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he World Economy

At the root of the crisis of the capitalist system is the crisis of the world capitalist economy. On a world scale, capitalism can no longer take humanity forward. It cannot provide even the most basic means of subsistence to the vast majority of humanity. 2.8 billion human beings are condemned to live in squalor on less than $2 a day. The capitalist system has long outlived its progressive historic role, and in its epoch of decay threatens to sink the whole of humanity with it. But the decline of the capitalist system does not proceed in a straight line. Within this general downward curve, the boom-slump cycle continues to operate, albeit unevenly. Some countries’ economies recover momentarily, while others contract. But boom or slump, recovery or recession, capitalism remains a system of exploitation and oppression.

The relationship between the economic cycle and the mood of the working class is not direct and mechanical, but complex and dialectical. As Leon Trotsky explained, "So long as capitalism exists, cyclical oscillations are inevitable. These will accompany capitalism in its death agony, just as they accompanied it in its youth and maturity." However, the particular conditions under which the boom or slump takes place must be accounted for, including the recent history of the class struggle. A cyclical economic recovery by no means implies a dampening of the class struggle, just as an economic crisis does not lead directly to a revolutionary upsurge. The concrete situation in each country must be taken into consideration.

Despite this or that temporary stabilization in this or that country, the overall equilibrium of the world capitalist economy remains critically unbalanced, giving rise to all manner of contradictions. Seemingly insignificant changes or incidents can have effects far greater than they would under "normal" circumstances. Non-economic factors such as natural disasters can also play a role in influencing world politics and economics. Cause becomes effect and effect becomes cause. Blows that could normally be absorbed by a healthy economy can push it over the edge. The "straw that broke the camel’s back" can seemingly appear from nowhere, like a lightning bolt from a clear blue sky. However, there can be no "final crisis" of capitalism – it will continue to exist on the backs of the suffering billions until it is overthrown by the world working class.

According to the World Trade Organization, world trade recovered in 2004, growing an estimated 8.5 percent, an improvement over 2003. This was largely due to growth in trade and output in China, Latin America, and Africa. According to the Economist Intelligence Unit (EIU), the world economy grew at around 3.9 percent in 2004, the fastest in 20 years. This was led largely by the U.S. economic expansion of 4.4 percent, the largest gain in growth since 1999. Some countries such as China and India expanded rapidly in 2004 with growth rates of 7 percent or more. But growth was very uneven, and there are already signs that while the overall expansion may continue in 2005, the pace of growth will slow.

Aging populations in the advanced industrialized countries are eroding tax revenues and adversely affecting consumer spending. High oil prices and a tremendous public debt load all weigh heavily on the world economy. Oil prices have nearly tripled from about $20 a barrel at the start of 2002, and currently hover between $50 and $55 a barrel. Prices will remain in that range if not higher for the foreseeable future. Geopolitical instability in the oil-producing regions, in particular the Middle East, Venezuela, Nigeria, and to some extent Russia, all point to continued volatility in oil prices. The days of cheap oil are over.

The number two and number three engines of the world economy, Japan and Europe, are in the doldrums. Although Japan’s official growth rate of 2.6 percent in 2004 was the best showing since 1996, its GDP actually contracted during the last 3 quarters of 2004, pushing it into its 4th recession in 10 years. Deflationary pressures on the Japanese economy continued for the 4th straight year. Core consumer prices in Japan fell 0.3 percent in January from a year ago as price-cutting competition in the telecom and electronics sectors continued. The Economist Intelligence Unit expects GDP in Japan to grow just 0.8 percent or less in 2005.

Europe has fared little better. Germany narrowly escaped its third recession in four years when GDP contracted by a surprise 0.2 percent in the last quarter of 2004 after stagnating in the third quarter. Unemployment in France has reached 10 percent. Now more than ever, the fate of the world economy rests on the United States. U.S. economic growth is expected to slow to 3.3 percent in 2005 - growth based largely on continued consumer demand – much of it bought on credit to be paid back with interest.

Europe and the U.S.

It is against this general background that the latest diplomatic maneuvers of the Bush administration must be considered. On the international plane, the U.S. ruling class is confronted with a rabbit warren of complications and contradictions. Faced with a longer-than expected and increasingly costly occupation of Iraq, Bush has shifted to the diplomatic front in order to impose U.S. imperialism’s will. In other words, Bush and co. are attempting to bully other countries into following its directives, offering bribes when possible, and threatening military action or economic and diplomatic sanctions when that fails.

Bush tore up all the old norms of diplomacy when he alienated the U.S.’ traditional allies and unilaterally invaded Iraq. The Europeans opposed the war not because they had moral objections, but because they wanted a share of the loot. The Americans made it clear that they were running the show, so the Europeans stayed out (overwhelming public opposition to the war in Europe was also a factor). But now the U.S. is desperate to legitimize the occupation and needs a hand in training Iraqis to take over the more distasteful aspects of the occupation. And in a major policy shift in relation to Iran, they need Europe to play the role of "good cop" to their "bad cop".

For their part, the Europeans need help with their struggling economy. Condoleeza Rice and GW’s recent visits to Europe were an attempt to smooth things over in order to get back to the business of jointly exploiting the world working class. The occupation of Iraq is as brutal as ever, yet somehow the European capitalists are now willing to provide some assistance, however limited - for a share of the spoils. It’s clear that both sides made a number of concessions - as always, money talks. But this is not the end of the story.

Relations with Europe over Iraq may be superficially patched up for public consumption, but deep divisions remain between these rival groups of exploiters. These will continue to grow in the coming period, especially as regards trade, security, and the future of the NATO military alliance. The U.S. would prefer to dominate European affairs through a stronger role for NATO, which it dominates, whereas the Europeans, led by Germany and France want to deal with the U.S. on their own terms and in their own interests through the European Union.

