Wednesday, 8 November 2017

O Portugal: a esquerda no governo

Por Tom O’leary

A polemica recente sobre a politica económica no Portugal é muito importante porque tem importância para todos os grupos anti austeridades da esquerda. Os grupos da esquerda têm alcançado algo único no período atual, em que o governo do Portugal é o único que opera para terminar a austeridade. Nos termos mais generais, isto é o objetivo para o governo possível de Corbyn na Inglaterra, também deveria ser o objetivo para a esquerda completa da Europa, então precisa de observar o governo do Portugal. 

O periodista que e famoso na Inglaterra que se chama Owen Jones começou a polemica com uma afirmação verdadeira que a experiência portuguesa demostra que a austeridade nunca era necessária. As políticas que sustentam o crescimento económico são mais preferidas e também causam uma redução do déficit publico entre outras vantagens. Uma variedade de pessoas criticou Jones incluindo Jolyon Maugham, um comentarista de Twitter que publicou muitos tuítes que apoiam completamente as ações da União Europeia com respeito ao Portugal.

 O tuíte é um modelo de brevidade, contem ao menos três errores em menos de 140 caracteres e, mais importante, os credores do Portugal foram resgatados pela UE, não o país. O governo do Portugal ainda tem as dívidas dessa época que pioraram devida ao programa da austeridade que as acompanharam. Se pode culpar a comissão da União Europeia, o Fundo Monetário Internacional, o Banco Central Europeu, os políticos portugueses (alguns do Partido Socialista que agora estão na coalizão da esquerda), as agências de notação de riscos de crédito, os bancos domésticos e internacionais, e claro, os credores. Como o partido politico da Inglaterra, os ‘Liberal Democrats’, Maugham não só defende a adesão à UE, senão também a austeridade que a UE perpetua.

A recuperação do Portugal não vem por causa da imposição do programa da austeridade, mas apesar das políticas da austeridade. Mas os questiones mais importantes para a esquerda agora são como a recuperação económica pode ser alcançada e pode ser mantida.

O desempenho económico

O FMI prevê um crescimento do PIB real de 2,1% no ano de 2017, o que pode ser a taxa mais forte desde a começa da crise em 2008. Mas a taxa de crescimento foi de 2,8% na primeira metade de 2017 comparada ao mesmo período em 2016, o que ultrapassa a UE ou a média da zona euro. Não há dúvida que o crescimento económico tem acelerado desde a coalizão entre os democratas socais e os partidos extremas da esquerda em 2015 e isto continua.

O crescimento do PIB do Portugal, ano por ano
Fonte: Eurostat

A primeira conclusão deveria ser que a terminação da austeridade não cause desastres. De fato, tem causado um crescimento acelerando e uma redução nos deficits públicos do setor publico. A segunda conclusão é que o governo da esquerda pode terminar austeridade apesar da UE e ainda a zona europa ao menos nas limitas certas.

O crescimento é limitado pela acumulação do capital, que é o crescimento nos meios de produção. Desde a coalizão da esquerda, o nível do investimento (a Formação Brutal de Capital Fixo) subiu 7,7% (dados pelo segundo quarto de 2017 já não é disponível). Durante o mesmo período, PIB real subiu ao menos da metade dessa taxa. Por isso o investimento causou o crescimento económico.

O governo contribuiu ao aumento no investimento, mas a contribuição mais grande proveram do setor privado. Os lucros previstos são o fator principal dos investimentos privados então é provável que as medidas do governo português para aumentar o consumo e o seu incremento modesto dos investimentos causaram o acréscimo dos níveis previstos do lucro. Em breve, as medidas de incentivo têm estimuladas a economia portuguesa.

É mais preferido e mais efetivo que a austeridade, mas não é sustentável para o futuro. O aumento ao consumo não se sustenta por um crescimento dos salários e das rendas. Eurostat reporta que a proporção das poupanças caseiras tem mergulhada. Essas cifras se-pode ver na tabela seguinte.

A proporção das poupanças caseiras, %:
Fonte: Eurostat

Essa redução nas poupanças caseiras e os níveis do consumo atual (causado pelo investimento do setor privado) não são sustentáveis. Os salários reais estão em queda e em certo ponto, sem o crescimento real nos salários e nas rendas, as casas vão limitar seus gastos.

Para sustentar a recuperação económica e aumentar os salários reais, o crescimento do investimento deveria aumentar por maneira sustentável. É improvável que o setor privado vai fornecer o investimento se os gastos dos consumadores fraquejem. Então, o governo tem de procurar maneiras no que pode aumentar o investimento do setor publico.

