A

SEMINAR REPORT
ON

WORLD RECESSION

Submitted in partial fulfillment of requirement for the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted to: Submitted by:

Mrs. Shallu Mehta Angrej
Lecturer Roll No. 9055
MBA 1ST Semester

Department Of Management Studies

JAN NAYAK CH. DEVI LAL MEMORIAL COLLEGE OF
ENGINEERING
BARNALA ROAD, SIRSA-125055
2009-11
WORLD RECESSION

The fear of a recession looms over the United States. And as the cliche goes, whenever
the US sneezes, the world catches a cold. This is evident from the way the Indian markets
crashed taking a cue from a probable recession in the US and a global economic
slowdown.

Weakening of the American economy is bad news, not just for India, but for the rest of
the world too.

So what is a recession?

A recession is a decline in a country's gross domestic product (GDP) growth for two or
more consecutive quarters of a year. A recession is also preceded by several quarters of
slowing down.

What causes it?

An economy which grows over a period of time tends to slow down the growth as a part
of the normal economic cycle. An economy typically expands for 6-10 years and tends to
go into a recession for about six months to 2 years.

A recession normally takes place when consumers lose confidence in the growth of the
economy and spend less.

This leads to a decreased demand for goods and services, which in turn leads to a
decrease in production, lay-offs and a sharp rise in unemployment.

Investors spend less as they fear stocks values will fall and thus stock markets fall on
negative sentiment.

Stock markets & recession

The economy and the stock market are closely related. The stock markets reflect the
buoyancy of the economy. In the US, a recession is yet to be declared by the Bureau of
Economic Analysis, but investors are a worried lot. The Indian stock markets also crashed
due to a slowdown in the US economy.
The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The
markets bounced back after the US Fed cut interest rates. However, stock prices are now
at a low ebb in India with little cheer coming to investors.

Current crisis in the US

The defaults on sub-prime mortgages (homeloan defaults) have led to a major crisis in the
US. Sub-prime is a high risk debt offered to people with poor credit worthiness or
unstable incomes. Major banks have landed in trouble after people could not pay back
loans (See: Subprime pain: Who lost how much)

The housing market soared on the back of easy availability of loans. The realty sector
boomed but could not sustain the momentum for long, and it collapsed under the
gargantuan weight of crippling loan defaults. Foreclosures spread like wildfire putting the
US economy on shaky ground. This, coupled with rising oil prices at $100 a barrel,
slowed down the growth of the economy.

How to fight recession

Tax cuts are the first step that a government fighting recessionary trends or a full-fledged
recession proposes to do. In the current case, the Bush government has proposed a $150-
billion bailout package in tax cuts.

The government also hikes its spending to create more jobs and boost the manufacturing
and services sectors and to prop up the economy. The government also takes steps to help
the private sector come out of the crisis.

Past recessions

The US economy has suffered 10 recessions since the end of World War II. The Great
Depression in the United was an economic slowdown, from 1930 to 1939. It was a
decade of high unemployment, low profits, low prices of goods, and high poverty.

The trade market was brought to a standstill, which consequently affected the world
markets in the 1930s. Industries that suffered the most included agriculture, mining, and
logging.
In 1937, the American economy unexpectedly fell, lasting through most of 1938.
Production declined sharply, as did profits and employment. Unemployment jumped from
14.3 per cent in 1937 to 19.0 per cent in 1938.

The US saw a recession during 1982-83 due to a tight monetary policy to control
inflation and sharp correction to overproduction of the previous decade. This was
followed by Black Monday in October 1987, when a stock market collapse saw the Dow
Jones Industrial Average plunge by 22.6 per cent affecting the lives of millions of
Americans.

The early 1990s saw a collapse of junk bonds and a financial crisis.

The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest
expansion on record.

From March to November 2001, employment dropped by almost 1.7 million. In the 1990-
91 recession, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The
2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000.

The dot-com burst hit the US economy and many developing countries as well. The
economy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as
technology stock prices crashed.

Impact of a US recession on India

A slowdown in the US economy is bad news for India.

Indian companies have major outsourcing deals from the US. India's exports to the US
have also grown substantially over the years. The India economy is likely to lose between
1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big
tickets deals in the US would see their profit margins shrinking.

