Socialist Economic Bulletin

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.

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%).

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.

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.

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 terms average 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.

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.

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).

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.

By John Ross

Every day the media reports deepening political destabilisation gripping both major ‘Anglo Saxon’ countries – the US and UK. Most important for the world, of course, is US political instability where almost daily crises hit the Trump administration – resignation of the President’s Chief of Staff, sacking of the head of the FBI, public attacks by the President on members of his Cabinet, virulent public and even obscene denunciations by the President’s advisers of each other, numerous Congressional investigations, sensational leaks from inside the national security agencies the FBI and CIA, open campaigns by key mass media such as the New York Times and CNN to remove the President etc. This US domestic political instability is clearly tightly intertwined with crises and developments in world politics – US relations with Russia, US disputes over the Iran nuclear deal, differences over US policy to China etc.

But, in addition to analysis of immediate events, it must be borne in mind that the UK and US were successively for two centuries the world’s most powerful economies. Analysing the deepening political crisis in the Anglo-Saxon countries, in its fundamental historical context, therefore also allows a clear understanding of the present dynamics of the global economy and geopolitics – as well as making clear why US domestic instability is inextricably linked with international geopolitical instability.

Historical position of the Anglo-Saxon economies

Starting with the fundamental historical framework, during the two centuries in which the ‘Anglo Saxon’ economies, first the UK and then the US, were the dominant countries in the world economy they both, at the respective peaks of their power, played a decisive global role in stabilizing the world economy through being large scale suppliers of capital for economic development of other economies.

The economic process involved, and its relation to the geopolitical dominance of first the UK and then the US, was simple. Throughout most of this period the UK and US were the world’s most internationally competitive economies. This competitiveness generated large balance of payments surpluses from overseas trade and property incomes. But, in economic terms, a balance of payments surplus necessarily involves an equal export of capital. Therefore, this high competitiveness of the US and UK economies generated balance of payments surpluses, which were used to generate capital exports to other countries, which in turn helped stabilise recipient states and the global economy as a whole. While this essential mechanism was the same in both countries certain specific features of the two economies will now be briefly examined in chronological order.

Pax Britannica

The period of UK global economic dominance in the 19th and early 20th centuries was classically studied in Imlah’s masterpiece Economic Elements in the Pax Britannica. This analysed the way in which throughout most of the 19th century large scale capital exports from the UK stabilised the world economy and geopolitical situation. Imlah’s study was of the detailed economic background to the reality that general conflict between the great European powers, which for most of this period were also the world’s most powerful states, did not occur for almost a century between the end of the Napoleonic Wars in 1815 and the beginning of World War I in 1914. Imlah noted that throughout this century the UK, at that time the world’s most powerful economy, was a large-scale exporter of capital – Figure 1 shows this process and extends the data to the present day.

Figure 1 shows that huge UK export of capital, generated by its balance of payments surpluses, already reached eight percent of GDP by 1870 and by 1913 it was approaching 10% of GDP – to understand the consequences of the trends in this chart, as already noted. it should be appreciated that running a balance of payments surplus is equal to exporting capital.

Imlah noted that massive supply of UK capital to other states, by compensating for shortage of capital in them, stabilised both the individual recipient countries and the world economy. It was for this reason that Imlah termed the 19th century the ‘Pax Britannica’ – supply of capital to the other countries by the world’s most powerful economy of that period stabilised the global situation.This period of avoidance of generalised conflict between the major European powers in 1815-1914 was, of course, used by them to colonise other countries – but that is another issue.

But after 1913, as Figure 1 shows, the economically devastating consequences of World War I for Britain meant that the UK could no longer play its former global stabilising role. By 1928 British export of capital had fallen to 2.6% of GDP. Britain’s ability to stabilise the global economy was then further weakened by the Great Depression – by 1935 UK export of capital was only 0.5% of GDP. During World War II the UK became a massive recipient of capital in aid from abroad – above all from the US.

After World War II UK export of capital resumed, but only at around of one percent of GDP. By this time also the UK had so declined as a percentage of the world economy that its capital exports were too small to play a globally stabilising goal.

Britain moved briefly into balance of payments deficit in the mid-1970s but then from the early 1980s onwards the UK moved into a permanent and worsening balance of payments deficit – this deficit indicating its economy had lost its international competivity. This date of the severe deterioration of Britain’s international competitiveness is of course significant – it was the Thatcher period.

This UK balance of payments deficit from the early 1980s had great domestic economic significance as analysed below. However, in terms of its global consequences by the late 20th/early 21st centuries the UK had lost its position as an economic ‘superpower’. While the UK balance of payments deficit was still internationally significant, being the world’s second largest in dollar terms after the US as shown below, by this time the global role of the UK deficit was very subsidiary compared to the US.

Rise and decline of the US stabilising role in the world economy

The US became world’s largest economy in approximately the 1880s but there was naturally a time lag before its period of global economic dominance began. In the 19th century the US had been a large-scale capital importer – a major part of which came from the UK. However, by the beginning of the 20th century the US economy’s rising power meant it had become a capital exporter – see Figure 3. The US remained an exporter of capital until the beginning of the 1980s. As the gigantic export of capital by the US during the World Wars, reaching its peak at 7% of GNP, was exceptional a five-year moving average for this data is also shown in Figure 4.

After 1945 the US acquired hegemony among the capitalist economies – completely replacing the UK. US capital exports were important not only in general but also specifically for particular regions and countries US foreign policy wished to stabilise/aid. For example, the US granted massive economic aid to Western Europe after World War II (the Marshall Plan), the US gave large scale aid to key military allies (e.g. Israel), the US subsidised numerous countries in the ‘Third World’ it wished to support US foreign policy, US company investment into numerous economies stabilised recipient states etc.

As with the UK during the ‘Pax Britannica’, from World War II until the 1980s the US could use large scale capital exports to maintain the stability of global order in which it was the dominant economy. These capital exports, in turn, were made possible by the US balance of payment surplus – reflecting the US’s high degree of international competitiveness.

However, Figure 3 shows that from the early 1980s a fundamental change took place. The US moved from balance of payment surplus into balance of payments deficit – that is the high international competitiveness of the US had disappeared. From a balance of payments surplus in 1980 the US had moved to a deficit of 2.8% of GDP by 1988 – an annual deficit of over $400 billion in today’s prices.

This worsening of the international competitive position of the US and UK would necessarily lead to deterioration of their domestic and global positions – the trends which are analysed below are merely the precise mechanisms by which the deteriorating international competitive positions of the US and UK worked themselves out. The present political destabilisation of the US and UK will be seen to be an inevitable consequence of these fundamental economic processes.

The Anglo-Saxon economic ‘black hole’

The net effect of the huge decline in US and the UK international competitiveness under Reagan and Thatcher, with both the US and UK moving into large balance of payments deficits, was that the major Anglo-Saxon economies became a type of global economic ‘black hole’. This may be seen clearly in Figure 5 which shows the 10 economies in the world with the largest balance of payments deficits in 2016. No other country even comes close to the $481 billion balance of payments deficit of the US or the $116 billion deficit of the UK.

