Thursday, 2 August 2018

Jeremy Corbyn is right - manufacturing matters

By Tom O’Leary

The multi-faceted attack on Jeremy Corbyn’s leadership of the Labour Party continues to include unjustified attacks on his economic policy. The liberal press, led by The Guardian and The Independent mounted a completely specious attack on his economic policy, even claiming that he was adopting the economic nationalism of Donald Trump.

Anyone who read the speech would know this is untrue. Instead, Corbyn was offering a sharp critique of the ruling economic ideology, which has for decades argued that finance and banking was the key to prosperity. “We’ve been told that it’s good, even advanced, for our country to manufacture less and less and to rely instead on cheap labour abroad to produce imports while we focus on the City of London and the financial sector,” Corbyn said.

But advocates of that economic model Britain, which has effectively adopted since Margaret Thatcher in the 1980s, also hit back. Because of the crash, their overt rallying cry cannot be to subordinate everything to the banks and the finance sector, which was Thatcher’s rallying call. Instead, it is to downplay the role of manufacturing and deride any attempt to revive it. It is also claimed that services are much more important. As banking, finance and their related services such as financial accounting, financial law and so on, are the largest, most profitable parts of the services sector, it is easy to see that this is the Thatcherite argument in a new, less open form.

The verdict of history

Thatcherism was a disaster for the British economy. This can be gauged on the actual performance of the economy during and since her time in office. The explicit claim for her project was that it would end Britain’s role as ‘the sick man(!) of Europe’ and its relative economic decline. In fact, the Thatcherite project of privatisation, union-busting, deregulation and lower government investment and spending led to even lower growth. This is despite the fact that she enjoyed the enormous windfall of North Sea oil revenues, which only started to gush as she entered office.

Chart 1 UK GDP 1948 to 1979

The period after the Second World War happens to divide into two neat periods until the 2008 crash, both of 30 years duration. 1948 represents the beginning of ONS GDP data. Thatcher came to office in 1979 and British economic policy has been dominated by Thatcherite ideology ever since, despite repeated changes of government. The crash of the 2008 and subsequent recession and stagnation can be traced back to those policies.

The verdict is clear. In the 30 years prior to Thatcher UK GDP rose by 145%. In the 30 years including her tenure and subsequently the economy grew by just 114%.

Far from reversing the relative decline of the British economy, the Thatcherite model accelerated it.

This can be seen starkly in the relative decline of manufacturing over the same period, shown in Chart 2 below.

Chart 2. UK Manufacturing, 1948 to 2017


In the 30 years prior to Thatcher, British manufacturing output more than doubled, rising by 123%. In the 30 years that included her terms in office and subsequently, manufacturing output rose by just 16.1%. From the recession onwards it has also remained in a downturn, falling by a further 5.9% since 2008.

Why manufacturing matters

The Thatcherite, or neoliberal argument against manufacturing is that it is old-fashioned and outdated. Modern economies, it is argued are increasingly based on services.

It is true that in all almost all advanced industrialised economies workers are increasingly employed in services sectors of the economy. Yet almost every other OECD economy has a greater proportion of manufacturing in GDP than the UK’s miserably low level of 9.2% (World Bank data). Germany’s manufacturing content is more than double that level at 20.7%. Chart 3 shows manufacturing as a proportion of GDP in selected industrialised economies.

Chart 3 Manufacturing Share in GDP of Selected Industrialised Economies

Because manufacturing requires a larger scale of fixed investment than service sectors (sometimes vastly more) the value created by each manufacturing workers is far greater than the average worker.

The greater output of manufacturing as compared to services sectors allows both greater reinvestment and higher pay. Crucially, manufacturing outputs are also the inputs for a host of other sectors, including energy, construction and many service sectors themselves, including transport, storage, communications and distribution. A weak manufacturing sector hampers the ability to develop all these other sectors.

This is nothing to do with economic nationalism. On the contrary, as an advanced industrialised economy, the manufacturing sector in Britain is one of the sectors most integrated with the world economy. It is often an important link in a Europe-wide or even global supply chains. To take the car industry, about one-third of all inputs to the British car industry are imports. At the same time, almost 80% of all cars produced here are for export, and 55% of all engines manufactured here are for export.

The complexity of these supply chains and the interconnection of markets can be highlighted in the following way: In 2016 the top 5 UK goods imports were all manufactures, electrical machinery, mechanical machinery, cars, ‘other manufactures’ and medicinal and pharmaceutical goods. Together they accounted for 42.9% of all imports and amounted to £185 billion. They are almost mirrored by the top 5 goods exports of mechanical machinery, cars, electrical machinery, medicines and pharmaceutical goods and aircraft, which together accounted for 45.4% of all exports and amounted to £132 billion.

It is not the case that British Minis are being sold Germany, while German BMWs are being sold here. The reality is that components of both are researched, designed, tested and manufactured in both countries, and many more besides. The value added per British car worker is almost £100,000 per annum, which as far greater than the UK workforce as a whole (by more than 50%). A decisive element of the high value-added is this integration in highly specialised multinational supply chains.

Participation in the international socialisation of production/division of labour is decisive for the development of the economy, on which prosperity depends. Anything that develops manufacturing, one of the sectors most linked to the world economy, will enhance that process, which is what Jeremy Corbyn proposes to do. By the same token, anything that blocks or interrupts the economy’s links to the rest of the world will also hit manufacturing hard.

Thursday, 26 July 2018

The crisis in the NI economy never really ended


By Tom O’Leary

The latest release of key data for Northern Ireland (NI) has had business organisations wringing their hands about the weakness of the economy. The CBI said the economy "looks to be on the brink of recessionary territory" after the economy contracted in the 1st quarter of 2018. In fact, the economy has contracted in three of the last four quarters. 

But this is not a short-term problem. Over the longer run, it is clear that NI economy has never recovered from the Great Recession. It remains in a crisis.

Chart 1 below shows a comparison of overall growth rates for NI, Scotland, for the UK and for the Irish Republic (RoI). It is reproduced from the Northern Ireland Statistical Research Agency (NISRA).

Chart1. NI, UK, Scotland and RoI Growth


Source: Northern Ireland Statistical Research Agency (NISRA)

The Northern Ireland Composite Economic Indicator (NICEI) is very far from being as authoritative as a measure of GDP. But it is the most advanced measure so far developed, and movements in the Index are likely to be good indicators of the trends in NI output overall. 

The chart shows that the overall level of output in NI has been exceptionally weak even on a comparative basis. This is highlighted in the table below, which shows the level of growth since the low-point of the recessions in the respective countries or regions, as well as the level of growth since the 1st quarter of 2006, the first available data.

Table 1. Changes In Output, %, Q1 2006 to Q1 2018
 *Data to Q4 2017 only
**NICEI, others GDP
Source: NISRA
 
Even if the data for RoI is disregarded entirely, based on the widely remarked upward distortions to GDP, the comparative performance of the NI economy has been miserable. This is despite the fact that UK-wide and Scottish growth rates have themselves been extremely weak over the period.

[The economy of the RoI has hugely inflated GDP levels, based on the government policy of attracting spurious investment from overseas, which is in reality a tax avoidance scheme. As a result, much economic data is meaningless. However, on one real measure RoI’s total real wages have risen by a very slow 7.4% over the last 10 years. Yet even this miserable level compares favourably to -3.75% for the UK over the same period].

As the Table shows the NI recession lasted 3½ years to 4 years longer than elsewhere. The NI recession only ended in the 2nd half of 2013. The recovery since that low-point has also been minimal. And the level of output in the NI economy still remains more than 4% below its pre-recession peak. The other economies have all recovered, at least to some extent.

Looking wider, most of the EU countries hit hardest by the Great Recession have made some sort of recovery, including Spain and Portugal. Italy is one of the worst-performing major economies in the world. Since the 1st quarter of 2006 the Italian economy has contracted by 2.4%. But the NI economy has been even worse. Only the ravages inflicted on Greece in the interests of its creditors put it in a separate category, having contracted by 21% since the beginning of 2006.

Disastrous public-private partnership

The disastrous performance of the NI economy has two sources, both the private sector and the public sector. As Chart 2 below shows, both the private and the public sectors have contracted since 2007. When the Tories came to office in 2010 they abruptly reversed the growth in the short-term rise in the public sector, which had been promoted in 2009 in response to recession.

Meanwhile, the NI private sector went into recession at the beginning of 2007, probably reflecting its links to and dependence on the private sector in RoI, where the recession began before the recession in the UK.

 
This highlights the structural problem of the NI economy as a whole. Its natural link is the RoI economy, especially via the private sector in NI. But the public sector in NI remains dependent on the parsimony of the Westminster government, which refuses to invest and insists that the private sector will, without any evidence.

