September-October 1999

(This is the second part of the article. In the first part which appeared in the May-June issue of People’s March, we looked at the historical process of its growth and its centralisation. In this we shall deal with the export of capital and growing indebtedness.)

Export of Capital

Lenin said, "typical of the old capitalism, when free competition held undivided sway, was the export of GOODS. Typical of the latest stage of capitalism, when monopolies rule, is the export of CAPITAL."22

The export of capital, in the form of FDI, FII and the third world debt, increased at an accelerated pace in the post-war period, but took a gigantic leap in the last two decades. "The need to export capital arises from the fact that in a few countries capitalism has become ‘over ripe’ and (owing to the backward state of agriculture and the poverty of the masses) capital cannot find a field for ‘profitable’ investment." (ibid)

In the developed countries, organic composition of capital becomes higher and this trend gets more and more acute. Due to this trend the rate of profit declines and profitable investment becomes uncertain. Hence the rapid increase in the export of capital to the backward countries in order to offset the declining rate of profit by finding outlets for profitable investment. Besides, as the surplus value that is generated, which takes the form of accumulated capital, comes only from exploiting the labour power of the workers it reduces their purchasing power, limits the home market for commodities and finally erupts into a crisis of over-production. To meet this crisis of this over-production too, capital seeks markets beyond the country of its origin – i.e. seeks a world market.

Already in the earlier section we have seen the gigantic growth of MNC monopoly houses, now we shall turn to their operations, through Foreign Direct Investments (FDI) abroad – outside their home country.

Foreign Direct Investment

FDI is the long-term movement of capital across borders. It goes into acquiring assets abroad, either by establishing new companies in foreign lands, or buying up companies in other countries or going into joint ventures with them. Today, as markets are restricted, little of this money goes for new investments, but it is chiefly going in buying over other companies – through mergers and acquisitions within the private sector, and by so-called ‘privatisation’ in the public sector. According to an UNCTAD report, in 1996, of the total FDI, 75% went towards cross-border Mergers and Acquisitions. FDI that goes to third world countries is part and parcel of imperialist hegemony over backward countries ... to exploit and loot them. FDI that goes to other developed countries is part of their cut-throat competition to grab each other’s markets. In backward countries too, besides the loot, there is also a fierce scramble amongst the MNCs and major powers to gain spheres of influence.

The furious rate of growth in FDIs can be seen from the fact that the total stock of FDI has increased 50 times in the last four decades. It has increased from $56 billion in 1960, to $700 billion in 1975 to $1,700 billion in 1990 and to a phenomenal $3,000 billion (or $3 trillion) today. The quantum involved each year is increasing by leaps and bounds – while it was $60 billion in 1985, it rose to $230 billion in the year 1994. In the year 1995 it took a further leap by 46% to $325 billion. According to ‘The Economist’ (June 24, ’95) in the previous thirteen years FDIs have grown five times faster than trade and ten times faster than world outputs.

The bulk of FDI flows emanate from the five major imperialist countries. The following table gives the percentage of FDI of the five major powers as a percentage of the total FDI stock. Though the USA is still far ahead of the other powers, we see a phenomenal drop in their share of the total between 1971 and 1994. The major increase has gone to Japan followed by Germany.

Share in total FDI stock, 1971-1994
(in percent - %)

With the growing crisis in the imperialist economies, and resort to greater outsourcing of production, a greater and greater amount of production is taking place abroad. For example, in 1996, 21% of Japanese production in manufacturing took place offshore... mostly in South East Asian countries. The following chart (on the following page) shows the growth of MNC production abroad. As a percentage of world GNP it has grown from 23% in 1968 to 41% in 1988 and is estimated to reach 53% by 1999.

Also the sectoral focus of FDI investment is shifting with greater emphasis on the financial sector which has increased from about 7% of the total in 1950 to 29% of the total in 1990. During the same period manufacturing increased from 32% to 40%.