Europe’s plans to lift a 15-year embargo and sell high-end arms technology to China threatens to undo all of Bush’s diplomatic maneuvering, potentially sparking an all-out trade war. China has been beefing up its military capabilities in recent years, and the Pentagon is concerned about the delicate balance of power between China and Taiwan, fearing the European technology could tip the balance. Several U.S. Senators have come out in aggressive opposition to such a deal. Daniel Goure, a Pentagon consultant and a Vice President of the Lexington Institute military think tank summed it bluntly: "Europe can do defense trade with China or it can do defense trade with the U.S. It can’t do both." This comment is an indication of the serious contradictions lingering just below the surface.

The Pacific: the Next Battleground

Asia in general is also extremely unstable. The tsunami disaster brought to the surface the many social pressures that have building up in the region for decades. The appalling poverty of millions across Asia is preparing tumultuous events in the coming period. Pakistan, which borders Afghanistan and Iran, is a mess of contradictions that will come to a head in the not-too-distant future. It is a powder keg waiting to explode with big consequences for the entire region. Across the border in India, the fall of the BJP has solved nothing for the masses despite the improving economy.

Adding further complexity to the international economic situation, China’s 1.3 billion people, 3.7 million square miles of territory and a $1.4 trillion economy are a rising force in the region. It has emerged as an economic powerhouse, growing at 9 percent per year and sucking in oil, steel, and concrete, as well as manufacturing increasingly sophisticated electronics and consumer goods. This has significantly changed China’s economic and diplomatic weight on the world stage. Particularly in Asia, where it is encroaching on Japan’s traditional spheres of influence, but also in Latin America, where it is actively working to elbow out U.S. interests.

As reported in the Washington Post: "In the first 11 months of 2004, China invested $889 million in Latin America, according to the Commerce Ministry, as part of the government’s ‘go out’ strategy to guarantee raw material imports. On return from a recent trip to Beijing, President Hugo Chavez of Venezuela said that in coming years, Chinese firms would invest nearly $350 million to extract oil from eastern Venezuelan fields and another $60 million in natural gas wells." There are also plans for $20 billion in business with Argentina.

Seen as outsiders at regional meetings just a few years ago, the Chinese are now looked to for guidance by other Asian countries. Abdul Razak Baginda of the Malaysian Strategic Research Center assessed the situation as follows: "There is now this feeling that we have to consult the Chinese. We have to accept some degree of Chinese leadership, particularly in light of the lack of leadership elsewhere." According to the Washington Post, China has also taken the lead in organizing an East Asian summit conference for November. A senior Chinese diplomat said it had not been decided whether the United States will be invited to attend and, if so, in what capacity. That the question of U.S. participation is even being discussed underlines the shift in Asia’s diplomatic landscape.

The Washington Post also highlights the country’s rising economic clout: "At China’s initiative, for instance, ASEAN countries and China in December agreed to create a free-trade zone by 2010, which would further integrate neighboring countries into China’s orbit. Trade between China and the 10 ASEAN countries has increased about 20 percent a year since 1990, and the pace has picked up in the last several years. Bilateral trade hit $78.2 billion in 2003, up 42.8 percent from the previous year. Chinese and ASEAN officials said the figure was about $100 billion and rising by the end of 2004."

China has also emerged as an important stabilizing element in the U.S.’s potentially explosive confrontation with North Korea. The U.S. is far less bellicose in its dealings with this country than it was with Iraq precisely because they have the potential and possibly already have weapons of mass destruction within striking distance of Japan and beyond. With the Chinese currency pegged to the dollar and billions in U.S. assets in Chinese hands, what was once treated as a colonial backwater is now a major player. In response, the Japanese, whose economy is still far larger than the Chinese, have tightened strategic cooperation with the U.S., and in December, issued a 10-year defense program that identified China as a potential threat. It is clear that one of Washington’s long-term goals in pursuing the Iraq war was to control China through domination of the world’s major oil supplies. But China’s economic, political, and military expansion doesn’t come without tremendous social cost. The bureaucracy’s moves towards gradual capitalist restoration could explode in their face if the millions of unemployed workers and peasants who were promised jobs for life have anything to say about it.

Russia

In Russia, the Bonapartist Vladimir Putin continues to tighten his grip on the state and economy, and is increasingly throwing his weight around on the international arena. The recent arms deals with Syria and Venezuela, and plans to sell uranium to Iran have again put him at odds with the U.S. And yet Bush endorsed Putin as a committed democrat on a recent visit, only to cautiously reverse his prognosis on a subsequent trip. Bush cannot afford to further alienate his "friend" Russia, already threatened by NATO’s encroachment of its borders and still smarting from the blow to its national and military prestige after the collapse of the Soviet Union. The U.S. has also encircled Russia with military bases in several former Soviet Republics, and orchestrated a pro-U.S. political overturn in one of Russia’s most important neighbors, the Ukraine. Yet Bush relies on Putin’s support in the global "war on terror" and cannot afford to let the vast Russian territory again fall completely out of the general U.S sphere of influence.

World Socialism: the Only Solution

It is clear that the equilibrium of the world is extremely unbalanced. Every inch of our planet is affected by the convulsions of an economic and social system in terminal decline. We have often explained that sharp, sudden changes can come at any time, radically and rapidly changing the consciousness of billions of people. War, revolution, counter-revolution, and the brute forces of nature have shaken the world from top to bottom over the past year, and the coming year will be no different. The bitter experience of life under capitalism is forcing millions to seek an alternative to the constant chaos and instability of the profit system. That alternative is workers’ democracy and world socialism. Join us in this struggle!