This movement of the ‘Anglo-Saxon’ economies from balance of payments surplus to balance of payments deficit, that is from being suppliers of capital to requiring large amounts of capital from the rest of the world, necessarily changed their entire role in the world economy. From the UK and US position in the 19th and most of the 20th centuries, of being large scale suppliers of capital to the rest of the global economy, the US and UK by becoming dependent on capital from other countries reversed their role to becoming a ‘black hole’ in the world economy. From being globally stabilising exporters of capital the US and UK became dependent on capital from other countries. This meant that the US and UK have been transformed from stabilisers of other countries’ economies to destabilising the world economy.

As the impact of the US under Reagan was globally most important this will be concentrated on. But it will be seen that Thatcherism was simply a small scale variant of Reaganism – naturally with certain specific national features.

Decline of US international competitiveness

Analysing first the international dimension of the US economy, It was already noted above that the Reagan period witnessed a radical decline in US international competitiveness. As shown in greater detail in Figure 6, prior to Reagan winning the presidency in 1980 the US balance of payments, the key indicator of the US economy’s competitiveness, had remained essentially in balance despite the negative impact of the international oil price rise in 1973 – the largest US balance of payments deficit was 0.7% of GDP in 1977. In contrast, following Reagan’s election the US balance of payments deteriorated sharply – i.e. the US economy suffered from rapidly declining international competitiveness. By 1987, Reagan’s penultimate year in office, the US balance of payments deficit reached 3.3% of GDP – showing unprecedented post-World War II worsening US competitiveness. Overall in the period from 1980, the last year before Reagan came to office, and 1988, his last year in office, the US balance of payments deteriorated from a surplus of 0.1% of GDP to a deficit of 2.3% of GDP – a worsening of 2.4% of GDP, or almost $450 billion at today’s prices.

​Reagan and the accumulation of US debt

US state debt sharply increased from 38% of GDP when Reagan became president to 60% of GDP when he left office. While in mere words Reagan talked about ‘small government’ in reality a policy of high state spending, focussed on the military, was carried out which could only be financed by debt. In summary, the area in which the Reagan showed real economic skill was large scale borrowing and debt accumulation.

Once again Reagan created a policy framework which was then followed by most subsequent US presidents. Initially Clinton, reversing Reagan’s policy, reduced US state debt to 50% of GDP, but George W Bush rapidly restored US state debt to Reagan’s levels – state debt reaching 61% of GDP by 2007 as shown in Figure 7. With the beginning of the international financial crisis US state debt then rose rapidly further – reaching 99% of GDP in the 1st quarter of 2017.

This data therefore shows clearly that large scale build-up of US state debt was begun under Reagan, not simply during the international financial crisis – although the latter of course augmented US state debt further.

​Rising US household debt

Alongside this large-scale US state borrowing the Reagan period saw a rise in US household debt – which increased from 47% of GDP in 1981 to 57% in 1988 (see Figure 8). Once again Reagan began a process which successor US presidents continued. Under Clinton, while state debt fell as a percentage of GDP, household debt continued to rise. This process continued under George W Bush – household debt reaching 98% of US GDP by 2008.

Such a large-scale build-up of US household debt was clearly unsustainable – US households were spending beyond their real incomes. The violent consequences of the international financial crisis therefore necessarily forced a sharp reduction in US household debt, with it falling from 98% of GDP in 2008 to 78% in the 1st quarter of 2017. This greatly exacerbated the fall in US living standards from levels which had been temporarily sustained by the large-scale debt increase under Reagan and his successors. This in turn necessarily destabilised US politics.

​Overall rise in US debt

In summary, the overall consequences of the process inaugurated by Reagan was therefore a huge build-up of total US debt, which rose from 135% of GDP in 1980 to 188% in 1988. to 250% by 2009 – see Figure 9. The process unleashed by Reagan’s military spending, continued on the state side by the military expenditure of George W Bush, and on the household side under both Clinton and Bush, might therefore be likened to a huge ‘credit card binge’. While the huge bill on the credit card is being run up the card owner feels good as they are spending a lot! But when the credit card debt necessarily has to be paid the owner feels the deeply damaging effects.

The repayment became due with the international financial crisis. With the beginning of this crisis US state debt dramatically rose from 62% of GDP in 2007 to 101% of GDP by 2015, but simultaneously with this explosion of state debt the economic consequences for the population was extremely severe. Not only did US median incomes fall below 2009 levels, as analysed below, but US households were forced to run down debt by almost 19% of GDP.. With this combination of a fall in household incomes and the necessity of households running down debts accumulated from Reagan onwards, the deep economic and social discontent of the US population shown in the 2016 US elections was inevitable.

Trends in US income inequality

Turning to other features, Reagan inaugurated a massive increase in US inequality, and a falling share of total incomes received by the great majority of the US population – the consequences of which culminated in current US political instability.

Table 1 below shows the percentages of US total incomes received by different levels of US income groups. As it will be seen that a clear change took place in 1980 the changes are shown in two periods – 1967-1980 and 1980-2015.

Analysing first the richest and poorest groups, from 1967-1980 the share of total incomes received by the 20% of American households with the lowest incomes rose marginally from 4.0% to 4.2%. The percentage of total income received by the top 5% fell from 17.2% – 16.5%. A small but definite evening out of the most extreme US income differences was therefore occurring in 1967-1980.

After 1980 this trend radically reversed. The share of incomes of the bottom 20% of US households fell from 4.2% to 3.1%. Simultaneously the share of incomes of the top 5% of US households rose by an extremely sharp 5.6% – from 16.5% to 22.1%. Furthermore, the share of total incomes in every income group in the bottom 80% of the US population declined – the total fall for 80% of the population being an extremely severe 7.1%, from 55.9% to 48.8%.

In monetary terms, the total income of the top 20% of US households in 2015 was $5.1 trillion while that of the entire bottom 80% was only $4.9 trillion. The total income of the top 5% of the US population in 2015 of $2.2 trillion was over seven times that of the bottom 20% of the US population of $0.3 trillion.

In summary, if from 1967-80 there had been some evening out of the most extreme US income inequalities, after 1980 there was instead a massive increase in the share of incomes of the top 5% of the population with and a simultaneous severe loss of the share of incomes of 80% of the population.

