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Ch. 12 Wars since 1989. Economic crisis and the fall of the Soviet Union

posted 9 Apr 2012, 06:57 by Admin uk

Whatever has overstepped its due bounds is always in a state of instability.1

Seneca the Younger, Roman philosopher, 1st Century AD

The era of the Cold War and the wars of national liberation came to an end in 1989 when the Berlin Wall collapsed.

The new world situation did not mean the end of war. The entire world en­tered a new epoch, one of spiralling instability – economic, political, social, diplomatic and military. And the number of casualties increased. However, wars in the new situation had characteristics that were different from those of the 1950’s to the 1980’s. In the following chapters we look at the three types of wars that developed in the 1990’s.

1. The first set of wars was caused directly by the collapse of the Soviet Un­ion and the end of the Cold War. Defence spending in Russia fell by 95% up to 1998.2 The American ruling elite was intoxicated by the power that had come their way and by the opportunities this opened up. Having ac­quired military superiority, they attempted to redraw the political map by at­tacking regimes they wished to eliminate – in Iraq, Serbia, and Afghanistan. At the same time, wars broke out in the former Soviet Union – in Moldavia, Georgia, Armenia, Azerbaijan and Chechnya.

2. Global economic problems and the removal of the Soviet ‘threat’ meant tougher competition between the big capitalist powers. This led to France and the US supplying arms to different sides in wars in Africa – in Rwanda, Congo-Kinshasa, Congo-Brazzaville, and Sudan. It also led to war in Eu­rope for the first time since the Second World War – in Yugoslavia.

3. The crisis of the developed countries economies caused the economies of many of the developing countries to go into free fall at the same time as Soviet oriented movements disintegrated at the same pace as the Soviet Union. Africa suffered the most. In the wake of growing poverty, civil wars broke out. These wars began to turn the clock back. In many parts of Af­rica something approaching barbarism began to spread.

The Iraq war begun in 2003 includes elements of all these wars.

To understand these types of wars, it is necessary to understand how and why the new world situation developed. The end of the post-war boom in the mid-seventies prepared the ground. The end of Stalinism in Eastern Europe decisively pushed the world into instability.

Economic crisis

1974/75 saw the deepest downturn in the world economy since the end of the Second World War. Since then, economic development has been increasingly unstable. The recessions that developed in the early 1980s, the early 1990s, and at the beginning of the new century, were all deeper than those that occurred during the post-war upswing. All eighteen major finan­cial crises since the Second World War have occurred after 1974.

Although the economy boomed for periods both in the 1980s and the 1990s, recovery was not as complete as before. Class divisions continued to widen and, in most countries, there were cutbacks or stagnation in many areas: the public sector, terms of employment, job availability, pay, and working environment. Workplace stress increased greatly.

Between 1947 and 1973, productivity (production output per hour worked) in the OECD countries increased at an average annual rate of 3%. Growth in productivity means that there is more for all to share. Between 1974 and 1991, the increase was only 1% a year.

Productivity rose again to an average annual rate of 1.3% between 1992 and 1998, mainly as a result of an intensification of work. The rate then leaped ahead for a few years, which led to hopes that investment in com­puters and IT would end the economic problems that had started in the mid-1970s. But these predictions proved over-optimistic. As early as 1989, Robert Solow, winner of a Nobel Prize for economics, pointed out: “You can see computers everywhere but in the productivity statistics”.3 This is a crucial point.

Industrial production in the West was computerized in the 1970s, and of­fices in the 1980s. During the 1990s, people’s homes filled up with comput­ers. Homes, however, are hardly likely to generate much of an increase in productivity. The Internet, which developed rapidly in the late 1990s, may well have a more lasting effect on productivity. It makes the distribution of goods more efficient and makes it easier for companies to purchase what they want. But this process will take time and it will never be enough to bring about any great change in Western economic development.

If the rise in productivity in the late 1990s was not caused by the more widespread use of computers, what did cause it? The answer is that it was due to a higher rate of computer production. When the breakthrough came for personal computers, production was moved out of garage workshops, and into hyper-modern factories that cost billions to build. This meant that production became far more rational – so efficient that the average productivity rate soared, despite the fact that the rest of the economy was performing poorly. The American economist Robert Gordon spelled it out: “The productivity performance of the manufacturing sector of the United States economy since 1995 has been abysmal rather than admirable. Not only has productivity growth in non-durable manufacturing decelerated in 1995-99 compared to 1972-95, but productivity growth in durable manu­facturing stripped of computers has decelerated even more.” 4

Falling investments

The development of productivity is heavily dependant on investments. Investment in new machinery, better buildings and distribution systems, enable goods to be produced more cheaply and efficiently.