Most important, there has been a dramatic increase in the percentage of FDI going to the oppressed countries during the 1990s. This huge increase is an indication of the greater hegemonistic role of the imperialist powers and their ruthless offensive against third world countries. The bulk of this investment goes to swallow up existing industries and only a small portion goes for creation of new industries. The FDI inflows into the backward countries increased from 17% of the total (or $25 billion) in 1990 to 38% of the total (or $90 billion) in 1995. Of course, 80% of the FDI going to the third world went to just ten countries.... with China taking the largest share of 37%. This big spurt in FDI can also be seen in the Latin American countries. The following table gives a picture of this growth :

FDI inflows into Latin America²³ (in $ bn)

On these huge investments in third world countries, it has been estimated that the total outflows in dividend, interest, royalty, etc. is about $200 billion yearly. Imperialism’s export of capital to third world countries is explained by the fact that over there profits are high, capital involved relatively low, wages low and raw materials and land cheap. Besides, environmental and other such regulations are either loose or non-existent and trade union rights negligible. So, for example, in 1993 the rate of return on the FDI of the US in third world countries was 16.8 % - twice the rate of return in the imperialist countries.

And if FDIs have seen a massive growth, there has been a veritable explosion in the growth of speculative capital.... also called FII (Foreign Institutional Investment) capital or portfolio investment – or, Casino capitalism.

Casino Capitalism

The present crisis in South East Asia was precipitated by a speculative attack on the Thai baht. In just the one month of July ’97, when the baht was made to crash by 35%, hedge-fund operators such as George Soros and Julian Robertson, and banks, such as the Citibank, made a cool $3 billion (Time-November 3, ’97) - this is equivalent to Rs. 11,000 crores, or the entire yearly profits of India’s top 565 private sector companies taken together. This is the tribute extracted from the Thai people, whose lives have been destroyed by the crisis. But this was only the beginning of the crisis. Since then, not only has the Thai baht crashed further, but entire currencies and stockmarkets of all countries of South East Asia has fallen prey to the wolves of finance capital. Overnight, millions of people have been pauperised.... overnight billions and billions of dollars have been made by a handful of speculators and investment banks.

Speculative capital (or portfolio investment) is that capital that seeks short term speculative gains - from a few hours to a few days, to a maximum of few weeks.... It goes for option trading, stock speculation and trade in interest rates.... It goes for financial arbitrage transactions where the investor buys a product such as bonds or currencies on one exchange, in the hope of selling it at a profit on another exchange, sometimes simultaneously by using electronics.24 Cross-border transactions in bonds and equities was less than 10% of GDP in 1980 for the major developed countries, by 1996 they were generally over 100%.

As the ‘New Internationalist’ (August 1993 issue) reported, "Currency traders and corporate bond dealers hold the upper hand. High-speed computer technology combined with billions of dollars in free-floating currencies has created an integrated but anarchic global financial market.... Governments ratchet up interest rates which simultaneously attracts speculators and discourages productive investment. And social programmes are cut to please money managers in Tokyo, London and New York who have an antipathy to budget deficits."

According to estimates from the Harvard Business Review, for the equivalent of every dollar circulating in the ‘productive economy’ of the world, between $20-$50 is currently circulating in the arena of pure finance. The daily turnover of foreign exchange transactions is $2 trillion (this was only $15 billion in 1973) of which only 15% corresponds to actual commodity trade and capital flows. Within the global financial web, money transits from one banking haven to the next, in the intangible form of electronic transfers. In 1971, about 90% of all foreign exchange transactions were for trade and long-term investment and only 10% was speculative. Today, the positions are reversed.

The massive explosion in speculative capital can be seen by analysing its growth over the past two decades. Here are some facts :25

* In 1973 the daily foreign-exchange trading amounted to $10-20 billion; in 1983 it was around $60 billion; by 1992 it was $900 billion; and by 1995 it was $2 trillion.

* Today, each of the premium stock markets on the globe is involved in feverish transactions in previously unheard of financial derivatives such as ‘futures’ and ‘options’ involving interest rate, etc. Indeed the secondary markets, as such transactions in financial derivatives are known, have grown several times larger than the primary markets (transactions in equities). The global stock of principal derivatives (options, futures, swaps, involving interest rates and currencies) was $1.1 trillion in 1986. By 1991 it increased to $6.9 trillion.... today it is $23 trillion. Compare this with the value of the total global stock of productive fixed capital, estimated at $20 trillion in 1993 !! Derivative contracts are bets placed on the movement of stock prices, currency prices, interest rates and even entire stock-market indices. Until the late 1970s futures contracts on interest rates were non-existent; presently outstanding contracts on interest rates alone amount in value to more than half the GNP of the US.

