Socialist Economic Bulletin

By Michael Burke

The Communist Party of China was founded on July 1, 1921. In a short series of graphs this note aims to highlight some of the consequences of that decision for China and the world. In particular, the trends in rapid growth in Chinese living standards after the Chinese Revolution is highlighted in a way that is designed to be more readily understood in societies where nothing similar to this has taken place over a similar timescale.

Background

The Communist Party of China was founded after a series of attempts by young radicals and nationalists to agitate against foreign domination of the country. In 1839, Britain invaded China and there followed a ‘century of humiliation’ as it was territorially and economically carved up among the Western imperial powers.

One aspect demonstrating the degree of that humiliation was the enormous decline in living standards under British Empire-led rule.  This is shown in Chart 1 below (all data from Angus Maddison, unless otherwise stated).

Chart.1 Per Capita GDP in China in the Century of Humiliation, Int’l $

Under rule by foreign powers, China’s per capita GDP fell over a period of a hundred years (1850 to 1950) from $600 to $448. By contrast, and for comparison, British per capita GDP rose from $2,330 to $6,939 over the same period.

Later success

The CPC’s first great achievement, and the necessary first step for all later development, was its ability to expel the foreign colonialists, culminating the Revolution of 1949. Chart 2 below extends the first chart to the modern period, up to 2008, to the time Maddison’s death.

Between 1950 and 2008 China’s per capita GDP rose from $448 to $6,725. So, in 100 years of colonial and capitalist rule, living standards fell by over 25%. Yet in 58 years after the Revolution per capita GDP rose by 14 times. To bring matters up to date, the World Bank (which uses a different, but consistent measure of international purchasing power) which estimates that per capita GDP rose a further 128% from 2008 to 2019. This implies a cumulative growth in output of between 1950 to 2019 of 33 times.

Chart 2. China’s Per Capita Incomes, 1850 to 2008

One of the stranger arguments about the current Chinese economic system is that it is capitalist, in part reflecting an inability or unwillingness to accept prosperity as an aim or product of socialism. Oddly, on both left and right can be found arguments that imply or explicitly state that China’s prosperity is a product of capitalism.

Yet China was opened up to capitalism for 100 years and it was an economic disaster.  It was only when the CPC led the peasants and workers to power that economic development was possible, and the scale and pace of the development since has been astonishing.

Success in a global, historical comparison

It is difficult in richer societies to imagine both the scale and pace of that transformation. Therefore, it may be useful to demonstrate both of these in relation to historical comparisons. Chart 3 below is based on the same data as in Chart 2.  But in addition, it uses as reference points the estimates for per capita GDP provided by Angus Maddison for a variety of societies and over different historical periods. 

The purpose is to highlight some important milestones on China’s path of economic development, and to give an indicator of its pace. All comparisons are the author’s, not Maddison’s.

Chart 3. International Comparisons of China’s Per Capita Incomes, International $

It is important to dispel any notion that this was an inevitable process, independent of any policy decisions and simply a reflection of ‘catch-up’ that often occurs to all extremely poor nations.  This can be done in 3 ways:

1. When Britain led the foreign invasion and carve-up of China in 1840, in the century that followed there was no catch-up as per capita GDP actually fell (to a level seen in Western Europe after the fall of Rome and the barbarian invasion).
2. Within the era following the Revolution there are distinctive periods of growth which themselves reflect policy decisions.  In particular in the period from 1950 to 1978 per capita GDP grew strongly, by 118%. However, in the following 28 years through the ‘reform and opening up’ process, per capita GDP grew much more rapidly, by 518%.
3. International comparison shows that similar countries, including ones which had liberated themselves from Empire, did not grow nearly as rapidly. This is highlighted in Chart 4 below, in the comparison of modern trends in per capita GDP in India and in China.