​US median incomes

Summary of US trends

• A major fall in the international competitiveness of the US economy;
• The US economy losing its previous position as a large-scale exporter of capital and it becoming dependent on imports of capital;
• A very sharp increase in US state debt;·
• An increase in US household debt,
• Sharply increasing inequality

• The first fundamental parallel between Thatcherism and Reaganism was the sharp deterioration in the UK’s international competitiveness under Thatcher. This was already shown in Figure 1 above. The UK moved from a balance of payments surplus of 0.6% of GDP in 1978, the year before Thatcher came to office, to a deficit of 3.6% of GDP in 1990, the year she left office. Therefore, under Thatcher the UK balance of payments deteriorated by 4.2% of GDP. This worsening of UK international competitiveness under Thatcher was consequently even worse than the US under Reagan – the UK’s balance of payments situation deteriorating by 4.2% of GDP compared to 2.4% for the US.
• This rapid deterioration of the UK’s international competitiveness under Thatcher, the increasing proportion of products which were imported, necessarily produced the same phenomenon as the growth of the ‘rust belt’ under Reagan. In the case of the UK it was the north of England that suffered massive unemployment and closure of industries. The political destabilisation and anger produced by this began the process leading to these regions voting in favour of the economically irrational policy of Brexit as a protest.
• UK unemployment rose dramatically under Thatcher – increasing from 6% when Thatcher came to office to 12% by the mid-1980s. Under the impact of rising unemployment and regressive tax changes introduced by Thatcher UK inequality rose rapidly. The Gini coefficient went from 0.25 in 1979 to 0.34 in 1990. Under Thatcher, as under Reagan, a massive increase in proportion of income going to the better off occurred. The real income of the bottom 10% of the population fell by 2.4 per cent, so the poor were worse off in 1990 than in 1979, while the income of the top 10% of the population rose by 48%. As a result, the number of those living in poverty under Thatcher rose sharply. Taking a standard UK measure of poverty, those with incomes below 60% of median incomes before housing costs, in 1979, 13.4% of the population were in this category while by 1990 this had almost doubled to 22.2%.

• a massive deterioration in UK international competitiveness, and in consequence an increasing dependence of the UK economy on capital from abroad;
• an extremely rapid rise in inequality.

• The drastic loss of international competitiveness of both the US and UK economies under Reagan and Thatcher led necessarily to elimination of jobs in industries which had previously supplied the domestic market as imports replaced domestically produced products. This culminated in the creation of the ‘rust belt’ in the US, which voted for Trump in 2016, and economic depression in the North of England – which voted for Brexit in 2016.
• Inequality rose dramatically under both Reagan and Thatcher, inaugurating the trend which has deepened further since.
• Reagan immediately launched a course of massive build-up of US private and state debt and, with a certain delay, a huge debt build-up also developed in the UK.

• The US balance of payments deficit contracted from 4.3% of GDP in the last quarter of 2007 to 2.4% of GDP in the 2nd quarter of 2009 – while in the 1st quarter of 2017, the latest available data, the US balance of payments deficit was 2.5% of GDP.
• US total debt stopped rising after it reached 250% of GDP in the 3rd quarter of 2009 – but the financial resources available to US households sharply contracted with debt falling from 98% of GDP at the beginning of 2008 to 78% of GDP by the 1st quarter of 2017.

• In 2010 the Arab Spring and the generalised destabilisation of the Middle East began;
• Following the collapse of Gaddafi’s Libyan regime in 2011 ‘jihadists’ were powerfully reinforced in West Africa;
• In 2012 the electoral breakthrough of Marine in Le Pen in France began the rise of ‘populist’ movements in advanced countries;
• In June 2016 the UK voted for Brexit;
• In November 2016 Trump was elected US President, against the opposition of the establishment of both Republican and Democratic Parties, inaugurating almost continual severe political clashes in US politics;
• In May 2017 Macron was elected French President against the opposition of both right and left wing traditional political parties, and then Macron proceeded to crushingly defeat the traditional French parties in the legislative elections,
• In June 2017 Theresa May lost her Parliamentary majority in UK general election.

By Tom O’Leary

Recent discussion on the Tories’ Brexit mess has centred on the UK’s inability to emulate Singapore, because the government no longer has a parliamentary majority for the big tax cuts that would be necessary. This assertion was made in The Times and repeated in the New Statesman is wrong on both counts. The Financial Times also incorrectly argued that the Singapore model was one of low taxation.

There would be a majority among the Tory and DUP MPs, probably allied with the LibDems for tax cuts. This is what has happened in the two previous parliaments as part of austerity. What is stopping them from going down this route now is not parliamentary arithmetic but the opposition of the EU, who would refuse any beneficial trade deal if the UK adopted beggar-my-neighbour tax policies. And this is too embarrassing to admit.

But the debate also betrays a complete lack of understanding about the post-World War II economic performance of Singapore, which is not based on low taxes at all. As the huge rise in Singapore’s level of prosperity is simply a unique combination of general factors determining economic growth, that misunderstanding should be challenged and overcome.

Economic policies
The UK has already ‘done a Singapore’ as its main rate of Corporation Tax is currently 19%, with an intention to cut it to 17%. Singapore’s CT rate is 17%, but this has only been in place since 2010, long after the Singapore miracle began. Until 2000, the main CT rate in Singapore was 26%, and the growth rate has been slower since.

The measure of Singapore’s tremendous performance can been gauged by taking just one indicator, per capital GDP. Using Angus Maddison’s data, in 1950 Singapore’s per capita GDP was just $2,219 and the UK’s was more than treble that at $6,939. By 2008 Singapore had far outstripped that of the UK at $28,107 to $23,742. There is a strong material incentive to learn from Singapore’s success story.

Singapore is a capitalist economy, but it is not a bastion of laissez-faire economics, as is often wrongly asserted. The state owns all the land. This is not mainly deployed for rent, but allows the state to direct investment through the allocation of land for commercial and other purposes. The effect is to be able to direct strategically the level and focus for investment.
In addition, the state itself has a very high level of investment. A number of Government-Linked Companies are among the largest in the economy and include SingTel, Singapore Airlines and others. Effectively these are the sectors privatised in the UK, which Singapore has kept in state hands. Overall, the direction of investment through land ownership, and the ownership of major companies and a tax system which favours investment over speculation has produced a much higher rate of investment (Gross Fixed Capital Formation) in Singapore than in the UK over 50 years, as shown in Chart 1.

From the early 1960s onwards, that is after independence in 1965 Singapore has had a very high rate of investment, much higher than in the UK. But there is a far greater gap between the UK and Singapore in terms of merchandise trade as a proportion of GDP. This is shown in Chart 2 below. Singapore is one of the most ‘open’ trading economies in the world, with total trade a large multiple of GDP. It is also a significantly more open economy than the UK.

Stagnant economy, falling investment and profits By Tom O’Leary

In order to resolve a crisis it is necessary first to accept that there is one and then to identify its causes. These are indispensable preliminary steps before a solution is found. Unfortunately, Britain labours under a government-sponsored set of delusions about its own economic performance which need to be punctured before rational policy prescriptions can be formulated.

This piece follows a recent one on ‘Britain’s lost decade’ of economic stagnation with annual growth of less than 1% in real GDP over a decade, and its aim is twofold, to prove that Britain’s economic performance is in a crisis, in relative as well as absolute terms, and to show its fundamental driving force, the trend in profits.

