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Winfried Wolf

How Deep and How Broad Remains to be Seen

International Capitalist Recession
on Horizon in 1980

(17 March 1980)

From Intercontinental Press, Vol. 18 No. 10, 17 March 1980, pp. 263–271.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

In May 1979 we made an analysis of the current economic situation that has since been confirmed. At that time we wrote that “there are very strong reasons to believe that a new international recession is on the horizon. It may emerge toward the end of 1979 in some countries and in 1980 in others. In the meantime the policies of the various imperialist countries, especially the United States, could be decisive at a time when they again find themselves on the horns of a dilemma. If they try to stop inflation ... they will plunge headlong into recession. If they allow the economy to roll along or even pick up steam ... inflation will get stronger and attempts to apply the brakes will become even more risky.” [IP/I, June 25, 1979, p. 631]

In fact the economic recession began in the United States in the middle of 1979. In Britain and Italy it started late in the second half of 1979. In France it is expected before the end of the first half of 1980. The same holds true for West Germany. There is now only one question mark regarding the big imperialist countries – the perspectives for the Japanese economy.

It is projected that the Japanese economy will experience a drop in growth rate in the second half of 1979 and the first half of 1980. But opinion is still divided on whether that country will be pulled into the whirlpool of the international recession of 1980.

The projected scenario for late 1979 and early 1980 bears a striking resemblance to the first half of 1974, which was the beginning of the most serious economic crisis in the imperialist world since 1929/32.

In the first half of 1974 all the major imperialist countries except France and Italy were heading toward a simultaneous recession. During the second half of 1974 the international economic crisis broke out, with declines in production in all the imperialist countries, including France and Italy. The tendencies toward crisis were thus generalized throughout those countries and were mutually reinforcing.

The 1979–80 scenario resembles the beginning of 1974 in yet another specific respect. The rise in oil prices (and the general increase in raw material prices), which undoubtedly had some negative effects on the economies of the imperialist countries, both in 1973–74 and in 1979–80, is being presented by the bourgeois mass .media as the “number one factor in the crisis,” as “the oil crisis” or the “energy crisis.” The purpose is to divert attention in a classically demagogic way from the tendencies toward crisis and the internal contradictions within the capitalist mode of production itself.

Through this the ruling class tries to divert the critical consciousness of the masses that has been awakened by the capitalist crisis toward a “foreign enemy.” This demagogic attempt to confuse the masses has gone the furthest in the United States, where it has been strengthened by the taking of hostages at the American embassy in Tehran. The American people, divided since the Vietnam war, Watergate, and the 1974–75 economic crisis, seem, at least superficially, to be united again by a nationalist wave.

In place of a discussion on the beginning of a new economic crisis and its social consequences, “national attention has been fixed on the conflagration in Iran ... President Jimmy Carter ... as fire chief to the nation is the figure to whom all heads must turn. The storm-tossed presidency is back in business and with it the battered, abused president.” [The Economist, December 22, 1979, p. 22.)
 

Underlying Features of the World Economic Situation

In order to understand the specific features of the world economic situation we must first place them in a broader and more meaningful context. Since the end of the 1960s, the international capitalist system has been in a new global social crisis. The basis of this crisis is the cyclical industrial crises that tend to reinforce each other and whose consequences affect all of society. The economic crises tend to become political crises or to reach their sharpest expression in them.

This means, in the first place, that the working class and the masses of the colonial and semicolonial countries face a gigantic attack on their standard of living and on social benefits, along with a growth in unemployment. This can already be seen as the 1976–1978/79 economic upturn draws to an end, even before the outbreak of the 1980 recession.

In nearly all the imperialist and semicolonial countries, the 1976–78 economic upturn did not lead to any significant rise in real wages (in contrast to what happened in the upturn that preceded the 1974–75 crisis). In fact, real wages often even declined during the upturn.

Furthermore, the number of unemployed – even before the new economic crisis has broken out – is already as high as it was during the depth of the last economic crisis.

In this period of increasing tendencies toward new cyclical crises, general economic analyses become more important than short-term economic projections. In making their forecasts, the bourgeois institutions of different states and of supranational groupings like the European Economic Community (EEC) and the Organization for Economic Cooperation and Development (OECD, which includes all the imperialist countries) have at their disposal the most sophisticated statistical and technical methods. But these institutions, in contrast to Marxist analysts [1] were unable to predict the 1974–75 recession, draw an overall economic balance sheet, and determine on the basis of that balance sheet the probability of a new international recession.
 

The Projections ...

On the eve of the recession that has just begun, the OECD was obliged to sharply revise downward its analyses and projections, some of which were only several weeks old, using the obvious excuse of the new “oil crisis.” As the December 20, 1979, London Financial Times stated, the OECD was obliged to revise its already very somber predictions for 1980, which were contained in its semiannual Economic Perspectives, on the very day the report was published. Following the increase in oil prices no economic growth whatsoever was expected in the OECD countries as a whole.
 

... And the Reality

The relationship between the reality, meaning the revised projections concerning actual economic growth, and the original forecasts is presented in Table I.

In its May 1979 analysis, the OECD had predicted a 2% growth for the OECD countries as a whole. Then in its December 1979 report it had already lowered this projection to 1.25%. In mid-December yet another downward revision lowered the prediction to 0.3% for 1980. But even this prediction will have to be corrected.

