Socialist Economic Bulletin

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).

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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.

For the many, not the few. Vote Labour on June 8
Over 100 economists have endorsed the Labour manifesto for this election. For good reason. The manifesto sets out to defend public services and improve living standards. It will seek to balance current spending over the business cycle and improve public services by increasing taxes on big business and the highest-paid 5%. It will also see to improve prosperity, pay and jobs with an investment-based industrial strategy.

Labour is the only party promising this. The Conservatives intend to the do the opposite, renewed austerity to make workers and the poor pay for their own disastrous economic mismanagement, including Brexit. There is only one choice to defend living standards.

Tories want to drive living standards lower. Corbyn wants to end austerityBy Tom O’Leary

During the current crisis the UK has experienced the longest-ever recorded fall in living standards. The biggest part of that fall is not the cuts to government spending, even though these have had severe effects. Instead the largest factor contributing to the fall in living standards is the decline in real wages. The Resolution Foundation calls this decade the worst for falling pay in over 200 years. 

This fall has now resumed once more because of the combination of stagnation in wage growth and rising prices. The rise in prices is a Brexit effect, after the sharp devaluation of the pound following the referendum result in June 2016. It is ridiculous for Theresa May to suggest the falling pound and therefore the fall in real wages, is not the result of the Brexit vote.

Chart 1 below shows the recent acceleration of the inflation rate as measured by the CPI, up to 2.7% from a year ago in April. Other measures are worse. The RPI, which the ONS has replaced with the CPI shows the inflation rate at 3.5%.

Mainstream economists, including the former and current chairs of the US central bank bemoan the fact that wages are often ‘sticky’. This means that ordinarily, outside ferocious attack, authoritarian dictatorship or worse, it is hard to get workers to accept cuts in their pay in cash terms. This is regarded as a necessary condition for capitalist recovery, as wages fall and profits rise. But the most effective way of driving down real wages is to hold wages down and let prices rise. This can be supplemented by other factors, such as freezes to the pay of the public sector and casualisation of the workforce. This is what has happened.

As Chart 2 shows, the pace of the fall in real wages in the UK currently has begun to resemble the decline at the start of the recession. It is precipitate. The 1-month data and the 3-month average are both shown. The latter is highlighted by the Office for National Statistics (ONS) as it smooths out fluctuations. This now shows real wages declining once more. But the 1-month data is useful in highlighting turning-points, as SEB has previously argued. On this measure, real wages are down 0.5% from a year ago. With further devaluation-induced price rises in the pipeline, the fall in real wages has much further to run.

The cumulative scale of the decline in real wages over this crisis is shown in Chart 3 below. On a monthly basis, real weakly wages peaked at £531 in February 2008, just as the recession was about to begin. They had fallen to £497 in March of this year.

The peak in wages was in part because wages are ‘sticky’, they were still rising even as the economy was just about to slump and prices had been slowing. There was also the last hurrah of the financial boom, and reflects the City bonuses paid then.

In essence the whole of the austerity policy can be understood as a conscious effort to overcome this stickiness, that is to drive down wages and to get workers and the poor to bear the brunt of the recession while allowing big business and the rich to be shielded from it.

Average weekly earnings data only applies to those in full-time work. But it seems unlikely that those in part-time work or in the swollen ranks of the fake ‘self-employed’ will have fared better than those in full-time employment.

There are currently just under 32 million in workers in the UK. As already noted, average real weekly pay has fallen since just before the recession by £34. Even if we take the less erratic quarterly data, it has fallen to £496 from £520 in the 1st quarter of 2008. This is a real fall of £24 per week, or effectively a fall of £1,250 per year. For 32 million workers that is approximately an aggregate decline of £40 billion in real wages from the 1st quarter of 2008 to the same period in 2017. Even if only the 23.5 million full-time workers are considered and part-time workers ignored entirely, the fall in their real wages amounts to over £29 billion.

By contrast, despite severe reductions in the growth rate of public spending and cuts to all types of social welfare, Government Consumption expenditures have actually risen over the same period. According to OECD data Government final consumption expenditures have risen by £32 billion since the 1st quarter of 2008.