The big difference between economic activity during the upswing after the Second World War and the situation in later years lay in a decline in invest­ments. In the EU zone, the investment rate fell from an average of about 25% of the GDP in the 1950s and 1960s, to about 20% in the 1980s and 1990s. In Japan, it fell from around 35% to 30%, and in the US from 20% to 18%.5

What are the reasons for the low rate of investment since the 1970s com­pared to the previous period? To understand this, it is first necessary to give an outline of how a business cycle works.

The cycle begins with some capitalists investing in new machinery. This allows them to produce the same or better goods cheaper. They do this in order to stay ahead of the competition and earn bigger profits than their rivals. Employers who make machines will have to employ more people. The new people employed will get higher wages than when they were un­employed. Thus demand for consumer goods rises and employers in the consumer goods industries will employ more people as well. This leads to greater demand, and further investment.

A spiral of growth, a boom, has begun.

However, this cannot go on for ever. The first companies to invest in new machinery make a larger profit than those that come after. Everybody has to follow suit, if they are not going to fall hopelessly behind. When every­one is standing there with large, expensive new machines that churn out any number of goods, all find it harder to sell their goods – at a profit. A crisis of over-overproduction develops. According to Marx, the reason for this is that too much money has been invested in new equipment in relation to the size of the workforce. 6 This leads to what he calls the tendency of the profit rate to fall.7

Once profits have fallen to the extent that the least profitable companies no longer have resources to invest, unemployment increases. People buy less and investments dry up.

A downward spiral, a recession, begins.

However, just like when things go up, when they go down they don’t go down for ever. When enough investments have been destroyed to restore the balance between machines and employees, profits will be restored. The machines are seldom destroyed physically. Normally, it is their value that is destroyed. This happens, for instance, when machinery is auctioned off for a fraction of its original price after a bankruptcy. The companies that have not gone bankrupt are strengthened by the disappearance of others. Profits rise and the ground is prepared for another boom.

The key question is this: At what level of investment have profits fallen enough for the economy to turn downwards? Why was it at around 27% of GDP in Europe in the 1950s and 1960s but at 22% in the 1970s and 1980s?

Economic development can be thought of as a combustion engine, where investment is the petrol. The more petrol you inject, the faster the engine goes – but only up to a certain point, after which the engine chokes unless you add more air. It is the growth in world trade that provides the capitalist engine with air.

After the Second World War, the rapid growth in world trade that resulted from the economic dominance of the US led to an unprecedented eco­nomic upswing. As world trade expanded, the benefits of specialization and large-scale production made sure that the value of machines (and wages) could be reduced even during the boom. This kept profits high, even at high levels of investment. Slumps mainly expressed themselves as a fall in the rate of growth, not as contraction of the economy.

Since the early seventies, investment levels have declined for three main reasons.

1. Trade conflicts

Despite all the talk about globalization, trade barriers made it increasingly difficult for world trade to develop. In time, Germany and Japan rose and began to challenge the US in the economic arena. The world was divided up into three big trade blocs, each of them led by a powerful imperialist state. Tension between the blocs was great. In 1999, it caused the collapse of the trade talks organized by the World Trade Organization (WTO) in Seattle. Nor were later trade talks successful.

In North America, the NAFTA (North American Free Trade Agreement) zone, including Canada in the north and Mexico in the south, was formed. It was dominated by the US. The US also viewed the whole of South America as its backyard and tried to negotiate a pan-American trade bloc that would embrace the whole continent.

In Europe, through the European Union, the EU, the European capitalists tried to unite against their competitors. 8

Thirdly, Japan sought to extend its role internationally.

While countries within the various blocs have integrated to some extent since the 1970s, the growth in world trade has slowed considerably despite all the talk of globalization.

Although it got nowhere near the level of the 1950s and 1960s, world trade picked up a bit in the 1990s. This was due to more trade within the trading blocks. However, the effect on the growth of production was less than pre­viously. The existence of trading blocks has increased the incentive to move factories in search for cheaper labor and bigger subsidies. This appears in the statistics as a growth of world trade, but it does not actually increase the amount of production. During the recession in 2002-2003 world trade actually fell. The following graph show this, http://www.wto.org/english/res_e/statis_e/its2006_e/its06_longterm_e.pdf, (Average annual percentage change in volume terms).