Sem mais conhecimento da economia portuguesa não é possível para produzir um plano para o investimento do setor publico. Não obstante, há uma variedade das fontes potenciais para fundos que incluem:
  • O numero de corporações que são públicos que podem aumentar seu investimento (usando as reservas ou os empréstimos novos
  • Os pedidos para a comissão europeia para acelerar/aumentar seu programa dos gastos do capital
  • A nova infraestrutura e outros projetos que o Banco Europeu de Investimento custeia
  • Os novos impostos para os super-ricos e as companhias grandes para pagar os investimentos
  • A remoção dos subsídios para os negócios para criar fundos para o investimento public
  • Quando é possível, empréstimos adicionais pelo governo
A escala do investimento que é necessário é muita grande. Em 2000 a Formação Bruta de Capital Fixo como uma proporção do PIB subiu 28%, mas agora representa quase metade dessa. Entretanto todos os passos nesta direção asseguram que a recuperação tem uma base mais sustentável.

O governo português da esquerda demostrou que existe um alternativo à austeridade, mas os incentivos não funcionam de longo prazo. Para sustentar a recuperação e mostrar que o alternativo à austeridade é o investimento, necessita-se os medias mais fortes.

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Este artigo é uma modificação do artigo que originalmente apareceu em inglês.

Thursday, 26 October 2017

The importance of trade for jobs

By Tom O’Leary

The Brexit negotiations are entering a decisive phase, with leading UK business organisations saying they will not invest and must consider whether they relocate if there is no agreement on a transition phase and there is clear progress on trade talks. For its part the Tory Cabinet is deferring any discussion on its key aims for EU trade talks, despite the pretence it is clamouring for them to begin. Any decision on the desired new relationship with the EU would probably lead to Cabinet splits, so discussion is being avoided.

The potential damage to the economy and living standards can be gauged in terms of jobs. Chart 1 below shows the number of UK jobs that are directly dependent on exports. In OECD jargon, these are the totals of ‘domestic employment in the UK embodied on overseas final demand’.

Chart 1. UK Employment Dependent on Exports, by region


 
There are 6.6 million UK jobs directly dependent on exports. The total could be far larger including jobs indirectly dependent on exports. OECD member countries account for 4.8 million of the jobs total, non-OECD for the remaining 1.7 million (numbers do not sum due to rounding). This is 2011 data, the most recent available and has probably grown since (for reasons discussed below).

Separately, the EU directly accounts for 2.8 million of the total. As elsewhere, this is only the direct total not including indirectly-supported jobs and has also probably grown since. Furthermore, through the EU the UK currently has some type of ‘free trade’ deal with between 50 and 60 countries. In reality, these deals are for lower tariffs and non-tariff barriers than would otherwise apply through World Trade Organisation rules, without being in the tariff-free regime of the Single Market.

The effect of leaving the EU Single Market would be threefold. First, any new tariffs or non-tariff barriers between the UK and the EU would raise prices of production that would lead to higher prices overall. Producers may try to mitigate these by lowering UK wages and relocating jobs to within the Single Market area. A relatively small increase in these barriers or tariffs may lead to a much larger fall in wages/loss of jobs. A car manufacturer’s profit margin may be, say, 10% but as the tariffs on components range from just under 3% to 10% for complete cars, this would be a large part of total profits, or all of it. The incentive to drive down wages and/or relocate would then be very great.

Secondly, similar considerations would apply to all those countries where the UK currently has a trade deal via its membership of the EU. They too would want to lower costs with lower wages and/or consider relocating. In addition, simple calculations about the respective size of markets may also prompt relocations from the UK to the Single Market area.

Thirdly, these various trade deals usually contain little or nothing at all about trade in services. Services tend to be more thorny issues, not least because freer trade in services means more liberalised immigration regimes, as services are essentially about people (finance, accountancy, law, education, and so on). Yet it is in the services sector where the UK economy has a clear advantage, and currently benefits from the highest level of liberalisation in the Single Market. In 2016, UK exports of services accounted for one quarter of total exports.

Brexiteers argue that the EU is one of the slower-growing regions of the world economy. This is correct. But nothing in Brexit will raise the level of exports or the jobs that depend on them. Table 1 below shows the growth in employment by exports from regions and countries from 1995 to 2011 (the full range of the OECD data).
 