This may seem strange, given the harsh burden of austerity that hits workers and the poor. But the rise in real Government Consumption reflects the almost inescapable rises in government spending, on items such as pensions, the NHS, education and so on, even where these do not keep pace either with growing demand or the specific inflation in those sectors. The latest Tory Manifesto, with cuts to all types of social welfare is an attempt reduce these outlays, while maintaining tax cuts for the rich and big business.

But the maths are plain. The biggest factor in driving living standards lower is the fall in real wages. This has now resumed. The Tory Government will be hoping to turn that to good effect using the fall in wages to drive up the profit rate, where they previously failed. At the same time it will reduce the automatic rises in some areas of the Budget, further reductions on those areas of spending which otherwise rise automatically.

This Tory plan is built around a Hard Brexit. Leaving the Single Market will hurt both wages and profits, as trade barriers are introduced and investment is diverted towards larger markets. In those circumstances, the Tories are attempting once more to ensure that the greater share of that loss is on wages, not profits.

By contrast, this Labour leadership is opposed to austerity in all its forms. It will attempt to shield workers and the poor from the crisis and therefore should be wholeheartedly supported even on those grounds alone.

Some on the left reject these arguments on wages, and refuse to accept that Brexit is driving living standards lower. This is an error, reflecting their misconceived support for Brexit. The left should always be the best defenders of living standards for the overwhelming majority of society, and propose arguments that would reverse the falls that are imposed during a crisis. To do that, it must first recognise reality, that real wages are falling once more from a combination of stagnant cash wages and rising prices caused by the Brexit currency devaluation. Any sober assessment would suggest that further falls in wages and living standards must be expected as the Tories attempt to get workers and the poor to pay for the Brexit crisis.

The big trade unions are sure to offer resistance to the new offensive, as will this leadership of the Labour Party. The same cannot be said of any of Corbyn’s opponents in the Parliamentary Labour Party, who either embrace austerity or offer fake opposition to it. 

The left as a whole needs to be clear about the very negative consequences of Brexit and stand with the unions and the Corbyn leadership who will resist job cuts and lower pay. It also needs to be clear about how this renewed crisis came about in order to end it.

Why the ‘Belt & Road’ region will be the main locomotive of the world economy By John Ross

The importance of the Belt and Road (B&R) summit for China and participating countries is well known. What is not so widely grasped is that the B&R region is now by far the most powerful locomotive not only of the regional but of the global economy. To be precise:

· Measured at current exchange rates the IMF projects that in the next five years’ growth in the B&R region measured in absolute dollar terms will be almost twice that in North America and four times that in Europe.

· Measured in purchasing power parities (PPP’s) growth in the B&R region will be almost five times that in North America and more than five times that in Europe.

Growth in the B&R region, in summary, will dwarf that in North America and Europe.

This fact that the B&R region has now emerged as the most powerful locomotive of the world economy is due to two simultaneous developments:

· Rapid growth in the B&R region,

· Extraordinarily slow growth in the West by historical standards.

The aim of this article is therefore to put more precise orders of magnitude on these trends. The data used is the five-year growth projections of the IMF. It should be made clear that using these figures does not at all mean that they are being taken as a 100% accurate prediction of what will occur. But the IMF data clearly establishes that the economic growth potential of the B&R region is so much greater than that of either North America or Europe that entirely implausible assumptions of future development patterns would have to be made for the far stronger growth of B&R not to be strikingly apparent.

This data therefore clearly establishes that the B&R region will be the main locomotive of the global economy during the next period.

Slow growth in the Western economies

The first feature creating this new situation in the international economy is the quite extraordinarily low growth in the Western economies by historical standards. The statement sometimes made in the Chinese media that the period commencing with the international financial crisis of 2008 is the West’s ‘worst economic crisis since the Great Depression’ is somewhat misleading put in that form as in one crucial way it understates the problem. The overall slow growth and stagnation in the Western economies is already almost equivalent to that after 1929 while the factual projections for the next five years lead to the conclusion that the cumulative slow growth/stagnation of the Western economies will be worse, although different in form, from that during the period following 1929. To show this Figure 1 illustrates three sets of data:

• 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.

