THE current episode of the US financial crunch is expected to drag the entire global economy into recession.

The International Monetary Fund (IMF) says the US economy may shrink 0.7 percent by the end of the fourth quarter of 2008, while growth in other centers of capitalism such as Europe, Japan and Canada would substantially slow down to 0.9, 1.4 and 1.3 percent, respectively.

On the whole, the IMF now sees a 25-percent chance of global economic growth slowing to 3 percent or less in 2008 and 2009, which according to the multilateral agency is equivalent to a global recession.

Broadly speaking, recession refers to the fall in economic activity. It is a phase often technically measured as two or more consecutive quarters when the growth rate of the gross domestic product (GDP)?the total production of goods and services of an economy?is negative.

Recession is the contraction phase or the ?downtime? in the business cycle. Thus, it is often reflected not only in declines in industrial production and sales but also in employment and real income (or the income relative to the increase in the prices of basic commodities).

Boom-bust cycle

Recession is a phenomenon of capitalism?an economic system that is known for its boom-bust cycle and inherent problems of glut and retrenchment.

Capitalism is the dominant economic system in industrialized countries, often characterized by high levels of technology, production and productivity, and dominated by capital, machines and commodities. Mass of workers come together to produce a commodity for exchange and create a value over and above the value of capital that the businessman puts in and the wages that the workers themselves receive.

Capitalist production therefore creates a profit, which however is pocketed by the capitalist, who either spends it on luxury items or reinvests it in production.

The reinvestment advances technology further and makes production cheaper and more efficient, but shortens the turnover cycle, increases inventory, reduces the workforce and consequently the purchasing capacity of consumers, and eventually decreases the profitability of the capitalist.

Depression

Extend this bust period for two consecutive quarters and spread it across industries and the entire economy, it is what is considered recession. Prolong recession, it is what is considered depression.

Recession may be accompanied by deflation (falling prices), which may be closely associated with the labor reduction that has just happened thus resulting in falling demand, or by inflation (increasing prices), which may be due to reluctant reinvestment and sales or simply hoarding thus falling supply.

Inflation may go with economic stagnation (stagflation), which is simply, on an economy-wide scale, the inability of capitalists to invest in new productive capacity.

Limits of capitalism

Capitalism has its limits. In order to solve the crisis of overproduction, which decreases profitability (take note, the crisis is not about falling profits but falling rates of profits), the businessman has to think of a solution to continue making money out of its finance capital that is lying around and get out of the bust period.

One classic way is to invest more in production, which has been proven to only aggravate the surplus and reduce the purchasing capacity of the workers who are the foremost consumers. This classic solution has already reached its limits and only asserted themselves. The businessman has to think of more creative ways therefore to ?correct? capitalism.

One solution is to lend money?to consumers, households, industries, and governments?in order to artificially inflate demand, bloat investment and facilitate trade and investment flows.

Another solution is to open up new markets by exporting goods, capital and the entire production stages, and take advantage of cheaper wages and raw materials in the host countries.

The other solution is to invest the profits from production (the finance capital) in financial activities, which promise big returns out of earning interests from lending and mere speculation.

Globalization

All these cross-border solutions have been facilitated by globalization?a policy that has caused governments (especially the weaker ones) to open up their economies, privatize key economic sectors including public utilities and social services, and deregulate key industries, presumably to ?level the playing field? for the incoming foreign capital, products and corporations, and to propel them to development.

But then again, as underscored by the recent explosion of the global capitalist crisis, globalization has only routed the local businessmen and farmers, depressed purchasing power, further contracted the global market, and worsened the glut in finance capital.

Pre-industrial level

The Philippines, among the weaker economies, has been at the receiving end of globalization policies. By bearing the capitalist crisis, does recession happen in the Philippine economy?

Technically, the Philippine economy is going through a crisis that is characterized not by overproduction but by low technology, low productivity and shrinking production of its productive base?agriculture and manufacturing. It is not qualified therefore for a boom-bust cycle, as there is no boom in the Philippine economy?rather its crisis is permanent.

The Philippine economy is not dominated by capital and machines and the production of commodities. In fact, its production remains at pre-industrial level?agriculture remains more than 90 percent unmechanized while industry remains more than 90 percent on handicraft level.

The entire economy is propped up by services (as a malfunction of diminishing productive base) rather than the production of commodities.

Subsistence

Workers are not mobilized en masse for production. In fact, 75 percent of the Philippine economy is composed of peasants who produce on small-scale and subsistence level. The Philippine economy creates a surplus value (in the form of rent rather than profit) that has low rates of return, thus it barely qualifies for a ?crisis of overproduction? of some sort.

Given its colonial history, the Philippine economy is also dominated by foreign capital and products, which are not circulated or re-created in the domestic economy in order to contribute to long-term capital formation. Rather, foreign corporations repatriate their profits or capture and dominate the domestic market without transferring technology and creating domestic savings.

Poverty

The Philippine crisis has created permanent unemployment and abject poverty?a surplus and steady supply of labor and needy people?a condition, as in supply-demand equations, which has cheapened labor and increased living costs.

The Philippine economy therefore is not qualified technically for a recession, but it is one of the more vulnerable underdeveloped countries that global capitalism would bring down with it in a recession, with graver repercussions than the already felt effects of the global crisis on the economies of industrialized countries.