The December 1979 OECD report projects a 3% drop in the American gross national product in the first half of 1980, with an end to the recession in the second half of the year as the growth rate climbs to 0.25% of the GNP.

Similarly for Britain the report projects a drop of 2.8% in the first half of the year, and then a slackening in the recession in the second half, with a drop of only 0.5% in the GNP. The report forecasts that the West German GNP will grow by 2% in 1980.

All these projections seem higher than what the results will end up being.

The difference between the original OECD analyses and its more pessimistic, but more realistic, corrections does not involve whether or not there will be an international recession in 1980. Even the most “optimistic” projection by the OECD saw the growth rate of the imperialist countries as a whole falling from 3.9% in 1978 to 3.5% in 1979 and to 0.3%, practically zero, in 1980.

But if we examine industrial production in the OECD countries, which reflects the trends of the business cycle much more clearly than the gross national product does, we already see an absolute decline in the volume of material production. If the most “pessimistic” corrections to the OECD’s figures turn out to be correct, the 1980 international recession will mark a serious new economic crisis.

In “purely economic” terms, such a crisis would be comparable to the one in 1974–75. But in the social field it would be much more severe than the previous one.
 

Unemployment Already Growing

A rise in unemployment – even before the recession – can be seen from the job figures. In nearly all the imperialist countries the unemployment rate at the end of 1979, at a time when the new recession has barely begun, is higher than it was in 1975 at the height of the earlier crisis. This can be seen in the figures in Table II. Although differences in the way various countries determine their unemployment rate makes it difficult to compare rates between countries, within each country the same method was used for both 1975 and 1979, which makes that comparison highly significant.

The only reason that the total number of unemployed in the imperialist countries is still below the 17.5 million mark reached at the height of the 1974–75 crisis is because in the United States for the time being there are still 2.5 million fewer unemployed than in 1974–75.

But for the Common Market countries the present figure of 6.1 million unemployed is far higher than the 1975 total of 4.5 million (Blick durch die Wirtschaft, September 15, 1976; Hannoversche Allgemeine Zeitung, December 20, 1979).

This means that the 1974–75 crisis reestablished an industrial reserve army of labor that has been largely maintained during the whole 1976-1978/79 recovery. This “army” was able to exercise its “classic” function: “The industrial reserve army, during the periods of stagnation and average prosperity, weighs down the active army of workers; during the periods of over-production and feverish activity, it puts a curb on their pretensions.” (Karl Marx, Capital, Vol. 1. [New York: New Left Books, 1976], p. 792.)
 

Run-Away Inflation

“Acceptance” of high levels of unemployment has in no way resulted in a “stable currency,” as many bourgeois economists had claimed it would. In fact, the inflation rate again began to rise in 1978. In 1979 it reached a level that was only slightly lower than the highest level of 1974 (see Table III).

We should note three specific aspects of this inflationary development. First of all, the rate of economic expansion during the 1976–1978/79 recovery was considerably lower than during the “boom” that preceded the 1974–75 crisis. This means that the higher price levels of 1979 are more the result of long-term tendencies toward increasing private and public indebtedness than of a high level of economic activity.

Secondly, most imperialist countries began applying so-called “stablization” policies very early in the 1976–1978/79 recovery phase. This meant high interest rates and credit restrictions, in contrast to what took place during the preceding expansion phase. Therefore, with very few exceptions (such as Italy), the present inflation does not stem from inflationary budgetary policies.

Finally, the current inflationary phase exposes more clearly than ever the demagogic and phony character of the so-called “wage-price spiral,” according to which higher wages cause higher prices.

In recent years in most of the imperialist countries the rise in nominal wages barely equalled the rise in the cost of living. In some countries there was even a decline in real wages. Only in rare cases were there improvements in real wages, in which workers shared in the considerable growth in productivity. It is therefore impossible to maintain that the increase in the inflation rate is caused by the “excessive” growth of wages.
 

United States Sets the Pace

The recession began in the United States during the second quarter of 1979. Its specific starting point was determined by the administration’s economic policies (which obviously flowed from the previous expansion).

Since the end of 1978 this economic policy was oriented toward “stabilization.” The Federal Reserve Bank’s rediscount rate – the rate at which it lends money to banks – steadily rose from 7.4% in 1978 to 12% in October 1979, which was designed to stop the growth of private demand. The growth rate of government budgets was slowed, and budgetary deficits were reduced.

This reduction in demand was combined with a decline in real individual income. The small rise in nominal income was lower than the rise in the rate of inflation. Private consumption still rose in 1978 and 1979, primarily through the growth in the number of wage earners. But it did not rise in the same proportion as the GNP. This finally led to a turn in the business cycle in mid-1979.

But what we have is a contradictory turn in the cycle, rather than a straight line toward the crisis. There have been many commentaries devoted to the theme of the “hesitating decline,” calling it “astonishing” and “unforeseen.” In fact, the Carter administration’s plans run the risk of being thwarted by the uneven fluctuations of the second half of 1979. The administration had hoped to “manipulate” the economy in such a way as to come out of the recession before the decisive months of the 1980 presidential campaign. That goal may very well not be achieved.