Relatively unobserved, a qualitative change occurred in trade disputes during the 1990s. Previously, the combatants engaged mostly in a war of words. Now, they began using more painful methods to out-compete one another. To start with, they used non-tariff barriers (import regulations, technical requirements, legal complexities, etc) as “a strategy for impeding world trade”, to quote the Office of the US Trade Representatives.9 This led to different systems for DVDs and mobile phones in the US and Eu­rope, for instance, and different environmental provisions.

Trade sanctions were also imposed more frequently. As a result of the EU’s insistence on limiting the import of ‘dollar bananas’, in favour primarily of bananas from the former French colonies, the US imposed trade sanc­tions on a whole series of European products. These included Swedish ginger snaps and sewing machines from the Swedish company Husqvarna. Subsequently, trade sanctions were imposed as a result of the EU refusal to import American meat treated with hormones. Disputes between the US and Japan over the sale of spare vehicle-parts, and between the US and Canada over timber, also resulted in trade sanctions. The steel trade was hit. Even the collective agreement governing the Swedish cinema industry was affected by this trade war. The 2004 agreement was delayed as a result of American objections that Swedish public funding created unfair com­petition for Hollywood. Which is absurd, as without public funding there would be no films made at all in Swedish, and Swedish films hardly compete with American films outside of Sweden.

The EU countries were also feuding with one another. Germany with France. The poorer EU countries with the wealthier. And Britain with eve­ryone else. But they agreed on one thing: Keep out the US and Japan! Increas­ingly, this became the glue that bound them together. The EU, accordingly, did not back down on the banana issue, despite the fact that the restrictions clearly infringed the WTO regulations they themselves helped to draw up.

2. Speculation and debt

The instability caused by the decrease in world trade was compounded by the reappearance of massive speculation. Although a normal part of life under capitalism, speculation had played relative insignificant role during the post-war upswing. Then, high profits could be earned by making in­vestments in production. As world trade declined, it became more profit­able to use money for speculation. In 2000, the American Stock Exchange was estimated to be worth 150% of the country’s GDP, which was almost twice as much as in 1929 (the year of the Wall Street Crash). Stock values increasingly lost touch with the actual value of the companies concerned, especially in the IT sector.

Money invested in the stock exchange is not translated into investment in actual production.10 Stock-market money is part of a giant pyramid game. There is also a huge trade in derivates, bonds, art and not least – currencies. Before 1973, the US dollar was the world currency. Most other currencies were pegged to the dollar, and the dollar was tied to gold. This ensured financial stability. In those days, 90% of all international monetary transac­tions were payments for goods and services. Twenty years later, such pay­ments accounted for only 10%. The rest was speculation.11

Debt has the same effect as speculation. In the US, private sector debt was, by 2001, at its highest level since the Second World War – 68 % of GDP.12 In many other industrialized countries, the debt rate was even higher. State debt also reached record levels.

3. Cuts and lower living standards

Spurred by increased competition on the world market, capitalists tried to compensate themselves by attacking workers’ pay and working conditions, and the public sector, even during a boom. As living standards declined, the market for many of the capitalists’ products, and consequently investments, also declined. The capitalists were sawing off the branch they themselves sat on.

Thus, the barriers to capitalist development – national boundaries and private ownership of the major companies – that were partially overcome during the post-war upswing, grew and become more difficult to surmount. A capitalist world economy dominated by the US became a thing of the past (although the USA’s military dominance was larger than ever). State intervention in the economy and the welfare state eroded. The system had greater difficulty in recovering from each crisis.

The fall of Stalinism

The other crucial reason for the rising instability in the world was the fall of the Soviet Union and the dissolution of the Eastern bloc. The collapse was preceded by growing economic problems, but the problems were of a very different kind from those that imperialism has to grapple with.

In the Soviet Union, capitalism and the rule of the landlords were abol­ished, but power was not in the hands of the workers. There was a pecu­liar combination of economic planning and ruthless dictatorship. Despite the dictatorship, considerable progress was made in a number of fields. In 1917, Russia had been a backward, semi-feudal country with a largely illiterate population. The Soviet Union, however, grew into a modern de­veloped economy with a quarter of the world’s scientists, with health and educational systems that could compete with anything the West could offer, and with the capacity to put the first satellite in orbit and the first man in space. By the late 1970s, the Soviet Union was a powerful industrial nation that in terms of output had overtaken the rest of the world in a number of key sectors, such as oil, steel and cement. All this was achieved without unemployment or inflation. Prior to perestroika (Gorbachov’s reform pro­gramme), which was launched in the late 1980s, the price of dairy products and meat had not risen since 1962. The price of bread, sugar and most food products had not gone up since 1955. And rents were extremely low.13