The worries for exporters will grow as rupee strengthens further against the dollar. But
experts note that the long-term prospects for India are stable. A weak dollar could bring
more foreign money to Indian markets. Oil may get cheaper brining down inflation. A
recession could bring down oil prices to $70.
Between January 2001 and December 2002, the Dow Jones Industrial Average went
down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the record
highs reached is taken, the DJIA was down 30 per cent in December 2002 from the highs
it hit in January 2000. In contrast, the Sensex was down 45 per cent.

The whole of Asia would be hit by a recession as it depends on the US economy. Asia is
yet to totally decouple itself (or be independent) from the rest of the world, say experts.

The US is in the early stages of a recession which could be as deep and

intractable as any since the Second World War, with serious consequences for the
rest of the world.

So wrote the dissident mainstream economist Wynne Godley in October. 1 Godley was
one of the few economists predicting recession back in the giddy heights of the US stock
exchange boom two years ago. But the forebodings are shared by many of a more
conventional aspect. As Godley notes, 'Everyone agrees that the US now is in recession.'

Among those who agree is The Economist. Back in January it insisted that all the US
faced was what it called a 'slowdown' or a 'correction'. 2 Now it says that 'there are good
reasons to expect America's recession to be deeper and longer-lasting than most people
expect... Indeed, it is possible that the world economy as a whole may be about to suffer
its deepest downturn since the 1930s'.3

What has caused the turn around in opinion? And what is really happening to the
world economy?

The crisis began well before the suicide hijack attack on the World Trade Centre on 11
September. The week before the attack the Financial Times had felt able to carry a three-
part article on the crisis in the telecommunications industry which said, 'A $1,000 billion
bonfire of wealth has brought the world to the brink of recession'.4 The Economist was
just as pessimistic:

The sharp slowdown in America has already caused a recession, maybe not at
home, but in Mexico, Singapore, Taiwan and elsewhere. In more and more
 countries around the world output is now stalling, if not falling. Total world
output probably fell in the second quarter for the first time in two decades. Many
commentators argue that America can still avoid recession, so long as consumer
spending does not collapse. But 1982 suggests otherwise: America then had its
deepest recession since the 1930s, yet consumer spending continued to grow,
offset by plunging investment and exports.5

The roots of the crisis

I analysed the major elements in the US economy leading to recession in articles I

wrote for this journal earlier this year, 6 and in Socialist Review early in 2000.7 I only have
room here to summarise the main points.

i. The 'new economy', centred upon microchip-driven devices and

telecommunications, did not alter the basic trajectory of the US economy. It
increased productivity in certain sectors, but much less than the hype then
suggested, and it could no more keep the boom going indefinitely than could the
greater revolutionisation of production that had occurred in the 'new era' of the
'roaring' 1920s.

A recent report from the management research consultants McKinsey Global

Institute confirms that:

In most sectors of the economy large increases in IT investment did not

produce any improvement in productivity... Nearly all the post-1995 jump
in productivity was in six sectors--retail, wholesale, securities, telecoms,
semiconductors and industrial machinery and equipment (mainly
computers)...in the six sectors a number of factors contributed to the
improvement--of which information technology was just one.8

ii. The real driving force of the boom was a large-scale rationalisation of industry in
response to the Japanese competitive challenge of the 1980s, combined with and
based upon a massive increase in the rate of exploitation. Holding down wages
 and increasing working hours enabled the US ruling class to restore the rate of
profit to roughly what it had been in the mid-1970s--although not to the higher
level it had been at through the long boom from the 1940s to the 1970s.
iii. The relatively rapid growth of the US economy compared with its major
competitors attracted investable funds from all over the world. Stock exchange
levels were driven ever higher, losing all contact with the real level of profitability
in the economy. The ratio of share prices to dividends rose to more than twice its
average over the previous 50 years. At the same time, this inflow of funds made it
possible for both firms and consumers to borrow on a massive scale, until total
spending in the US exceeded total income by some 6 percent.

iv. The boom had reached the point where it could only keep going if two
contradictory things happened simultaneously--if profits were raised so as to
justify share values, which meant further increasing the rate of exploitation, while
wages were raised so as to sustain the level of consumption, which meant
lowering the rate of exploitation. This underlying truth might be covered up for a
period of months, but at some point the balloon was bound to be punctured.
'Capitalists...are so carried away by their own hype that they think the profits are
magically going to rise. When these illusions are not fulfilled, the stock exchange,
and probably the economy as whole, can only crash disastrously'.9