In our view, the “hesitating decline” is not at all surprising. If one begins from the concept, which is inherent to the Marxist theory of crises, that the decisive motor force of the industrial cycle is not overall demand, but rather the fluctuations in profit and in the rate of profit, then the contradictory picture becomes quite understandable.

In fact, the profits of American companies grew an average of 10% a year in both 1978 and 1979 (net profits, based on the figures reported by the companies themselves). The rise in gross profits (before taxes) even reached 39% for the two years taken together.

The rise in profits scarcely slowed in 1979. This was expressed toward the end of 1979 in a rather high level of corporate investment. Since there is a growing tendency for corporations to finance these investments internally, the restrictive credit policy had a more limited effect than was expected.

As a result, contrary to the Carter administration’s plans, the low point of the economic crisis will most likely come toward the middle of 1980. The OECD projects a decline of 3.5% in the gross national product during the first half of 1980, followed by stagnation during the second half. The unemployment rate was expected to go from 5.9% to 7.2% in 1980. There is some doubt, however, that these projections can be achieved.

There is a danger that 1980 will see the reverse of what took place in 1979. Given the growth in excess productive capacity, there is a risk that industrial profits could fall absolutely, bringing with it a decline in investment. The demand for consumer goods, which is already being deliberately restrained, will fall even further with an increase of 1.5 million to 2 million more unemployed (total unemployment is projected to reach 7.5 to 8 million people).

The international recession will lead to a pronounced slowdown in international trade, if not an absolute decline, which will make it highly unlikely that a recovery could be fueled by a growth in American exports.

The only possibility for preventing the American recession from lasting throughout 1980 would be a precipitous return to deficit spending, to the growth of budget deficits and the public debt, with the risk of an immediate rise in the inflation rate.

But the consequences of such a policy on the international position of the dollar would be very serious, at a time when the United States already has a double-digit inflation rate. It is not at all certain that the American bourgeoisie would allow Carter to get involved in such an adventure for solely electoral ends.

By late 1979 the signs of the recession could be seen. According to the December 31, 1979, Business Week, production in the automobile industry had declined 15% compared to the level at the end of 1978. New housing starts had dropped 30%, and production of furniture, household appliances. steel, and nonelectrical machinery had also dropped.

Regardless of how the American recession evolves in 1980, one central fact must be noted: American imperialism was no more successful in this last cycle than in the previous one in stopping the decline in its ability to compete with its principal rivals. In 1978 productivity rose only 0.1% in the United States, and in 1979 it seems to have actually fallen in absolute terms (Table IV).

The results of this growing productivity gap on the ability of the U.S. manufacturing industry to compete can be seen by looking at Table V.

What has happened is that interimperialist competition has sharpened and the competitive position of the European and Japanese capitalists has improved. David Rockefeller summarized the situation in a dramatic way. “The world markets for modem industrial goods,” he noted, “are increasingly dominated by our competitors ... We are increasingly living off the results of the basic research of the 1960s and its technological application at the beginning of the 1970s. This reservoir is gradually drying up ...” [2]
 

Is Japan the Last Pillar?

Leaving aside exceptional cases like Austria, which only involve small countries, Japan was the only imperialist country that experienced what could really be called a new boom in the course of the 1976–1978/79 recovery. In three years – 1977, 1978, and 1979 – the Japanese GNP rose in real terms by 5.5%. In 1977 and 1978 the boom was pushed ahead primarily by the policy of economic expansion (the budgetary deficit totalled 40% of government expenditures). In 1979 the main motor forces were a growth of family income, a fall in the exchange rate of the yen, an expansion of exports, and, to a lesser extent, a growth in corporate profits.

In 1980 it is anticipated that real Japanese economic growth will still be somewhere on the order of 3% to 4%, even though industrial production itself might tend to stagnate.

In the context of the world economic situation, the Japanese economy is to some extent a counterpole to the U.S. economy. If left to itself in a “neutral” world market (meaning neither a rise nor fall in the real volume of world trade), the Japanese recession could be delayed until 1981.

The most important reason why the Japanese economy experienced this rather remarkable boom in 1977–79 compared to its main competitors (even if it was more moderate than Japan’s past booms) is that several of the motor forces behind the longterm expansion of Japanese imperialism are still operating, even though they have been weakened.

For example, although the level of Japanese wages is rising, wages remain below those of its main competitors. This is especially true of the employer’s indirect wage costs. In 1978 and 1979 nominal wages in manufacturing in Japan rose 5.9% and 7.8% respectively. In West Germany the corresponding raises were 5.1% and 6%, and in the United States they were 8.6% and 8.8%.

The growth in productivity in Japan remains so rapid that the percentage of wage costs in total costs even fell in 1978–79. Japan was the only imperialist country where this drop took place.

This relatively slow rise in wages might seem to contradict the statement made earlier about the role of increased domestic spending in 1979. But this increase is largely explained by the rise in overtime work, the payment of summer bonuses, and the decline in the rate of saving.

The special evolution of the relationship between real wages, wage costs, and labor productivity in Japan is not explained solely by the success of research and technological innovation in that country. It stems from the specific structure of Japanese industry, which is made up of an ultra-modern sector and an archaic sector, with a real “dual-labor market.” The existence of the archaic sector continues to exert pressure on the union movement and on wages, although this dualism is gradually declining.