* The growth of the global bond market has grown enormously due to the heavy issues of bonds by governments to finance their burgeoning Public Debt. These are traded in the international market and are a big platform for the international speculators. In 1982 the total international bonds outstanding was $259 billion by 1991 it was $1.6 trillion; and by 1994 it had increased to over $2 trillion.

This explosion in speculative capital has been facilitated by (i) the change from the gold-standard in currency trading to a floating-exchange rate (ii) the prising open of the financial service (banks, securities and insurance firms) markets, which culminated in the December 13, ’97 WTO agreement on financial services, (iii) opening out the economy, including the stock exchanges to FIIs, (iv) freeing bank interest rates and slowly shifting to full capital-account convertibility of currencies – thus dismantling all barriers to financial trade and (v) massive borrowings due to the spiraling Public Debt (see article) and creation thereby of an international market for government bonds.

With the crisis in accumulation, which is characterised by excess surplus capital with diminishing opportunities for profitable investment, decadent parasitic capitalism is resorting to greater deployment of this surplus capital in speculation. As Lenin pointed out long back, a rentier class is created whose members live by ‘clipping coupons’ and who are totally isolated from production. But today these international speculators wield such enormous power that they can overnight destroy currencies and economies as is evident in South East Asia today.

The speculative attack on South East Asian currencies and the IMF package will ultimately destroy the central banks, thereby thwarting the possibility of financing economic development from within. Already in several countries in Africa, East Europe and the Balkans, central banks have being replaced by colonial style ‘currency boards’. Under this set-up, monetary policy is administered by an expatriate (foreign) governor appointed by the IMF. The transfer of wealth resulting from currency speculation is unprecedented in modern history. Solely in South East Asia, more than $100 billion of foreign exchange reserves were confiscated in 1997. And these amounts do not include the collection of private debts nor the value of assets appropriated by western capital under the privatisation programmes — estimated for Russia to be more than five times the Marshal Plan or equivalent to $430 billion.

Speculative transactions have become so vast, that today 40% of the earnings of the top six banks of the USA, and the four big banks of UK, are derived from the trade in currencies and securities. By the end of the eighties the daily volume of currency trade was almost equal to the monthly volume of world trade. Now, it is even more than that. Also, the annual increase in the stock of world financial assets, exceeds the annual average of world fixed capital formation. For example, between 1982 and 1988, $3,800 billion on an average were added every year to the world financial assets, while the annual fixed capital formation all over the world was $2,300 billion during that period.

What is worse, this portfolio investment has, of late, been targeting the third world countries, where returns are much higher. The foreign portfolio investment (FPI or FII) inflow into the third world has turned into a veritable deluge in recent times. FII inflows into the underdeveloped countries which was $9.3 billion in 1990, rose to $36.8 billion in 1992 and $93 billion in 1993. Of this, investments in equities in underdeveloped countries increased from a mere $138 million in 1990 to $11 billion in 1993.26 Investments in third world bonds had an equally big rise – from $4.7 billion in 1990, it rose to $21.2 billion in 1992 and then jumped to $42 billion in 1993.27

With such large volumes of funds no central bank, particularly of third world countries, is able to ward off attacks by international speculators ... and defacto the currencies of third world countries are under control of the imperialists. Also, by the volume of their investment on stock exchanges in backward countries they virtually determine the prices on the stock markets. And by their increasing penetration of equity capital in both private and public sector industry they are tightening their control on production. Such is the pathetic state of these so-called ‘independent’ countries!