The data in Figure 1 of course shows that the onset of the ‘Great Depression’ after 1929 was far more violent than that of the international financial crisis in 2008. After 1929, during only three years, overall GDP of the advanced Western economies plunged by 15.6% compared to only 3.3% after 2007.

But it is not so widely understood that after the initial post-1929 economic collapse recovery during the 1930s was rapid and post-crisis growth was strong – the US being the most important exception. This can be clearly seen in Figure 1 and by examining the situation in 1938, the last year before World War II. By a convenient statistical coincidence, 1938 was nine years after 1929, and 2016, the most recent year for current factual data, was nine years after the last pre-international financial crisis year of 2007. Therefore, in comparing 1929-38 with 2007-16 the same length of time is being analysed.

The strong recovery of most advanced economies following the post-1929 recession is demonstrated by the fact that by 1938 the GDP of most major advanced economic centres was substantially above 1929 levels. To be precise by 1938:

• 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 overall GDP of the advanced economies 7% above its 1929 level.

The US was an exception – US GDP in 1938 was still 5% below its 1929 level.

However, in contrast after the 2008 international financial crisis there was no rapid recovery and strong growth as there was after the post-1929 collapse. By 2016, nine years after the last financial crisis year, the recovery from the crisis in the advanced economies was almost as slow as during the ‘Great Depression’ of the 1930s and by the end of 2017 it will be significantly slower. More precisely due to the slow growth by 2016, total GDP growth in the advanced economies in the nine years after 2007 was only 10.1%. By the end of 2017, on IMF predictions, the growth in the advanced economies after 2007 will actually be lower than after 1929 – total growth of 12.3% in the 10 years after 2007 compared to 15.1% in the 10 years after 1929. Furthermore IMF data shows that the future growth in the advanced Western economies after the international financial crisis will be far slower than in the same period after the 1929. IMF projections are that by 2021, fourteen years after 2007, total growth in the advanced economies will be less than half that in the 14 years after 1929 – average annual growth of only 1.3% compared to 2.9%, and total growth of 20.6% compared to 49.8%.

Figure 1

Developing economies

To grasp the present pattern of global development, and the background of B&R, it should however be noted that the data given above is specifically for advanced economies. Growth in developing economies is far faster both than in the advanced economies after 2007 and in the advanced economies after 1929. As shown in Figure 2 on IMF projections total GDP growth in the developing economies from 2007-2021 will be 98% compared to only 21% in the advanced economies. Annual average growth in developing economies in 2007-2021 will be 5.0% – not merely faster than the annual average growth of the advanced economies of 1.3% in the same period but much faster than the average 2.9% in the advanced Western economies in the 14 years after 1929.

The extreme slowing of economic growth in the present period is therefore specifically an issue of the advanced Western economies.

Figure 2

The B&R

Turning specifically to the B&R, which as will be seen is the most powerfully growing region among the developing economies, this is of course closely connected with China – which is now one the three great centres of the world economy with the US and the EU.

Comparing these three economic centres it is well known that measured at current exchange rates China’s economy is smaller than either the US or the EU – in 2016 China’s GDP was $11.2 trillion compared to $16.4 trillion for the EU and $18.6 trillion for the US. Measured in PPPs China’s economy is actually larger than the US but to avoid discussion of PPP calculations, and because data on savings is not available in PPPs, in this article all measures are at current exchange rates unless specified otherwise.

However, while China’s GDP is smaller than the US or EU it is not yet sufficiently widely understood that China already enjoys a decisive advantage over these other economic centres in one decisive field – savings, that is finance for investment. Furthermore, China’s considerable lead in this will get bigger with time. As shown in Figure 3 by 2016 China total annual savings – that is the sum of company saving, household saving and government dissaving – was $5.1 trillion compared to $3.5 trillion for the US and $3.6 trillion for the EU. By 2021 on IMF projections China’s annual finance created for investment will be $6.9 trillion, compared to $4.2 trillion for the EU and $4.0 trillion for the US.

In summary, while China’s GDP is smaller than the US China has already overtaken the US as a financial ‘superpower’. It is this which enables China to take initiatives such as AIIB and international fixed investment and infrastructure initiatives which are crucial in the B&R.