Relative performance

As a measure of the absolute crisis, in per capita terms real GDP has risen in the UK by just 1.7% from its peak at the end of 2007 to the 1st quarter of 2017, which is effectively zero. This is in real £ terms. The UK’s relatively poor performance is shown in Table 1 below, in US$ terms.

In current US Dollar terms the World economy has grown by over 52% more than the UK economy, which in part reflects the repeated devaluations of the pound over the last decade. In Purchasing Power Parity (PPPs) terms, which adjusts for exchange rate differentials, the World economy, which itself has grown exceptionally slowly, has even so grown by almost 19% more than the UK economy over the period.

As a measure of the potential increase in prosperity for the population as a whole, it is useful to focus on changes in per capita GDP. In Table 2 below, the UK has fallen significantly behind the growth in World per capita GDP in both current US Dollar terms, and in PPP terms.

Since the Great Recession both UK real GDP and real GDP per capita have grown far less rapidly than the World economy. The period is characterised by both relative and absolute crisis.

How did we get here?

In the previous article, it was shown how the main factor in the slump is the continuing crisis of investment. Recent data also show the continuing slump in UK productivity. Labour productivity fell in the 1st quarter of 2017. In general, mainstream economists have no explanation for this at all, and the Bank of England has called it a ‘puzzle’. Mainstream economists struggle to explain the crisis, even now.

Recently, the widely followed analyst Frances Coppola ( @Frances_Coppola ) posed the question as to why manufacturing productivity was still falling, and generally received replies that obscured rather than revealed causal relationships. SEB pointed out that the consequence of falling investment is that the stock of capital (the means of production) begins to fall as it is used up in production or becomes dilapidated. This is what has happened in the British economy over the longer-term, most markedly in manufacturing. Chart 1 below shows the level of real manufacturing capital stock in the UK economy.

Effectively, the stock of manufacturing capital plateaued between 2004 and 2007. Business was only investing enough to replace exiting stock, not enough to add to productive capacity. From that point on it fell markedly. In 2015 the manufacturing capital stock was below its level in 2001. There is therefore no ‘puzzle’ about falling producitivity or falling output – the manufacturing means of production have been reduced. Manufacturing output is now 2.8% below its pre-recession peak. Over the longer term, manufacturing output actually peaked in December 2000 and is now 4.9% below that level.

More cannot be produced, and it cannot be produced more efficiently in modern manufacturing without investment. The consequence of disinvestment is lower output, lower productivity, lower pay and fewer jobs. But this then poses the question of why investment has fallen, leading to a fall in the means of production.

In an economy dominated by capitalism investment is determined by profitability. Crises of ‘overproduction’, ‘underconsumption’, ‘disproportionality’ between branches of industry, speculative bubbles, and so on, which all appear frequently can all be resolved relatively easily as long as profitability remains robust. But the contrary is also true. There can be no private sector-led recovery without a recovery in profits.

The current slump was caused by a slump in profits. Chart 2 below shows the relationship between UK profits, Investment (Gross Fixed Capital Formation) and GDP. Profits (as measured by the Gross Operating Surplus) in the UK peaked in the 1st quarter of 2006. Investment peaked in the 4th quarter of 2017. GDP peaked in the 1st quarter of 2008. It shows that Profits fell first, Investment followed and then GDP contracted.

This is not simply a sequential relationship. It is also an arithmetical one. The largest percentage fall was in Profits, followed closely by Investment, and the fall in GDP was much more shallow. From peak to trough, the rate of return for UK non-financial companies fell by 24%. The maximum fall in the level of Investment was 11.7%, while the peak to trough fall in real GDP was 6.1%.

It should be noted that throughout the entire period from the 1st quarter of 2006 to the 1st quarter of 2008 Consumption continued to rise strongly. In fact it did not begin to turn lower until the 3rd quarter of 2008, six months after the recession began.

The recession was driven by the fall in Investment. The fall in Investment was itself driven by the fall in profitability. It is the weakness of Investment which continues to act as a brake on the economy, leading to stagnation or worse. Therefore the trend in profitability takes on decisive quality if there is to be a private sector-led recovery.

By John Ross

• This relative stagnation of the Western economies explains the interconnection between underlying economic trends and immediate events such as US actions in Syria, US policy to North Korea, major Western political events such as Trump’s election and Brexit, China’s current economic situation, and strategic developments such as One Belt One Road (OBOR), etc.
• Key new initiatives in China’s policy launched by Xi Jinping are coherently interrelated with the objective changes in the global economy since 2008.
• The international financial crisis of 2008 inaugurated a new period of the global economy, and therefore of China’s interrelation with it, compared to the preceding ones since the creation of the People’s Republic of China (PRC). It will be demonstrated that this response is an integrated response to the new period of the global economy since the international financial crisis. A brief analysis of some of the key consequences for countries outside China, and their interrelation with China’s foreign policy, will be given.
• It should be made clear that in this article only some international features of China’s policies are analysed – other domestic ones, such as the struggle against corruption are equally important but beyond this article’s scope, while some are domestic Chinese matters it is inappropriate for a non-Chinese citizen to comment on. But, despite this limitation, it is hoped an international analysis focusing on the new period in the world economy, as it interrelates with China, throws some light on developments both in China and internationally.

• Growth trends in the advanced Western economies after 1929.
• The factual trend in the advanced Western economies from 2007-2016;
• The latest IMF predictions for 2016-2021

• In September 1931 Japan invaded Manchuria, beginning its military attack on China.
• In September 1931 Britain abandoned the gold standard, resulting in collapse of the then existing international financial system.
• In November 1932 Roosevelt was elected US President, leading to the ‘New Deal’.
• In January 1933 Hitler became German Chancellor.

• Japan’s GDP was 37% above its 1929 level;
• Germany’s GDP was 31% above its 1929 level;
• UK GDP was 18% above its 1929 level;
• Western Europe’s GDP was 13% above its 1929 level;
• The GDP of the advanced economies as a whole was 7% above its 1929 level.

• 1913-1950 – period of slow average annual growth in the advanced economies (2.0%)
• 1950-1978 – period of rapid average annual growth in the advanced economies (4.4%)
• 1978-2007 – period of slower but still relatively rapid average annual growth in the advanced economies (2.6%)
• Period commencing after 2007 – very slow average annual growth in the advanced economies (1.1% in 2007-16, and IMF projected 1.3% in 2007-21)