Table 1. Growth in Employment Dependent on Exports, by Region and Country, 1995 to 2011
Source: Calculated from OECD data
In common with many other countries, the UK has an increasing proportion of jobs which are dependent on exports. This reflects the continuing growth in the international division of labour. This is despite the fact that the UK’s low investment and productivity rates mean that the growth rate of export-dependent jobs is lower than many other industrialised economies. 

Total UK direct employment dependent on exports rose from 20.9% in 1995 to 22.5% in 2011. This is a concrete measure of the growth of the international division of labour, or what Marx termed the socialisation of production. In key sectors the change has been dramatic, so that in 1995 roughly half of all employment in the machinery and equipment sectors was dependent on exports, by 2011 it was over 70%. For transport equipment (including cars) employment rose from just under half to more than two-thirds.

Total non-OECD export-related employment has been growing much more strongly than OECD export-related employment. This reflects the much stronger economic growth of the non-OECD economies. In all cases, these data belie the claim that ‘X country is taking our jobs’. The reality is that increasing trade is increasing UK jobs.

The two most important non-OECD countries in terms of creating jobs in the UK are China then India. Within the OECD bloc the US and then the EU itself are the areas creating the greatest number of UK jobs. Within the EU28, Spain has been the most important country for UK job-creation. The UK’s much lower level of competitiveness means it is not gaining German, French and other export-related jobs. Together these four, the US, China, India and the EU are responsible for more than 700,000 new UK jobs in the period 1995-2011, or 60 per cent of total new directly export-related jobs.

In Trumpenomics there is a reactionary idea that freer trade arrangements such as NAFTA have destroyed US jobs. In reality, the US has added about 1 million jobs based on exports to Canada and Mexico since 1995, a year after NAFTA came into force. Unfortunately, this type of crude mercantilism has much wider support than Trump and his delusional supporters. It is expressed as the idea that that the growth in imports exceed the growth in exports, then the decline in net exports is economically detrimental.  

But the growth in the international division of labour/socialisation of production represented by rising trade both increases jobs and their productivity, so raising living standards. As Adam Smith pointed out, if coal is produced in Newcastle and then it is used in smelting, the citizens of Newcastle may buy the metal products with the proceeds of their coal production. This is true whether the smelting takes place in Aberdeen or Amsterdam. In either case the smelting operations create jobs in Newcastle.

A withdrawal from the Single Market would go against the tide of economic development and current international practice. It would unilaterally replace a tariff-free regime with new tariffs and non-tariff barriers. It would therefore cost an unknown but large number of UK jobs.

Wednesday, 11 October 2017

No, Jeremy Corbyn won’t ‘bankrupt the UK economy’

By Tom O’Leary

In a textbook case of political projection, the UK economy continues to stagnate and the response of the Tories and their supporters is to create scare stories about an economic impact of a Corbyn government.

This is clearly a mark of political desperation. Having presided over the longest recorded fall in living standards, the government’s inability to lead an upturn means it is reduced to blaming the last Labour government and the next one for its own failings. Even thoughtful commentators such as Martin Wolf at the FT accuse Corbyn of ‘populism’ and ignoring the realities of a private sector-dominated economy.

But there is a serious point buried deep beneath the Tories’ wild claims. There are always constraints, which cannot be overcome with airy declarations that Labour can just print money. An incoming Labour government under Corbyn will face stiff opposition from its ideological opponents outside the Tory party, including the City of London. The pressures on the Wilson-Callaghan government were so great, even though circumstances were in many ways far more favourable and Labour was attempting only modest reforms, that they eventually capitulated and precipitated an entirely fake ‘IMF crisis’ in 1976 in order to slash public spending.

In the early 1970s the UK was not faced with a crisis of public finances. The real crisis was of profitability and therefore investment. In the current crisis, the public sector deficit as a proportion of GDP has averaged more than double the deficits of the 1970s period.

The real policy target was addressing the real problem; falling profitability. In common with other Western economies in the early 1970s, UK profitability fell, signalling the end of the long post-World War II boom. In the UK, highly unusually the total level or mass of profits fell outright in 1974. Slashing public spending and capping pay was the now-familiar policy adopted in response.

The scare story used then was that the country would be bankrupt if it could not borrow from overseas. A variant on this mechanism was actually used in the EU financial crisis, as the ‘Troika’ of IMF, European Central Bank and EU Commission. In the case of Greece, the Greek bank system was starved of funds by the ECB in order to impose austerity on the government.