Another special feature that continues to influence the Japanese economy is the state’s ability to intervene massively to help increase the competitiveness of Japanese industry. The state’s intervention is made possible by a variety of factors, among them the enormous surplus in the balance of payments in 1977 and 1978, the traditionally lower share of public expenditures in the gross national product, and the very low rate of inflation of the yen.

A concrete example of this state intervention can be seen in the shipbuilding industry. The industry practically doubled its share of world construction between 1956 and 1968, reaching 50% in the latter year. But then it began to decline, falling to 42% in 1977 and 40% in 1978. In August 1979 the Japanese government encouraged the establishment of a crisis cartel of shipbuilders. Some 34% of the total productive capacity of seven shipyards is to be eliminated. Investments to rationalize production are aimed at regaining the lost share of the world market.

This entire operation involves enormous state subsidies on a scale that is inconceivable in the other imperialist countries. It goes far beyond the bail-outs of Chrysler in the United States and British Leyland in Britain.

However, it is nonetheless true that Japanese imperialism suffers internal contradictions of its own, in addition to those of the international capitalist economy. The inflation rate is again rising as a result of the enormous budget deficits. The balance of payments will show big deficits in 1979 and 1980 ($7.5 billion in 1979, and a projected $9 billion in 1980).

The government has had to begin applying a policy of restricting credit. The rediscount rate rose from 4.25% in May 1979 to 6.25% in December, passing the West German rate. The budget proposed from 1980 projects a rise in expenditures of only 4% in real terms, the lowest increase since 1958.

It is true that the nearly 50% rise in the value of the yen between 1975 and the end of 1978 left a margin for subsequent declines in its value that might make a new Japanese export offensive possible. Already the yen has declined about 25% since the beginning of 1978, and about 10% since the beginning of 1979. [3] Japan’s competitors are very nervous about such an export offensive and threaten to react with protectionist measures.

But if world trade stagnates or even declines in 1980, a Japanese export offensive would only allow the country to maintain the present volume of exports rather than raise it. Given the accumulated deficit in the balance of payments, this would lead to a new increase in inflationary pressure, bringing with it new restrictive fiscal measures and ending in a recession.

There are two possible variants in this scenario. The first is that the Japanese recession will develop only after the international recession, meaning in 1981, thereby moderating the international recession and once again improving the position of Japanese imperialism with regard to its competitors.

The second possible variant is that the delay in the American recession and its extension internationally would deepen the internal tendencies toward crisis in Japan (accelerated inflation, restrictive credit policy, initial fall in profits, growing difficulties in certain export markets), which would ip turn precipitate the Japanese recession before the end of 1980. If this happens it will deepen and prolong the international recession and make a recovery in late 1980 and early 1981 much more difficult.
 

Western Europe Faces New Internal Tensions

The third big imperialist bloc – the European Economic Community (Common Market) and the other capitalist countries in Europe that are tied to it – is faced with new internal tensions on the eve of the international recession. The economic respite granted to the imperialist countries of the EEC following the 1974–75 crisis was not used to consolidate or homogenize the alliance. Political unification of the EEC remains a very long-term perspective.

The European Monetary System that was established in March 1979 to stimulate coordination of economic policies of the various countries by forcing them to maintain the exchange rates of their currencies within strict limits, is proving to be artificial and unworkable. There has been no progress toward a common economic policy.

Today, all signs appear to indicate that the most important countries of Western Europe will go through a recession in 1980. But the specific economic evolution of each of these countries continues to be determined primarily by national factors. There is no industrial cycle for all of Western Europe as a whole.

From an economic point of view, imperialist West Germany remains the most relatively stable country within this bloc. Following the 1974–75 economic crisis, West Germany went through an economic recovery that was just as pronounced, although not as linear or massive, as the Japanese boom. The recovery was checked in 1977 by restrictive budgetary measures and by the fact that household demand rose only very slightly. In 1978 and 1979, however, higher growth rates were again seen.

As in the United States, the main economic brake in West Germany in 1979 seemed to be the lag in mass consumption. The growth in wages was much slower than the growth in national income in both 1978 and 1979. In 1979 there may even turn out to have been a decline in real wages.

The steelworkers strike in early 1979 resulted in a defeat for the union. The wage increases in nearly all branches of industry were lower than in 1978, while the inflation rate went from 2% to 6% in the course of the year.

Corporate profits and investment activity remained at a high level and could have led to continued economic growth in 1980 if they had not run up against the weakening of consumer demand.

In the autumn of 1978 the Bundesbank, which is independent of the Bonn government, began a course of “stabilization,” which it stepped up further in 1979, because of the resurgence of inflation. This has resulted in a decline in the growth of industrial production.

In 1980 an additional factor, the international recession, will further slow down the West German economy by tending to depress West German exports. In 1979 exports were largely responsible for the growth of the economy as a whole, with exports rising 7% while the gross national product rose 4.5%. The fact that some 60% of German exports go to Western Europe, where nearly all its clients will be hit by the recession, cannot help but have an effect

The only aid for the economy during 1980 would be an increase in deficit spending by the government. This would, however, run up against the resistance of the Bundesbank. The fact that the parliamentary elections will take place in the autumn of 1980 makes such a reversal of economic policy quite likely. But the best it could do is moderate the recession (with the number of unemployed increasing from 800,000 at the end of 1979 to around a million in 1980), not prevent it. [4]

The French economy experienced only a modest revival: about 3% growth in the GNP in 1977, 1978, and 1979. All the economic indicators point to France also falling into the recession in 1980. The “Barre Plan” instituted by Premier Raymond Barre combined encouragement of capitalist profits, investments, and exports with austerity measures against the working class.