• The first period, commencing after 1913, is the crisis of the international economic system marked by World War I, the 1929 crash, and World War II – this period of fundamental instability definitively ended with the beginning of the stable post-World War II boom in the advanced economies. This period was characterised by radical fragmentation of the world economy both by war and by generalised protectionism after 1929. The starting point of this period is World War I while its international conclusion, the commencement of a stable post-World War II boom, may be put at approximately 1950. Developments within China culminating in the creation of the PRC were clearly not autonomous from these processes in the international economy but were related to international events and their geopolitical consequences. The creation of the PRC in 1949 was directly related to this period – its culmination in a fundamental historical sense. During this historical period, average annual growth in the advanced economies was low – an annual 2.0%. However, this was not a low stable average but the statistical result of extreme fluctuations between strong booms and severe recessions. This overall international period may therefore be taken as 1913-1950.
• The second global period is the stable post-World War II ‘golden age’ boom in the advanced Western economies. The pure ‘boom’ phase of this, characterised by relatively uninterrupted rapid economic growth in all major advanced economies, was from 1950-73 – during this period ‘Keynesian’ economic techniques were dominant in Western economies. After 1973 there was economic instability, following which in 1979/80 a radically new economic policy was embarked on by Reagan/ Thatcher – with the reintroduction of ‘neo-liberal’ methods into the Western economies and a clear break with Keynesianism. Almost simultaneously in 1978 China embarked on a radically new, and very different economic policy to neo- liberalism, with a ‘socialist market economy’ created by ‘reform and opening up’. This economic period could therefore be taken as either 1950-78, in line with domestic Chinese developments, or as 1950-1980 in line with international ones – the last date being Reagan’s election. As this article’s focus is the interrelation of international with China’s domestic trends 1950-78 will be used for statistical purposes – although it would make no major difference if it were defined as 1950-80. During this period 1950-78 average annual growth in the advanced capitalist economies was high at 4.4% and until 1973 without severe recessions. In China, this was the period of the planned economy which produced average economic growth only very marginally higher than that for the world economy – in the period 1950-78 world economic growth was 4.6%, growth in the advanced economies 4.4%, and China’s growth 4.9%.
• The third economic period lasted from 1978 to the onset of the international financial crisis in 2008. In the advanced economies, this period was characterised by the neo-liberal policies inaugurated by Reagan/Thatcher and in contrast in China by the ‘socialist market economy’ policies inaugurated by Deng Xiaoping. In this period growth in advanced economies slowed significantly compared to the post-war boom, to an annual average 2.6%, but remained higher than the period of deep crisis commencing with World War I. In this period, China’s socialist market economy model far outperformed neo-liberal policies in the advanced economies – China’s annual average growth in 1978-2007 being 9.9%. To enable a comparison with analysis more usually used in China, it may be noted this internationally defined period 1978-2007 takes in most of three of the domestically defined five leadership periods.
• In 2008, the international financial crisis commenced. As already analysed growth in the advanced economic since then is extremely low – an annual average 1.1% in 2007-2016 and on IMF projections 1.3% in 2007-2021. This average growth rate is actually significantly lower than in the period of great crisis in the advanced economies commencing with World War I. But the low average in the present period is created, after the 2007-2009 recession, by very slow but relatively stable growth rather than a low average created by extreme fluctuations of boom and recession seen in the crisis commencing with World War I. Because of this extremely slow recovery after the international financial crisis the term ‘Great Stagnation’ most fits the present period since 2008. This phase in the global economy, of course, provides the international context for the ‘new normal’ in China.

• No serious scholar suggests that the PRC’s creation in 1949 was unrelated to the great period of international crisis starting with World War I, proceeding through the Great Recession after 1929, and culminating in World War II.
• All analysis in China notes the great turning point of 1978 and Deng Xiaoping’s ‘Reform and Opening Up’. While in some literature insufficient attention is paid to the fact that this coincides almost exactly in time with the great turn in the Western economies in 1979/80 inaugurated by Reagan/Thatcher the present writer’s experience is that immediately this is pointed out Chinese scholars note that such a fundamental turn in both China and the Western economies occurring at almost exactly the same time cannot be a coincidence. Whatever explanation is then given it is therefore evident that 1950-1978/80 constitutes a period in the history of both China and the Western economies and a new one started with 1978/80.
• It is noticed inside and outside China that the international financial crisis of 2008 was the greatest peacetime financial crisis since 1929. But in some analysis this is inaccurately treated, explicitly or implicitly, as simply a temporary episode, a somewhat large ‘blip’ in the advanced economies which will be followed by a ‘return to normal’. Put in terms of a comparison to a well-known discussion in China it is explicitly or implicitly suggested that the advanced economies after 2007 entered a ‘V’ shaped period – a sharp downturn followed by a return to a relatively rapid rate of growth.(6) It has instead been established earlier in this article that, to make a comparison to discussion in China, in terms of growth rates the advanced economies after 2007 entered more an ‘L’ shape – a downturn without this being followed by a return to a rapid average rate of growth. The facts given demonstrate that the years since the international financial crisis of 2008 constitute a single historical period characterised by a new low average growth rate in the advanced economies. This constitutes a new period of the international economy and therefore its interrelation with China.

• 1949-78
• 1978-2007
• 2008-

• 1949-78 in China was a period of a ‘social miracle’ without precedent in world history. Life expectancy, well known in economics as the most sensitive overall indicator of social conditions, as it sums up in a single figure all positive trends (prosperity, good education, good health provision, environmental protection etc.) and negative trends (poverty, poor education, bad health care, pollution etc.), rose in China by 29 years from 1949 until Mao Zedong’s death in 1976 – from 35 to 64. China’s life expectancy increased by more than one year for each chronological year that passed, rising from 73% of the world average in 1950 to 105% in 1976. However, this period’s stupendous social achievement was not accompanied by exceptionally rapid economic growth. As already noted in 1950-78 China’s overall GDP growth was only marginally above the world average – China’s GDP rose by an annual average of 4.9% compared to a world average of 4.6%, and China’s annual average increase in per capita GDP was 2.8% compared to a world average of 2.7%.
• In 1978-2007 China’s socialist market economy far outperformed the economic growth rate of the Western economies – China’s annual average GDP growth rate was 9.9% compared to 2.6% in the advanced Western economies. By this very rapid economic growth China successfully achieved the transition from a ‘low income’ to an ‘upper middle income’ economy by international classification – and was taken to the threshold of achieving ‘high income status’.
• The period from 2008 onwards has seen China rise towards achieving ‘moderate prosperity’ by 2020 and attaining ‘high income’ status by World Bank criteria shortly thereafter. In short, the period of the ‘Great Stagnation’ in the Western economies will simultaneously see China rise into the ranks of high income economies – this transition to ‘moderate prosperity’ and then to ‘high income’ status by international criteria constitutes a key domestic feature of the present period.

• From the domestic economic viewpoint, the transition of China from ‘high middle income’ status to ‘moderate prosperity’ and then ‘high income’ status by international criteria.
• From the viewpoint of international economic development by very slow growth in the advanced Western economies.

• The characteristic of the present period in the advanced economies is slow average growth but not violent oscillations of expansion and crash – as in the last period of very slow growth in the advanced economies commencing with World War I. While no major acceleration of the advanced economies is to be expected neither is there reason to anticipate a massive economic crisis of the 1929 type – the crisis commencing with World War I was produced by the disintegration of the global economy amid both war and then after 1929 due to generalised protectionism. These conditions do not currently exist. Prolonged slow growth in the advanced economies, not sudden deep crisis, is therefore the central perspective.
• As China faces a substantial period during which growth in the advanced Western economies will be low, while no sharp crisis is expected the prospects for the growth rate of China’s exports to these countries will be relatively limited.
• Continued slow growth of the US economy creates protectionist trends within it – although other advanced economies, most importantly in terms of size the EU, remain strongly opposed to this.
• These international trends provide the overall global context for China’s ‘new normal’.