A refusal to invest is hardly unique to NI among the Western economies. The entire OECD economy remains in an investment blight. This characterises the period we are in.

But the NI economy faces a longer-term, structural problem. When NI was created in 1922 it was part of the British Empire, which was still a globally sizeable market, even while it faced with mounting competitive challenges. NI shipping, manufacturing, linen and banking were an important component of the Empire’s output. But the Empire is long gone. Most of those industries in the North have gone with it.

Now, the world has three major economic units, the US, China and the European Union Single Market which together account for roughly 60% of the world economy. NI’s links to the EU Single Market now face severe disruption via Brexit. It will be left as an adjunct of the UK economy, which represents now just 2¼% of world GDP (according to World Bank data), and continues to decline. The latest decline in NI economic activity is a pointer to those strategic difficulties. The NI is suffering a declining participation in the world economy. Brexit will accelerate that.

The private sector in NI has already begun to anticipate the potential effects of Brexit, where the simple size of the UK market means there is only limited rationale to invest, for any enterprise, wherever its ultimate location. The incentive to invest in NI is even more curtailed than for the UK. The Westminster government has exacerbated these trends both through the ill-conceived Brexit policy itself, as well as its own repeated refusal to invest in the NI economy.

Monday, 23 July 2018

Economic lessons from the left governments in Latin America – and a comparison to China

By John Ross

Note:


This article is based on Marxist economic theory and macro-economic study of Latin American countries combined with two primary direct experiences:

· The author is a specialist on China’s economy – having written over 200 articles on it, published in English, Chinese, Spanish, Portuguese, French and Russian over a 26-year period.

· He was directly involved in some economic discussion in Venezuela during the period of Chavez, including directly with President Chavez (articles related to this in Spanish and English may be found at http://thevenezuelaneconomy.blogspot.com/).

However, the author has insufficient knowledge of the detailed situation in all Latin American countries and this article does not deal with directly political issues. This article therefore only deals with certain key economic issues which can be clearly seen both in the trends in Latin America and in comparison, to Asian countries – particularly China. It is therefore circulated for discussion in the expectation of inevitable criticism and improvement – these are greatly welcome.

The new wave of social struggles in Latin America


Recent events in Latin America entirely refute the claim in the Western media that the right wing was carrying all before it in the continent. Certainly, the right wing in Latin America is strongly coordinated by outside forces, and the left in Latin America does not have the same advantages in easy unification and coordination – despite the great successes and achievements of the ‘pink tide’ at the beginning of the century. But the reality is that both the right and the left have very deep social roots in Latin America and that there will be a prolonged period of struggle between them. To take simply some recent key events.

· The election of the new left President of Mexico, Andrés Manuel López Obrador, popularly known as AMLO, is an important advance for the whole left internationally, especially in the Americas.

· Polls show that in Brazil Lula would win the Presidential election – which is why a fraudulent state policy is being carried out to imprison him and ban him from the election.

· A new economic crisis in Argentina has forced its neo-liberal government to humiliatingly go to the IMF – discrediting it and launching a new round of social struggles.

Confronted with this situation the Latin American right is increasingly using a strategy proposed by the US of ‘lawfare’ – that is the use of an unelected judiciary, which in reality is controlled by the right and the US, to block popular politicians.

The ‘Brazil Wire’ news service carried an excellent description of strategy noting: ‘ The US has launched a new kind of war on Latin America and it’s called “lawfare”: using the local legal system to oust unfriendly but democratically elected politicians while ignoring corruption by their allies on region’s far right.’

This noted the launching of this strategy to deal with the ‘pink tide’ of the election of left wing governments in Latin America: ‘Hillary [Clinton] gave a speech in 2009 in which she said, “having a functioning democracy isn’t enough in Latin America, we have to support these countries to have strong, independent judiciaries.”’

This strategy also drew on the experience of the right wing in Italy, where similar methods were used a decade earlier to install entirely corrupt governments which carried through massive privatisations. There is a direct link of this to the Lava Jato (Car Wash) campaign being used against the left in Brazil: ‘in 2004 Lava Jato’s inquisitor judge Sergio Moro published a paper called “Considerations of Mani Pulite”, his interpretive thesis on the 1990s Italian – with US cooperation – anti-corruption probe which decimated Italy’s political order, in particular its center-left, and paved the way for both the political emergence of Silvio Berlusconi, the most corrupt leader in its history, and a wake of privatizations of its massive public sector nicknamed “the pillage of Italy”. Mani Pulite in particular, its use of the media to whip up public indignation and support of convictions served as the prototype for Moro’s own operation Lava Jato, launched a decade after his paper…. this new intensified order of privatization, all starting with a scam corruption trial causing media indignity and the overthrow of democratically elected governments with social welfare programs, only to be replaced by truly corrupt leaders who sell off all the goods’’

The bias in such right wing campaigns was blatant: ‘two of the former presidential candidates from the conservative PSDB party, which is the main conservative opposition to PT in Brazil and a long time friend of the United States, have been implicated in tens of millions of dollars worth of bribes with audio and video evidence and had all charges thrown out against them, even though you can just go online and see the evidence yourself, whereas ex-president Lula was given a 9.5 year prison sentence for supposedly receiving $200,000 worth of reforms on a luxury apartment that the prosecutors and judges – who are the same people in this investigation – cannot prove that he ever owned or set foot in. There’s no proof. Lula himself recently said in a speech, “the least they could do is give me the deed to this place.” So it is very selective. You don’t see any politicians from the conservative PSDB party going to jail in Brazil over this…

‘there is a general consensus among the majority of the Brazilian people that this is a witch hunt against Lula. The majority of the people consider him to be innocent. 96% of the Brazilian people reject the Coup president Michel Temer. He’s got a 4% approval rating. And I would also say that most people, probably slightly over a 50% majority, believe that Lava Jato is a witch hunt targeting the PT party, that has had disastrous results for the Brazilian economy.’

The aim of this ‘lawfare’ is to prevent left wing politicians running for office who would be elected, or to attempt to block them in general from campaigning on policy within their countries. This anti-democratic ‘lawfare’ has seen:

· Lula blocked from running for president in Brazil – as already analysed.

· In Argentina former left President Cristina Fernández de Kirchner has been charged with treason, a crime punishable by 10 to 25 years in prison. The right-wing government, in office since 2015, was already unpopular before it signed a bailout deal with the IMF and its support is expected to further decline. Kirchner would be a strong candidate for next year’s Presidential election, so the aim is to block her from running.

· On 3 July the National Court of Justice of Ecuador ordered the preventive detention of the country’s former President Rafeal Correa and requested that he is extradited from Belgium where he is currently living.

Confronted with this assault on democracy and social progress the first and unconditional requirement is international solidarity from progressive forces in every country.

The second issue, however, is preparation of the struggles by an analysis of the strengths and weaknesses of the previous ‘pink tide’ in Latin America – the series of left wing governments that were elected across the continent from 2000 onwards.

The strengths of these progressive governments are well known. They bought about a radical reduction in poverty, inequality and increase in popular living standards. This ‘revolution in distribution’ was the common achievement of all of them and a tremendous contribution to progress both in the continent and globally. But objective analysis shows that only in certain cases was this accompanied by a ‘revolution in production’ – that is the ability to protect their economies from the downturn in international commodity prices which started in 2014 as an aftermath of the international financial crisis. It is therefore useful to examine the different experiences and the reasons for them in terms of economic policies. The main economic examples will be analysed in turn.

Political success and economic success – Bolivia and Nicaragua


The most combined experience of both continuing economic and political success, the two of course being interrelated, was in Bolivia and Nicaragua. In both cases the left has retained political power. The economic record of the left governments in these countries is shown in Figure 1

· In Bolivia Evo Morales was elected President in December 2005 and has been re-elected to office ever since. The Bolivian economy has grown in every year since Morales was elected with the total expansion of per capita GDP up to the end of 2017 during his term being 46% with an annual average growth rate of per capita GDP of 3.2%.

· In November 2006 Daniel Ortega was elected President of Nicaragua and has been re-elected to office since. The Nicaraguan economy has grown in every year since Ortega was elected with the exception of 2009 when it was hit by the international financial crisis. The total expansion of per capita GDP up to the end of 2017 during Ortega’s turn in office has been 38% with an annual average growth rate of per capita GDP of 3.0%.

This relatively smooth and substantial economic growth, of course, significantly underpins, and helps explain, the political success of the governments in Bolivia and Nicaragua.
If the reason for this impressive economic success in Bolivia and Nicaragua is examined, its key macro-economic factor is shown in Figure 2 – the significance of this will become even clearer when less successful cases are analysed.