Figure 3

B&R as locomotive

Based on these economic fundamentals the comparative growth potentials of the B&R region, North America and Europe may now be analysed. As B&R is a regional initiative IMF data for North America, including Canada and Mexico, is given – rather than simply that for the US. For Europe the European Union (EU) as a whole is taken. Given this framework then:

· Measured at current exchange rates projections from IMF data from 2016-2021 shows that in the next five years the B&R region will account for 46% of world economic growth – compared to 24% for North America and 10% for the European Union – as shown in Figure 4.

Figure 4

The situation in 2016

Turning now to the impact of the different growth potentials in the main world economic centres on the structure of the global economy, as a starting point Figure 5 shows that in 2016 the GDPs of the B&R region and the North American region were approximately equal in size while the EU was slightly smaller than either – B&R being equivalent to 27.5% of World GDP, North America 28.1%, and the EU 21.8%.

Figure 5

However, as the average growth rates in countries in the B&R region are much faster than those in either North America or the EU within five years the structure of the world economy will be sharply changed – as is shown clearly by Figure 6 and Figure 7. By 2021 the GDP of the B&R region, calculated from IMF data, will be $29.7 trillion, compared to $21.1 trillion for North America and $18.3 trillion for the EU. In percentage terms the B&R region will be 31.3% of world GDP – compared to 27.3% for North America and 19.2% for the EU.

Figure 6

Figure 7

Can another country block B&R?

The fundamental economic data also makes clear why no other individual country can block the success of B&R – specifically India cannot block B&R. This is due to the fact that while B&R is open to numerous countries economic realities make clear which countries are indispensable for B&R’s success.

Four large economies are within the B&R region – in descending order of GDP size China, India, Russia and Indonesia. Together these make up 79% of the GDP of the B&R region in 2016 and 85% of its projected growth in 2016-2021. However no other country makes up even 5% of the GDP of the B&R region or 2% of its projected growth – therefore no single other country than these four is by itself large enough to ensure the B&R initiative did not succeed.

Of these four large economies Russia and Indonesia are strong supporters of B&R and their presidents will attend the Beijing summit. India is therefore the only large economy in the B&R region which has indicated at the time of writing it will not participate in the Beijing summit.

This reticence is regrettable, and India’s enthusiastic participation in B&R would undoubtedly strengthen B&R. But in 2016 India was only 11% pf the B&R region’s GDP and 15% of its projected growth in 2016-2021. Put in other terms, 89% of the GDP of the B&R region and 85% of its growth potential was outside India. Given this weight India could not block B&R’s development even although its participation would be extremely valuable.

Tasks for the B&R

These macroeconomic trends naturally do not mean there are no problems for B&R. The advantage of North America and the EU is that their per capita GDPs are much higher than the B&R region, and both NAFTA and the EU have an institutional structure which B&R does not have nor is projected to have at present. But the much greater growth performance in the B&R region compared to any other, and therefore the vastly greater market expansion of the B&R region than any other, is much stronger than the institutional framework of the relatively stagnant North American and European economic centres.

It is clear that the B&R region is aided by, and can build on, the existence of a number of partial institutional frameworks within its area. These include the Association of South East Asian Nations (ASEAN), the Shanghai Cooperation Organisation (SCO), the existing Eurasian Economic Union (EAEU – Russia, Belarus, Kazakhstan, Armenia, Kyrgyzstan) and the Asian Infrastructure Investment Bank (AIIB). The wider proposed initiatives include the Regional Comprehensive Economic Partnership (RCEP) promoted by China. The wider concept of a Eurasian Union promoted by President Putin clearly overlaps with the B&R – as President Putin states.

The Beijing summit on 14-15 May will therefore have numerous tasks to work on not only its own projects but building and integrating existing initiatives. But the reshaping of the world economy by the B&Rs much greater growth potential than any other region is clear.

Conclusion

It may be seen from the data above that the differences in growth potential between the B&R and other major economic centres are not small – that is within the margin of error of five year economic forecasting . On IMF data projections:

· In the next five years, the B&R region will account for 46% of total world growth.