The Labour leadership under Corbyn and McDonnell has already set itself a number of useful tools to cope with an economy that will have suffered both sharp recession and prolonged slow growth. In the first instance is borrowing for Investment, which leads to economic growth, while balancing current spending on Consumption, which does not. (Contrary to wild claims, this does not mean adopting austerity but reducing tax giveaways to businesses and the rich). Secondly, a National Investment Bank is an extremely useful vehicle for channelling an increase in public sector investment. Thirdly, through the fiscal responsibility rules it has given itself a ‘knock-out’ clause on current spending too if growth were so slow that interest rates were close to zero. Finally, it has not ruled out Quantitative Easing (money creation) to supplement an investment-led approach to economic recovery.

The charge from the Tories is that all of this is a ‘magic money tree’ fantasy, a variant on the claim that there is ‘no money left’. But this is untrue, and marks an important difference with the 1970s. Chart 1 below shows the ‘Investment Gap’, the difference between the level of investment in the economy and the level of profits. Investment is measured by Gross Fixed Capital Formation and profits measured by the Gross Operating Surplus of firms. Both are in nominal terms.

The Investment Gap. UK Profits versus UK Investment 1948 to 2016

The chart shows that an enormous gap has opened between the level of profits and the level of investment (even the latter is flattered because it included the investment of government and of private households).

The proportion of profit directed towards investment has also fallen dramatically, especially since the early 1970s when it reached its zenith. In fact, for the entire period 1966 to 1976 the level of investment in the economy as a whole exceeded the level of profits. In 1976 itself investment was equivalent to 125% of UK profits. This was particularly boosted by a much higher level of public investment than now. But there is no reason why business investment alone cannot exceed the levels of profits, at least for a period, when borrowing can be used to supplement profits as a source of funding (in anticipation of high profits).

As a result of this investment gap - the gap between profits and investment – there is plenty of money left. The gap between profits and investment in 2016 was £96 billion, equivalent to just under 5% of GDP. If the economic situation continues to deteriorate and Brexit has the anticipated further depressing effect, then these resources will be invaluable.

The argument that the company sector is too indebted to fund investment is factually incorrect. Company debt has been falling measured as a proportion of GDP, and especially measured against its own profits since 2010. Its interest bill has fallen to £8.5 billion in 2015 from £26.5 billion in 2007 (ONS Blue Book).

Yet if all the Corbyn leadership intended was to introduce further taxes on business or simply expropriate their profits, then the current investment go-slow would rapidly become an all-out investment strike. But that is not the policy. The economic policy also includes significant public sector investment, from which the private sector profits. It is simply that the non-investing, non-productive sectors of the economy will be worse off, while those businesses providing inputs to public sector investment and/or who benefit from it will be winners. If access to overseas markets is not disrupted, this is the basis of a successful reforming economic policy.

Friday, 25 August 2017

What can the left do in government?

By Tom O’Leary
 
The recent controversy over economic policy in Portugal is very important as it holds extremely valuable lessons for the entire anti-austerity left in Europe as a whole. The left in Portugal has achieved something unique in the current period, operating in government to end austerity. In the broadest sense this is the prospectus for a Corbyn government. It should be for the entire left in Europe. Therefore the entire experience bears close scrutiny.
 
Owen Jones began the controversy with a simple statement of fact, that the Portuguese experience shows that austerity was not necessary. Policies supporting growth were far preferable, and among other things also led to a reduction in the public sector deficit.    Jones has come under attack from a number of quarters. Jolyon Maugham, a widely followed commentator on twitter led the charge, with a series of tweets in a complete defence of the EU’s actions.
 
 
The tweet is a model of brevity, containing at least three errors in less than 140 characters. Most importantly, it was not ‘Portugal’ which was bailed out but its creditors. The government still bears those debts from that period, and these were made worse by the austerity programme that accompanied it. The EU Commission is one of the culprits, along with the IMF, the ECB, local politicians (including those from the Socialist Party which is now leading the current left coalition), as well as the ratings’ agencies, the domestic and international banks and of course the creditors. Like the LibDems, in defending EU membership Maugham goes further and defends EU austerity.
 
The Portuguese recovery comes despite the imposition of the austerity programme imposed, not because of it. But the most important questions for the left now are how can recovery be achieved, and how can it be sustained.
 
Economic performance
 
The IMF is forecasting 2.1% real GDP growth in 2017, which would be the strongest rate of growth since the crisis began in 2008. But the growth rate has been 2.8% in the first half of 2017 compared to the same period in 2016, exceeding the EU or the Euro Area average. There is no doubt that growth is accelerating and has done so since the coalition of the social democrats and far left parties came to office.
Portuguese GDP Growth, % change year-on-year
Source: Eurostat

The first conclusion must be that ending austerity does not lead to disaster. Instead it has led to accelerating growth (and lower public sector deficits). The second conclusion is that it is possible for a left government to end austerity while in the EU and even the Euro Area, at least within certain limits.
 