Chart 4. China and India, Per Capita Incomes, US current $ at Purchasing Power Parities

Source: World Bank

In 1950, very shortly after both the Chinese Revolution and Indian Independence, India’s very low per capita GDP was still considerably higher than China’s in percentage terms.  According to the Maddison data GDP per capita GDP was $619 in India versus $448 in China (in International $ terms). Both countries grew far more rapidly than they had under colonial rule.

However, China pulled level with India in 1992 and more rapid growth meant that it had reached a per capita GDP of $16,804 in 2019, 140% greater than in India.

Conclusion

In 1921 when the Communist Party of China was formed 474 million Chinese were attempting to subsist on per capita GDP of something less than $600 per year. Now there are 1.4 billion Chinese citizens with a per capita GDP of almost $17,000 in 2019.

The CPC inherited a level of output comparable to the living standards in Western Europe after the fall of the Roman Empire in the West. Within 70 years, a single lifetime, a rise in per capita incomes has taken place which either took millennia in other countries, or which, unfortunately many other countries are still very far from achieving.

Naturally, many people in those countries will be keen to examine the main factors responsible for such a transformation in living standards, with the aim of learning from them and adapting them to local conditions where possible.  Anyone interested in economic development, or increasing living standards, or socialism will want to do the same.

These 4 charts are not designed to identify those main factors driving exceptional growth, but simply to provide a very small snapshot of the effects of policies and structures which were aimed at raising living standards and to encourage study of these issues.

By Tom O’Leary

There are widespread claims that British Chancellor Sunak is implementing Corbyn and McDonnell’s economic policies even though this has been explicitly denied by both of them. Simultaneously, there is the claim that Biden is resurrecting Keynes with his $1.9 trillion stimulus packages.

These claims are important to examine, and not simply because they are at risk of sowing widespread confusion.  It is also important to set out what the recent changes in economic policy represent on both sides of the Atlantic, especially as they are likely to be influential in the Western countries as a whole as the latest iteration of neoliberal economic policy.

Source of confusion

In Western Europe (and to a lesser extent in the US) the dominant economic policy from 1950 to 1980 was ‘demand management’.  This was characterised by a loosening of fiscal and monetary policy when there was an economic downturn and the reverse when there was a perceived risk of ‘overheating’ and inflation.  This policy fell apart in the economic crisis of the early 1970s and was replaced by Reaganism and Thatcherism from 1980 onwards with what have become known as neoliberal policies.

This failed policy of demand management was incorrectly understood as ‘keynesianism’.  It is not in the scope of this article to explain why this is not a product of Keynes’ thought, and this has been done rather well elsewhere on SEB.

The point emphasised here is that this policy of demand management is not effective, as its failure in the early 1970s shows.  This is because simply increasing demand does not automatically lead to increased production, and still less it does not automatically lead to increased investment, that is the growth in the means of production.

However, after the horrors of World War II and the following 20-plus years of economic rebuilding, growth and prosperity in Western Europe and the US, the associated ideas of demand management maintain a powerful attraction. This includes in the European labour movements and their Lefts.  Yet it remains important to dispel this confusion, as it disarms all of these forces in their response to the latest economic turn in the major Western economies.

The turn in economic policies

Just as they did in the 1980s, the US is leading the Western economies towards a new economic policy, with Britain as its most faithful follower.  To understand that economic policy it is necessary to take account of the key developments in the US, which is both the stimulus packages under Biden and Trump taken together, the two British Budgets in March 2020 and 2021 and the various stimulus packages all across in the advanced industrialised countries.

These policies can be summed up as providing a safety net for business (including tax breaks, loans and guarantees as well as direct subsidies).  For payroll workers there is an element of wage support, although this also includes wage cuts in most instances.  There is little or no support for more marginal workers, the unemployed, those forced into ‘self-employment’ and others.

The latest Biden package totalling $1.9 trillion includes an innovation, a $1 trillion stimulus to household spending.  Trump called his own earlier package ‘stimulus measures’ but they were nothing more than temporary and partial subsidies, very little of which went to households (mainly a $600 cheque to households, meant to cover 3 months’ expenditure).