· The growth of the B&R region in the next five years will be almost twice that of North America, and over four times that of Europe.

· By 2021 the B&R region will account for a substantially higher share of world GDP than North America or Europe.

No plausible margin of error therefore alters the fundamental fact that in the next five years the B&R region will be by far the most important locomotive of the world economy. In particular, that the growth potential of the B&R region far exceeds that of North America and Europe. This reality must therefore be the basis of economic strategy in the coming period.

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This article originally appeared in Chinese at Sina Finance Opinion Leaders.

What is at stake in France?By Tom O’Leary

Although they are broadly similar in terms of GDP and population size, France is a more important country than Britain in the EU. Any move by France to exit the EU and the Single Market would have a far greater impact than the self-inflicted damage to living standards in Britain arising from Brexit. As a founder member of all the EU’s forerunners and an economy more deeply integrated into the Eurozone economy, a French departure would have a shattering effect. At the very least a number of other countries could also be expected to depart, including Spain, Portugal and Italy.

Marine Le Pen is vying for the lead in the Presidential race, and she proposes a referendum on a French exit. The continued strength of Marine Le Pen’s far right and overtly racist Front National in the opinion polls is evidence of a deep malaise in French society. The FN continues to record about one quarter of the vote, while many other candidates also play a similar anti-immigrant and anti-Muslim tune in a lower register.

France, like many European countries including Britain, does not have an immigration crisis. It has an economic crisis in which immigrants and minority ethnic and/or religious communities are used as scapegoats. Without its migrants, and the daughters and sons of migrants, the economic crisis would be even more grave. 

The road to socialism is very unlikely to lead through the EU. Under certain circumstances, where a socialist programme of taking control of the means of production to increase investment was being offered, exit could lead to far better outcomes than sticking with the EU. Even then, the new government would need great skill in minimising the disruption to trade. But of course, this is not what the overtly racist Le Pen proposes, but nor does any other candidate.

The French crisis

Like every other phenomenon, the analysis of current economic situation must begin from evidence, not myth or rhetoric. The outline of the crisis is evident from Chart 1 below. It shows the change in real GDP since the crisis began and the change in the main components of GDP.

• a derogation from (or better, rewrite of) the EU fiscal rules to exempt public borrowing for investment from all fiscal targets
• a large increase in public borrowing for investment
• a large increase in the budget and lending of the European Investment Bank across Europe
• an increase in the EU Budget for investment purposes
• ECB bond purchases to widen to include the debt of the state-owned enterprises and semi-state sector, public bodies, regions and municipalities linked to their increased investment
• Europe-wide investment programmes in renewable energy, integrated energy storage and distribution networks, hi-speed rail, improved broadband and telecommunications links, and in higher education
• using their balance sheet strength, increase borrowing for investment by the still substantial French state-owned sector, including railways, energy, cars, telecoms, post, airports and others
• altering the tax code to penalise companies paying exorbitant salaries or shareholder dividends, and to benefit companies increasing their level of investment and training.

Austerity has only half worked. New, more radical measures will be attemptedBy Tom O’Leary

The latest GDP data show that austerity has only been effective in driving down wages. It has not been effective at all in boosting profits, which is its purpose. As a continuation of existing policy may simply yield the same results, new and more radical measures will be needed.

Wages down, but profits not up

The purpose of austerity is to increase the share of national income that goes to business and the rich, that is, to boost the profit rate. It has nothing to do with deficit-reduction, which is much more readily achieved by polices that boost growth and thereby increase tax revenues. To boost profits, wages have been frozen or cut, while the total level of social spending has been frozen. Taxes have been cut for business and the rich. So, the UK began the crisis with a main Corporate Tax rate (on profits) of 28%. It is now 20% and is due to fall to 17% in 2020. At the same time, taxes paid by workers and the poor have risen, especially VAT.

But the UK version of austerity has only produced the effect of depressing wages and the incomes of the poor. Real wages have begun to decline once more. But austerity has not succeeded in transforming the profitability of UK businesses. Table 1 below shows the distribution of national income as a proportion of GDP in 2013, when the current very modest recovery properly began. It also shows the proportionate distribution of national income of the £200 billion rise in nominal GDP between 2013 and 2016.