The limits on growth are set by the accumulation of capital, the growth in the means of production. Since the left coalition came to office the level of Investment (Gross Fixed Capital Formation) has risen by 7.7% (data for the 2nd quarter of 2017 is not yet available). Over the same period real GDP has grown at less than half that pace. Investment has led growth.
 
The government has contributed to this rise in Investment, but the bigger contribution has come from the private sector. As anticipated profits are the driver of private investment it is likely that government measures to boost Consumption, combined with its own modest increase in Investment have had the effect of boosting the anticipated level of profits. In short, stimulus measures have kick-started the economy. 
 
This is far preferable and more effective than austerity. But this is not sustainable over the long-term. The boost to Consumption has not been supported by rising incomes and wages. Instead, Eurostat reports that the household savings ratio has slumped. The trend in Portuguese household saving is shown in Table 1 below, along with Eurostat forecasts for 2017 and 2018. (For reference, Eurostat forecasts the UK household savings rate will fall to 3.7% in 2018, versus an EU average of 9.9%).
Table 1. Portuguese Household Savings Ratio, %
Source: Eurostat

This run-down in household savings is unsustainable. Even current levels of Consumption, which have encouraged increased private sector Investment cannot be sustained. Real wages have been falling. At a certain point, without real growth in incomes and wages households will take fright and rein in their spending. 
 
In order to sustain the recovery as a whole and to lift real wages, Investment growth must be sustainably increased. This is unlikely to come from the private sector if consumer spending flags. Therefore government will have to find ways in which it can increase public sector Investment.
 
Without much more detailed knowledge of the Portuguese economy, it is impossible to provide a blueprint for a public sector-led investment programme. But there are a number of potential sources of funds. These include but are not exhausted by the following:
  • The large number of corporations that remain in public hands increasing their investment (using either reserves, or new borrowing)
  • Requests to the European Commission to accelerate/increase its capital spending programme
  • New infrastructure and other projects funded by the European Investment Bank
  • New taxes on the extremely rich and big companies to fund investment
  • Removal of subsidies to business to free up funds for public investment
  • Additional government borrowing where possible
The scale of the Investment needed is very high. In 2000 GFCF as a proportion of GDP reached 28% and is effectively half that currently. But every significant step in that direction puts the recovery on a more sustainable basis.
 
The Portuguese left government has indeed shown that there is an alternative to austerity. But stimulus wears out. To sustain the recovery and show that the alternative to austerity is Investment, bolder measures will be needed. 

Friday, 11 August 2017

Confronting Venezuela’s real problems, and the slanders against it


The crisis in Venezuelan has been the occasion for all sorts of reactionaries, anti-socialists and supporters of the US to attack the government’s ‘Bolivarian socialist’ experiment.

In general, these attacks completely ignore the achievements of the Chavista movement including the rise in life expectancy, the improvements in health, education, housing and so on. They completely overlook the objective predicament caused by the fall in the oil price (itself a goal of US policy). They also rely primarily on IMF forecasts, which have proven less than accurate.

Furthermore, these attacks attempt the slander that the horrific levels of violence in Venezuela prove the ‘failure of socialism’, when the overwhelming majority of the bombings and murders are conducted by supporters of the opposition in an effort to destabilise the elected presidency. Nearby Honduras has a far higher homicide rates, and this regime was installed by the US!

The current crisis in Venezuelan does not prove the impossibility of achieving socialism. It proves that it is extremely hard to achieve, and will face the utmost opposition from the US and all its allies. As a result, socialists themselves have to be extremely careful to address objectively the real problems of socialism, and not fall back into defeatism, or into wishful thinking about the current failings.

The article below first appeared on SEB in December 2014, written by Michael Burke and is reproduced without alteration. In particular, the outline policy conclusions have even greater force, now that the anticipated crisis of growth and living standards has materialised.

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The transformation of Latin America and the Caribbean and its new challenges


The economic growth rate of the Latin American and Caribbean countries as a whole has changed dramatically from the beginning of this century. Living standards have improved after a lost generation from the 1980s onwards. Tens of millions have been lifted out of absolute poverty and many more have seen their lives transformed. It is important both to learn from this process and to understand the threats to it.