Biden’s is a genuinely large but temporary boost to household incomes, equivalent to approximately 5% of GDP. Taken with the Trump package that was mainly directed towards business the total additional government spending in response to the pandemic is $4.1 trillion, or just under 20% of US GDP.  Little wonder that the economy is expected to grow at a rapid pace this year.

In Britain, the Office for Budget Responsibility (OBR) estimates that the total support offered by the British government (which is overwhelmingly to business) at £356 billion, equivalent to approximately 12.5% of GDP. In the other advanced industrialised countries the support measures are sizeable, adjusted downwards in line with the shallower contractions in GDP generally seen elsewhere.

Rising government debt

All of this increased expenditure combined with falling GDP have led to sharp increases in government borrowing.

Government debt issuance in the OECD (Organisation for Economic Co-operation and Development) is expected to be a new record, equivalent to US$19 trillion in 2021 after $18 trillion in 2020 and compared to US$11.2 trillion in 2019. The level of debt issuance was previously on a declining trend in response to the moderate growth of the OECD economies. So, it can be stated that the entire increase in new debt is a product of the economic crisis caused by the failed response to the pandemic.

These totals far exceed the levels of government borrowing seen even in 2008 to 2010.  But this is because the depth of the current economic crisis far exceeds the impact of the Long Depression.  There is also a distinct possibility there is a China effect. Simply leaving the US economy to its own devices threatened to open such a huge growth gap between the US and China that it would soon become irrecoverable.  The huge stimulus is designed to close that growth gap.

Sharply rising government debt and a large temporary boost to spending that may have confused commentators in their wildly inappropriate comparisons. But it should be noted that the initial response to the 2008 crisis was also to increase government spending, and only when the recovery was secured this was followed by vicious austerity in 2010.

In this crisis, it is already clear that increased subsidies and one-off boost to incomes are being combined with structural, that is long-lasting austerity measures. This is shown in the way that Biden reneged on his campaign pledge for a $15/hour Federal minimum wage and cut unemployment benefits.  Sunak is cutting government current spending, increasing taxes on workers and maintaining a pay freeze on public sector pay, as has been shown previously on SEB. 

Macron in France is still battling for his Thatcherite labour market ‘reforms’, while Germany is eyeing privatisations.  All of these are different aspects of a shared drive towards austerity, modified by national conditions.

Will it work this time?

The main factor in determining the level of production is the amount of labour available and its quality (skills, training, education).  But increasing the level of production per worker without simply increasing their hours requires an increase in the means of production, through investment.

The reason ‘demand management’ failed was because in a capitalist economy investment is driven not by ‘demand’ but by profits.  Firms may either find that additional output is not profitable for a variety of reasons (additional costs or low availability in acquiring raw materials, intermediate goods or necessary labour). Alternatively, they may prefer to try pushing prices higher in response to increased demand, especially if they expect that increase to be temporary.  Others may find they have the additional capacity to meet the rise in demand without creating additional productive capacity.

This certainly seems to have been a factor in the US, the leading capitalist economy over a prolong period (and the G7 economies generally).  The level of capacity utilisation in the US economy is shown in the chart below.

Chart1. US Capacity Utilisation

Source: FRED

There are two important factors to note from the chart.  The first is that the rate of capacity utilisation in the US economy is lower than 75%. There would have to be an enormous, sustained increase in the level of consumption to oblige US capitalists to increase their investment on the confident assumption of future profitability.

Secondly, which reinforces the first point, is that it is also clear that the rate of capacity utilisation in the US economy has been on a long, unbroken downtrend over several decades, only interrupted by cyclical swings.  Reversing that downtrend would require a qualitative change in the overall conditions of the US economy to boost profitability, not simply a one-off boost to household incomes however large.

It should be noted too, not entirely as an aside, that this decline in capacity utilisation is mirrored by the same long-term decline in investment as a proportion of GDP in the US economy, as shown in Chart 2 below.

