Overproduction with cheap labour will bring recession

The International Monetary Fund (IMF) has been given a wake-up call by its newest chief economist, Raghuram Rajan, whose assessment of global imbalances, published by the IMF in October 2005, contains a critique of the current situation.

Essentially, he sees the danger to the present world order as being one of overproduction and overcapacity leading to lack of investment and a fall in growth rates.

Since everyone knows that the global competitive market must grow or it will go into recession, this analysis is tantamount to a serious warning. Ironically, it is close to the conventional Marxist conclusion that "the crisis of overproduction" will finish off capitalism.

Walden Bello, a distinguished economist who directs Focus on the Global South from the Philippines, summarises Rajan's thesis for the Nautilus Institute, starting with the evidence.

The American computer industry at the turn of the century was increasing production by 40 percent a year - far exceeding projected demand.

The car industry was selling only about 74 percent of its output - a crisis for, in particular, Ford and General Motors that has seen their profits crash to produce losses in the billions.

Steel production exceeds demand by 20 percent, or about 200 million tons.

Telecommunications' overcapitalisation has produced a "mountainous glut" of telecoms networks.

The result has been a reluctance to invest in new capacity and low growth rates, averaging between 1 percent and 2 percent in Europe, the US and Japan.

Only the extraordinary Chinese growth rate has prevented a global recession. Its annual rate of 8 percent to 10 percent ended Japan's long recession, as Japanese exports to China rose by a record 44 percent in 2003. Other Asian economies also benefited.

"In country-by-country profiles, China is now the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia and Australia," according to the Straits Times of Singapore.

Transnational capital has fuelled this China-centred development, having seen China as the solution to the problem of overproduction in the mature markets of Europe and the slow growth in Africa.

But China, unlike Africa, has not allowed foreign companies to sell there without first investing there. So transnationals have had to invest in employing Chinese people.

While labour remains extremely cheap - there are still 700 million rural Chinese queuing for industrial jobs - that remains profitable for foreign companies. So China's poor people, and its poverty wages, are keeping Western, as well as its own, companies profitable.

However, China is itself starting to overproduce in the sense of having overcapacity. Its home-grown New Left movement advises expanding the home market through income and asset redistribution.

Overproduction is, of course, another word for underconsumption: that is, there is not enough buying power in the economy to enable output to be sold.

So far, the government continues to take the conventional line that export-led growth based on cheap labour is the best path. China's official policy is not to develop a home market, but to continue to dump its cheap products on the rest of the world.

Increasingly, governments, including our own, are being pressed to develop local and national markets rather than pressing on with the export-oriented project - which can never, by definition, be a global win-win situation.

Some countries will always lose when others win.

Overproduction leading to recession is a certainty while every enterprise globally is competing for the same or shrinking markets.

Sooner or later, all countries will have to redistribute incomes from the top to the bottom. That is the only way they can redeem the current situation of overproduction in the midst of poverty.

# Margaret Legum is the chairperson of the SA New Economics Network