DISLOCATIONS AND CRISES

By Attac Austria

[This article published on the Attac Austria website is translated from the German on the World Wide Web, http://www.attac.at/index.php?id=6029&type=98.]



DISLOCATIONS

Deregulation of the finance markets and liberalization of capital transactions have far-reaching consequences for democracy and the economy. Finance markets lose their supportive function for the real economy. The real economy suffers massive repercussions and dislocations.

SHAREHOLDER VALUE

Since the beginning of the 1970s, there was a power shift in favor of shareholders. Management is rewarded for revving up the stock price – often through mass layoffs, wage cuts and location changes. Otherwise investors threaten the immediate sale of shares and falling prices. If the prices fall, gaining new capital will be more difficult. One runs the risk of being bought up cheaply. Real investments need a long time to realize profits and become comparatively unattractive.

LOCATION- AND TAX COMPETITION

Through the possibility of shifting production sites or private assets abroad, corporations and rich persons can threaten migration and put whole states under pressure. Governments yield to the threats and lower social- and environmental standards as well as taxes on business profits and assets. Public revenues sink. Budgets are in deficit; states must “save.” Public portions are privatized. Social benefits are reduced and funds for services like nursing and child care are lacking. For women, these savings have very negative consequences since they must take over the largest part of this work without pay.

HIGH INTERESTS BURDEN THE STATE AND THE ECONOMY

Free capital transactions always lead to rising interests since finance capital gains power owing to liberalization and can enforce its interests – high interests. However high interests make credits expensive for small businesses that want to invest. Big businesses often become creditors instead of investors. Few jobs are created. The increasing unemployment weakens the unions. Wages and salaries sink. Most real incomes have not risen for ten years even though the economy in part has grown robustly.

For the state, high interests lead to problems since repayment of its debts becomes more expensive. This enlarges the deficit forcing the state to save more.

PRIVATIZATION OF THE PENSION SYSTEM AND SOCIAL CUTS

The capital markets have caused fundamental changes with pensions. For a long time, the working population paid the pensions of retirees in the so-called contribution system. This “generation contract” was based on solidarity and social balance. Supposedly this cannot be financed any more. Therefore people – with state sponsorship – are driven into private pension systems although this did not alter the fact that this population group grew older, more costly and more risky. Despite lower income because of their higher life expectancy, women pay higher premiums than men. In countries with partial privatization, old age poverty rose by leaps and bounds. Nevertheless there are tendencies where the capital market is expanding to nursing and education.

DANGER FOR DEVELOPING- AND THRESHOLD COUNTRIES

The growing instability on finance markets is especially problematic for developing- and threshold countries. On account of their more unstable banking- and finance systems, they cannot resist the sudden inflow and outflow of massive capital funds. Serious crises can be triggered. This often leads to the intense devaluation of their currency making their debts in foreign currencies rise enormously. The dependence of affected countries on their creditors soared.

Despite the danger of instability, the International Monetary Fund (IMF), the World Bank and the World trade Organization (WTO) pressed developing- and threshold countries to open their capital markets. Since the 1970s, this led to great financial crises in Mexico, Asia, Russia, Argentina, Brazil and Turkey. The consequences are increased poverty, unemployment and indebtedness.

Thus the liberalization of the finance markets started a mechanism where the broad mass of the world population lost. Only a few financial conglomerates and wealthy are winners.

CRISES

Since the end of the system of Bretton Woods, there were more than 160 financial crises according to the IMF. Although every financial crisis is unique, there is a basic model of the process:

- 1st Phase: An event (for example, liberalization of capital transactions, binding of a currency to the US dollar or a sectoral boom) raises the profit expectations of international investors in a certain region. Higher bond prices are expected.

- 2nd Phase: Capital begins streaming into the region. Prices climb on account of the increased demand. The expectations become a “self-fulfilling prophesy.”

- 3rd Phase: The boom is seen as a bubble since the real economic data does not follow the boom in the bond prices. Investment projects turn out to be unprofitable. A reversal occurs. With massive profits, the first investors withdraw their capital.

- 4th Phase: Prices begin falling. In a panic, the securities are sold and the invested capital abroad is made secure. Prices are enormously depressed. The international capital is removed and leaves behind a devastated economy.

Many companies cannot repay the credits they received from banks during the boom phase. In the worst case, the banking system collapses since businesses cannot pay back their credits and savers in mass numbers withdraw their money. The financial crisis plunges the real economy into a recession. States often accept liability for foreign credits. The debt service increases since the value of the local currency falls. The state has to save. Cuts in social spending are often the consequence intensifying the crisis. Unemployment and poverty expand. The population bears the consequence of the crisis while the financial investors evade all responsibility and frequently emerge from the crisis with enormous profits.