Links to US economy

The Philippine economy will be affected by the global recession through its three aspects: It is significantly linked to the US economy and other foreign economies; it has basic weaknesses and vulnerabilities; and it is a ?client? of globalization.

The US economy will definitely slow down, which will reduce Philippine exports to the United States and cut down US investments in the country. The US slowdown will put strong downward pressure on all the economies it relates with, including Europe, Japan, China and other East Asian countries.

The Philippines has varying degrees of economic dependence on these other countries?90 percent of its total foreign trade and investment is with these countries?so there will be a cascading effect through various countries.

Remittance

The other direct link is through the employment of overseas Filipino workers (OFWs) and remittances. It is unlikely that the number of OFWs in the United States will go down?they may be the first to be sacked as the US economy shrinks but they will also be the first to be rehired in cheaper and lower quality jobs as the US economy continues to reel from the crisis.

It is also unlikely that the number of OFW deployment in other countries, especially those dependent on US trade and investments will go down, as migrant labor has always been a vent of the global economic crisis. What is likely, however, is that OFW remittances will slow down due to falling and negative incomes and social services, and mounting debts in the host countries, particularly the United States.

Export processing zones

All these will result in job losses and wage pressures domestically, especially in export processing zones, manufacturing and financial sectors and call centers?the main destinations of American capital. Foreign capital will pour in, on a race-to-the-bottom approach however, in agriculture-based and extractive industries such as the sectors of energy, gas, water and mining.

Banks will be prudent in lending, especially to the already marginalized sectors of agriculture and small businesses. This will translate to a business slowdown, especially for small local capitalists. Slower remittances will aggravate the credit squeeze and the resulting overall business slowdown, as consumer spending will be tepid.

Apart from these direct links, the Philippine economy has basic vulnerabilities. One vulnerability of the Philippine government is its fiscal crisis. The fiscal balance is an indicator watched by foreign investors and creditors, and the unresolved fiscal crisis means that the Arroyo administration is still pressured into making it appear that its fiscal house is in order?e.g., higher taxes, tighter spending, sustained debt payments to maintain credit worthiness and support credit ratings.

Foreign debt

Another weakness is the administration?s overdependence on foreign debt. The credit crunch that will emanate from the United States with higher risk premiums and interest rates will mean higher borrowing costs and much larger debt service for the Philippine government and local firms.

The colonial financial and trading system, which serves as a conduit for foreign capital and remains dominated by foreign banks, insurers and fund managers, is a basic weakness. At the minimum, this colonial system, coupled with financial deregulation, makes the country too vulnerable.

All these, however, do not worry the Arroyo administration as annual OFW remittance of $16 billion to $20 billion is a significant foreign exchange buffer to external financial shocks, far greater than the proceeds from net exports, investments, debt and official development assistance.

This makes the Philippines relatively better off than other Southeast Asian countries which do not have such a steady source of foreign exchange. What also makes the Arroyo administration more confident is that the risk of sudden adverse trends in remittances is unlikely because millions of Filipinos are spread across so many countries, which will suffer a crisis but a number of which may deal with migrants more ?favorably.?

Lower pay

But migrants will stand to face even lower pay, less benefits and worse working conditions as employers pass the burden of economic adjustment to them.

Finally, the long-standing backwardness of the domestic economy is the most basic backdrop of the global turmoil. The Philippine economy has been distorted which is why recent growth has been so disconnected from jobs and income creation. No amount of hype on OFW remittances on the part of the administration can cover up the fact that the Philippine economy is in permanent crisis.

As in the past stages of the general crisis of global capitalism, industrialized countries have concocted ways in order to pass on the burden to underdeveloped countries such as the Philippines, the latest concoction being globalization. Yet, globalization has long been debunked as an effective policy in addressing the global crisis and has been exposed as an offensive on weaker economies and peoples, pushing them into greater difficulties.

Globalization offensive will be heightened in the face of the latest crisis episode. Foreign corporations will be more ferocious in continuing the plunder of weaker economies through investments and debt. This ferocity will take advantage of cheap labor in host countries by creating permanent unemployment and employing schemes such as contractualization, flexibilization, downsizing, rotation and the like.

Extractive industries are currently the No. 1 investment destination all over the globe, and such search for cheap raw materials will intensify with the global financial crisis.

Speculation

Speculation, especially on energy and food commodities, will also intensify to artificially inflate demand, and this will translate to unwarranted price increases. The collapse of a large segment of the parasitic financial instruments implies that there is going to be a shift from mortgage to speculation, another parasitic activity.

TNCs will also pick up the drive for the privatization of social services and public utilities worldwide as new avenues of capital and profits. Domestic fiscal crises will be made as the excuse.

Weak governments such as that in the Philippines will be made to increase regressive taxes and the value-added tax in order to ensure fiscal and financial health for further trade and investment liberalization.

Finally, migrant labor will be promoted more aggressively and efficiently.

This will be recession Philippine-style, which will be reminiscent of, yet more acute than, the crisis periods of the 1980s and 1990s. After all, as many fear and predict, the global economic crisis that has perpetuated and precipitated our very own crisis, is going to be the worst since the Great Depression.

(Rosario Bella Guzman is the executive editor of the research group Ibon Foundation.)