It should be recalled that GDP is divided into two parts:

· Inputs into production, that is investment – in Marxist terminology Department 1 of the economy

· Consumption which, by definition, is not an input into production – Department 2 of the economy in Marxist terms.

As ‘nothing can come from nothing’, only inputs into production can increase economic output. Figure 2 shows how an increasing proportion of the economy devoted to fixed investment underpinned Bolivia and Nicaragua’s economic growth.

· The percentage of fixed investment in Bolivia’s GDP rose from 14.3% to 20.8%.

· The percentage of fixed investment in Nicaragua’s GDP rose from 24.9% to 30.1%.

This high/rising percentage of fixed investment in GDP is in line with the pattern, as will be shown below, of the successful Asian socialist economies such as China.

To summarise, Bolivia and Nicaragua both carried out not only a ‘revolution in distribution’ but also a ‘revolution in production’ – sustained increases in economic growth even when faced with negative trends such as the fallout of the international financial crisis and the decline in commodity prices after 2014. This is a decisive factor underpinning both their economic and political success.

Economic success, political defeat due to betrayal– Ecuador


Ecuador constitutes a special case in Latin America in that the political setback came from treachery from within the camp of the left.

Rafael Correa was elected President in December 2006. He was re-elected President to three terms as president until 2017. His successor, Lenin Moreno, was the nominee of Correa’s party Alianza País. However, in office Moreno subordinated the country to the US. To attempt to block Correa’s support in the country the fraudulent arrest warrant already noted was issued in July 2018.

Despite great economic obstacles in Ecuador, which does not even have its own currency but uses the US dollar, great economic and social progress was made under the Correa government as clearly summarised by the US Center for Economic and Policy Research (CEPR).

· Annual per capita GDP growth during the past decade (2006–16) was 1.5%, as compared to 0.6% over the prior 26 years.

· The poverty rate declined by 38%, and extreme poverty by 47% percent. The reduction in poverty was many times larger than that of the previous decade.

· Inequality fell substantially, as measured by the Gini coefficient (from 0.55 to 0.47).

· The government doubled social spending, as a percentage of GDP, from 4.3% in 2006 to 8.6% in 2016.

· Public investment increased from 4% of GDP in 2006 to 14.8% in 2013, before falling to about 10% of GDP in 2016.

This increase in the proportion of fixed investment in GDP in Ecuador can be seen in Figure 2 above – it rose from 20.9% of GDP in the year before Correa was elected to a peak of 27.6% of GDP in 2013.

In 2015-2016, in addition to problems created by the increase in the exchange rate of the dollar, with no ability to devalue, Ecuador was struck by severe natural disasters such as the eruption of the Cotopaxi volcano and the El Nino phenomenon and, most substantially, the severe earthquake, which killed at least 676 people with over 16,600 injured and which by itself had a negative impact of 0.7% on GDP. This led to the necessity in the short term to devote more of the economy to consumption, in order to maintain the population’s living standards, but there was no confusion on the fundamental strategy of increasing the level of investment in the economy. This simply tactical shift was politically successful in ensuring the election of the candidate of the Alianza País in the 2017 Presidential election.

Overall the development in Ecuador therefore was an economic success but culminating in a political defeat due to treachery by Correa’s successor Lenin Moreno.

Economic inability to deal with the effects of the decline in commodity prices creates political setback – Brazil and Argentina.


Brazil and Argentina were the two biggest countries in Latin America in which the left came to power, before AMLOs recent victory in Mexico – being respectively the largest and fourth most populous countries in the continent, and its largest and third largest economies.

· Lula was elected president of Brazil in October 2002. He was succeeded in 2011 by Dilma Rousseff who won re-election in 2014 until being removed from office by a fraudulent ‘constitutional coup d’etat’ in August 2016 – with Temer becoming president, whose current approval rating is 4%.

· Néstor Kirchner became Argentina’s president in May 2003. He was succeeded by Cristina Fernández de Kirchner who remained in office until the right winger Macri was elected president in December 2015.

The economic dynamics in Brazil and Argentina are shown in Figure 3

· In Brazil, under the left government, the economy grew steadily until 2013. Per capita GDP in 2002-2013 rose by 33%, an annual average 2.6%. However, from 2014-2016 Brazil’s per capita GDP fell sharply by 9%.

· In Argentina per capita GDP grew by 58% from 2002-2011 – an annual average 5.2%. However, after 2011 GDP growth stalled and by 2015 per capita GDP had fallen by 3% compared to 2011.

Such a negative economic trend in the final periods of the left governments in Brazil and Argentina necessarily undermined their support. While they had made a ‘revolution in distribution’ delivering great progress for the population of their countries, they unfortunately did not succeed to make a ‘revolution in production’ – that is the ability to develop an economic policy capable of continuing substantial economic growth when faced with economic difficulties such as the aftermath of the international financial crisis or the fall in commodity prices.
Major political difficulties faced these governments – for example in Brazil the PT did not possess a majority in the legislature and the 1990s had seen many aspects of neo-liberalism institutionalised in the Central Bank and other bodies. Very negative economic circumstances were also inherited by Brazil’s left-wing government in exceptionally high interest rates and an overvalued exchange rate. Nevertheless, confronted with such strong objective difficulties, compared to positive examples in Latin America and the experience of China, it appears there was an insufficiently clear perspective on strategic macroeconomic direction which had negative consequences when the period of high commodity prices came to an end.

Turning to the explanation of the difference between the left wing governments which achieved both economic and political success and Brazil and Argentina, this can be clearly seen by comparing Figure 4 below with Figure 2 above.

· In Brazil the percentage of fixed investment in in GDP did rise significantly from 2003 to 2013 – from 16.6% of GDP in 2003 to 20.9% of GDP in 2013. However, from 2014 onwards it was allowed to fall, dropping to 16.4% of GDP by 2016.

· In Argentina the increase in fixed investment was shorter lived than in Brazil– from 15.1% of GDP in 2002 to 19.5% of GDP in 2007, before falling to 15.8% of GDP in 2015.

Therefore, whereas in Bolivia and Nicaragua, and for most of the period of the left government in Ecuador, the percentage of fixed investment in GDP rose continuously, underpinning economic success, no comparable scale of increase took place in Brazil and Argentina. This meant that Argentina and Brazil were not so capable of resisting the negative economic trends unleashed by the aftermath of the international financial crisis and the fall in commodity prices.

A special case Venezuela – the left in political power but problems in the economy


Venezuela constitutes a special case in Latin America. Chavez was elected president in 1998 and assumed office in February 1999. Initially he faced great opposition from capitalist control of the state oil company PdVSA, the overwhelmingly dominant economic resource in Venezuela, which created great economic difficulties. But the popular uprising of April 2002, to defeat the attempted anti-Chavez coup d’etat, by destroying capitalist control of the army, transferred the centre of state power into the hands of the working class. The working class has retained state power in Venezuela until the present – a great victory. In December 2002-2003 Chavez defeated the management strike in PdVSA – thereby for the first time securing firm control of the country’s most important economic institution.

These victories were followed by rapid economic expansion in Venezuela. Between 2003 and 2008 per capita GDP rose by 52% – an annual average 8.7%. Despite a moderate economic setback in 2008-2010, due to the impact of the international financial crisis, recovery then took place and in 2013 Venezuela’s per capita GDP was still 50% above its 2003 level – an annual average increase over that period of 4.1%. Chavez died in March 2013 and was succeeded by Nicolas Maduro who has remained President until the present.

From 2013 onwards, however, Venezuela’s economy sharply contracted primarily with both a fall in the price of oil and a decline in oil output. By 2017 Venezuela’s per capita GDP was 39% below its level of 2013 and 8% below its level of 2003. This economic contraction, whose social consequences were greatly exaggerated in the Western media, did not prevent the working class retaining power, with Maduro securing re-election in 2018. But it undoubtedly lowered support for the government, with Maduro’s voting falling by 1.3 million between 2013 and 2018. The economic situation in Venezuela was identified by Maduro as a key issue to address. These overall economic dynamics are shown in Figure 5.
Turning to analyse these trends in Venezuela they are greatly affected by the oil price – shown in Figure 6. The key Venezuelan macro-economic variables, fixed investment and saving, are shown in Figure 7.

For most of the period of Chavez presidency Venezuela was sustained by a sharply rising oil price – which rose from $12.2 on 1 February 1999, the date of Chavez inauguration as president, to an all time high of $145.3 on 3 July 2008. There was then a very severe fall during late 2008 and 2009, due to the international financial crisis, but by 29 April 2011 the oil price had recovered to $113.9. It was still $105.7 in July 2014. After that, however, in line with other commodity prices, the oil price fell sharply reaching a minimum of $26.2 on 11 February 2016. It then recovered to over $70 by July 2018. These trends are shown in Figure 6.