• As advanced economies are in a period of very slow growth US neo-cons, and others who think not in terms of ‘win-win’ outcomes but of zero sum games, cannot deal with rising ‘competitors’ such as China by accelerating their own economies. The competitive strategy of those such as US neo-cons which think in such negative terms therefore has to be to attempt to slow other economies such as China. This point is analysed in detail for US relations with China in 一盘大棋? ——中国新命运解析. In relation to China, this means that the previous US strategy was to attempt to undermine and disintegrate China by fake campaigns on ‘human rights’, finding and supporting a ‘Chinese Gorbachev’ etc. – i.e. centring on political offensives. This perspective was, however, almost immediately blocked by Xi Jinping with the ‘four comprehensives’, the emphasis on the role of the Communist Party of China (CPC) etc. Given the present situation of the US and advanced economies, which precludes any major sustained acceleration in economic growth, US neo-cons have instead to seek to achieve their strategic goals by attempting to slow and create crisis within China’s economy.
• A prolonged period of slow growth in the advanced economies necessarily creates political instability within them. Developments such as Trump’s coming to office against the wishes of the majority of the US political establishment, the UK’s economically irrational Brexit decision, the lesser but still significant upheavals in other Western countries (e.g. rise of Le Pen’s National Front in France, ‘left’ leaders such as Sanders or Corbyn, strength of overtly xenophobic currents in a number of EU states etc) must therefore not be understood as temporary but should be expected to persist.
• Given very slow growth in the advanced economies, the US is less able to use its old post-World War II/Cold War policy of large scale economic aid to developing countries to stabilise them – i.e. the US is less able to use an economic ‘carrot’ as well as a militarily ‘stick’. The US is therefore increasingly forced to rely solely on military force in attempting to ensure carrying out of its policies in developing countries. This policy, shown in the bombing of Serbia, invasion of Iraq, and the bombing of Libya would be further intensified if Trump’s budget policy of drastic reductions in foreign aid and large increases in military expenditure is ratified by the US Congress.
• While a number of major developing economies continue to grow rapidly, very slow growth in major advanced economies necessarily produces stagnation and chaos in some weaker developing economies or those which are struck by side effects of the advanced economies slowdown – for example oil and commodity producing states are severely affected by low commodity prices. This produces social instability and in some cases war. An area defined by different levels of military conflict now extends from West Africa, through parts of North Africa, into the Middle East, upward into Ukraine and, stepping over relatively stable Iran, into Afghanistan. Given the slow growth in the advanced economies, and the inability of the US to pursue its old post-World War II policy of using economic means to stabilise situations, such instability and military conflicts may be expected to continue in the coming period – although the regions and countries in which such conflicts take place may change. US foreign policy has shown, in Iraq and Libya, that in a number of cases it prefers ‘failed states’, even if this leads to strengthening of ‘jihadism’, to the existence of stable regimes which do not follow US interests. This clearly has geopolitical and even military consequences for China.
• There is a danger that a situation where the US is unable to break out of its slow economic growth, which faces acute political instability in parts of the less developed world, and in which China’s growth continues to far outperform it, will result in US military measures to attempt to resolve the problems facing it. The facts of the global economy make clear that Ian Johnson’s warning of an economy which ‘continues to stagnate’ and therefore of the risk of ‘overseas adventures and blaming foreigners for the country’s woes’ is highly accurate – but it applies to the Western economies. The strengthening of China’s military forces is therefore extremely necessary, and in the interests of global peace, as a counterbalance to the risk of such military adventurism by the US. The emphasis on modernisation and strengthening of China’s armed forces is a necessary response to this. Equally other countries, therefore, have an interest in the success of China against dangerous and adventurist tendencies which potentially flow from trends in the Western economies.

• The increasing weight of China in the world economy;
• The slow growth in the Western economies.

• The emphasis on a ‘community of common destiny’ is correct from a fundamental theoretical and long term viewpoint – as it flows from the fact that the advantages of division of labour mean international economic cooperation is mutually beneficial. This cooperation corresponds to the reality that in economics, due to the advantages of international division of labour, ‘one plus one equals more than two’ and therefore there exist in reality ‘win-win outcomes’, not the ‘zero-sum game’ concept of US neo-cons. But more immediately the concept of a ‘community of common destiny’ is also opposed to the protectionist strategy of key members of the Trump administration. It is for this reason that Xi Jinping’s speech to the Davos World Economic Forum earlier this year emphatically defending globalisation received widespread international support.
• Slow growth in the advanced economies creates the specific form of relation of other countries to both China and the US. China’s economy is much more rapidly growing than the US but the US retains global military superiority. Therefore, China’s attraction for other countries is strongly economic while the US possesses military power. Put in aphoristic terms China offers other countries inclusion in OBOR, or the AIIB, whereas the US offers the ‘stick’ of a military attack or the ‘carrot’ of military alliance.
• The slow growth analysed above is specifically of the advanced economies. Growth in the developing economies is much faster. A specific characteristic of the present economic period is therefore of slow growth in the advanced economies and much more rapid growth in a number of developing economies. This clearly shows the strategic importance of key initiatives for China such as OBOR, the AIIB, the BRICS bank etc. The growth potential of the OBOR region, in both percentage and absolute terms, is much greater than either that of North America and Europe – giving other countries a strong incentive to participate in its benefits.
• Very slow growth in the advanced economies provides the context of the ‘Washington Consensus’, which continues to be promoted by the US but which facts show has been far less successful in producing economic development than China’s socialist market policies and the increasing number of countries influenced by this – a detailed analysis of this was given in 世行数据中隐藏着一个秘密. It is therefore important that China actively promote its economic policies internationally. More rapid international economic growth resulting from this naturally benefits China but also aids those countries experiencing such growth.

Britain’s lost decade By Tom O’Leary

The economic crisis which began in the 1st quarter of 2008 is now entering its tenth year. It is the longest economic crisis that anyone alive today in this country will have experienced. It is not abating. On the contrary, it is showing signs of deepening once more.

As this is such a decisive turning-point in economic life, it will have a profound impact on political life for many years to come, even long after it finally ends. The key question is how will it end?

Characteristics of the crisis

The UK economy has grown by just 8.1% over 9 years, from the 1st quarter of 2008 to the 1st quarter of 2017. This is an annual average growth rate of less the 1% in real GDP. By comparison, 9 years after the 1929 crash, the economy had expanded by 18.6%. In the UK, the current Great Stagnation is now much worse than the medium-term outcome of the Great Depression.

The driving force behind the slump is a lack of investment. Chart 1 below shows the change in real GDP and its components from the 1st quarter of 2008 to the 1st quarter of 2017.