But the results were rather modest. The bourgeoisie felt that profits did not increase enough. The inflation rate did not decline. In fact it hit a double-digit rate again in the second quarter of 1979. The government itself made a significant contribution to this inflation rate by “freeing” prices and rents. The impact of this move was greater than the rise in oil prices.

The only success achieved by Barre’s policy for French imperialism was the increase in exports, which achieved an average growth rate of 6% in 1977–79. At the same time there was a constant increase in unemployment – one good increase deserves another – which reached 1.4 million in November 1979.

Given the approaching recession, the French government decided to adopt a more expansionary budgetary policy for 1980. The projected deficit for 1980 ($7.5 billion) is more than double what was originally planned. This could lead to an explosive social situation in 1980, with an inflation rate rising to 15% or even higher while the number of jobless will surpass 1.5 million, perhaps even reaching 2 million. [5]

Margaret Thatcher’s new cabinet in Britain has deliberately pushed toward recession. Its economic policy has been characterized by the most cynical ruling class objectives. The increase in indirect taxes, which was the counterpart to the reduction in direct taxes (favoring the middle classes and the bourgeoisie), has led to a more than 17% rise in the cost of living. This resulted in a reduction of consumer income and real wages.

The 1980–81 budget, like the preceding 1979–80 budget, is based on opposition to any stimulation of demand, which once again means a reduction in consumer spending. This is being done in a recession year. The rise in the rediscount rate – which stood at 17% in December 1979 – is supposed to lead to a reduction in the rate of growth of the money supply. But it will have an additional deflationary effect – it will deepen the recession. The capitalist industrialists are drawing their conclusions from the interest rate by sharply reducing their investments, which will be an additional recessionary factor.

According to the January 4, 1980, London Times, British industry, having become conscious of the fact that a deep recession was imminent, was obliged to lower its investment plans for this year and next. That was indicated by the figures published by the Ministry of Industry. The volume of these investments will decline 6% to 10% in the area of manufacturing. It is expected that investments this year will be 18% below the high point reached in 1970.

What is true for the “big” economic policy is also true for the “small.” Brutal reorganization plans are aimed at reducing the deficits in the nationalized sector of the British economy, at the cost of eliminating tens of thousands of jobs in the British Leyland auto plants and in the steel industry.

There is certain to be resistance by the working class and the unions to this policy of “monetary stabilization” and “rationalization” at the expense of the workers. This resistance will be heightened by the government’s plane to restrict trade-union rights and the right to strike. There will be very sharp struggles in early 1980.

But the economic context in which these struggles unfold is not favorable for the workers. The number of unemployed reached 1 million by the end of 1979 and could go as high as 2 million in 1980. Given the fact that the rate of inflation should rise to 20% in the spring of 1980, the struggle against the reduction in purchasing power and massive lay-offs will run up against tremendous resistance from the employers and the government. [6]

From a capitalist point of view the situation in the nationalized industries is quite catastrophic. The projected “rationalization” plans closely correspond to the logic of the capitalist economy. This can lead to a situation like that at British Leyland, where a segment of the affected workers show their “understanding” about the need for the “rationalization” measures. The absence of clear anticapitalist policies and alternatives from the unions and the Labour Party heighten the disarray and confusion in sectors of the proletariat, facilitating the bourgeoisie’s maneuvers to divide the workers.

The limited economic recovery that the Italian economy went through in 1977–79 came to an end in late 1979 as a result of heightened inflation, a decline in profits, and what was seen as a more than uncertain political situation. Until the end of 1979 overall demand remained rather strong. This was due to a number of factors: large-scale indexing of wages, even though there is always a delay in wages catching up to the inflationary explosion of prices; a rather expensive budgetary policy; and very limited credit restrictions.

Despite the fact that the 17% inflation rate is close to the British record, the Italian government was unable to follow the Thatcher cabinet’s example of imposing a reorganization plan based on austerity. Its Italian counterpart, the Pandolfi Plan, remained largely on paper.

Given the recession expected in 1980, the Cossiga government responded with a planned record budget deficit for 1980 of $55 billion and massive aid for industry, especially for the export sectors. All this means that inflation will continue to climb and the competitive position of Italian imperialism will again decline unless there is a massive devaluation of the lire. But such a massive devaluation of the lire would deeply shake the European Monetary System. [7]

This European Monetary System (as well as the stability of the Common Market itself) will be sorely tested in the course of the 1980 recession. In an analysis of the European Monetary System in the March 26, 1979, Intercontinental Press/Inprecor, we wrote that the system of fixed exchange rates threatened to “transform the EEC into an inflationary community.” We emphasized the fact that inflation rates were very different in the different countries belonging to the EMS and that the “projected rise in inflation rates can create multiple problems, especially if Italian inflation again becomes uncontrollable.” Since then this hypothesis has been shown to be correct. It applies to British inflation as well, even though the British pound remains outside the EMS.