The World Bank offers a variety of measures of real GDP. For a continent such as Latin America it is important to use a single international currency, in this case US Dollars. On this basis, in real terms the growth rate of the entire continental economy accelerated sharply in 2000. In the 20 years from 1980 to 2000 the average annual real growth rate was just 2%. From 2000 to 2013 this has increased to over 3.3% per annum. The change in the trend growth is shown in Fig. 1 below.


Fig.1 Latin America & Caribbean, Real GDP, US$ 2005

The transformation is even more apparent in per capita terms. As the population grows real GDP needs to grow simply in order to maintain average standards of living. Arithmetically, real GDP growth must exceed the growth of the population if, in practical termsaverage living standards are to rise. Until the beginning of this century real GDP growth was insufficiently strong and per capita GDP stagnated. Since that time, per capita GDP has grown. This is shown in Fig. 2 below.

Fig.2 Latin America and the Caribbean, Real Per Capita GDP, US$

Per capita GDP is an average measure. It can disguise both large and growing inequality in incomes, as one class claims most or all of the benefits of growth. But this has not been the case in Latin America in the recent past. Fig. 3 below shows the transformation in the lives of the poorest classes of society - those earning $2 a day or less. In 2002 there were 108 million people in Latin America and the Caribbean subsisting on less than $2 a day. In little more than a decade this total has been more than halved to 53 million people. In total 55 million people or almost 1 in 10 of the entire population has been lifted out of absolute poverty.

Fig.3 Latin America and the Caribbean, Persons Living on $2 a day, millions

A similar pattern is evident from a range of indicators. The numbers living on less than $4 a day has fallen over the same period from 236 million to 159 million since 2000. This is crucial. The rise to $2 a day means that people can generally expect to eat most days. Above $4 a day people can also begin to move beyond basic necessities and establish at least some quality of life. Most important of all average life expectancy at birth has risen by 3 years, from 71 years to 74 years. This is the most fundamental social indicator of all indicating improvement in living conditions and prosperity and is only possible with a combination of increased access to a range of foodstuffs, improved healthcare and housing.

There are a large number of indicators of poverty reduction and social progress which point in the same direction, although some important indicators of the position of women have not improved or have even gone backwards. These are significant omissions which need addressing. But taken as a whole the improvement in the economy, the general well-being of the population and its poorest members have also shown remarkably rapid and dramatic improvement since the beginning of this century.

Source of growth

Many Latin American and Caribbean economies are exporters of basic commodities. Like all commodity producers they benefited from the strong rise in global commodity prices in the early years of this century. The increase in commodities’ prices is illustrated in Fig. 4 below, as the commodities’ research Bureau (CRB) aggregates a basket of many of the key commodities’ prices, which doubled in price over the period.


Fig.4 CRB Commodities Index, 1993 to 2012
Source: Reuters/CRB

However the widespread assertion that exports were the sole or even main contributor to regional growth is a misconception. The accurate picture is that the increased export earnings from rising commodities prices were a catalyst for growth in general but that this growth was led by investment. This is shown in Table 1 below which itemises the growth rates for GDP and its components since the beginning of this century.

Table 1. Latin America & the Caribbean, Growth of GDP & Its Components, 2000 to 2016 (Forecasts)

For most of the period 2000 to 2012 exports were one of the weaker components of GDP growth. Over the period as whole they grew more slowly than GDP itself. Furthermore for the entire period exports grew more slowly than imports. As a result net exports actually subtracted from growth.

The leading component of growth was fixed investment. This conforms to economic theory, where the amount of capital deployed and the growth of the workforce and its quality (via training and education) account for the overwhelming bulk of growth. In the most accurate terminology, fixed investment is the accumulation of the productive capacity of any economy. As previously noted, both consumption and living standards improved dramatically over the period. But consumption cannot be an input into growth. If consumption growth exceeds output, it can only be sustained by increased indebtedness which actually leads to lower living standards. The increase in both private and public consumption was only made possible through the sustained increase in fixed investment, which was the strongest component of GDP growth by some distance.

It was only in 2010 and 2011 that exports grew more strongly than GDP. This was a result of global quantitative easing led by the US and the modest recovery in the leading economies which had the effect of driving up global commodities prices even further. But this produced its own negative effect. 2012 was the first year where fixed investment growth lagged GDP growth and the economy has slowed since. As resources are diverted away from investment economic slowdown inevitably follows.

Problems caused by the US

The period 1980 to 2000 was a lost generation for Latin America. The US had overthrown the Allende government in 1973 and held sway over the continent mainly through its alliances with brutal military dictatorships. The revolts against the dictatorships in Nicaragua, El Salvador and Grenada were all blocked or overturned by the US or US-backed forces.