Chart 2. US Gross Fixed Capital Formation as % of GDP

Boosting demand will not be enough to sustain growth over the medium-term, because it is unlikely by itself to create the scope for profitable investment when there is already such a high level of idle capacity.  Instead, by themselves the stimulus measures will do only that, stimulate economic activity for a year or two against a backdrop of otherwise very weak growth.

However, as previously noted the governments of the advanced capitalist countries are not simply boosting ‘demand’.  They are also imposing austerity measures right now, the most important of which is the surge in unemployment and cuts to pay. 

Just as ‘demand’ or consumption does not determine profitability, so it is possible to increase profitability even if consumption remains unaltered (or receives only a temporary boost).  Profitability can be increased if the rate of exploitation is increased, specifically if wages for the same work are cut or if work is increased for the same wages. 

Both of these are being imposed now, the former largely on manual and other workers who are forced to attend work even under furloughs, and latter largely on stay-at-home, mainly ‘white collar’ workers.  Pay per hour worked is cut in either way, initiated by furlough schemes, underpinned by rising unemployment (the mechanism of the ‘reserve army of labour’) and supplemented by measures such as no increase in the Federal minimum wage, or cuts to unemployment benefit, or public sector pay freezes, cuts to Universal Credit payments, and so on. 

These austerity measures are integral to the whole economic plan, which is why it is extremely foolish and misleading to compare them to the policies of Corbyn, McDonnell or Keynes.  They amount to an all-round attack on wages and the social wage even while there is a temporary boost to demand.  In fact, the enormous sugar rush effect of the trillion dollar boost to household incomes may help to mask the effect of these impositions.

This is not so different to the stimulus in 2008 and 2009 followed by austerity from 2010 onwards.  The first is meant to revive capitalism and the second designed to boost its profitability by placing the burden of the crisis on the shoulders of workers and the poor.  The scale of the crisis caused by allowing the virus to circulate means the scope of policy measures is far greater and the two episodes, of stimulus and austerity, have been concertinaed.

Their purpose is to alter the relationship between labour and capital in the advanced industrialised economies in favour of the latter, to increase the rate of exploitation and then to lay the basis for a rise in profitability leading to a self-sustaining rise in business investment.

This did not work after 2010.  It remains to be seen whether it will work this time around.  It would be guaranteed to fail if there were large-scale resistance to these impositions. But that has yet to materialise.

By Diane Abbott MP

It is a modern miracle how incredibly damaging Tory Budgets are given a warm welcome by the overwhelming majority of the media, the miraculous status undimmed by the fact that it happens year after year.

The consensus was that last week’s Budget was a “spend now, tax later” plan.

The opposite is true. Aside from measures to try to cope with the pandemic which a clearly reluctant Chancellor is obliged to extend, the substance of the latest Budget, like the 2020 Budget, is to cut spending and raise the taxes on working people now.

In addition, far from there “being no money left,” there is in fact an enormous tax giveaway to big business.

The talk of tax hikes in the future on corporate profits is pure conjuror’s trick, designed to distract from what is actually happening now, using a policy that may never be implemented.

But as damaging as this austerity Budget will prove to be, there is even worse to come from its serial failures to address the multiple crises of British society, including the pandemic itself, the prospect of catastrophic climate change, the huge and deepening inequalities in society, the housing crisis, the crises in public services and in our basic infrastructure.

Robin Hood in reverse

In any sober assessment of this Budget it should be clear that the austerity policy has been reintroduced with a vengeance, following on from last year’s 5.7 per cent real-terms cut in government current spending (the day-to-day spending on schools, hospitals, public services of all kinds).

At the same time the support measures the Tories announced are mainly short-term and overwhelmingly to support business.

As this government’s policy has repeatedly shown, in a negative way, and other countries in a positive direction, the economic health of any nation depends on its public health.

The best gift the government could have given to businesses (and far less expensive) would have to suppress the virus with a zero-Covid policy. It still could, if it changed policy.