The share of profits (Gross Operating Surplus) has not risen at all. From 2013 to 2016 nominal GDP rose by £200 billion. The Compensation of Employees has risen by just £84 billion. Austerity has been very ‘successful’ in driving down workers’ share of incomes, from 50.5% of GDP in 2013 to just 42% of the change in GDP from 2013 to 2016. (In real terms, the effect of inflation is that total compensation has risen minimally over the period). 

But austerity has not been successful at all in driving up the profit share of private corporations. In the financial sector profits have actually fallen even in nominal terms. For non-financial private companies as a whole profits have only just about kept pace with the moderate rise in GDP. There has been no profits bonanza for private producers.

Instead, there has been a sharp increase in the ‘Other income’ share of national income. This includes a variety of income streams, and mixes profits and incomes of the non-profit institutions, households and others. Partly it reflects the growth of spurious ‘self-employment’.

To demonstrate this is not a quirk of using the year 2013 as a starting-point, the same exercise is repeated in Table 2 below. This shows the distribution of national income as a proportion of GDP in 2007, the last year before the recession. It also shows the proportionate distribution of national income in the £409 billion rise in nominal GDP between 2007 and 2016.

The outcome is that austerity has worked to driven down the wage share, but it has not boosted the profits of companies. Without boosting their profits there will be no significant increase in business investment. As raising profitability remains the aim of policy, so further more radical measures will be required.

This government will try to impose radical measures to further curb wages and spending on public goods to boost profits. The mechanism for this will now be the opportunities afforded by Brexit. It seems likely, given the ineffective outcome of policy to date, that this project would have been attempted in any event within the EU. But removing the protections on workers’ rights, the environment, consumer safeguards and so on provides greater room for manoeuvre.

Weak starting-point

For the year 2016 real GDP grew by 1.8%. This is the second weakest annual rate of growth since the crisis began. Tory government policy temporarily boosted consumption in 2014 as part of its re-election campaign. Growth has been decelerating since.

Real UK GDP growth in 2016 was marginally less than that of the EU as whole (1.9%) and a little greater than the US (1.6%). Of course, it was a fraction of Chinese GDP growth (6.7%).

The effect of the Brexit vote has been mainly felt through a decline in the pound, which has both lifted prices and should boost exports. Those trends will not continue indefinitely. Instead, the act of leaving the Single Market will create a new situation. The GDP data provide evidence of what that new situation will look like and how the current contradictions will be resolved.

Commentators have tended to focus on the rundown in the household savings ratio to a new low of 3.3%. This is an average rate and clearly implies that a large and growing proportion of households are able to save nothing at all or are becoming more indebted.

Household Consumption grew by a full percentage point faster than GDP in 2016, 2.8% versus 1.8%. As Household Consumption accounts for about three-quarters of all Consumption in the UK this would usually mean total Consumption was rising strongly. If Consumption could lead growth this would be a positive development.

For ‘keynesians’ who persist in arguing that Consumption does lead growth, the UK economy is a text book case. Except that the argument is wrong. Strong Consumption has not led to rising Investment, as the ‘keynesians’ suggest. The rise in Consumption cannot be sustained by a persistently declining savings rate. Instead, at a certain point households will decide they cannot or will not continue to support rising Consumption when incomes are not rising as fast and will restrain spending, maybe sharply. Sustained rises in Consumption requires sustainably rising incomes. This is only generally possible if the economy itself is growing.

Falling business investment

Rising growth itself depends on increasing trade and rising investment. Yet business Investment fell in the final quarter of 2016, down 0.9% from a year ago. This is in line with 2016 as whole, where business investment fell by 1.5% from 2015 to 2016. Rising Consumption has not led to rising Investment as Chart 2 shows.

Private Investment is driven by anticipated profits. This is not the same as preceding profits, which businesses judge can and do vary considerably. Chart 3 below shows there is a close correlation between the change in Profits (blue line) year-on-year and the change in Business Investment (red).