GDP has risen by over £151bn during the crisis. While Consumption (both Household and Government Consumption combined) has risen by over £112bn, Investment has risen by just over £9bn. The decline in Net Exports is simply a function of the much greater growth in Consumption than Investment over the period – both exports and imports have risen, but imports have risen more.

There could hardly be a more striking refutation of the idea that there can by any such thing as a ‘consumption-led’ recovery. During this crisis Consumption has been rising much faster than Investment. Taking Consumption as a whole, both Government and Household Consumption, this has risen by 7.8% during the crisis, more than twice as fast as Investment which has risen by just 3.1%.

As a result, the proportion of the economy directed towards Consumption has risen and the proportion directed towards Investment has fallen. This can be illustrated very starkly by what has occurred during the crisis itself.

It is widely accepted that one characteristic of the pre-crisis period is that Consumption had been growing faster than Investment for a prolonged period. Taking just Consumption and Investment (and leaving aside net exports, inventories and accounting discrepancies) by the 1st quarter of 2008 the proportion of the economy directed towards Consumption had reached 82.5% and Investment fell to just 17.5%. However, in the crisis itself, Consumption has risen to 83.1% while Investment has fallen further, to 16.9%.

Taking the whole economy, in the crisis Investment has risen by just £9.3bn and GDP has expanded by £151.3bn. Therefore the rise in Investment has comprised just 6.2% of the rise in GDP during the crisis, down from Investment being over 16% of pre-crisis GDP. The course of the recovery has not begun to resolve the crisis. It has only deepened it.

Naturally most people do not obsess about GDP data. They do care though about living standards. These have fallen dramatically for most people. Chart 2 below shows the trend in real household disposable income.

This is third episode of falling real household disposable incomes. The first was the Great Recession its in 2008 onwards. The second was austerity from 2010. We are now in third fall in incomes in a decade.

From simple arithmetic, if real GDP has risen even marginally but real household incomes have fallen sharply, this means that some other actor in the economy is gaining a greater share of GDP at household’s expense. This is the case currently, as profits are rising.

The implications of this important development will be examined in a follow-up piece.

By John Ross

It is crucial for both economic and geopolitical perspectives to have an accurate analysis of trends in the US economy. The publication of the latest revised US GDP figures is therefore important as it provides the latest opportunity to verify these developments. This data confirms the fundamental trends in the US economy under Trump:

• • The US remains locked in very slow medium and long-term growth – particularly in terms of per capita GDP growth.

• • Due to extremely weak growth of the US economy in 2016 a purely short-term cyclical upturn is likely in 2017 – but any such short-term cyclical upturn will be far too weak to break out of this fundamental medium and long-term trend of US slow growth.

This article analyses these economic trends in detail, considers some of their geopolitical consequences, and their impact on domestic US politics.

US GDP and per capita GDP growth

In the 1st quarter of 2017 US GDP was 2.1% higher than in the first quarter of 2016. Making an international comparison to other major economic centres:

• • US total GDP growth of 2.1% was the same as the EU’s 2.1%.

• • Making a comparison to the largest developing economies, US 2.1% growth was far lower than China’s 6.9% or India’s 6.2%.

This data is shown in Figure 1

However, in terms of per capita GDP growth the US was the worst performing of the major international economic centres, because the US has faster population growth than any of these except India. US annual population growth is 0.7%, compared to 0.6% in China and 0.4% in the EU – India’s is 1.3%. The result therefore, as Figure 2 shows, is that US per capita GDP growth in the year to the 1^st quarter of 2017 was only 1.3% compared to the EU’s 1.7%, India’s 4.9% and China’s 6.3%.

In summary US per capita GDP growth is very weak – only slightly above 1%.

Figure 1

Figure 2

Business cycle

In order to accurately evaluate the significance of this latest US data it is necessary to separate purely business cycle trends from medium/long term ones – as market economies are cyclical in nature failure to separate cyclical trends from long term ones may result in seriously distorted assessments. Purely cyclical effects may be removed by using a sufficiently long term moving average that cyclical fluctuations become averaged out and the long term structural growth rate is shown. Figure 3 therefore shows annual average US GDP growth using a 20-year moving average – a comparison to shorter term periods is given below.

Figure 3 clearly shows that the fundamental trend of the US economy is long-term slowdown. Annual average US growth fell from 4.4% in 1969, to 4.1% in 1978, to 3.2% in 2002, to 2.2% by 1^st quarter 2017. The latest US GDP growth of 2.1% clearly does not represent a break with this long-term US economic slowdown but is in line with it.

Figure 3

 

Cycle and trend

Turning from long term trends to analysis of the current US business cycle, it may be noted that a 5-year moving average of annual US GDP growth is 2.0%, a 7-year moving average 2.1% and the 20-year moving average 2.2%. Leaving aside a 10-year moving average, which is greatly statistically affected by the severe recession of 2009 and therefore yields a result out of line with other measures of average annual growth of only 1.4%, US average annual GDP growth may therefore be taken as around 2% or slightly above. That is, fundamental structural factors in the US economy create a medium/long term growth rate of 2.0% or slightly above. Business cycle fluctuations then take purely short-term growth above or below this average. To analyse accurately the present situation of the US business cycle therefore recent growth must be compared with this long-term trend.

Figure 4 therefore shows the 20-year moving average for US GDP growth together with the year on year US growth rate. This shows that in 2016 US GDP growth was severely depressed – GDP growth in the whole year 2016 was only 1.6% and year on year growth fell to 1.3% in the second quarter. By the 1^stquarter of 2017 US year on year GDP growth had only risen to 2.1% – still below the 20-year moving average.

As US economic growth in 2016 was substantially below average a process of ‘reversion to the mean’, that is a tendency to correct exceptionally slow or exceptionally rapid growth in one period by upward or downward adjustments to growth in succeeding periods, would be expected to lead to a short-term increase in US growth compared to low points in 2016. This would be purely for statistical reasons and not represent any increase in underlying or medium/long US term growth. This normal statistical process is confirmed by the acceleration in US GDP growth since the low point of 1.3% in the 2^nd quarter 2016 – growth accelerating to 1.7% in 3^rd quarter 2016, 2.0% in 4^th quarter 2016 and 2.1% in 1^stquarter 2017.

Given the very depressed situation of the US economy in 2016 therefore some increase in speed of growth may be expected in 2017 for purely statistical reasons connected to the business cycle.

Figure 4

 

Conclusion

The economic and domestic US political conclusions of the trends shown in the latest US data are therefore clear

• • US economic growth in 2016 at 1.6% was so depressed below even its long term average that some moderate upturn in 2017 is likely. President Trump’s administration may of course claim ‘credit’ for the likely short-term acceleration in US growth in 2017 but any such short-term shift is merely a normal statistical process and would not represent any acceleration in underlying US growth. Only if growth continued sufficiently strongly and for a sufficiently long period to raise the medium/long term rate average could it be considered that any substantial increase in underlying US economic growth was occurring.