These are among the austerity measures that have not got the publicity they deserve:
• A public-sector pay freeze (except for nurses, whose 1 per cent rise is still a cut in real terms, after inflation)
• Another cut in government current spending (£4 billion)
• A rise in council tax (£2bn)
• A freeze on income tax thresholds (which means 1.3 million of the lowest-paid workers are brought into the tax net and ordinary workers lose out by paying more tax than if the thresholds had risen with inflation).

Together these amount to a huge attack on living standards of ordinary people.

At the same time, taxes for businesses are being cut massively.

Ignore all the spin about the big rise in corporation tax on profits, which is way in the future and may never happen.

Companies will soon be able to claim £13 for every £10 invested.

This “super-deduction” of tax is a huge tax giveaway amounting to around £27bn.

The Office for Budget Responsibility (OBR) says the policy will not boost business investment over the medium term, just simply bring it forward in the short term. So it is just a giveaway to business.

Together, this is the transfer of incomes from ordinary working people and the poor to big business and the rich.

It is the classic definition of austerity, and the same type of policy as George Osborne, David Cameron and the Lib Dems adopted. It is Robin Hood in reverse.

No-one should be fooled by the kerfuffle over a proposed corporation tax increase.

This is not due to be implemented until the financial year beginning in April 2023.

So any tax payments are years away and the government could scrap it at any point.

The missing elements of a Budget

This government specialises in not implementing measures it has previously announced.

One of those, dating from the general election, is that it would tackle the housing crisis that it helped to create.

But the Budget subsidies for mortgages and deposits are useless on their own.

There needs to be a huge programme of affordable homebuilding, otherwise these measures simply drive prices even higher, making homes even more unaffordable.

There was also next to nothing in the Budget about tackling catastrophic climate change, either in terms of investment to combat it or providing for a green recovery.

Two different Commons committees have said there are no plans to put government declarations on climate change into practice.

The Public Accounts Committee (PAC) says ministers have “no plan” to meet climate change targets, two years after setting them in law.

And the business committee says the vital UN climate conference scheduled will fail unless its goals are made clear.

In addition, the 110-page “Red Book” document from the Treasury, the word “inequalities” or “inequality” were mentioned just once!

And this was in the false messaging about levelling up, which we now find is only happening in Tory areas.

In addition, the government has not published an equalities impact assessment of the Budget.

Yet black and Asian people have been much more disproportionately hit by the economic fallout of the crisis, along with poorer households and young people.

They have also been disproportionately hit by the death toll in the pandemic. The Budget literally had nothing to say about any of this.

Underlying all of this is a complete failure to grasp the real relationship between the economy and the pandemic.

Notoriously, the Treasury’s Eat Out to Help Out scheme could not be sustained because cases and then deaths rose again, and the scheme itself probably contributed to that.

At every stage, “putting the economy first” has been disastrous for lives, and for livelihoods.

The OBR forecast is now that unemployment will rise to 5.9 per cent, while we know Covid-19 cases are likely to rise once more with schools and colleges reopening again on Monday.

Instead of dealing with the pandemic, the Tories are using it as backdrop for a renewed austerity policy against the bulk of the population.

Diane Abbott is Labour MP for Hackney North and Stoke Newington.

The above article was first published here by the Morning Star.

Pre-Budget Briefing

From the Office of Diane Abbott MP  diane.abbott.office@parliament.uk

*In March 2020 the official forecasts for the year were that GDP would grow by 1.1% in real terms and by 1.8% in 2021, and that the unemployment rate would remain steady at 3.8%

*In the event the economy contracted by 9.9%, a virtually unprecedented slump in peacetime and one of the worst outcomes in the G7.  Unemployment has risen to 5.1% and a recent survey for the Resolution Foundation shows that many more expect to lose their jobs.

*The importance of this disparity is not to highlight forecasting errors, but to underline the gravity of the current crisis and its effects on real people’s lives, as well as to highlight a key failing of this government.