As the purpose of private investment is to realise profits, in general changes in profits tend to lead changes in business investment. But in 2016 business investment fell while profits grew very modestly. Businesses expect profits to be significantly lower in future. 

Naturally businesses can be wrong. A rise in exports could have a sustained positive impact on production and profits for export. This could be a response to the fall in pound, compensating for the rise in prices and fall in real incomes that is underway.

But there is no evidence that this is the case. Exports rose by 1.8% in 2016, not faster than GDP as a whole. By contrast imports rose by 2.8%. So the trade gap actually widened from £45 billion in 2015 to £52 billion in 2016. Economists speak of ‘J-curve’ effects on the trade balance after currency devaluations. This simply describes a process where the trade balance initially deteriorates and only improves years later as the effect of rising import prices fades and exporters win market share based on lower export prices.

That might be possible, although it would run contrary to established UK custom, where devaluations are used simply to hike prices, while investment is kept low so that any competitive gain is quickly eroded. If UK producers were gearing up for a global export drive, they would be using the windfall of the more competitive currency to restrain export price increases and raise investment. Neither of these two potential developments are taking place. As previously noted, business investment is falling. Remarkably too, UK producers have chosen to raise export prices at a faster rate than the rise in import prices (see Chart 4, below).

Brexit and the crisis

Using the Rahm Emmanuel dictum of ‘let no good crisis go to waste’ the government has embarked on a policy which will use the new-found freedom of Brexit to get rid of ‘red tape’ (workers’ rights such as restrictions on the working week or maternity leave, environmental protection and consumer standards).  

The claim is that the UK will be moving closer to the Singapore model of development. This is untrue. Singapore’s per capita GDP is US$85,382 versus the UK’s $41,756, according to World Bank data. This primarily arises from two factors. First, Singapore’s openness to trade is nearly 6 times greater than the UKs (326% of GDP versus 56.5%). Secondly, Investment (Gross Fixed Capital Formation) is a higher proportion of that much higher per capita GDP (25.5% versus 16.9%). Contrary to myth, Singapore also exercises a large degree of public control over investment, including outright state investment.

Chart 5 UK Average Weekly Earnings

The blue arrow points to the date in 2016 of the UK’s EU Referendum

Brexit will not include any of this. In the words of leading leave campaigner Michael Gove, the aim is that the UK’s relationship with the EU will not be like Norway or Switzerland, but like Albania. The UK is severing its links with its closest markets, whereas Singapore has thoroughly integrated itself into the regional South East Asian economy and the rest of the world. In the UK the low level of investment is declining. The state will not be a directing hand over investment. It will be increasingly laissez-faire. In 2012 the Tories commissioned, but were unable to implement the main measures of, the Beecroft Report, calling for the wide-ranging removal of workers’ right.

So far, austerity has ‘worked’ only to drive down wages. It has not driven up profits. New, more radical solutions will be attempted if a real recovery in profitability is to be achieved, facilitated by Brexit. 

What China achieving ‘moderate prosperity’ means for China and the world

China’s recently concluded “two sessions,” the National People’s Congress and the Chinese People’s Political Consultative Conference, reaffirmed China’s strategic medium term goal to create a “moderately prosperous society in all respects” by 2020. But “moderately prosperous” is a specifically Chinese term. To give a clearer idea internationally of what achieving this would mean, it is enlightening to give a global comparison for China’s goal of “moderate prosperity.”

The result is extremely striking. If China successfully attains “moderate prosperity” by 2020, then at current exchange rates:

• Only 19 percent of the world’s population will be in countries with a higher per capita GDP than China,
• 62 percent of the world’s population will be in countries with a lower per capita GDP than China.

China will have overtaken almost every developing country. Its level of economic development will have become higher than several countries in Eastern Europe. A country’s level of economic development, its per capita GDP, is an overwhelming determinant of improvement in overall living and social standards. Internationally almost three quarters of life expectancy, the single most sensitive all round indicator of human conditions, is explained by per capita GDP. The difference in life expectancy between a low-income economy and a high income one by international standards is twenty years – 61 compared to 81.