In early 1980 the tensions that will result from Italian inflation will be so strong that we can expect to see a major revision of the exchange rates (with a devaluation of the Italian lire). But this will jeopardize the EMS as a whole since it is neither able to guarantee fixed exchange rates nor moderate the inflation rate in the countries that are hardest hit by inflation.

The weakening of the EMS will call into question the only tangible progress the Common Market countries had made since the last crisis toward stronger economic integration. And should the EEC countries all go into recession in 1980, we will see the institutions of the EEC itself thrown into a deep political crisis. The Thatcher cabinet’s refusal to pay the projected British contribution to the EEC budget is only the beginning. It is very possible that those countries that are hardest hit by the recession (Italy, Britain, and perhaps even France) will be driven to take protectionist measures during 1980. And while it is likely that there will be a massive new EEC credit arrangement for Italy, that will undoubtedly be accompanied by new pressure for a “stabilization” program – that is, for greater “austerity.”

While we do not have the space to deal with the perspectives of the smaller EEC countries in detail, it is worthwhile to trace these in the sketchiest way. The Dutch economy saw an initial decline in GNP in mid-1979, and a recession is expected in 1980. In Denmark, after years of an inflationary policy and huge foreign indebtedness, which reached $14 billion at the end of 1979, the workers were given an austerity program as a Christmas present, although the program is relatively mild.

Belgium, along with Denmark, has the highest unemployment rate in the EEC. With the aid of a heavy international loan, Belgium is trying to avoid devaluing its currency.
 

Effects of the Rise in Raw Material Prices on the Imperialist Countries ...

It seems that a norm has developed wherein the high point of the business cycle (and the beginning of its downturn) is associated with two related phenomena.

The first is the effort by the rawmaterials exporting countries (particularly though not solely the OPEC countries) and the multinational companies that dominate raw materials to thoroughly exploit the law of supply and demand in their favor – that is. to impose major price increases.

The second phenomenon is that in the imperialist countries these price increases have been used to launch a big propaganda campaign to convince people that the increase in oil prices and those of raw materials in general are responsible for the new recession, nationally and internationally.

The propaganda campaign has a very practical aim in the day-to-day class struggle. It aims to convince the working class and the unions that they don’t have the right to be compensated (through an increase in nominal wages) for the portion of the higher cost of living caused by higher prices for oil and other raw materials. “Everybody” has to pay the higher bill for oil imports.

In reality, the capitalists are at present able to pass on the higher energy costs to consumers. Thus in the final analysis the “oil bill” is paid by wage earners alone. Furthermore, if we look at the mediumterm tendency of raw material prices, the 1979 hike seems quite restrained. In fact, the prices of industrial products rose considerably more than raw material prices during the whole 1975–78 period (Table VI).

This favorable balance for the imperialist countries in their trade with the raw-materials exporting countries (basically the semicolonial countries) was further enhanced in some cases by changes in the exchange rates. Because the majority of raw-material imports are paid for in dollars, the rise in the value of the deutsche-mark and the yen against the dollar further reduced the import bill for West Germany, Switzerland, and Japan (and to a lesser extent Holland, Belgium, France, and Austria). Thue in 1978 the cost of imports in West Germany fell 3.5%, reflecting a net improvement in the terms of trade (the prices of exports remained stable during the same year).

This is the background of the rise in prices in oil and raw materials in general. In dollar terms, the prices of raw materials rose 34% from December 1978 to December 1979 (including the price of oil, which rose about 50%). But taking into account the changes in the exchange rates and the difference in the pace of price rises for industrial goods and raw materials since 1975, the rise in the prices of imports for the imperialist countries was only on the order of 15% to 25%. Even in 1979, while West Germany, France, and Great Britain had to pay 9.5%, 11%, and 7.25% more for their imports respectively, they were able to increase their export prices 6%, 8.5%, and 12%.

Finally, we should bear in mind that the international recession will not permit new increases in raw material prices in 1980. The prices of raw materials other than oil have, in fact, already stopped rising in mid-1979, and the failure of the December 1979 OPEC conference leads us to believe that 1980 will not be marked by new rises in oil prices.

Meanwhile, the decline in the purchasing power of the imperialist currencies that these raw-materials exporting countries receive for their products (especially the decline of the dollar) is likely to set a new record in 1980.

In terms of costs, the rise in prices for raw materials and oil thus has had only a secondary effect on the economies of the imperialist countries. The rise in raw-materials prices does not explain the economic crises of the 1970s (in West Germany total imports of raw materials represent only 2.5% of the gross national product). But the rise in raw materials prices will lead to new deficits in the balance of trade and the balance of payments of the imperialist countries and to new imbalances in world trade.

The OECD predicts that the imperialist countries as a whole will have a cumulative balance-of-payments deficit of some $30 billion in 1979. Of course this covers over the big differences from country to country – surplus for Italy, balance for West Germany and France, big deficits for Japan, Canada, Britain, and the United States. The OECD predicts a similar deficit for 1980.

Experience has shown, however, that the OPEC countries keep most of the surplus of their balance of payments (which declined to $7 billion in 1978 and then reached $65 billion in 1979) in banks in the imperialist countries or use them for future purchases of industrial goods exported by those countries.
 