Under This Government, The Economy Isn’t Working

*That failing is not just the disastrous response to the pandemic, which means that this country has one of the highest per capita death tolls of any advanced industrialised country.  It is compounded by the false notion that there was a trade-off between public health and economic well-being.  There is not, and repeated delays in lockdown and repeatedly ending them too early to ‘save the economy’ have led to both a public health and an economic crisis of enormous proportions.

*As is frequently the case at the approach of a Budget, the economic crisis is portrayed primarily as a crisis of government finances.  But this again mistakes a symptom for a cause.  Government finances are under pressure because of the economic crisis, and the economic crisis is a reflection of the failure to suppress the virus.

*Those economic consequences are stark.  1.4 million new people have begun to claim unemployment benefit since the pandemic began.  Millions of people have seen their pay slashed.  Young people, and Black and Asian workers have borne the brunt of job losses.  Others have been ‘fired and rehired’ on lower pay and worse terms, while the government has stood idle.

*Underlying this bleak scenario is the fact that some basic functions of the economy are not working (as shown in the chart above). There is lots of misplaced talk of government largesse, of the ‘gap narrowing between Conservatives and Labour on spending’ and even that the current Chancellor is ‘carrying out Corbyn/McDonnell spending plans.’.  The fact is that a public health and economic crisis is exactly the time to increase Government Consumption. Yet this government cut it.  ONS data shows that General Government Final Consumption Expenditure fell by 5.7% in real terms in 2020 compared to 2019.  To be absolutely fair to the Chancellor, this is exactly what he said he would do in the last Budget, which is a renewed bout of austerity.

*Naturally, with over a million people losing their jobs, millions more either in fear of losing of their jobs and/or having to live on much lower pay, Household Consumption fell by 10.7%.  The government as a whole has allowed the pandemic to drag on for a year, rather than for weeks in those countries which suppressed the virus.  But the fall in Household Consumption simply highlights that the Chancellor has also not done enough to support jobs and incomes for employees, and hardly done anything at all for the millions of self-employed and The Excluded.

*The other area of extreme weakness is in Business Investment.  In all the heat generated about the role and level of corporate taxes, there has been very little light shed on the key variable these are meant to influence, which is Business Investment.  Supporters of cutting taxes on profits frequently claim that this will boost Business Investment.  Yet, while this country has one of the lowest level of taxes on company profits in the OECD, unfortunately it also has one of the lowest rates of business investment too.  And Business Fixed Investment also fell by 10.7% in real terms in 2020. The weakness of Business Investment is a chronic one, which has become acute and is not much higher in 2020 than it was 2005.

*Economic prosperity cannot be sustained by encouraging Consumption.  The terrible effects of the Lawson and Barber booms pale into insignificance to the damage wrought by the Chancellor’s wholly misconceived ‘Eat Out to Help Out’ scheme (research from the University of Warwick says it was associated with one-sixth of all new cases over the summer).  More fundamentally, people cannot sustainably increase their Consumption unless their incomes are also rising. That requires rising incomes and rising output, which both require rising Investment.

*In addition to the current public health crisis there are multiple crises of the British economy, including in dilapidated infrastructure, unaffordable housing, run-down public services and severe inequalities.  Probably the most dangerous and pressing of all is the crisis of climate change.  None of these can be address by increasing Consumption and require increased Investment instead. 

*Currently, despite lots of talk of incipient inflation, the UK government can borrow for more than 25 years at an interest rate under 1.4% per annum.  Investment in all of these areas outline above yields a return on investment that is far greater than the cost of borrowing.  It is irresponsible not to borrow to investment when interest rates on government bonds are so low (even below the rate of inflation!).

*The economic plan to revive the economy must begin with suppressing the virus (and transferring the private sector shambles of Test & Trace to the public sector).  All those who cannot go to work should be furloughed on full pay up to £25,000 a year and the same should apply to the self-employed. In addition, a wartime level of borrowing to invest should begin both to overcome the current crisis and to tackle the longer-term structural issues that blight our economy and wider society.

*The virus must be suppressed, the underlying economic factors must be addressed, and the pressing issues of climate change, housing, jobs, inequality and so on must be tackled, otherwise they will all simply deteriorate further.