After 1965, growth begun to slow. At the end of the Brezhnev era (Brezh­nev died in 1982), the Soviet economy was completely stagnant. In 1936, Leon Trotsky wrote: “It is possible to build gigantic factories according to a ready-made Western pattern by bureaucratic command—although, to be sure, at triple the normal cost. But the farther you go, the more the economy runs into the problem of quality, which slips out of the hands of a bureaucracy like a shadow. The Soviet products are as though branded with the grey label of indifference. Under a nationalized economy, quality demands a democracy of producers and consumers, freedom of criticism and initiative —conditions incompatible with a totalitarian regime of fear, lies and flattery.”14

During the Stalinist era, the bureaucrats had only been required to take simple decisions, like “more steel industry” or “more agriculture”. But when the volume of goods approached the million mark, this small elite of bureaucrats could no longer manage the economy. As there were no broad-based democratic controls to guide them in their work and no profit-hungry market to provide brutal, short-term solutions, the problems piled up. Moreover, the whole system was thoroughly corrupt, which is inevitable in a totalitarian state. Stagnation was unavoidable.

As the economy stagnated, dissatisfaction with the system grew. Many people could accept oppression as long as there was a steady improvement in their living standards, but once this was not forthcoming, oppression became intolerable. In many Eastern European states, the general discon­tent erupted in mass demonstrations. Among the slogans heard from the crowds on the streets of Berlin in 1989 was: “It’s we who are the people!”

The bureaucrats in power were not happy with the situation either. In part this was because they were feeling the pressure from below, but an economy that did not grow at all also meant bad times for many in the bureaucracy. They began to look for a way out of the crisis. This was during the late 1980s, a period when the fragile boom that had been gathering momentum during the decade reached its peak. Western media proclaimed that all crises were over, and that the economy had entered a new period of long-term growth. Imperialism had already enmeshed many of the Eastern European countries by giving them large loans. When the economic crisis became deeper in Eastern Europe they pushed harder. The resistance of the bu­reaucracy crumbled. Many also hoped that if they became capitalists they would do well for themselves.

The Berlin Wall opens, a new world order is proclaimed

On the night of 9 November 1989, the gates in the Berlin Wall were opened. When the astonished Berliners finally realised that the passage between East and West was truly permitted, wild scenes of rejoicing broke out. Young people climbed up on to the hated monument that had divided the city since 1961 and began hacking off pieces of concrete with hammers and chisels. Others played music and danced on top of the Wall. People threw themselves into one another’s arms, laughing and crying, at the place, where in previous years, fleeing East Germans had been caught by the bul­lets of the border guards. Many people have testified to the sense of release and joy they felt during the spontaneous festivities that would grip Berlin for days.

Those who celebrated in Berlin were witness to a turning point in history. It was not just a wall that fell in 1989 – the entire Eastern bloc of Communist countries, which had been ruled by dictators since the Second World War, had begun to disintegrate. Two years later, the Soviet Union was no more.

“We won!” trumpeted an editorial in the Wall Street Journal, arguing that the capitalist system had finally defeated all form of socialist experiment. The Cold War era and the balance of terror were a thing of the past. American political economist Francis Fukuyama went so far as to assert that it was not just the end of the Cold War but “the end of history as such: that is, the end point of mankind’s ideological evolution and the universalisation of Western liberal democracy as the final form of human government.15

George Bush the elder, who was US president at the time, promised a fu­ture of peace and growing prosperity throughout the world. He called it the New World Order. A new world order did develop. But it was nothing like what Bush had promised.

Wider gap

By the end of the 1990’s the 200 richest people in the world owned as much as the two billion poorest.16 Statistics from the UN’s Human Development Report 2002 claim that this was not due to a redistribution from the poor to the rich, but because things got better for everybody, just more so for the rich. The report says that the proportion of the global population living in extreme poverty declined from 29% in 1990 to 23% in 1999. However, the improvement recorded during the decade was almost entirely due to growth in a handful of East Asian countries. By far the largest among them was China, whose economy was to a great extent state-controlled. In China alone, the number of people living under the poverty line declined by 147 million between 1990 and 1998.17 (Over the same period, however, the gap between rich and poor in China widened.) Other countries with growth economies included Mongolia and Vietnam that also had mainly state-con­trolled economies.