In fact, the situation was even worse than this. This runaway boom had led
many firms to inflate their profits massively, so as to push up their share prices:

Spectacular growth in profits during the 1990s was partly due to dodgy
accounting... According to Bob Barbera of Hoenig, an investment bank,
the stated operating profits of the S&P 500 companies rose at a much
faster rate than the share of profits measured in the national accounts...
Thus, in the 1990s, profits at S&P 500 companies tripled, but profits
recorded in the national accounts merely doubled.
Whether technology-industry profits actually grew as fast in recent years
as they appeared to do is increasingly being questioned. A recent study by
 Gary Schieneman, Steven Milunovich and Lisa Liu, all analysts at Merrill
Lynch, examined 37 leading technology companies. The study found that
accounting properly for options and non-operating expenses reduced the
firms' profits by 25 percent on average.10

This suggests that profitability through the economy as a whole in the late
1990s was, in fact, considerably less than that of the pre-crisis years of the early
1970s and closer to the considerably lower levels of the 1980s.11

The turn from boom to bust

A boom of sorts did keep going through the first nine months of 2001 on both sides of
the Atlantic. It was a boom in consumption even while core industries began to sack
workers and to announce falls in profits, leading to a slow but cumulatively sizeable fall
in share prices. Hence the talk in the summer of 'two economies'--still booming service
and personal consumption sectors, and increasingly depressed manufacturing and
industrial sectors.

The economic importance of 11 September was that, at least in the US, it burst the
consumption balloon. It also provided industrial firms with a smokescreen behind which
they could massively speed up their announcements about poor profits and their sacking
of workers.

Both these things would have happened anyway. As The Observer reported on 23
September:

It was clear from the hundreds of profits warnings that corporate America has
decided to announce all of its bad news at once. Honeywell International third-
quarter profits would be between 43 cents and 45 cents a share, compared with
76 cents last year. The company is now considering cutting 12,000 jobs...
Eastman Kodak said that third-quarter profits would be a third below estimates.
Levis said it was cutting production as sales had fallen on last year. American
Express saw its share price fall to its lowest level since the Asian crisis.
 Analysts predict more bad news. 'We're looking at something more than a 20
percent decline in earnings for the S&P 500 compared with the same quarter last
year,' said Chuck Hill, a director of Thomson Financial, the research company
that tracks corporate profits.12

The Guardian repeated the same point some days later:

Companies are now taking long-overdue action to reduce their costs and boost
their earnings, which they are doing by taking advantage of the terrorist attacks
to sack their employees in droves. A study conducted by leading economists in the
US has found that the airline and hotel industries have laid off tens of thousands
of workers since 11 September.
Professor Christopher Thornberg, of the University of California, Los Angeles,
said airlines had been bleeding red, losing money hand over fist. They needed to
get rid of employees... Now the airlines say 'the devil made me do it. Bin Laden-
he's the one who made me lay off these people'.
He added that the tourist trade was also in trouble before the attacks. Occupancy
rates had fallen from 63 percent to 55 percent during the summer, he said. Now
they had an excuse to lay off workers without fearing any industrial difficulties.13

By late October the Financial Times could report:

The terrorist attacks have had less impact on companies' costs and strategy than
expected, according to the chief executives of the biggest US companies. But big
business is reeling from the effects of a recession that most executives believe was
already under way.14

This is an important point, because many supporters of capitalism have attempted to

blame each recession of the last 27 years on extraneous events. For instance, there are
frequent claims (in The Guardian and elsewhere) that the recession of the early 1990s
was caused by an increase in the price of oil resulting from the Gulf War. In fact the
average price of oil through the years 1990 and 1991 was no higher than it had been
previously. It shot up for a month or two and then fell just as sharply. The recession
followed from the internal dynamics of capitalism, particularly in the industrial countries,
not from some external factor. The same is true of the present recession.