• • This fall of US per capita GDP growth to a low level clearly has major political implications within the US and underlies recent domestic political events. Very low US per capita growth, accompanied by increasing economic inequality, has resulted in US median wages remaining below their 1999 level – this prolonged stagnation of US incomes explaining recent intense political disturbances in the US around the sweeping aside of the Republican Party establishment by Trump, the strong support given to a candidate for president declaring himself to be a socialist Sanders, current sharp clashes among the US political establishment etc.

• • Even a short-term cyclical upturn in the US economy, however, is likely to be translated into increased economic confidence by US voters. This may give some protection to Trump despite current sharp political clashes in the US with numerous Congressional investigations of President related issues and virtually open campaigns by mass media such as the New York Times and CNN to remove the President. The latest opinion poll for the Wall Street Journal showed that men believed the economy had improved since the Presidential election by 74% to 25%, while women believed by 49% to 48% that the economic situation had not improved.

In terms of geopolitical consequences affecting China:

• • The short term moderate cyclical upturn in the US economy which is likely in 2017 will aid China’s short term economic growth – particularly as it is likely to by synchronised with a moderate cyclical upturn in the EU. Both trends aid China’s exports

• • Nevertheless, due to the very low medium and long-term US growth rate the US will not be able to play the role of economic locomotive of the G20. In addition to economic fundamentals IMF projections are that in the next five years China’s contribution to world growth will be substantially higher than the US. It is therefore crucial China continues to push for economic progress via the G20 and China has the objective possibility to play a leading role in this.

• • Very slow growth in the US in the medium and longer term creates a permanent temptation to the US political establishment to attempt to divert attention from this by reckless military action or ‘China bashing’. China’s foreign policy initiatives to seek the best possible relations with the US are extremely correct but the risks from such negative trends in the US situation, and therefore of sharp turns in US foreign policy, must also be assessed.

To keep this article short only a factual summary of the key recent trends within the US economy are given here. A detailed analysis of why the US remains locked in slow medium and long term economic growth is given in my article  Why the US economy remains locked in slow growth  A long term historical analysis of US growth and its relation to economic growth theory may be found in my book The Great Chess Game (一盘大棋? ——中国新命运解析).

*   *   *

This is a slightly edited version of an article that was originally published in Chinese at New Finance, which was previously published here.

By Tom O’Leary

Under Jeremy Corbyn’s leadership the Labour Party has staged a stunning revival, prevented Theresa May achieving a landslide which she would have claimed as a mandate for ‘Hard Brexit’ and has caused a crisis of Tory government which will make it harder to make new cuts in public spending, apart from rising inflation. None of Corbyn’s opponents could have possibly achieved that outcome.

This point can be factually established in two ways. First, there is the record of the election campaign itself. None of Jeremy Corbyn’s internal or external opponents would have conducted anything like the same campaign or written anything similar to the manifesto that was produced. On the contrary, the tactic of Corbyn’s opponents was to ‘give him enough rope to hang himself’, believing that his programme would prove massively unpopular.

The Labour manifesto was leaked on May 11. It was probably not the intention of the leaker(s) but the effect was that Labour was able to have two launches and close examination of what proved to be a very popular manifesto. The polling effect was clear. On May 11, Labour was 14 points behind the Tories at 32% to 46% in the average of polls. On June 8 that lead had been cut to 2 points.

No doubt some of the narrowing was due to the Tories’ own manifesto, which in the words of one commentator ‘promised permanent winter but never Xmas’. But in the event the Tory support only fell by 4 points overall despite the dementia tax, axing free school meals, ending the ‘triple lock’ on pensions, no new money for the NHS and much else besides. Evidently, the main motor of the narrowing of the gap was Labour’s own platform aimed at defending living standards. 8 of the 12
point narrowing in the Tory lead was due to Labour’s campaign.

Source: Guardian

Secondly, there is comparative data to draw on. The Dutch general election and French Presidential elections have already taken place this year. The Labour Party has sister parties in both countries, the Dutch Labour Party the PvdA and the French Socialists, Partie Socialiste. They both stood on platforms that were at odds with the Corbyn manifesto. In both cases they accept and even embrace austerity. They also have policies which are anti-immigrant and anti-Muslim. Corbyn’s Labour had none of these. The result is a full justification of the superiority Corbyn approach in electoral terms.

Why the US economy remains locked in slow growth

• Trump selected as Republican Party Presidential candidate against the wishes of that Party’s establishment, and elected President against the opposition of the overwhelming major of the US mass media.
• Since Trump’s election sharp clashes have continued within the US political establishment with leaks against the President by the US security services, the President’s sacking of the FBI head, investigations by the US Congress and US police of close aides to the President, and open campaigns to force the President to change policies or to remove him from office by major US media such as the New York Times and CNN.
• Within the Democratic Party a serious challenge mounted to the Party establishment’s candidate Clinton by the first figure declaring themselves to be a socialist to receive major US public support for almost a century – Sanders.

• After 1965 US net savings/capital creation steadily fell as a percentage of the US economy until it once again became negative during the ‘Great Recession’ in 2008-2009. Given the strong correlation of US net saving/capital creation with US growth this declining trend of US capital creation naturally explains the long-term growth US slowdown that was shown above.

• Under Reagan a new policy was adopted of large scale US foreign borrowing. This may be seen in the very sharp deterioration in the US balance of payments during the Reagan period – the US balance of payments on current account worsened from a surplus of 0.3% of GDP in the 4th quarter of 1980, the last quarter before Reagan came to office, to a deficit of 3.4% of GDP by the 3rd quarter of 1986. This 3.7% of GDP worsening of the US balance of payments is equivalent to over $700 billion at today’s prices.
• Under George H. W. Bush (Bush Senior) the US temporarily abandoned large scale foreign borrowing. With foreign sources of financing US investment reduced US net fixed capital formation fell sharply, from 7.5% of GDP in the last quarter of 1988 to 4.8% of GDP in 1st quarter 1992. The US fell into recession in the last quarter of 1990/1st quarter 1991 – the unpopularity of this leading to Bush’s electoral defeat.
• Under Clinton and George W Bush US foreign borrowing increased massively, rising to 6.3% of GDP by the last quarter of 2005 – such huge borrowing was unsustainable, was a significant contributory factor to the international financial crisis, and necessarily had to be reduced.
• The onset of the international financial crisis forced a huge reduction in US foreign borrowing – reducing net inflows of capital into the US from 5.3% of GDP in 1st quarter 2007 to 2.5% of GDP in the 2nd quarter of 2009. The level of US foreign borrowing has since remained essentially unchanged – net inflows of capital into the US were 2.4% of GDP in the latest available data in the last quarter of 2016.

Claims appearing in sections of the media that there will be a basic acceleration of the US economy from its present state of low growth are therefore false – as such analyses have been previously tested and rejected by events during the very prolonged slowdown of the US economy analysed at the beginning of this article and was shown in Figure 2.