By Tom O’Leary

Keir Starmer’s speech on A New Chapter for Britain was heralded as a breakthrough moment where he would simultaneously set out his vision for the economy and society while beginning to outline a wholly different economic policy.  If that was its purpose, it failed miserably in every respect. 

But the speech does have some value as it highlights some striking misconceptions that are unfortunately quite widely shared across the labour movement. These are important to deal with because they are disarming the movement in the current crisis.

Starmer’s policies

The concrete pledges in the Starmer speech are as listed below:
No £20 cut in Universal Credit
Funding for local authorities to prevent ‘huge rises in Council Tax’
No pay freeze for key workers
Extend business relief and the cut in VAT for hospitality and leisure
Loans for small business start-ups
And, ‘update and extend’ the furlough scheme

Though generally welcome, all of these are limited, short-term measures in response to a feature of the current crisis.  They are not a vision for either a more prosperous or less unequal Britain over the medium term, or even a policy to reverse this crisis.

There is too some confusion over the plan to introduce a ‘British Recovery Bond to raise billions’, which is clearly aimed at private individuals by giving “millions of people a stake in Britain’s future”. It is wholly unclear how this would differ from existing National Savings Schemes, or how it would add much for investment, given the outstanding level of ordinary government debt is just under £2.5 trillion.

SEB has long argued for a substantial increase in government borrowing for investment. But this seems to fall way short of that.

Common fallacies across the labour movement

As insubstantial as the Starmer speech is, its paucity is indicative of a wider malaise across the labour movement.  This can be encapsulated in large sections of the labour movement adopting and repeating the Tory slogan of, ‘Build Back Better’, which is the ‘Land Fit for Heroes’ of our era. The promise that there is no intention to deliver.

The idea that they are engaged in ‘deficit-financing growth’ is a myth exposed by their own Budget in 2020. Instead, leaving aside one-off measures to cope with the fall-out of their damaging Brexit, Budget 2020 showed cuts to total government spending over the medium-term. 

The innovation was that there is a planned increase in government investment, rising from a pitiful 2% to an extremely modest level of 3% as a proportion (of exceptionally weak) GDP.  Even before the wider economic effects of the pandemic were apparent, the Office for Budget Responsibility (OBR) forecast 10 years consecutive growth that never once reached an annual rate of 2%, which would be historically unprecedented – and which was largely a Brexit effect.

But the government also planned to reduce government spending overall, by cutting public services and public sector pay. So, far from deficit-financing growth, the outlook even before Covid-19 was that inducements to the private sector to invest would be paid for by workers and the poor.  This is more like austerity-driven stagnation.

The scale of the crisis

Unfortunately, the OBR’s view of economic prospects is much closer to reality than the Build Back Better boosters of the Tory Party.  In fact, the OBR could not know a year ago how the government was actually going to proceed with economic policy beyond its fiscal plans, so its own projections are also probably too optimistic in the short-to-medium term.

What the government has done is to launch a ferocious assault on working class and the poor, and has provided every encouragement to employers to do the same.  Far from ‘better’, measures already enacted will make matters far worse for the overwhelming majority of the population unless they are resisted and reversed.

Starmer’s speech blithely ignores all of this.  Yet this is the central issue that the labour movement must grasp unless it is to go down under an enormous defeat. To demonstrate that this is not hyperbole, the charts below illustrate the real trends in the economy, focusing on the labour market.

Since March 2020 the number of people claiming unemployment benefits has risen by 1.4 million, more than doubling in less than a year despite the furlough scheme.

Chart1.

For those in work, hours have been slashed, down by 7% since the pandemic began.

Chart2. UK Total hours worked (millions per week)

In addition, redundancies peaked at over half a million in the 3 months to September.  But total redundancies since March 2020 have amounted to well over 1 million.

Chart 3. UK Redundancies, 3-month rolling data, thousands

In its own analysis the office for National Statistics shows that the current rate of redundancies currently exceeds the rate after the financial crisis.