The stock exchanges and the real economy

The most dramatic effects of the destruction of the twin towers was on the level of US
share prices. The Dow Jones industrial average fell 684.81 points on the first day stock
exchanges reopened.15 Two days later the Financial Times spoke of:

...one of the worst bear markets in history. In early trading yesterday, the Dow
Jones Industrial Average had fallen 31 percent from its January 2000 peak, one
of the worst ten declines the US market has experienced since the First World
War. In Germany, the DAX index has more than halved since the peak in March
2000; in London, the FTSE 100 has fallen 36 percent since its peak in December
1999.16

Stock exchange levels are of central importance to whole sections of the capitalist
class. They determine the cash value of the shares they own and the stock options that
come with directorships of companies. But the exchanges do not play anything like the
same central role in terms of the dynamics of the system such people preside over.
Relatively little new investment is raised through stock exchanges. Their main function is
in providing a market place for the buying and selling of shares in already-existing
companies. They are, in fact, secondhand markets, whose relationship with the main
business of capitalism--the accumulation of surplus value through exploitation at the
point of production--is somewhat analogous to that of used car dealers to the activities of
the giant car manufacturers.

A collapse of stock exchange levels sometimes indicates something fundamentally

wrong with the system as whole, and a rise in the levels sometimes suggests the system is
enjoying better health. What is more, a sudden collapse in the share values of some
companies can do a lot of damage to the balance sheets of other companies and financial
institutions that have tried to raise their own profitability by gambling on them. But there
is no automatic correlation between the ups and downs of the stock markets and the ups
and downs of the real economy. So, for instance, the Dow fell 40 percent between 1939
and 1942, in the early stages of the Second World War--just as US capitalism was
entering one of the biggest booms it had known.

This time round the lack of direct correlation between the stock markets and the real
economy was shown within a matter of a couple of weeks. For, while the real economy
continued heading into recession, with mass sacking and more reports of low profits, the
US and British stock exchanges started rising!

The Guardian reported:

There was a whiff of the good times returning to Wall Street yesterday with share
prices ending back to where they were before September 11.
After the massive falls in share prices in the immediate aftermath of the
devastation in New York and Washington, markets have roared back on both sides
of the Atlantic. London's FTSE 100 index is now higher than it was before 11
September, and at one point yesterday the technology rich Nasdaq was within five
points of its levels before 11 September...while the price earnings ratio for the
S&P 500 is back to its levels before the hi-tech crash 18 months ago.17

It is a proof of how short-sighted capitalists can be that they celebrated such a return
to the old ratio of share prices to dividends. That ratio, as we have seen, was twice its
historic average and was based on completely unfulfillable expectations about massive
increases in profit levels. It was nonsensical then. It is even more nonsensical now, with
virtually every company looking at reduced profit levels.

In fact the damage the recession was causing to the real economy was escalating all
the time. Two days after this report The Guardian told:

Bethlehem (the steel corporation) filed for protection against its creditors
yesterday in the US. This is the company that brought us much of the raw
material for the Empire State Building. One cannot help but notice how many
iconic names of America's corporate past are now tumbling into insolvency
 courts. Last week saw Polaroid file under America's Chapter 11. Bethlehem Steel
will not be the last great American name to go to the wall before the year is out.18

Ten days later:

Investors sold stocks and the dollar after disastrous data from the US... Orders
for durable goods, which most economists expected to show a small decline, sank
8.5 percent in September. The weekly totals of new claims for jobless benefits in
the US rose to 504,000, the four-week moving average hitting its highest since the
depths of the recession in 1991.19

The debt overhang

Numerous companies--in Britain as well as in the US--borrowed frenetically in an

attempt to cash in on the boom two to three years ago. Now many are very close to going
bust, with profits which barely cover their debt repayments. They only have to miss one
payment for their creditworthiness to collapse, other firms to call in their debts and the
receivers to come knocking on the door--quite likely in the company of the fraud squad.
This is what happened to such celebrated business figures as Robert Maxwell and Asil
Nadir in the recession of the early 1990s. It could happen to any one of a number of big
names this time round.

The most obviously overstretched firms are those that rushed into the new technology
sector associated with microchips, computers, telecoms and the internet. In Britain the
one time engineering giant Marconi-GEC has only just survived a meltdown in its value.
It is common knowledge that the cable firms Telewest and NTL are in a very tight
situation and that the terrestrial television companies of the ITV network are doing very
badly. But the damage is not confined to these sectors as the following list of most
indebted British companies suggests:20
 FINANCIAL STRENGTH INDEX (100 = WORST IN
EUROPE) 97
Telewest
British Airways 96
BskyB 93.7
United Utilities 90
Powergen 90
Railtrack 89.7
British Telecom 89.7
Lattice 86.7
Invensys 85.3
Scottish Power 83.7

A sudden decline in advertising has already hit the magazine publishing sector very
hard, while the travel industry was in trouble even before the collapse of US tourism after
11 September. The troubles of the airlines (Virgin and BA) and aero manufacturers were
rooted as much as those of the internet companies in the mania of the boom years. And in
other sectors many managing directors will be trying to bluff it out, knowing that one
small push could knock them over.