The results of the very high oil price during most of the period prior to 2014 was to create a very high level of total savings in Venezuela – total savings are equal to savings by companies, savings by individuals, and saving by the government. This very high oil price created very high company savings – total savings in the Venezuelan economy reached 42% of GDP in 2007.

As investment is financed by savings such a high level of savings would have permitted a very large increase in fixed investment in Venezuela, of the type seen in Bolivia, Nicaragua, or Ecuador – or of the type seen in China as analysed below. But although fixed investment in Venezuela recovered from their extremely low level of 2003 they never reached even the level of 1998. That is, Venezuela was not transforming its savings into fixed investment – as were, in contrast, Bolivia, Nicaragua, Ecuador or China. These trends are shown in Figure 7 – data in an internationally comparable form is only available up to 2013.

Without a high level of investment Venezuela’s economic growth could not be sustained in the face of the downturn in international commodity prices after 2014, and, even more directly damaging, without a high level of investment the rate of production of oil could not be maintained.

Therefore, Venezuela did not follow the successful economic path of Bolivia, Nicaragua, and Ecuador. This economic failure, as already noted, had a negative effect on the situation of the government – despite the overall great political success of retaining state power.

China


Finally, in addition to noting the positive lessons from Latin America, it is worth making a comparison of these experiences in Latin America with the successful socialist economy in China – as China’s experience and progress is still considerably underestimated in parts of Latin America.

In the almost 40 years since the beginning of China’s economic reform China’s economy has grown every year without exception. Its annual per capita GDP has increased on average by  8.4% a year over the 39-year period from 1978-2017. China experienced no serious economic crisis following the international financial crisis beginning in 2008.

As a result of that growth China has changed itself from a situation where in 1980 every country in Latin America had a higher per capita GDP than China to one in which by 2017 China had a higher per capita GDP than every country in Latin America except Panama, Chile, Uruguay, Argentina, Mexico and Costa Rica – China overtook Brazil in 2016. By 2023, on IMF projections, China’s per capita GDP will also overtake Mexico and Costa Rica.

Translating that into terms of the percentage of the population of Latin America, as Figure 8 shows:

· In 1980 100% of the population of Latin America lived in countries with a higher per capita GDP than China.

· By 2017 only 23% of the population of Latin America lived in countries with a higher per capita GDP than China and 77% lived in countries with a lower per capita GDP than China.

· By 2023, on IMF projections, only 7% of the population of Latin America will live in countries with a higher per capita GDP than China and 93% will live in countries with a lower per capita GDP than China.
To understand the scale of this transformation, however, it must be understood that China is far larger than Latin America – China’s population of China, at 1.4 billion, is more than two times that of the continent of Latin America.

Figure 9 therefore looks at the combined population of China and Latin America and notes the percentage of that combined population with per capita GDPs above and below China’s – that is, in a sense, it treats China as though it were a Latin American country for purposes of comparison. This shows that as recently as 1997 every country in Latin America, and therefore 100% of the population of Latin America, lived in countries with a higher per capita GDP than China. But, as already noted, by 2017 only 23% of the population of Latin America lived in countries with a higher per capita GDP than China and 77% lived in countries with a lower per capita GDP, while by 2023, on IMF projections, only 7% of the population of Latin America will live in countries with a higher per capita GDP than China and 93% will live in countries with a lower per capita GDP. As a result of this development China achieved the fastest increase in living standards of any major country.

In short, due to its economic policy, China has transformed itself from a country poorer than any in Latin America to one with a higher per capita GDP than all except the very richest Latin American countries. In particular it has overtaken Brazil in per capita GDP.
What, therefore, explains this extraordinary economic development in China and how does it interrelate with the lessons from Latin America? Figure 10 shows the similarity of China’s macro-economic development to the most economically successful left run governments in Latin America – Bolivia, Nicaragua and Ecuador. It shows that China’s growth, like theirs, was underpinned by a sustained and considerable increase in fixed investment. The contrast to the failure to raised fixed investment in a sustained way in Brazil, Argentina, and Venezuela is clear.

Conclusion


The lessons of the advance of the left in Latin America from 2000 onwards, during the ‘pink wave’, was one of the most inspiring and progressive in human history. The lives of many millions of people were improved.

It is also a complete myth, spread by the right, that the right wing has swept all before it. On the contrary the continuing success in a number of Latin American governments, the new left victory in Mexico, continuing struggles in Brazil and Argentina and elsewhere show that the left, as well as the right, has deep social roots in Latin America. The fact that the right in Latin America has to resort to ‘lawfare’ is precisely because it believes that if a democratic process were allowed to unfold the left would win.

At the same time, to confront the new round of struggles, it is necessary to draw lessons, both positive and negative, of the previous wave of struggles in Latin America. A key part of that is to draw the economic lessons. Study both of the successful examples in Latin America and of the socialist economy of China is crucial for this.

***

The above article was originally published here on the Brazilian website Opera Magazine

Monday, 9 July 2018

Misplaced optimism from the Bank of England Governor

By Tom O’Leary

The Bank of England Governor has declared that the UK economic outlook is improving. He may be right in a limited sense. The recorded growth rate of the 1st quarter of just 0.2% may not be as dismal in subsequent quarters. But there is little room in the medium-term outlook for misplaced optimism.

Carney said, “A number of indicators of household spending and sentiment have bounced back strongly from what increasingly appears to have been erratic weakness in Q1. The UK labour market has remained strong, and there is widespread evidence that slack is largely used up. Pay and domestic cost growth have continued to firm broadly as expected. Headline inflation is still expected to rise in the short term because of higher energy prices.”

But this only highlights the misconceptions about the drivers of economic growth and its consequences. The first indicators Carney relies on are Consumption data. But Consumption growth cannot drive economic growth, and is destined to fall back unless production and living standards are rising.
Consumption is a consequence of output, not a contributor to it. The growth in Consumption therefore requires the growth in output. Chart 1 below shows the real GDP growth rate (in blue, on the right-hand scale) alongside the proportion of GDP in real Final Consumption Expenditure (orange, on the left-hand scale).

Chart 1. UK Real GDP Growth and the Proportion of Final Consumption Expenditure in GDP, 1970 to 2016
 
Over time, in common with most Western economies, in the UK the proportion of GDP directed towards Consumption has grown. The corollary is that the proportion of GDP devoted to Investment has fallen. At the same time, the growth rate of the economy has slowed as the proportion of GDP directed to Consumption has risen and the proportion directed to Investment has fallen.

This apparent correlation between the falling proportion of GDP directed towards Investment is that it is associated with a decline in the growth rate of GDP. Peaks in Consumption are associated with troughs in GDP growth. If we take prolonged periods, such as the build-up to the Great Recession in 2008, this included a rise in the proportion of Consumption in GDP from 81% at the end of the 1990s to a peak of 87.8% in the depth of the recession in 2009.

This impression is confirmed by examining the data statistically. Chart 2 below shows the correlation between GDP growth and the proportion of Final Consumption in GDP. As the chart clearly shows, the correlation is a negative one, with a downward slope. As Final Consumption rises as a proportion of GDP, GDP growth itself slows.

Chart 2. UK Real GDP Growth & Proportion of Final Consumption in GDP, 1970 to 2016
 
Correlation is not causality. But the data completely belies the notion that economic growth, and the rise in living standards that growth allows, can be driven by rising Consumption over the medium-term.

Instead, the relationship is better understood as the relationship between Consumption and Investment, which both follow output. If output is not consumed, but saved and invested, it lays the basis for further output. However, if all output is consumed, then there is no possibility of increased output, and it will decline over time as capital (the means of production) are themselves consumed in the production process (through wear and tear, dilapidation, and so on). It is the increase in Investment which leads to the development of the means of production, which sustains an increase in production.

On this fundamental point, Carney’s assessment is wrong, even if better quarters ahead are possible in terms of GDP compared to the 1st quarter of 2018. Improving household spending and consumer sentiment cannot sustain increased growth over the medium-term.

The decisive factor is Investment. And here, the outlook is very far ‘bouncing back strongly’. Chart 3 below shows the rate of growth in Investment (Gross Fixed Capital Formation).

Chart 3. UK Growth in Gross Fixed Capital Formation, %
 
Investment (GFCF) fell in the 1st quarter of this year compared to the 4th quarter of 2017. Measured on the less erratic basis on yearly comparisons, it has been on a declining trend since the 1st quarter of 2014 and is now just 1.5%.

This Investment weakness and lack of growth in productive capacity is the source of Mark Carney’s other concern of rising price pressures. It is the dearth of Investment which is causing capacity constraints, from which he sees rising inflationary pressures. But even that standard interpretation may be misplaced. 