In addition toall this, in October 1998 the G-7 countries, at the initiative of the US, has set up a huge $90 billion ‘precautionary fund’ to bail out future crashed economies. This ‘fund’ basically goes to meet the claims of the international speculators. In other words, this massive amount is to be robbed from tax-payer’s money, in order to insure speculators from future defaults. Worst still this ‘contingency fund’ will be lent to ‘defaulting’ countries at high interest rates on a short-term basis. Instead of the IMF soft lending rate of 4.7% these loan will carry a 7.7% interest charge and will be for a duration of a maximum 2.5 years. In other words, the bail out money provided under the fund would have to be once again rescheduled with private lending institutions at market rates of interest. The intention is to completely strangulate the economies of the backward countries. But this is not all, the bulk of the third world countries are, in addition, severely indebted to the imperialists.

The Debt Trap

Debt has today become all-pervasive in this capitalist/imperialist system. Nothing could be a more telling condemnation of a system, that is so totally dependent on debt. The gigantic third world foreign debt, is the most pernicious, as it mortgages the freedom of the country and results in enormous capital flight. Besides this, most businesses function on borrowings (except the large MNCs and Banks), all governments, in both backward and developed countries, are heavily in debt (the Public Debt) and even every individual in the developed countries are seeped in debt.

This mountain of debt, adds to the sphere of speculative capital, it diverts enormous funds which could be used for development or social welfare, into fruitless debt servicing charges (interest and repayment of capital) and worse, it creates a massive leisure class – unproductive, worthless and a burden on society – that leads a parasitical existence on the sweat and toil of labour.

First let us look at the third world debt.

Third World Debt

The third world debt stood at a gigantic $1.9 trillion (or $1,900 billion) in 1995, inspite of massive repayments. By 1996 the debt had reached the figure of $2 trillion. Over the last 25 years there has been an astronomical increase in the debt of the third world. In 1971 it was a mere $70 billion, it increased to $567 billion by 1980; by 1986 it was $1086 billion and by 1992 it had become $1,419 billion. According to a UN report in the twelve years from 1980 to 1992 the third world foreign debt had increased by 250%, inspite of interest payments of $771 billion and principal repayments of $891 billion. In fact the total payments in these 12 years of $1,662 billion amounted to three times what was owed in 1980. In other words debt service alone drained out roughly $140 billion every year from the third world.

The two tables in the next column give a picture of the foreign debt and repayments in the year 1993, not only of different regions of the third world, but also of East Europe and the erstwhile states of the USSR, which are also heavily in debt.

Between 1970 and 1980, the long-term foreign debt of low-income countries rose from $21 billion to $110 billion. Worse still, due to the IMF’s SAP (Structural Adjustment Programme) it rose further to $473 billion by 1992. Interest payments on this debt rose from $6.4 billion in 1980 to $18.3 billion in 1992.28

The poorest region of the world, sub-Saharan Africa’s outstanding external debt in 1996 stood at $211 billion. This is more than twice the value of what the continent exports annually and has led to a situation where, as much as 57% of all concessional aid directly flows back to the creditor nations abroad.... and the IMF has been a major recipient of this perverse flow. This region’s debt increased 113% between 1982 and 1990.

According to the World Bank, Latin America is the most indebted region in the third world... by 1995 their external debt stood at $545 billion. This amounts to a debt of $1,330 for every Latin American man, woman or child. According to the same source, the Latin American debt is equivalent to about 40% of the region’s GDP, while its ratio of debt to exports (of goods and services) was 254%. This means the yearly debt far exceeds the total exports – a prescription for the debt trap.

The IMF, the so-called arbiter in the debt crisis, is, infact taking back more than what it is loaning out in many parts of the world. For example, African governments have paid $300 million more to the IMF than they received from it.29 Since 1987 the IMF has received $4 billion more in debt repayments from the 32 severely indebted low income countries, than it provided in new loans. The human cost of this imbalance has been immense.30 Not without reason the IMF is known as the Institute of Misery and Famine !!