Pre-1978

It is necessary to note that in 1949, when the People’s Republic of China was created, China was almost the world’s poorest country – in 1950 only 10 countries out of 141 for which data can be calculated had lower per capita GDPs. In 1949 China’s life expectancy was 35 – only 73 percent of the world average.

From 1949 to 1978 China achieved a “social miracle” without precedent in world history. From 1949 until Mao Zedong’s death in 1976, China’s life expectancy rose by 29 years – from 35 to 64, increasing by more than one year for each chronological year, or from 73 percent of the world average to 105 percent. There has never been such a sustained rapid increase in life expectancy in any other major country in human history.

But if in 1949-78 China’s social achievements were historically unprecedented, its economic growth was only approximately in line with the world average.

Trends after 1978

After the 1978 “reform and opening up,” as is well known, China’s economic growth became the world’s highest. Taking World Bank data:

• Between 1978-2015 China’s annual average growth rate was 9.6 percent compared to a world average of 2.9 percent – China’s growth rate was more than three times the world average.
• As China’s population growth was relatively slow, China’s global growth lead in per capita GDP was even greater. In 1978-2015 China’s annual average per capita GDP growth was 8.6 percent compared to a world average of 1.4 percent – China’s per capita GDP growth rate was more than six times the world average.

The result was the dramatic continuing rise in China’s relative position in terms of world economic development. The relevant data, showing the proportion of the world’s population living in countries with higher and lower per capita GDPs than China, is set out at current exchange rates, China’s preferred measure, in Figure 1. In internationally comparable prices (purchasing power parities – PPPs), the measure preferred by international economic institutions, the data is shown in Figure 2.

For clarity it should be noted that the sharp oscillations in China’s relative global position measured at current exchange rates during the 1980s do not reflect shifts in China’s productive economy but merely exchange rate shifts between China and India. Taking first the starting point:

• In 1980, measured in PPPs, only 2 percent of the world’s population lived in countries with a lower per capita GDP than China, while 75 percent were in countries with a higher per capita GDP.
• Measuring in current exchange rate is more complex, due to the changes in exchange rates in 1981-82. But if an average is made of 1981-82, then at that date 14 percent of the world’s population was in countries with a lower per capita GDP than China and 64 percent higher than China.

By either measure, of course, China’s relative position in the world at the beginning of “reform and opening up” was low.

The situation in 2016

By 2016, due to rapid economic development, China’s situation was entirely transformed.

• In PPPs, only 26 percent of the world’s population lived in countries with a higher per capita GDP than China, while China had a per capita GDP higher than 55 percent of the world’s population.
• At current exchange rates 26 percent of the world’s population lived in countries with a higher per capita GDP than China and 55 percent in countries with a lower per capita GDP than China.

In summary, by 2016 approximately only one quarter of the world’s population lived in countries with a higher per capita GDP than China, while the majority of the world’s population lived in countries with lower per capita GDPs than China – a total transformation of China’s situation.

Figure 1

Figure 2

2017-2020

From 2017-2020, the final period during which China projects “relative prosperity” to be achieved, economic projections must be made. Those used for calculations here are from the IMF’s October 2016 World Economic Outlook. These are chosen as they are conservative – exaggeration is of no use in analysing serious matters. The IMF data assume lower growth rates than China’s targets – an average 6.0 percent growth in 2017-2020, compared to the 2017 target of 6.5 percent and those for the 13th five-year plan (2016-2020). By 2020 on this data:

• At market exchange rates only 19 percent of the world’s population in 2020 will be in countries with a higher per capita GDP than China and 62 percent in countries with a lower per capita GDP.
• Measured in PPPs, 24 percent of the world’s population will be in countries with a higher per capita GDP than China and 58 percent in countries with a lower per capita GDP.

China has already overtaken in per capita GDP or in PPP all of the world’s other largest developing economies – India, Indonesia and Brazil. By 2020 China’s per capita GDP will be higher than several Eastern European countries.

As China has 19 percent of the world’s population, quite literally never in human history has anything approaching such a large proportion of the world’s population had its conditions of life improved so rapidly. That will be the astonishing measure of China’s success in achieving “moderate prosperity” – it is, without comparison, literally the greatest economic achievement in human history.

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This article originally appeared at China.org.cn.