... And on the Semicolonial Countries

For the semicolonial countries that are not oil-exporters, the new rise in oil prices, in contrast, is a real economic catastrophe. Already in 1974 and 1975 these countries had run up a cumulative deficit of $60 billion in their balance of payments. In 1979 alone this deficit will reach the record level of $47 billion. The OECD projects a deficit of $60 billion for 1980 – higher in a single year than the combined deficits of 1974 and 1975).

Taken as a whole, moreover, these countries have never seen a reversal of the tendency toward deficits in their balance of payments. The cumulative deficit for the period 1974–79 reaches the enormous sum of $200 billion.

As a result of this structural (and growing) deficit in the balance of payments of the non-oil-exporting semicolonial countries, there has been growing recourse to loans to finance their imports. These loans, moreover, have come more from the private imperialist banks than from international public institutions. The result has been a soaring level of indebtedness reaching such proportions that it is unlikely that it can continue at the present pace. There is, in addition, a serious threat that some of these countries will be unable to pay the interest on this debt, which absorbs a growing share of their current foreign exchange income (revenues from their exports). This prospect seriously worries bankers in the imperialist countries.

This fact leads us to two major conclusions. The “recycling” of petrodollars by the private imperialist banking system has reached the limit of its possibilities. The share of the so-called “third world” countries in world trade is no longer rising, but is rather in the process of declining. The non-oil-exporting semicolonial countries had a 14.1% share of world trade in 1976. This share fell to 13.3% in 1978 and to less than 12% in 1979 (Deutsche Bundesbank, Monatsberichte, no. 11, 1979).

Even the OPEC countries have stopped taking a growing share of the exports of the imperialist countries, as can be seen in Table VII.

There are a number of reasons for the reversal of this trend. Among them are the effects of the Iranian revolution; the fact that a number of OPEC countries such as Iran, Algeria, Nigeria, Venezuela, and Libya already have a current deficit in their balance of payments; the fact that the ability of the countries with a surplus – such as Saudi Arabia, Kuwait, and the Gulf emirates – to absorb manufactured industrial goods is limited for obvious structural reasons.

But the result is that in contrast to what took place in the 1974–75 recession, the semicolonial countries will be unable to serve as a substitute market for the exports of the imperialist countries. Since the same can be said for the bulk of the bureaucratized workers states, this is an important fdctor that could contribute to deepening the 1980 crisis.
 

The Basic Elements of the Imperialist Economy in 1980

There are a number of factors that will determine the evolution of the international capitalist economy in 1980.

1. An international recession that will encompass nearly all the imperialist countries and the majority of semi-colonial countries Beems inevitable for 1980.

A coming-together of the business cycles in the various imperialist countries clearly developed in 1978–79, with the beginning of a downturn in 1979. This is similar to what happened in 1973–74, which led to the 1974–75 recession. The fact that Japanese industry continued to expand in 1979 is not enough to prevent an international recession in 1980. Furthermore there is the possibility that Japan itself may be dragged into the recession in 1980. We should recall that although French and Italian industry were able to avoid the recession during the first half of 1974, this did not keep them from going into recession in the second half.

2. If the economic policies of the main imperialist countries allow the recession to run its “natural course,” meaning if there is no sudden shift from a “stabilization” policy to an inflationary “expansionist” policy, the deepest point in the new international recession should come toward the middle of 1980, or in the second half of the year.

3. The relatively long duration of the decline in production (which is comparable to that of 1974–75) is primarily the result of a specific feature of the evolution of the business cycle in 1979. In most imperialist countries the crisis was not directly unleashed by a decline in profits. In 1979 total profits even reached a record level over previous years (the growth rate of investments is generally running higher than the growth in the GNP).

In nearly all cases the immediate cause of the 1980 recession is insufficient demand for consumer goods, which is the result of a decline (or stagnation) in real wages, a drop in jobs, or a combination of the two.

The relative stagnation of consumer demand cannot be entirely made up for by the growth in demand for capital goods by factories. This process is deeply influenced, particularly in capitalist Europe and Japan, by the massive introduction of the most modern technology. These technologies, which are designed to “economize on labor,” increase productivity, productive capacity, and current production. But at the same time they reduce the number of jobs and consumer demand (under the combined influence of employers and governmental “austerity policies” and of monopoly price policies).

The insufficient consumer demand has been further exacerbated by a policy of “stabilization” and credit restrictions which has generally been applied earlier in the industrial cycle than was the case in the previous cycle.

In this situation, profits will begin to seriously decline only in the course of 1980 [8] under the impact of the growing excess capacity, the higher interest rates, the rise in raw material prices, and the like. This will deepen the recession or cause a longer period of stagnation.

4. Most of the imperialist countries were able to achieve real growth in their production in 1979 largely as a result of the increase in their exports. This possibility will no longer exist in 1980. The volume of world trade will show either reduced growth or even an absolute decline.

The shrinkage of the world market will be caused, in particular, by the recession in the imperialist countries themselves. These countries remain each other’s principal customers. A growth in exports to the OPEC countries and the bureaucratized workers states can no longer make up for this shrinkage. The Chinese market remains “geographically broad but limited in value.” [9]

5. It is possible that the economic policy in 1980 may shift toward inflationary pump-priming in some of the major imperialist countries, or the so-called “stabilization” policy might at least be abandoned. The fact that 1980 is an election year in the United States and West Germany could become a factor in this. So could growing resistance by the workers movement to the austerity policies, for example in France. Britain, Italy, or Spain.