His view that the strength of the labour market is leading to pay pressures is belied by the fact that real earnings growth remains close to zero. The focus on the falling unemployment rate may be misleading, along with the rise in the employment rate, both of which are at levels not seen in a generation or more.

This is because the number of hours worked per week in the economy is stagnating. Chart 4 below shows the total number of hours worked, in millions. The low-point following the recession was 914.4 million hours worked in the 1st quarter of 2010. But it peaked at 1,034.2 million hours in the 2nd quarter of 2017 and has since stagnated.

Chart 4. Total Weekly Hours Worked, millions
 
Although there are more people in work (and fewer unemployed workers) they are working shorter hours. Therefore total hours worked are not increasing. The growth of part-time working, zero hours contracts and perhaps even shorter time for full-time workers do not reinforce the idea of a labour market that is going to produce much higher wages. 

The lack of Investment means that the significant creation of jobs over the last period is dominated by lower productivity, lower-paid jobs. It is also at the same time leading to genuine capacity constraints. The Bank of England Governor’s optimism is misplaced. Consumer spending cannot sustain stronger growth over the medium-term. So, the weakness of Investment means that a strong recovery from here is highly unlikely.

Wednesday, 27 June 2018

Tories’ Brexit and Trump will only damage the economy

By Tom O’Leary

US President Trump seems to be stumbling towards a trade war. At the same time a large section of the current UK government seems intent of crashing out of the EU without a deal.

In both cases, there will be economic damage inflicted on other countries (in Trumps’ case, consciously so). But the main damage will be inflicted on their own economies.

Damage done

The damage is easy to identify. In the UK, a string of large manufacturers have highlighted the risks to their business arising from the prospect of a Tory ‘Hard Brexit’ or even no deal leading to the adoption of World Trade Organisation (WTO) rules. Airbus issued a statement (pdf) which was very clear. In summary, it said that a no deal outcome would inevitably mean that they would leave this country, and that until there was a deal which allowed product pre-approval (vital for the safety-conscious aerospace industry), and the free movement across borders of its goods and its people, they would be making no investment in the UK.

The UK CEO of Siemens said that, “If the Brexit we end up having provides significant friction, provides significant cost then of course that will be an argument against making investments here in the UK,” and argued for continued membership of the Customs Union until an equivalent friction-less system for goods is put in place.

BMW, which make Minis and Rolls-Royces said it had no plans to cut jobs and close plants, but “We always said we can do our best and prepare everything, but if, at the end of the day the supply chain will have a stop at the border, then we cannot produce our products in the UK.”.

In addition, the Society of Motor manufacturers and Traders (SMMT) (pdf) revealed that industry investment had halved in the last year and that sales and exporters were expected to fall. The SMMT’s chief executive said, “There is no credible ‘plan B’ for frictionless customs arrangements, nor is it realistic to expect that new trade deals can be agreed with the rest of the world that will replicate the immense value of trade with the EU. Government must rethink its position on the customs union. There is no Brexit dividend for our industry, particularly in what is an increasingly hostile and protectionist global trading environment.”

In the US, the Trump administration has already imposed tariffs on imports from a number of countries, primarily in an effort to corral them into a concerted anti-China trade policy. He threatens further trade tariffs, on a wider array of goods.

Clearly, the countries targeted will suffer directly. But the policy will also inflict jobs losses for US workers, loss of markets for US farmers and higher prices for US consumers. For US consumers, ‘Trump’s tariffs are already backfiring’ as the Washington Post neatly characterises the situation where US tariffs have led to a 17% jump in the price of washing machines in the US, hurting US consumers who buy almost 10 million washing machines each year at an average cost of over $400. 

The hit to US consumers, and money they cannot spend on other goods or services in the US, is around $680 million a year, with no appreciable increase in jobs created. Any jobs ‘saved’ will be at enormous cost and can lead to job destruction in other sectors, as US consumers pay Trump’s effective tariff taxes.

US farmers are worried that they will bear the brunt of Trump’s trade tariffs. US agriculture is enormously productive and US agricultural exports amount to around $140 billion per year. China offered to buy additional foodstuffs as a way of reducing its bilateral trade surplus with the US. But Trump refused to remove tariffs and now China and other countries will respond to Trump’s tariffs with their own, which will hit US farmers.

It is also clear that Harley-Davidson’s decision to shift production overseas will hurt US manufacturing jobs. The shift is necessary because of retaliation by the EU against tariffs imposed by Trump on European steel and aluminium production. But it is not only the retaliation which is destroying US jobs, but Trump’s initial actions themselves.

Self-inflicted damage

This is important, and key to understanding how both Trump’s protectionism and the Tory Brexit will damage the US and the British economies respectively. There is the obvious point that tariffs on steel will raise the input price of imported steel for all production where it is used. Either more costly or inferior steel will be used (if possible), which will hit jobs and living standards in the US.

But there is a more important and more fundamental reason behind the self-inflicted damage from protectionism. Production globally is integrated. There are single, global prices for nearly all commodities and for many semi-finished goods. Raising the price (through tariffs or other mechanisms) nationally tends to raise them internationally.

In addition, production is integrated through international, sometimes global supply chains. In the US, EU-owned car producers will be hit by tariffs on parts and other inputs from Europe and elsewhere. This is already happening. It will deter new investment in US-based investment for car production by overseas producers, and it will raise costs and act as a deterrent to expansion for existing producers.

The same logic applies to UK-based manufacturers and Brexit. If the UK link of multinational supply chains is broken, the chain will be reassembled without the UK. This is irrespective of the companies’ ultimate ownership, British, European, or third country. It is not a question of nationalism, but of markets, production, profit and jobs.

Airbus is obviously a transnational corporation. It relies on parts and inputs crossing national boundaries, sometimes several times as each plant adds new value to the production process.

Airbus cannot realistically have an integrated multinational supply-chain where one country imposes tariff barriers, operates separate rules (impacting safety standards) and where it cannot move key personnel around Europe to facilitate the integrated production process. If one locale unilaterally imposes tariff barriers, separate safety standards and monitoring or prevents free movement of skilled workers, it endangers production in that locale entirely.

UK-based car producers, like BMW, operate under the same strictures and require the same effective free trade regime to make their existing supply chains work. It is the threat of disrupting those supply chains, or even severing them altogether, which is the cause of the plunge in UK car industry investment in the last year.

Trump’s tariffs and the Brexit being pursued by the Tory government have the effect of severing these supply chains. It is the US and the UK respectively that will be the broken link, with the consequent loss of investment, productivity and jobs.

Socialised production

‘Making America Great Again’ and a ‘Global Britain’ are crass sound-bites when economic policy has the effect of reducing each country’s participation in the global division of labour. There is a fundamental economic underpinning to the damage Trump and the Tory Brexit will cause.

In his economic writings, Marx was primarily concerned with the analysis of the capitalist mode of production and its replacement by socialism. Socialism too is firstly a mode of production, one which allows the development of society and of the people within it; the producers collectively determining production to meet human needs, without value being extracted by capitalists. But as a materialist, Marx demonstrated that the basis of the new socialist society was the new mode of production itself.

The term ‘socialism’ derives from this socialised production. That is, the integrated production of all the necessary goods and services to satisfy human wants using the highest possible development of all the productive forces in society. These include labour and capital, as well as their integration into the production process through what Marx terms the socialisation of production.

The socialisation of production long precedes the development of capitalism. When we lived in forests and caves, some of us honed sharp instruments, others created weapons and others prepared the meat that had been hunted. Each successive society, based on successive modes of production raised the socialisation of production to a new, higher level, allowing it to be the dominant mode of production and the dominant form of society.

Capitalism raised this level of socialised production to a new, far greater height, as Adam Smith demonstrated in ‘The Wealth of Nations’, (which Marx drew on heavily, transforming Smith’s division of labour into ‘socialised production’.)

Volume 1 of Capital is shot through with reference to both ‘social production’ and ‘social division of labour’. The former appears 23 times in Volume 1 alone and the latter 16 times. And Smith’s own term, the ‘division of labour’ appears 164 times. They were staging posts on the way to Marx’s unified conception of socialised production. In addition, Marx’s Chapter 13 ‘Co-operation’, examines the increase in productivity arising even from the simplest forms of the division of labour.

Socialisation of production.

This socialised production of labour is ultimately the material basis for socialism. Socialism is necessary to replace capitalism precisely because, in Marx’s terms, “at a certain point the social relations of production come in conflict with the development of the productive forces”. That is to say, capitalist ownership of the means of production (from which they are solely concerned to derive profits) prevents the development of the productive capacity of the economy, and is the cause of if its deep, recurring crises. Only socialism can realise the full rational, socialisation of production to meet human needs.

