Political-Organisational Report Adopted at the XIX Congress of the CPI(M) March 29 to April 3, 2008, Coimbatore Part I
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Political-Organisational Report Adopted at the XIX Congress of the CPI(M) March 29 to April 3, 2008, Coimbatore Part I INTERNATIONAL SITUATION The period since the 18th Congress has seen the continuing hegemonic drive of United States’ imperialism. Through its overbearing military supremacy, the US seeks to maintain the dominance of imperialist finance capital and strengthen its stranglehold over global resources, especially energy resources. The strategy of the US for world domination, which combines imperialist globalisation with aggressive militarism, is trampling upon the economic self-reliance of countries through the imposition of neoliberal policies; challenging and subverting political sovereignty of nations through military invasions, sanctions, blockades and covert interventions; and causing immense suffering and destruction of lives and livelihoods across the world. The period since the last Congress has also witnessed growing worldwide resistance to the hegemony and militarism of the US and strengthening of the trend towards multipolarity in world relations. The economic problems faced by the US, an outcome of the inherent contradictions of imperialist globalisation, have aggravated in recent times. Deepening recession in the US can have serious implications for the world economy. ECONOMIC SITUATION Global Imbalances Over the past one decade, global economic growth has mainly been driven by the US economy. This has been reflected in the widening external deficit (current account deficit) of the US, i.e., imports of goods and services by the US exceeding its exports as well as incomes and transfers from abroad (interest, dividends, remittances, foreign aid, etc). The current account deficit of the US, which was around $140 billion in 1997 or 1.7% of the US GDP, witnessed a continuous and dramatic increase to over $800 billion or 6% of the GDP in 2006. This unprecedented level of current account deficit enabled countries across the world, to grow through exports of goods and services to the US market. While the adoption of neoliberal policies has meant shrinking public expenditure and a shift away from domestic market-oriented growth in most countries, the US has provided the major market for the export-oriented growth regime under imperialist globalisation. The benefits of such growth have been largely restricted to the successful exporters to the US, especially the developing countries of South East Asia, China and the oil-exporting countries (OPEC). Growing current account deficits have also meant that the US economy became increasingly indebted, but this growing indebtedness was sustained by huge capital inflows into the US from the rest of the world. The ability of the US to attract capital inflows despite growing external indebtedness is based upon dollar hegemony. The US has maintained dollar hegemony by controlling resources across the world, like oil and gas, and ensuring that their values remain stable vis-à-vis the dollar, through 1 military interventions if necessary. Since the dollar was conceived as the most stable currency, sovereign governments, transnational corporations and rich persons across the world hold bulk of their wealth and assets and undertake most international transactions in dollars. This ensured a high and stable international demand for the dollar and enabled the US to borrow cheaply from the rest of the world. Moreover, while the productive sectors of the US economy suffered due to cheap imports of goods and services from abroad, the financial and real estate sectors in the US witnessed booms since the mid-1990s and offered high rates of return on financial investments. Therefore, even though the current account deficit of the US widened and external indebtedness grew, capital inflows into the US continued. US Recession and Prospects of a Global Slowdown Despite increasing income inequalities within the US, credit-driven consumption growth of the upper and middle classes kept the economy going since the mid-1990s. The level of indebtedness of American households reached unprecedented levels during this period—mainly due to housing loans (mortgages) and consumer loans (credit cards). Much of the increase in household indebtedness was because of the stock and property market booms, which increased the financial wealth of many households, made them feel richer and drove them into greater borrowing and spending. As was noted in the 17th Congress of the CPI (M), the first jolt to this debt- induced consumption spending in the US came with the stock market crash and the collapse of the ICT boom in the US in 2000. This led to a recession in the US in 2001, which also caused a global slowdown. However, the real estate boom resumed, which led to economic recovery both in the US as well as in the global economy from 2002. But the real estate