It was this US dominance in the region which paved the way for economic collapse. The US had unilaterally withdrawn from the Bretton Woods currency system in 1971, provoking a global spike in commodities’ prices. It was forced to do so because it was unable to finance both the Viet Nam war and domestic consumption at the prevailing exchange rate. This fall in the US Dollar/rise in commodities’ prices resulted in a huge increase in the Dollar export earnings of the oil producing states, concentrated in the Arab world.

The oil producers, led by Saudi Arabia effectively bailed out the US through a huge inflow of those earnings in the form of ‘petro-Dollars’ into US banks. As well as financing US budget and trade deficits these funds were also used to boost US banks overseas lending, especially in Latin America.

The global downturn of the late 1970s left these borrowers exposed, primarily government borrowers. A full-blown currency, debt and economic crisis was marked by the Mexican government’s debt default in 1982. At US insistence, it was the US banks that were rescued, not the Latin American economies, through the issuance of ‘Brady Bonds, named after the US Treasury Secretary. Debt crises in a host of other countries followed and the resulting debt burden sucked capital from South to North over the following decades and led to economic stagnation and misery.

These gyrations are not solely of historical interest. The role of the US Dollar as the major reserve currency and the denominator for virtually all globally-traded commodities means that significant or abrupt changes in US economic and monetary policy are magnified in commodity-producing and/or debtor economies. Sharp changes in US monetary policy always lead to sharp dislocations in the rest of the world, especially in ‘emerging markets’. As the US is also the world’s largest net debtor economy, it has a constant necessity for inflows of overseas capital. In periods of economic expansion this need increases sharply. Changes in US monetary policy are conditioned by this requirement for capital generated in the rest of the world and so can cause abrupt and hugely dislocating flows of capital in other countries.

This is precisely what has happened in the most recent period. The US Federal Reserve Bank ended its third round of quantitative easing on October 29. This had helped to inflate financial assets included commodities prices from 2010 onwards. Now the US is consciously aiming to drive down key commodities’ prices. The US has agreed with the key oil producer Saudi Arabia that the oil price should fall. On the US side this is an extension of the sanctions against Russia, but it welcomes the collateral damage to countries such as Venezuela, where sanctions are now also threatened.

New challenges

Politics comes before economics. The economic transformation of an entire continent cannot happen randomly. Across the region (with certain exceptions) through decades of upheaval a political leadership has been forged that rejected the dominance of the US and its neoliberal economic policies. The period 2000 to 2002 was marked by the sharp turn of Hugo Chavez’s revolutionary government in Venezuela towards Bolivarian socialism, ending generations of national humiliation. Shortly afterwards the serial humiliations inflicted on Argentina hit a brick wall with its default. Then in 2002 the Lula and the Brazilian Workers’ Party won the Presidential election.

Although they represent different social coalitions their common platform is a desire for economic growth, and the improvement of the living standards of the population, in particular the poorest layers of society. In different ways they draw inspiration from the Cuban revolution and its determined resistance to US rule.

It is important to stress that economic redistribution was an outcome made possible by growth. It was not the driver of it. The principal economic contributor to the economic transformation was the rise in fixed investment. Until 2012 fixed investment was the strongest component of growth and was its leading element. Growing trade, including intra-Latin American trade was a key catalyst for investment-led growth. This in turn allowed the growth of both public and private consumption, which indicates the general rise in living standards.

But the catalyst of rising export revenues has gone into reverse. At the time of writing the CRB Index had fallen to 247, close to levels last seen at the depths of the crisis in 2008. The oil price has fallen below $65/bbl a new 5-year low. This is a direct consequence of changes in US policy. This is in effect a crisis of 2008/2009 proportions for most of the commodity-producing economies, which takes in virtually the entire continent of Latin America and the Caribbean.

The growth of fixed investment has slowed to a crawl, which will prevent any sustainable revival of GDP growth. This is illustrated in Fig.5 below with reference to Brazil, which is by far the largest regional economy and accounts for nearly 40% of the entire continental GDP. This shows Brazilian Gross Fixed Capital Formation (GFCF) as a proportion of GDP, both the total and the specific contribution of the private sector. From 2002 onwards the long-term decline in the investment rate was being reversed. But there has been a renewed decline in 2012 (and other data suggest this has been extended since).