It is incorrect to suggest, baldly that Marx was only in the first instance concerned with production. Volume 1 of Capital begins with commodities and money, not production, as the unique and specific feature of capitalism is that commodity production becomes generalised, and money becomes the universal substitute for all commodities. This is what is specific to capital.

Instead, the socialisation of production is a general phenomenon. It is a given throughout all modes of production. Capitalism raises this up to a new higher level, and Marx examines how this takes place within the capitalist system.

Socialised production is necessarily international. In Smith’s famous example, it was as easy to ship coal from Newcastle to European ports as it was to London. In the modern era, as we have seen, just-in-time manufacturing and complex supply chains mean that inputs for final products cross borders on multiple occasions.

Marx argued that capitalism really begins when individual capitalists employ larger numbers of workers, and the level of production becomes extensive and large amounts of commodities are produced. And the scope for the development of the productive capacity of the economy, the employment of large numbers of workers and of the degree of socialised production are all limited by the size of the market itself.

So, there is little incentive to build a smelting works if the ultimate sales of the commodities produced are very small. The development of the productive capacity and the scope for the increase in socialised production are in part determined by the size of the market.

Therefore the response of one Tory MP to the Airbus statement, to the effect that this country should establish its own aerospace industry instead, highlights the grave misunderstanding of fundamental economic forces.

The two main antagonists in global aerospace competition, Airbus and Boeing have a market value or around $100 billion and $200 billion respectively. This is the scale of investment that would be needed simply to establish a UK competitor. But, even with that investment, where is the market for this new production?

It could only come from a head-on struggle with the two market leaders who dominate the world market, And this while the UK imposes tariffs on parts, operates its own rules on product safety and bars highly-skilled overseas workers who would bring the expertise necessary to make that production feasible. It is more fantasy.

Like Trump’s protectionism, the Tory Brexit project will break global supply chains, reduce access to markets and interrupt the socialisation of production, the most important factor in economic growth.

Wednesday, 20 June 2018

The New Shape of World Politics - Disorder in the West, Stability in the East

By John Ross

The following article on 'The New Shape of World Politics - Disorder in the West, Stability in the East' analyses the reasons for the Trump administration introducing tariffs against China and the background to the recent G7 and Shanghai Cooperation Organisation (SCO) summits. It was originally published in Chinese by Sina Finance Opinion Leaders, therefore some issues specifically affecting China are dealt with in detail. But the most fundamental features analysed regarding the world situation - the consequences of the 'new mediocre/Great Stagnation' in the main Western economies, and their geopolitical consequences - of course apply equally to all countries.

* * *

The Trump administration’s imposition of a 25% tariff on $50 billion worth of imports from China [followed now by a threat to impose tariffs on a further $200 billion of imports from China] is an attack on China. But it is simultaneously an attack on the US population - the tariffs will apply downward pressure on US living standards through the increased price of imports and jobs losses due to price increases of components for US production plus the inevitable, already announced, proportionate counter tariffs by China.

The negative effects of such tariffs on the US population can already be seen in the fact that since Trump imposed tariffs on washing machine imports, the average price of laundry equipment including washing machines, has risen by 17% in the US. Price increases for the US population resulting from tariffs against China will, of course, be much widespread and greater than those on a single product such as washing machines.

This US tariff attack on China follows after US imposition of tariffs on steel and aluminium hitting US allies such as the EU, Japan, and Canada. This, and differences on other questions such as sanctions against Iran and the Paris Climate Change Accords, produced sharp disputes at the recent G7 summit in Quebec. The fact that the sharp dispute at the G7 summit took place almost simultaneously with the successful consolidation of the SCO at its own Qingdao summit, with India and Pakistan participating for the first time as full members, showed an increasing trend in world politics - ‘disorder in the West, stability in the East.’

At first sight the Trump administration’s tariffs appear irrational. China, during recent trade negotiations with the US, made reasonable, even generous, proposals to increase US agricultural, energy, manufacturing and other exports to China. China’s trade proposals would have created tens, probably hundreds, of thousands of US jobs and created greater incomes for US farmers. But naturally, China stated that such proposals would be null and void if the US introduced tariffs against China. China’s proposals would, therefore, also have increased the US economic growth rate. Therefore, by proceeding to introduce tariffs, the Trump administration has both foregone the possibility to create many thousands of new jobs in the US, and raise farmers’ incomes – while simultaneously tariffs, by raising prices in the US, will have a net effect of actually losing US jobs.

Nevertheless the US administration’s apparently irrational attacks, not only on China but on the US population and its allies, becomes perfectly comprehensible once it is grasped that the Trump administration in fact cannot significantly accelerate medium/long-term US growth – which, as will be shown, is at present at historically low levels. Therefore, the US form of competition with China cannot be to attempt to substantially accelerate US economic growth, to which no one could object or could prevent, but can only be an attempt to slow down China’s economic development.

The motivation for the apparently irrational actions of the Trump administration therefore becomes entirely clear once the actual factual situation of the US and main Western economies is analysed. The fact that the G7, including the US, is in historic terms is locked in the ‘new mediocre’ also makes clear why there is the strengthening of the trend ‘stability in the East, disorder in the West’.

Disorder in the West

Even before the Trump administration announced its 25% tariff against China the recent outcome of the two almost simultaneous summits involving the most important world leaders, the Shanghai Cooperation Organisation (SCO) in Qingdao and the G7 in Quebec, was intensely revealing in casting a light on world geopolitics and economics. It would be hard to imagine a more contrasting outcome of two major events.
  • The SCO summit saw further strengthening of that organisation, with India and Pakistan participating for the first time as full members. The SCO summit was marked by consolidation of cooperation between SCO countries and in particular by discussions between three extremely large states within it – China, India and Russia.
  • The G7, in contrast, was marked by a bitter argument and clashes between the other six members and the US.
It is important for understanding the dynamic of world geopolitics to grasp that this dynamic of ‘stability in the east, disorder in the west’ is not rooted in purely temporary factors. Instead, as this article will factually demonstrate, it is rooted in fundamental features of the global economic situation.

Acrimony at the G7

As the SCO summit was extensively covered in China’s media it is superfluous to give a detailed account here. It is sufficient to note that the expansion of the SCO now means its full members account for over 40% of the world’s population and cover the great majority of the Eurasian land mass. With observer states and dialogue partners the SCO includes 45 per cent of the world’s population. The SCO has, therefore, become the world’s largest regional organisation. The economic driving dynamic of the SCO will be analysed below.

The bitter character of the G7 summit was equally extensively covered in the Chinese media. Nevertheless, to avoid any suggest Chinese media may have exaggerated this, it is worth quoting some of the most authoritative Western news organisations.
  • Even before the G7 summit began Reuters reported, under the self-explanatory title ‘Trump to leave G7 early, tensions high after “rant” over trade‘: ‘U.S. President Donald Trump and Group of Seven leaders had a bitter exchange over trade tariffs, ratcheting tensions at a summit that he planned to leave early on Saturday… In an “extraordinary” exchange between the leaders on Friday, Trump repeated a list of grievances about U.S. trade, mainly with the European Union and Canada, a French presidency official told reporters. “And so began a long litany of recriminations…” the official said.’
  • Following Trump’s departure from the summit: The New York Times noted: ‘President Trump upended two days of global economic diplomacy late Saturday, refusing to sign a joint statement with America’s allies, threatening to escalate his trade war on the country’s neighbours.’
  • The Financial Times analysed: ‘Donald Trump capped a fractious meeting with G7 allies by refusing to back a joint statement from the group that had pledged to fight protectionism, blaming “false statements” from Canada’s prime minister Justin Trudeau and ratcheting up tensions on tariffs.'
What, therefore, explains the difference between the sharply contrasting SCO and G7 summits?

Part 1 – Economic Roots of Political Instability in the West

The Great Stagnation

Attempts in sections of the media to present the situation in the Western economies as very favourable has led to a serious inability in such analysis to foresee or explain the clashes which took place at the G7 summit or other features of the geopolitical situation. The reason for this is that factually, far from being favourable, the Western economies are undergoing a ‘new mediocre’, in the words of IMF Managing Director Christine Lagarde - what may be termed historically a ‘Great Stagnation’, in which Western long term economic growth is now astonishingly slower than in the ‘Great Depression’ after 1929.