boom was based upon reckless lending strategies of mortgage lending banks. In order to push up their credit business, these mortgage lenders made housing loans even to borrowers, whose ability to repay the loans were always doubtful (sub-prime lending). Such borrowers were enticed into housing loans by misleading offers of concessional interest rates and easier terms of repayment, in order to boost demand for housing and construction related activities and increase property prices. These loans were then packaged into securities that were sold off to other banks and financial institutions, in complex transactions that have been made possible by financial deregulation. The sub-prime lending crisis in the US, which surfaced in 2006, was triggered by increasing default on such housing mortgage loans. With increasing defaults and repossession of those houses by the mortgage lenders, the housing bubble eventually went bust. Sharp falls in property prices also led to the collapse of hundreds of mortgage lenders engaged in sub-prime lending, with even the largest mortgage lender in the US, Countrywide Financial, heading towards bankruptcy. Wall Street based banks, which had made huge investments in sub-prime mortgage based securities in order to reap speculative gains on the basis of the property bubble, also suffered huge losses. The declared sub-prime losses of Citigroup, the largest bank in the US, and Merrill Lynch, the biggest brokerage house, together amounted to over $30 billion in 2007. Several other OECD countries, which witnessed similar real estate bubbles over the past decade, are also witnessing a downturn in their property markets leading to huge financial losses for banks engaged in such lending. Switzerland-based UBS and France’s Société Générale have all suffered billions of dollars in sub-prime losses in 2007. The UK-based bank Northern Rock had to be 2 nationalised in order to save it from collapsing. Estimates suggest that total sub-prime losses of multinational banks and financial companies would amount to over $450 billion. Recently, Bear Stearns, the fifth largest investment bank in the US, had to be bailed out by the Federal Reserve (Central Bank in the US) using public funds, in order to prevent a systemic collapse. The legal provision invoked by the Federal Reserve in order to extend loans to bail out Bear Stearns, was last used to bail out banks during the Great Depression in the 1930s. Finally, another investment bank, JP Morgan Chase, bought off Bear Stearns at an astoundingly low price of $2 per share, which meant a discount of 93% on the price prevailing in the market the day before it was bought. The fact that the Federal Reserve had to subsidise the acquisition of a failed private bank by another one using taxpayer’s money, has completely exposed the myth of efficiently functioning financial markets in the era of globalisation. The collapse of the real estate bubble in the US, besides precipitating a recession in the US economy has also given rise to a worldwide credit crunch, because of the huge losses suffered by banks and financial companies. Stock markets across the world, from the Wall Street to the Asian markets including India, have witnessed successive crashes in the first few months of 2008 due to fears of a US recession. The US establishment has been desperately trying to salvage the situation by cutting interest rates sharply, in order to help the financial system in reducing losses and reviving the stock market. Fiscal measures like tax cuts and increased spending plans are also being considered. However, these measures cannot prevent the recession in the US economy and its global impact. The Western imperialist powers expect the fast growing economies in the developing world, like China and India, to provide the growth momentum for the world economy in the coming days. However, the fact that high growth in these economies is itself partly dependent on the US market, points towards the difficulty in sustaining such growth in the face of a slowdown in the US. A global downturn resulting from the US recession seems more likely at this stage. The IMF has already projected a slowdown of GDP growth in the US to 1.5% in 2008 from 2.2% in 2007. GDP growth rates in the advanced economies and the world economy as a whole are also projected to decelerate in 2008 to 1.8% and 4.1% respectively, from 2.6% and 4.9% in 2007. The actual situation can turn out to be worse than what these IMF projections suggest. Weakening Dollar The dollar has been weakening vis-à-vis the Euro and many other currencies in recent times, following the financial turbulence surrounding the sub-prime lending crisis. The IMF has reported that the share of the dollar in global foreign exchange reserves has fallen from 71.1% in March 1999 to a record low of 63.8% in September 2007. The weakening of the dollar is being further aggravated by the sharp cuts in the interest rates in the US, which are being undertaken in order to deal with the recession.