Economics to politics

The transition from boom to recession is never a smooth, evenly balanced decline.
There are always some firms that gamble more heavily than others during the boom.
There are always some industries hit disproportionately hard by the downturn. So periods
of apparently smooth decline are always interspersed with sudden crises when giant firms
and even whole industries are suddenly on the verge of collapse. And as quantity turns
into quality, so economic collapse can suddenly cause political eruptions. Governments
find it difficult to do nothing as they are faced with the desperate demands of giant
capitalists and the sudden bitterness of large numbers of workers. But whatever they do--
even if they do nothing--brings to the surface considerations about the whole direction of
society.
 Through the early autumn 11 September and then the war against Afghanistan diverted
people's attention from the harm the recession was doing. This is unlikely to continue as
the winter wears on.

Some of the problems are already coming to the surface in the US. The Bush
administration rushed to pump in government money to deal with the immediate shock
caused by the destruction of the twin towers.

The Financial Times reports:

This week, with little ceremony, President George W Bush quietly brought to a
close more than a decade of US economic policy orthodoxy. By signalling support
for lower taxes and higher public spending in the next year that could reach as
high as $130bn--1.3 percent of gross domestic product--he threw the US
administration's weight behind the proposition that a temporary deficiency in
aggregate demand should be met by a shift in government finances from surplus
to deficit.
This argument, the simplest distillation of the teachings of John Maynard Keynes,
has been out of favour in much of the industrialised world for ten years or more.
But with the world's three largest economies--the US, Japan and Germany--all in
recession or close to it, the conventional wisdom is up for reassessment.
In the US, the intellectual climate has shifted decisively in favour of just such an
activist policy. In the rest of the world, however, a revival of Keynesianism is still
viewed with suspicion.
The conversion of Mr Bush and his Republican Party to the cause of fiscal
stimulus has been going on for some months. But it has taken the tragedies of 11
September and their potentially devastating economic consequences to complete
the process.21
Even the Federal Reserve has joined in the calls for an activist fiscal policy [with]
Alan Greenspan telling members of Congress that a total stimulus of about 1
percent of gross domestic product would be prudent.22
 This revival of Keynesian methods of state intervention is being greeted in some
quarters as a welcome move that can see off the crisis. It can correct, it is said, the
damage done by reliance on free market capitalism and even represent the end of neo-
liberalism. Such, for instance, is the tone of some of the coverage in The Guardian.

The inadequacy of Keynesian solutions

But Keynesian methods cannot deal with the fundamental imbalances in the US
economy that developed in the boom of the late 1990s. Investment in key industries far
outstripped any increase in the source of profits. The current fall in profit rates is the
inevitable consequence.

The rate of profit cannot be restored without, on the one hand, further massive
restructuring of industry through large numbers of firms going to the wall and, on the
other, a huge increase in the rate of exploitation by slashing workforces and cutting
wages--as is already happening in the airline, aerospace and hotel industries. But in the
short term such measures can only lead to a deepening of the crisis and a further fall in
consumption, with ricochet effects right across the economy. Firms and private
consumers will be under pressure to cut back desperately in order to try to get out of debt
(or to end their 'negative saving' as some economists describe it). But it was precisely
their borrowing that kept the US economy from sinking completely before 11 September.

Wynne Godley describes the likely consequences of them ending their indebtedness:

If private net saving reverts to its historic norm over the next two years this would
remove a gigantic chunk of demand equal to about 7 to 8 percent of GDP, or
$750bn, from the circular flow of income. Such a deficiency would swamp all the
announced expansionary fiscal measures, which can hardly exceed $100- 200bn
per annum at the outside.23

In other words the recession is bringing to an end the orgy of borrowing that has kept
consumption and investment flowing until recently. The resulting decline in markets is
likely to be between four and eight times greater than any stimulus to the market coming
from changes in US government policy so far.