Such vast outflows of funds, specifically in backward underdeveloped semi-feudal economies, retards development and growth in these countries... keeping them in a perpetual state of backwardness. And it is this very same debt, and the need to service it, that has been the main cause for the Balance of Payment (BOP) crises that struck Mexico in 1994 and the whole of South East Asia today. The entire bail-out of the IMF is merely to meet payments to the international creditors of interest, and repayment of principal - it is not for development purposes. It is this default on the debt that is giving nightmares to the imperialists. The ‘Economist’ says "without an emergency injection of dollars, companies in South Korea and the rest would default on their debts. This would cause distress elsewhere, especially in Japan, where stagnation could turn to outright depression. From there the crisis could spread to the US, Europe and the rest of the world, as banks fail, credit disappears, stock markets crash and economies collapse. This is the nightmare that has driven governments, notably America, to support and indeed insist upon the Fund’s course of action."31 But these big loans, will only postpone the crisis, not solve it. Already, bourgeois economists are doubting whether these big bail-outs will even ease the crisis.

To sum up, Susan George, the author of ‘The Debt Trap’, says : "Every single month, from the onset of the debt crisis in 1982, until the end of 1990, (for which the calculations have been made) debtor countries of the South (i.e. third world) remitted to their creditors in the North (i.e. developed countries) an average of six-and-a-half billion dollars in interest payments alone. If payments of the principal are included, the debtor countries have paid creditors at the rate of twelve-and-a-half billion dollars a month – as much as the entire third world spends each month on health and education."32

The Public Debt

Due to the massive drain of resources because of the external debt, huge expenses on a despotic state machinery, enormous subsidies and doles given out to big business and the MNCs, and outright loot of the treasury (politely called corruption) by top politicians and bureaucrats – because of all this, third world governments have resorted to huge borrowings in order to meet their expenditures. This is known as the public debt, with money mobilised by the government through bonds, treasury bills, etc.

This enormous public debt results in huge sums being diverted away from development and social welfare...onto interest payments. This cripples growth, stunts development and is an unending cycle of debt, large interest payments, bigger debt, even larger interest payment... But this is not confined only to the third world... it is a disease that has afflicted all the developed countries as severely.

In fact the most indebted country in the world is the USA with a public debt of $4.9 trillion. This public debt of the USA has been growing at a fast rate and in the Reagon-Bush era it quadrupled.

If we look at the 24 OECD group of countries the public debt has crossed all bounds and reached the figure of $13 trillion. It is part of these gigantic funds that has created the massive speculative market for government bonds. According to the World Economic Outlook (1994) more than a decade of budget deficits has increased the proportion of public debt from 40% of GDP to 70% of GDP.

In Europe, where the Maastricht Treaty has laid down that the Gross Public Debt should not exceed 60% of GDP, the debts have been skyrocketing. In Germany itself the government debt has trebled since 1989 to reach 60% of GDP. In Belgium it is 150% of GDP; in Italy 118% of GDP; In Greece 110%; in Sweden 83%; in Finland 73% and in France and Britain it is 50% of GDP. In 1993 the member states of the European Community spent a huge $350 billion to service the public debt, on a debt of $4 trillion.

Such vast debts and such enormous interest payments are indications of a totally sick and decadent economy. But not just governments, even the people have been forced into indebtedness.

Increased Household Indebtedness

When the rich world economies started to stagnate in the 1980s, the world financiers, besides attacking the third world markets, turned to the proletariat of the rich countries to enhance spending. They pressed loans on people, especially through credit cards, which, besides earning bankers spectacular rates of interest (much higher than was available by investing in industry), also gave a boost to consumer demand. In addition to these loans a large section of the population were seeped in big housing loans.

The increase in household indebtedness has therefore been rising at a fast pace. In Europe, in 1980, the debt of private individuals was equivalent to 60% of their disposable incomes, by 1991 it had increased to 112%.33 In the US, household liabilities as a percentage of personal disposable income increased from 40% in 1952 to 100% in 1990.

The human cost of such indebtedness, in the present period of rising unemployment has been disastrous. It has led to large number of bankruptcies (household) and thousands being thrown out of their homes for failing to pay dues on mortgages of houses. In Britain alone, in 1991, 80,000 families were thrown out of their houses. The figures have been increasing and had been estimated to rise to 1,20,000 in 1992.34 In America, in 1997, a record number of people filed for bankruptcy — 1.34 million. This was 19.5% higher than in 1996 and a remarkable 400% more than in 1980.35 (To be continued)

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