This historical comparison is shown in Figure 1. This shows the percentage change in GDP for the G7 economies as a whole compared to the peak year of the business cycle preceding the respective economic crisis– i.e. the years are counted after 1929 and after 2007, with in each case the number of years since that peak shown. The data for the period after 1929 is the actual economic results, for the period after 2007 actual factual data is used up to 2017 and the figure for 2018 is the latest IMF projection for this year. The situation for the G7 as a whole is clear:
  • By eleven years after the crisis of 1929 the GDP of the G7 economies as a whole was 20.2% higher than in 1929. Considered in more detail, the downturn after 1929 was deeper than after 2007, but recovery was relatively rapid and fast. That is, in a sense, the 1930s is better thought of as the ‘Great Recession’ – i.e. sharp downturn followed by rapid recovery. The reason that the term ‘Great Depression’ is used, is due to the specific situation in the 1930s in the US.
  • In contrast, by 11 years after 2007 the GDP of the G7 economies as a whole was only 13.8% above the pre-crisis level – i.e. growth in the G7 as a whole after 2007 was significantly slower than after 1929.
Figure 1

Examining the main G7 economies in detail, and comparing the same number of years after 1929 and after 2007, the last year before the international financial crisis:
  • Eleven years after 1929, Japan’s GDP was 64% higher than its pre-crisis peak, whereas in contrast 11 years after 2007 Japan’s GDP was only 13% higher than its 2007 level. Therefore, by eleven years after 1929 Japan’s economic growth was almost five times as fast after 2007.
  • By 11 years after 1929 Germany’s GDP was 44% higher than the pre-crisis peak, whereas in contrast 11 years after 2007 Germany’s GDP was only 15% higher than it pre-crisis peak. Therefore, Germany’s economic growth in the 11 years after 1929 was almost three times faster than its economic growth in the eleven years after 2007.
  • By 11 years after 1929 UK GDP was 32% above its pre-crisis level, whereas by 11 years after 2007 UK GDP was only 13% above its 2007 level. Therefore, in the 11 years after 1929 UK economic growth was almost two and a half times as fast as after 2007.
  • In the 11 years after 1929 Italy’s economy grew by 24%, whereas in the 11 years after 2007 Italy’s economy actually shrank by 4%. Therefore, in the period after 1929 Italy’s economic growth was far faster than in the period after 2007.
  • Recovery in the US after 1929 was slower than in the other G7 economies just analysed. It took seven years for US GDP to recover to its 1929 level, and even then, recovery was weaker than in the G7 economies already analysed. Nevertheless, by 11 years after 1929, US GDP was 19.8% above its 1929 level whereas by the end of this year, the same 11 year period after 2007, US GDP will only be 18.3% above its 2007 level. That is, by the end of this year, US economic growth over the 11-year period since 2007 will also be slower than in the 11 years after 1929.
It was this recovery after 1929 of the US and three other major G7 economies – Germany, Japan, and the UK – which, explains why overall G7 growth in the 11 years after 1929 was significantly faster than in the 11 years after 2007. Only in two less important G7 economies, Canada and France, was economic growth in the 11 years after 1929 worse than after 2007 - but the weight of the relatively more minor G7 economies, Canada and France, was quite insufficient to match that of the US, Japan, Germany, the UK and Italy.

Political and geopolitical consequences of the 'new mediocre'

Once this fact that the main Western economies, the G7, are going through a period in which their growth is slower than after 1929 is clear then the key present features of the geopolitical situation, in particular the ‘disorder’ in the West, become clear. Comparing the geopolitical situations after 1929 and after 2007, then following 1929 the extreme violence of the economic downturn led to extremely rapid political crisis:
  • In 1931 Japan began war with China
  • In 1931 Britain abandoned the gold standard, destroying the existing international monetary system.
  • In 1932 Roosevelt was elected US President to launch the New Deal.
  • In 1933 Hitler became Germany’s Chancellor.
But the strong economic upturn after the depth of the post-1929 crisis also meant these regimes, once established, did not face serious domestic political opposition – Japanese militarism was not met with major domestic popular disapproval, Hitler was popular in Germany, the British Conservative governments of the 1930s had some of the highest popular votes in British history, Roosevelt became the longest serving US President.

Therefore, while the 1930s, after recovery from the depth of the economic crash, was a period of great international geopolitical instability the domestic regime in the major countries was rather stable. The exception to this, France, which went through the mass strikes and turmoil of the Popular Front government in 1936, confirmed this rule ‘from the negative’ – France was the one major G7 economy whose economy in the 1930s grew far more slowly than after 2007.

This different pattern of economic development after 2007, compared to that after 1929, explains current geopolitical developments which create the international situation facing the SCO.

Whereas after 1929 very rapid economic downturn led to rapid political crisis the long period of slow growth, the ‘Great Stagnation’/’new mediocre’ after 2007, means that the political instability began slowly and has progressively accumulated.
  • In 2010 rising political instability started in developing countries produced the ‘Arab Spring’ and widespread destabilisation in the Middle East.
  • In 2012 Le Pen’s National Front achieved electoral breakthrough in France beginning the rise of ‘populist’ movements in advanced countries.
  • In September 2015 radical left winger Corbyn was elected leader of the UK Labour Party, while in June 2016 the UK referendum voted for Brexit.
  • In 2016 Trump was elected US President against the wishes of the establishment of both Republican and Democratic Parties inaugurating almost continuous clashes in US politics.
  • In May 2017 Macron was elected French President against the opposition of both right and left wing traditional political parties.
  • In 2017 Merkel suffered a severe electoral setback creating the most difficult period in forming a German government since World War II.
  • In June 2018 ‘populist’ parties, the Five Star Movement and The League, formed a government in Italy.
Unstable geopolitical situation on the periphery of the SCO

This destabilisation, in its impact on developing economies, also explains the geopolitical situation surrounding the SCO.
  • To the west of the SCO region an arc of military conflicts extends from west and north Africa (Boko Haram in Nigeria, al-Shabab in Somalia, failed state in Libya etc), extending into full scale war in Syria and Iraq, while to the west and north of the Black Sea, in Ukraine, armed conflict broke out after the 2014 coup d’etat and problems of jihadist terrorism continue in parts of the Caucasus.
  • In one region of the south SCO war continues in Afghanistan.
  • To the east of the SCO region the US continues to attempt to carry out provocative actions in the South China Sea and in the regard to Taiwan Province of China, while making military threats against the DPRK.
  • With an impact on the entire global situation, the US has embarked on sanctions against Russia, tariffs against key US allies such as Japan, Canada, Mexio and the EU, sanctions against Iran, and now sanctions against China.
This geopolitical situation, in addition to its economic underpinnings, is worsened by the fact that US foreign policy has deliberately geopolitically embarked in recent decades on a policy in which it is prepared to accept an outcome of ‘failed states’ and the emergence of jihadist terrorist organisations. For example, in Iraq, prior to the US invasion of the country, jihadist terrorist were entirely marginal. After the US invasion, in the form of ISIS, jihadist terrorists controlled large parts of the country – indeed it is striking, and indicative, that at present the only parts of Iraq and Syria in which areas controlled by ISIS continue to exist are those were US forces are dominant. Similarly, in Libya US led NATO forces overthrew Gadhafi to create a ‘failed state’ in which large parts of the county were controlled by jihadist terrorist organisations which export weapons to large parts of Africa.

But as comparison to the 1930s shows, in addition to the impact on developing countries, very slow growth leads to increasing conflict between the advanced economies. Certainly, the present clashes between G7 member states are less than the full-blooded conflicts, culminating in war, between the US, Germany, Japan, the UK, Italy and France in the 1930s. But the increasing clashes between the G7 countries show, in a much milder form, the same trends.

Part 2 – Economic Roots of Consolidation of the SCO

The SCO

The economic contrast in the SCO region to that in the G7 is evident and is shown in Table 1 - this data is not taken from a source controlled by China, but from the projections of the IMF for economic growth in the period 2017-2023.

As may be seen, regarding the three largest G7 economies, which dominate the G7 group:
  • The highest total growth in per capita GDP in any G7 country in the period up to 2023 is Germany’s 10.3%, with an annual average growth of 1.7%.
  • Total US per capita GDP growth in the same period is projected to be 7.4%, an annual average 1.2% growth.
  • Japan’s total per capita GDP growth in this period is projected at 6.4%, an annual average 1.0%.
In contrast:
  • China’s total per capita GDP growth is projected at 39.4%, an annual average 5.7%.
  • India’s total per capita GDP growth is projected at 46.0%, an annual average 6.5%.
  • All SCO economies, except Russia and Kazakhstan, are projected to have faster per capita GDP growth than any G7 economy – and Russia and Kazakhstan are projected to have faster per capita GDD growth than every G7 economy except Germany.
The net result of much faster growth in the SCO region than the G7 is that, even measured at current exchange rates, total GDP growth in the SCO region is projected to be larger than in the G7 in 2017-2023 - $12.2 trillion compared to $11.1 trillion.