Yet there are already doubts in the US ruling class as to whether even that level of
stimulus is desirable. The stimulus is meant to come from an excess of government
expenditure over tax revenues. The Republicans want to achieve this by further tax cuts.
The Democrats in Congress are arguing that this will lead to an excessive demand for
funds from money markets, so leading to such a rise in long term interest rates as to
further reduce private investment:

Democrats argue, the damage to the economy from such a fiscal policy is not
confined to the effect on interest rates, says Robert Rubin, the former Treasury
secretary, 'The more important factor is confidence. Once you lose control of your
fiscal affairs it creates a general loss of confidence in economic management'.24

Some of the Democrats are simply using the argument as a way of pushing their
preferred stimulus to the economy, through increased public spending, as an alternative to
the Republicans' tax cuts. But, whatever their motives, they are pointing to the central
problem from a capitalist point of view. Even the limited Keynesian budgetary measures
proposed so far will run into serious problems in the medium term. Any improvement in
profits due to their effect in expanding the demand for goods is going to be countered by
the effect on profits and capitalist confidence of the government borrowing that provides
for that demand. What they gain on the swings they are likely to lose on the roundabouts.

This was exactly the problem Keynes himself confronted--and ran away from--in the
1930s. Every proposal he made, notes Skidelsky in his biography, was tailored, 'taking
into account the psychology of the business community. In practice he was very cautious
indeed'.25 In practice neither the British nor the US governments intervened on the scale
needed to deal with that crisis until they established a centrally directed war economy.
Despite the tone of the bellicose rhetoric coming from sections of the Bush
administration we are not going to see that in the near future. The US state will take
measures to protect giant US firms. US governments have usually been careful not to let
the neo-liberal ideology they propagate through the rest of the world hurt domestic
businesses too much and have been quite happy to use the state to bolster and restructure
US capitalism. But there is no sign of a stimulus on anything like the scale pessimists
such as Wynne Godley see as necessary.

What does this mean for Britain?

The official prognosis is that the British economy is strong enough to escape virtually
unharmed from the world recession, since interest rates are low, inflation is low and
projected increases in government spending should compensate for any reduction in
foreign markets. Such glib optimism ignores a few elementary points. The British
economy, like the US economy until recently, has been kept afloat by consumer spending.
Overall borrowing by households rose by 10 percent last year, the highest level since
1991. It is doubtful whether that rise will continue if the surge of redundancies we've seen
in recent months continues. And more redundancies are likely, since 'company
profitability has fallen to its lowest level in five and a half years, raising fears that
businesses are set to shed more jobs and cut investment to claw back disappearing
margins'.26

At the same time, the other side of the consumer boom has been an increasing excess
of imports over exports. This can be sustained so long as the belief persists that British
capitalism is doing better than its European, US and Japanese competitors, leading to an
inflow of international funds. But should any doubts begin to rise about this, the flow
could reverse overnight, suddenly creating a great sense of crisis. A couple of years back
there was a strong current of mainstream opinion arguing for a reduction in the value of
the pound against the euro, on the grounds that this would increase the competitiveness of
manufacturing industry. But when the value of the pound began, briefly, to fall in the
summer there were sudden worries that this would be counterproductive. A lower pound
would not succeed in raising the volume of exports as much as necessary should world
trade stagnate (and some estimates suggest it will only grow by about 2 percent in the
coming year),27 but would reduce the sterling value of each item sold: 'The decline in
sterling against the dollar and the Euro could hammer manufacturers further. Economists
said slack global demand may negate any competitive advantage from a weaker pound'.28

New Labour has had a fair degree of economic luck over the last four years. It is
unlikely to be enough to stop Britain being sucked into the global recession. And,
although this is unlikely to worry born again Blairites all that much, the avalanche of jobs
losses is likely to get worse.

The war and the recession

The effects of the US's resort to war have been contradictory. On the one hand, the US
military has been able to pump money into certain industries and provide them with a
floor below which markets will not fall-especially as Bush is finding it easier to push the
Son of Star Wars programme through. On the other hand, the sense of instability can
further damage the confidence of businesses and consumers.

What is important here is not, in the main, what happens on the military front--
although what happens next in Afghanistan, and any extension to the war elsewhere (for
instance in Iraq), will make a difference. Most significant will be whatever happens in the
wide region stretching from the Nile to the Indus.