Fig. 5 Brazil GFCF, Total and Private Sector, % of GDP

Capital outflow

There is also a new threat in the form of capital outflow. The US is the dominant financial power in the world and the US Dollar the main currency denominator not only for commodities but also for international debt. Yet the US has a structural capital shortage, as shown by its chronic deficits on the balance of payments. In periods where US capital is seeking to expand, it is obliged to suck in capital from the world. The outflow of capital from ‘emerging market economies’ was recently the subject of a strong warning from the Bank for International Settlements (BIS). This is a specific threat to the Latin American economies.

The BIS data show that Latin America and the Caribbean owe BIS-reporting banks (the banks of all the industrialised economies) a net amount US$1.337 trillion. Of this $565 billion is held in foreign currencies, which is virtually all in US Dollars. The overwhelming bulk of this US Dollar debt is owed by both private sector firms and banks based in the region and is owed to Western banks. US Dollar debt owed by governments is a relatively modest $113 billion.
In addition to the challenge posed by falling commodities’ prices and the need to reverse the sharp slowdown in the growth rate of investment, it is the region’s private sector firms which are the Achilles Heel of the economy.

The regional firms and banks are no longer benefitting from the rise in exports and are primarily responsible for the sharp slowdown in investment. They are also the primary source of capital outflow from the domestic economies, and will in many cases be directly responsible for it. They are likely to come under severe pressure as they absorb the effects of lower exports, slowing domestic economies and rising debt-servicing costs. There is no point in minimising the scale of these difficulties. They amount to a new crisis for the entire region and need a new response.

Responding to the new threats

A revival of growth is vital for a return to rising living standards. Three key steps are required, each of them interrelated. Returning to per capita GDP growth depends first on reviving the growth of fixed investment. Secondly it is necessary to soften the blow of falling export prices by increasing trade diversification. This is both a geographical diversification as well as adopting measures to increase the value created in production by increasing the output of finished goods and manufactures, compared to basic commodities. Thirdly a series of strong defensive measures are needed to insulate the region from the US-driven outflow of capital.

The decline in fixed investment is primarily the responsibility of the private sector. Since private sector investment is determined by the anticipation of profits a spontaneous recovery cannot be relied on, especially in the current conditions. Therefore the state sector must increase its own level of investment. It can do so in a number of ways, including directing domestic banks to increase productive investment by cutting back on speculation or other useless activity. It can regulate the level of private sector firms’ investment by legislation and other means (including in the awarding of government contracts). It can also apply windfall or other confiscatory taxes to fund direct government investment. If the private sector resists any of these measures, all necessary steps can be taken to overcome that resistance, including nationalisation.

One of the great successes of the period of expansion has been increasing continental economic co-operation through a variety of regional bodies, including Mercosur/Mercosul and ALBA. This helps to break down colonial patterns of development, where nearly all international trade was formerly geared towards exports of basic goods to the US. The deepening of regional ties through increased trade and infrastructure projects can help to soften the blow of falling commodities’ prices. But it is also important to move higher in the value chain of production and away from basic goods. Over the long-term manufacturing has been in decline as a proportion of GDP across the region. Increasing regional value creation requires both development of the economic capacity and access to hi-tech investment products. Here the two key potential allies are the deepening of ties with China and Russia. The former can provide funding for regional infrastructure and both can provide access to hi-tech investment goods, vital to revival of manufacturing and increasing value-added.

The outflow of capital represents an immediate and significant threat to regional prosperity. National savings need to be protected from US predations. Strong counter-measures are required. These may include restrictions on financial trading, capital controls and taking state ownership and control of the banks where necessary, as they facilitate the highly damaging outflow of capital.

Conclusion

Latin America and the Caribbean have seen a remarkable transformation in the most fundamental of living standards of the population in the first decade of this century. The first condition was the forging of a political leadership capable of coming to power and ending US domination.
Economically they were able to achieve this as the commodity-producing economies of the region benefited from the global rise in commodities prices. But this benefit was used to fund investment, which was the leading component of growth. It was the rise in investment which allowed the rise in living standards.

Now commodities’ prices have gone into reverse. Yet it remains the case that only increased investment can lead to increased prosperity. Therefore new radical measures are required in order to fund investment. Continuing the transformation in distribution will require a transformation in production.

This is centred on the direction of private sector firms and banks operating in the region. They have reduced their level of investment in the face of falling commodities prices and a slowing economy. They are also the primary source of the potentially disastrous capital flight from the region, which is being orchestrated by the US to destabilise its enemies and for its own benefit. Only by directing their levels of investment can growth be resumed. In some cases taking ownership of some of these banks and firms can the governments continue with their policies of economic and social transformation.