But measurement at current exchange rates significantly understates the real expansion of markets for companies in the SCO region compared to the G7. The reason for this is that lower wages in developing economies, not only in production but in distribution and retailing, mean that goods and services can be sold profitably in developing countries at lower prices than in advanced ones. For this reason, current exchange rates understate the size and expansion of developing economies compared to advanced ones.

The branch of economics that deals with this is known as Purchasing Power Parities (PPPs). This analyses the volume of goods and services produced in an economy taking into account the differences in price levels. It is, therefore, a better measure of the increase in volume of production of goods and services than measurement at current exchange rates.

As Table 1 shows, measured in PPPs, the increase in GDP in the SCO region, 23.0 trillion dwarfs that in the G7 at 9.4 trillion.

To complete the picture on the SCO, if SCO official observer states (Afghanistan, Belarus, Iran and Mongolia) and SCO dialogue partners (Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka and Turkey) are included the difference between the SCO region and the G7 becomes larger. The IMF projects increase in GDP in 2017-2023 in all SCO full members, observers, and dialogue partners at $12.3 trillion compared to $11.0 trillion in the G7. In PPPs the lead of all full members, observers and dialogue partners is 24.1 trillion compared to 9.4 trillion in the G7.

Given this much faster economic growth in almost all SCO members than in the G7, and greater total size of potential economic development in the SCO region than in the G7, it is clear all SCO states have a strong interest in maintaining conditions of geopolitical stability, in order to enjoy the fruits of this economic growth.

Table 1

South China Sea

To further analyse the reasons for ‘stability in the East’ a second decisive area surrounding China can be analysed – those countries and regions bordering on the South China Sea. This area is of particular importance because deliberate attempts have been made by the US to destabilise this region – the attempt to get the Hague Permanent Court of Arbitration to illegitimately rule on the region, provocative voyages by US warships in the region etc. Sustained attempts by the US to escalate tensions in the South China Sea region to high levels, however, have been unsuccessful.

To understand the economic background to this failure of the US efforts, it is striking that Table 2 shows that the IMF projects that every country or region bordering on the South China Sea will in the next period have a faster growth rate than every G7 economy. In particular between 2017 and 2023, in addition to China, the IMF projects:
  • Malaysia’s per capita GDP will grow a total 23.8%, an annual average 3.6%.
  • Indonesia’s per capita GDP will grow a total 28.1%, an annual average 4.2%.
  • The Philippines per capita GDP will grow a total 32.3%, an annual average 4.8%.
  • Vietnam’s per capita GDP will grow a total 38.0%, an annual average 5.5%.
Regarding overall economic potential growth in the region, the South China Sea region does not contain India, which together with China is the world’s most rapidly growing very large economy, but nevertheless the rapid growth of the states in the region means that the economic growth potential of the South China Sea region is essentially equal to that of the G7 measured at current exchange rates and much greater than that of the G7 measured in PPPs. The IMF projects that, measured at current exchange rates in 2017-2023, economic growth in the South China Sea region will be $10.9 trillion compared $11.1 trillion in the G7, while in PPPs the growth of the South China Sea region will be 17.7 trillion compared to 9.4 trillion in the G7.

Table 2

SCO and the South China Sea region

To analyse the situation in a consolidated way, the SCO and the South China Sea region include China, therefore the combined economic growth of all states in these regions in 2017-2023, as projected by the IMF, is shown in Table 3. As may be seen:
  • Even at current exchange rates, considering only full members of the SCO, the economic growth in the combined SCO and South China Sea region is projected, on IMF data, to be significantly greater than that of the G7 - $13.5 trillion compared to $11.1 trillion.
In terms of PPPs the greater growth of the full SCO members and South China Sea region compared to the IMF is overwhelming – 26.8 trillion compared to 9.4 trillion. In summary, in PPPs, the best approximation of the real increase in markets for goods and services, the combined growth of the SCO and G7 regions will be almost three times than of the G7.

Table 3

Belt and Road Initiative

Finally, in analysing the broader perspective of the Belt and Road Initiative (BRI) a complication is that, unlike the SCO states or the South China Sea region, the area covered by BRI is not officially defined. Furthermore, the BRI has a specific feature that India, for political reasons concerning its border dispute with Pakistan in Kashmir, refuses to officially support the BRI - while in reality India fully participates in, and benefits, from economic development in the BRI region. Therefore, to calculate the economic growth in the Belt and Road initiative, in addition to that of the strictly defined SCO and South China Sea states, it is necessary to make assumptions regarding which other countries to include.

There is no advantage in exaggeration in serious matters, so here only a ‘narrow’ definition of the BRI economic potential will be included. The BRI region will be taken as SCO and South China Sea states plus the other remaining states of the former USSR (excluding the Baltic States) plus Iraq – other Middle Eastern and East European states are highly favourable to BRI but they are not included here. This means for present calculations including in a wider BRI region, in addition to the SCO and South China Sea regions, Turkmenistan, Moldova, Georgia, Ukraine, and Iraq.

Table 3 therefore shows what may be termed both a ‘narrow’ and a ‘wide’ definition of the economic potential in the area surrounding China in comparison to the G7.
  • The ‘narrow’ definition of the economic potential in the regions surrounding China may be taken as only full members of the SCO and those states bordering on the South China Sea.
  • The ‘broad’ definition of the economic potential in the regions surrounding China may be taken as all full members of the SCO, SCO observer states and SCO dialogue partners, plus states bordering on the South China Sea and BRI states as defined above.
It was seen above that even taking a narrow definition of the economic potential in the states surrounding China this is projected to be greater than the G7 in the period 2017-2023. If a ‘broader’ definition of the BRI is included, then the economic advantage of the region surrounding China, compared to the G7,is evident.
  • At current exchange rates, in 2017-2023 the IMF projects the broad economic potential in the BRI region around China at $14.2 compared to $11.1 trillion in the G7.
  • In PPPs, which more accurately reflects real sales, the advantage of the region surrounding China is overwhelming compared to the G7 – in PPPs 29.2 trillion compared to 9.4 trillion.
Geopolitical Consequences

The geopolitical conclusions of the economic trends analysed above are clear.
  • The G7 is in a situation of the ‘new mediocre’/’Great Stagnation’, in which economic growth is even slower in the period after 1929. This necessarily produces domestic political instability within the G7 states, significant clashes between G7 countries as registered at the Quebec summit, and the development of significant terrorist threats, or even full scale civil war, in developing countries which are highly influenced by economic situation in the G7 – this instability surrounds the SCO region. It also explains the apparently irrational tariffs introduced by the Trump administration against China – the US cannot accelerate its own economy in the medium/long term and therefore for competition it conceives it has to concentrate on slowing China.
  • In the SCO and South China Sea regions, in contrast, a high economic growth potential exists compared to the G7. This means that the states in this region have very strong incentive to reject destabilising activities promoted by the US and, instead to concentrate on economic growth.
It is these two different situations, in the areas dominated by the G7 and within the SCO, that produces ‘disorder in the West, stability in the East’. Failure to accurately analyse this situation, in particular the consequences of the ‘new mediocre’ in the G7, led some commentary in China to entirely fail to foresee the outcome of the SCO and G7 summits. The ‘disorder in the West, stability in the East’ is therefore not a purely temporary phenomenon but is based in fundamental economic processes. This same processes explain the introduction by the Trump administration of tariffs against China.

Conclusions

This underlying economic situation, however, does not mean that there are no problems confronting China’s geopolitical policy quite the contrary. But it means the nature of the situation must be understood accurately. In particular, in addition to the immediate problem of US tariffs against China:
  • The slow growth in G7 provides a long-term basis for terrorism, failed states, and even full-scale warfare in a number of developing countries dominated by economic trends in the G7. This means the anti-terrorist and security functions of the SCO remain of extreme importance and challenges may be expected in these domains.
  • The inability of the G7 economies to overcome the ‘new mediocre’, but a situation where the US retains global military superiority, produces a permanent temptation of the US to resort to military solutions and provocations. For this reason, both military reform in China and security cooperation between SCO members will be of great importance.
  • The inability of the US to secure its goals by economic methods means the US will necessarily be tempted to take measures which are short of war against China but are deliberate provocations designed to create geopolitical tensions – for example provocations in the South China Sea, in regard to Taiwan Province of China etc
  • While all states in the SCO and South China Sea regions have a strong mutual interest in peaceful economic development and cooperation there will be attempts by forces hostile to China to instead subordinate this to conflicts with China provoked by US neo-con forces – such US forces are particularly active in India and Vietnam. This, therefore, will require ongoing efforts by China’s diplomacy.
The apparently irrational actions by the Trump administration of introducing tariffs against China must therefore be seen as a symptom of the wider economic processes producing ‘stability in the east, disorder in the west’.


The above article was previously published here at Learning from China