory oversight on financial sector liberalization are adequate for combatting the danger of getting caught in the vortex of international finance capital. This view is a facile one. If these restrictions were part of an international understanding, so that all countries imposed them, then no single country would face any hardship arising from capital flight. But globalized finance capital would oppose such restrictions tooth and nail. The advanced capitalist states, which (as a surrogate for the nonexistent single global imperialist state) act in unison to provide support for such capital, would buttress its opposition. The Bretton Woods institutions would fall in line, no matter how many well-meaning economists they have on their staff. If, perchance, some understanding were reached, it would be too qualified to be of much significance to the third world.

On the other hand, if restrictions were imposed by particular countries unilaterally, those countries would certainly face immediate hardships as capital flight occurred or as financial flows bypassed them. In short, the tragedy of the present predicament of the third world is that if getting caught in the vortex of globalized finance is painful, getting out of it is equally painful.

Getting out, therefore, must be supported by the people. This means that even restrictions on international finance have to be accompanied by an alternative economic program, bringing palpable benefits to the people, and an alternative political agenda entailing thoroughgoing democratization of society and the polity. People must be directly involved in decision-making and hence remain politicized and able to confront imperialism.

The precise contours of this program would vary from country to country. But land reforms (where they have not been carried out); a revival of public investment, especially in rural infrastructure and employment generation programs, financed by taxes on the rich; a reduction of income inequalities to generate domestic demand for a range of simple and non-import-intensive commodities; decentralization of resources and decision-making to directly elected bodies at the local level; the strengthening of democratic institutions and enforcement of greater accountability of the state, would constitute some of the essential ingredients of such an alternative program. There would, of course, have to be controls over capital flows, over the financial sector (especially including political control over the central bank) so that it serves the needs of development, and over trade, so that domestic food availability is not reduced through agricultural exports, and domestic industry is not destroyed through indiscriminate imports or dumping.

With bourgeois nationalism in a cul-de-sac, an alternative anti-imperialist national struggle based on the workers and peasants is the order of the day; such an alternative program would facilitate this. For socialists to talk of a national agenda against globalization which, after all, represents a form of internationalism—albeit of the bourgeois variety—may seem odd. But there is no escape from the fact that the nation still remains the only practical point of intervention in the struggle against imperialism. In the transition from the bourgeois internationalism, signified by the current globalization, to a new internationalism based on the unity of the working people, there has to be an interim anti-imperialist national agenda carried forward by the workers and peasants.

A new internationalism is not mere wishful thinking. Since the workers and peasants are being adversely affected all over the third world (and the former socialist countries), an objective basis clearly exists for unity among them against the hegemony of international finance capital; and this unity can also, in due course, include the working class in the first world, which is losing out through stagnation, unemployment, welfare cuts, and attacks on trade unions. But the route towards such internationalism lies in an anti-imperialist national agenda.

This route is not easy. The collapse of actually existing socialism over large tracts of the globe, and the fact that inter-imperialist rivalries are relatively muted, implies that imperialism will have an easier job snuffing out any challenge mounted against it in some particular corner of the world. But if the challenge emanates from a large enough country or group of countries, if it is based on broad popular support, and if it is accompanied by a strengthening of democratic institutions through which the people can remain politically active (unlike under old socialism, in which they became rapidly depoliticized and power was exercised in their name by what, in effect, was a dictatorship of the Party), then it may well prove a harbinger of a renascent socialism.*

*Notes for this article are available from the MR office. Contact the assistant editor using our contact form.

1999, Volume 51, Issue 03 (July-August)
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