War often leads to political instability culminating in revolutions. But it is not often
that the potential for revolutionary upheaval affecting their vital interests worries rulers
when a war is only a few weeks old. But that has been a constraining factor on the US
administration's conduct of its military operations. Media commentators talk openly of
the possibility of revolutionary upheavals in countries such as Saudi Arabia and Egypt,
and they fear the impact of the war on Afghanistan on the festering conflict between India
and Pakistan over Kashmir.

But there are powerful currents within the administration which are dismissive of such
fears as they push to broaden the military actions so as to achieve wider US global
objectives. It is impossible to tell who will win out, or how close to revolutionary
upheaval places like Saudi Arabia really are. But there can be no doubting the devastating
impact on the US economy if a widening of the war were to result in the sweeping away
of any of the regimes that guard the US's oil supplies.

Meanwhile, the deepening of the recession will increase instability in many different
parts of the world. In Europe it is likely to accentuate the trend we saw in the early 1990s
and summed up as 'the 1930s in slow motion'--a polarisation away from the centre
towards the forces both of the far right and of a revived left. The important change since
the early 1990s is the growth of the anti-capitalist movement, usually now central in the
anti-war movements. It can provide a focus for the sudden bitterness created by the crisis
in a way which was hardly possible a decade ago.

In parts of the Third World we may well see 'the 1930s in fast motion'--economic
crisis on such a scale as to destabilise old political formations and states that depend on
them.

'Private capital flows to emerging economies will fall sharply, producing the
toughest financial conditions for these countries since the debt crises of the
1980s', warned the Institute of International Finance, a body representing global
banks and asset managers, in September. It expected developing country exports
to decline by 2 percent this year after growing by 22 percent in 2000.29

How desperate things could get was shown in Argentina long before 11 September.
The government was thrown into crisis in the spring as it attempted to make massive cuts
to the educational budget after three years of recession. It bought time for itself by giving
the economic portfolio to Domingo Cavallo, who had been economics minister for the
government thrown out at the previous election. He was briefly hailed in the media as the
nation's saviour. By the summer he was having to push through his own even more
savage package of cuts in return for an $8 billion IMF loan. Yet the economy continued
sliding:

Argentina's economic recession, now in its fourth year, seems to be deepening.

Construction activity fell 11 percent in August compared with the previous year
while industrial production fell almost 6 percent.
 September car production sagged 47 percent compared with a year ago.
Consumer confidence is now close to historic lows. The immediate consequence
is that tax collection plummeted 14 percent in September, forcing the government
into yet another of round of spending cuts to meet its zero-deficit target.30

The government, not surprisingly, received a thrashing in provincial elections in

October. In Buenos Aires, where a huge chunk of the electorate cast blank votes, the
opposition Peronists got a majority of seats, but a quarter of votes went to the various
parties of the far left. Against such a background it is hardly surprising that most
commentators think it can only be a matter of time before the government is forced to
devalue its currency and default on some of its debts.

Such a course might bring some revival to the Argentinian economy. But its impact
internationally could be devastating. The country 'accounts for more than 20 percent of
the emerging market bond index'.31 Default would damage those (mainly US) banks
which have lent to Argentina--and would lead others to withdraw funds from other
countries, so pushing them to the brink of bankruptcy. Some are in the zone subject to all
the aftershocks of the Afghan war. Turkey has vied with Argentina for a year as the state
which most worries the financiers. Egypt is deep in debt, despite some writing off of what
it owed ten years ago as a bribe for backing the US war against Iraq. Pakistan owes $37
billion, but the debt relief bribe on offer so far is meagre. At present no less than 60
percent of Pakistan government revenues go on servicing its debt--under the proposed
rescheduling scheme this would only fall to 50 percent. 32 And all these countries' exports
will be hit by the downturn in American, Japanese and European economies.

This definitely means increased poverty for very large numbers of people. It remains
to be seen whether that will translate into the eruption of mass bitterness on the streets
and the toppling of governments. But it certainly shortens the odds on this happening.

The official prognosis from apologists for the world's ruling classes is that a short
recession will 'correct' the excesses of the boom years, and that a quick military victory
will dispose of the threat to the US's client regimes in the Middle East.
 If this is how things turn out, they will be very lucky indeed. Bush and Blair have
unleashed war that can have all sorts of unpredictable consequences in a region that is
full of highly combustible material at a time when their economies are skidding all over
the place.