In the African countries south of the Sahara, the number below the poverty line increased in the 1990s from 242 million to 300 million. In Latin America, too, the number of extremely poor people increased in the 1990s, as it did in Central Asia, Eastern Europe and the former Soviet Union. The UN’s Human Development Report for 2003 warned that the socio-economic situation worsened in 21 countries during the decade. UN studies showed that in the 1980s only four countries had experienced such lengthy declines.

Furthermore, at the end of the 1990s, the World Bank moved the inter­national poverty line by a few hundredths. In the case of the Middle East and North Africa, this change in how statistics were compiled halved the number of people living in extreme poverty from 4 to 2%. In Latin Amer­ica, the number was reduced from 24 to 15%.18

Rearmament costs and new wars

1989 was followed by several years of military disarmament around the world. Costs fell globally by about a third, up to 1998.19 This was mainly due to the collapse of Russia’s planned economy. But by 1996, the US had already begun to increase its defence spending, and after 1998 the overall global curve turned upwards. Since then, rearmament costs have risen every year. The US, which even before 11 September 2001 accounted for 36% of the world’s defence spending, increased its lead further. In 2003, it ac­counted for 43% of all arms purchasing around the world.20

During the decade, the total number of people killed in wars between states fell by two thirds, to 220 000, compared with the 1980s. (In the 1980s, it was the war between Iraq and Iran that claimed most lives.) But the number of deaths in civil wars increased to 3.6 million. Half of all civilians killed in war were children.21

The wars listed below involve major conflicts that began in the 1990s. Wars that ended before 1994 are not included, and nor are deaths indirectly caused by war, through starvation, disease and the like. Even if the figures may not be totally accurate, they give an idea of the situation.

Azerbaijan (22 000 dead), Kashmir (26 000 dead), Sierra Leone (43 000 dead), Chechnya (47 000 dead), Eritrea (50 000 dead), Tajikistan (51 000 dead), Sudan (54 000 dead), Algeria (87 000 dead), Bosnia-Herzegovina (90 000 dead), Afghanistan (90 000 dead), Congo-Kinshasa (109 000 dead), Liberia (150 000 dead), Burundi (212 000 dead), Somalia (359 000 dead), Rwanda (815 000 dead). 22

The New World Order brought a downward spiral of disintegration, chaos and violence, each war serving as a catalyst to further decline.


1 http://www.etni.org.il/farside/funquotes.htm

2 Swedish Peace and Arbitration Association (18 December 2003).


3 www.guardian.co.uk/online/insideit/story/0,13270,946779,00.html

4 The Economist, 22 July 1999

5 Swedish economic report: LO-ekonomerna: Ekonomiska utsikter, 1997

6 Marx uses the more precise expressions ‘constant capital’ for machines, factories and raw

materials, ‘variable capital’ for the employees, and ‘organic composition of capital’ for the relationship between the two.

7 The profit rate is the relationship between, on the one hand, expenditure on labour, raw

materials and machinery, and, on the other, profit. Adam Smith, John Stuart Mill and John Maynard Keynes also noted the tendency for the rate of profit to fall.

8 http://www.wto.org/english/res_e/statis_e/its2006_e/its06_longterm_e.pdf,

(Average annual percentage change in volume terms)

9 Statement issued on 2 April, 2002

10 Doug Henwood: Wall St.,1998

11 Bror Perjus: Casino Jorden, 1998

12 Michael Roberts: Deflation and Depression, 2002

13 Ted Grant: Russia – from Revolution to Counter-Revolution, 1997

14 Leon Trotsky: The Revolution Betrayed, 1936

15 Frances Fukuyama: End of History?, 1989

16 UN Human Development Report, 1999

17 Mats Wingborg and Markus Larsson: Har världen blivit bättre? 2003 (www.forumsyd.se)

The figures are taken from the World Bank.

18 Sven Lindquist, Dagens Nyheter, 5 november, 2003

19 The data is taken from the 1999 Yearbook of the Stockholm International

Peace Research Institute (SIPRI).

20 Dagens Nyheter, 18 June 2003, quoting the 2003 SIPRI Yearbook.

21 These figures have been taken from the UN’s Human Development Balance Sheet 2002 and

seem low when compared with other reports. The proportion of civilian war victims increased dramatically during the century as a whole. At the beginning of the 20th cen­tury, 10% of the war dead were civilians, while at the beginning of the 1990 as many as 90 per cent of those killed in war were non-combatants.