It is also possible that the working class in some of the main imperialist countries may try to win back in 1980 what it lost in real wages and social benefits, despite conditions that seem at first glance unfavorable for such struggles.

If either of these two possibilities were to occur, it would moderate the recession in the immediate period. But it would only lead to the crisis manifesting itself on other levels or being delayed. For example, if the inflation rate did not diminish during the recession, that would sharply reduce the possibilities for a pump-priming policy in 1981–82 and would therefore slow the pace of economic recovery after the recession.

Similarly, a rise in real wages would weigh on the profit rate and would make a sharper recovery after 1980 less likely.

6. In any event, 1980 will see a new massive attack on the international working class and on the oppressed masses of the semicolonial countries. Unless there is heightened resistance in the imperialist centers, real wages will decline.

Unemployment will surpass 20 million people, perhaps going as high as 25 million (the highest since 1938). This means that in the course of a decade the absolute number of unemployed in the imperialist countries will have doubled since unemployment in the 1970–71 recession reached 11 million in those countries.

Even if the 1980 recession does not go as deep as the one in 1974–75, which is not at all certain, it will go further than the previous recession in undermining the chance of survival of a number of the least profitable monopolies.

Spectacular bankruptcies and government subsidies on a broad scale will occur. The case of Chrysler, the third largest U.S. automaker, is typical in this regard. By September its 1979 losses had already hit $721 million. Even the promised government credit of $1.5 billion, along with bank credit of the same scope, will not guarantee its survival.

The second largest West German electrical appliance manufacturer, AEG-Telefunken, was temporarily saved by help from the banks and by “rationalization” measures that will result in a decline of 13,000 workers in 1980. We have already mentioned British Leyland, British Steel, and the Japanese shipyards.

In the semicolonial countries impoverishment will increase under the impact of the credit restrictions applied by international finance capital and the international institutions they control and by the rise in oil prices.

A catastrophic new famine could result, particularly given the fact that these countries would have to restrict imports of fertilizers and oil, which in turn would lead to declines in production, while reserve stpcks of food will be reduced as a result of the limitation of grain production in North America in the wake of the ban on American grain exports to the Soviet Union.

This whole evolution, together with the growing dangers to the environment and the threats posed to the survival of humanity, particularly through the increased and irresponsible pursuit of nuclear power, show even more clearly that the capitalist system is outmoded and must be replaced. New revolutionary developments comparable to those in Iran and Nicaragua in 1979 could take place. A new rise in workers struggles against the austerity policies is possible.

Nonetheless, the European bourgeoisies have gained some political ground in recent years (election victories in France, Britain, Portugal, the “controlled transition” from Franco in Spain, etc.). The bourgeoisie is trying to use the rising unemployment to weaken the position of the working class and to wrest even more concessions from the reformist leaders.

A victory by Franz-Josef Strauss in the coming West German federal elections would undoubtedly strengthen the camp of the bourgeois reactionaries in Europe.

The crisis in the strategies of the reformist leaders, including the “left currents” within the Socialist and Communist parties, has been clearly revealed under the effects of the economic crisis. The policies of the reformist leaderships have deepened the disorientation of the working masses, who have been struck by the governmental austerity programs.

Only the development of a revolutionary Marxist alternative, through building an international and revolutionary parties and through initiatives toward the traditional mass organizations, corresponds to the needs imposed by the new historic crisis of capitalist society – a crisis that began in 1968 and will be further deepened by the 1980 recession.

* * *

Footnotes

1. In Crise de 1974–79 Ernest Mandel wrote: “It is however necessary to place the economic evolution of the 1970s – from the inflationary boom of 1972–73 through the generalized recession of 1974–75 and the moderate upturn of 1976–77, toward a possible new recession in 1979 – in a broader historic context” (Paris: Flammarion, 1978).

2. Frankfurter Allgemeine Zeitung, October 25, 1979.

3. Far Eastern Economic Review, December 14. 1979; Monatsberichte der Deutschen Bundesbank, September 1979.

4. For the data on West Germany, see especially Monatsberichte der Deutschen Bundesbank, November 1979.

5. For the data on the French economy see: Wirtschaftswoche, October 15. 1979; Weltkonjunkturdienst, March 1979.

6. For the data on the British economy see: The Economist, December 22, 1979; Financial Times, December 24, 1979; Frankfurter Allgemeine Zeitung, December 10, 1979; Le Monde, November 14, 1979.

7. For the data on the Italian economy see: Frankfurter Allgemeine Zeitung, October 3, 1979; Weltkonjunkturdienst, March 1979.

8. In Britain it is expected that profits will fall 30% in 1980 (Financial Times, December 24, 1979). In the United States they are expected to fall 5% (Business Week, December 31, 1979).

9. This is the main conclusion to be drawn from the work of a symposium on East-West trade that took place in Vienna in September 1979. The main reason for the limited expansion of exports to Eastern Europe is the growing indebtedness of these countries to the imperialist countries, which results in impossible interest payments.

If these exports had continued to grow at the pace of recent years, the small countries of Eastern Europe would have built up some $300 billion in debts to the West by 1980 (Frankfurter Allgemeine Zeitung, October 2. 1979).

 
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