Chart4. UK Redundancy Rates Compared, the Pandemic Versus the Financial Crisis

Meanwhile, the reported rise in average annual pay is misleading. As already noted, payroll employee numbers have fallen sharply and these have been concentrated among the lower paid, which pushes the average for the remaining employees higher.

Taken together these trends amount to an all-round attack on the pay, hours and conditions of workers, especially lower-paid workers.  They are underpinned by the rapid rise in unemployment, which both increases the available supply of labour and undermines union bargaining positions.  In addition, the freeze on pay in the public sector (accounting for 5 million workers) is designed to place a cap on all workers pay. 

The outlook is even more bleak. According to the Resolution Foundation 8% of all those currently in work either expect to lose their jobs or have been told they will lose their jobs.  Even if only half of them are right, this would mean another 1.2 million unemployed.

Conclusion

It is this crisis that economic policy should seek to address, with strong public investment, job-creation and redistribution. 

First though, it requires accepting the reality of the scale of the crisis. Secondly, it needs to be understood that these are the economic indicators behind the widespread ‘fire and rehire’ policies, a conscious effort by the employers and this government to increase the rate of exploitation. They are not a response to lockdown, still less a natural outcome of a pandemic.  Thirdly, the ambition for economic policy must be commensurate with the scale of the attack that is being mounted. Otherwise, we are simply accepting defeat without a fight.

This is what Starmer neglects.  The labour movement as a whole cannot afford to be so complacent.

By Ken Livingstone

Now is the winter of our discontent — and the Tory government is entirely to blame.

More than nine months into Britain’s Covid-19 crisis, Boris Johnson and his ministers have failed utterly to protect public health and to drive down infections.

This is not just incompetence — although that has been in evidence — it is fundamentally a failure of policy.

Britain’s 60,000 virus deaths represent 877 out of every million people in the population.

In New Zealand the equivalent figure is five, in China it is three and in Vietnam it is less than one half.

With thousands, even tens of thousands, testing positive every day, it is simply not possible to “track and trace” their contacts.

Only where the necessary steps have reduced the virus to very low levels is the public, effectively free from Covid-19, free to return to something resembling normal life, with fully operating and effective “track and trace” systems in operation.

Whereas early October saw millions of Chinese people travelling safely around their country to enjoy the Golden Week holiday, two months later, millions here face tough choices and Christmas without their families.

This is an abdication of responsibility by a government that is unwilling to face the consequences of its own bad decisions.

New year promises to bring some new hope and the prospect of the start of a vaccination programme.

But even before that happens, we are set to see huge numbers of additional unnecessary deaths.

While the most recent lockdown was successful and infection rates began to fall, on December 2 alone — the day that Britain officially moved to the confusing and poorly funded “tiers” system — 648 lost lives were recorded along with 16,170 new cases.

While people are right to be angry and frustrated, ending lockdown in these circumstances — especially with seemingly no action taken to even start to fix issues around track and trace — is callous and irresponsible.

Failure to bring the virus under control has taken its toll on the economy too, as repeated lockdowns and protracted restrictions have been necessary to stave off even greater catastrophe.

While those on the front line — health and care workers, often the low paid, women and BAME employees — are disproportionately exposed, many who have the option have understandably avoided returning to work or socialising.

According to figures produced by the Office for Budget Responsibility, Britain now faces the worst economic slump for more than 300 years and one of the sharpest declines experienced by any major economy.

Contrary to the government’s false claim that there is “a balance to be struck” between saving lives and protecting the economy, the opposite is true.

The only way to save livelihoods is to save lives and defeat the virus.

What is needed is a zero-Covid policy as the aforementioned countries have pursued — a strategy that promises Covid-19 freedom, both in the sense of being free from the daily toll of deaths and infections and of being free to fully enjoy our lives again.

Both things go hand in hand. Vaccines — even if they only provide protection for a short period — can be a huge part of this urgently needed approach.

So too are the financial measures necessary to support those who have to self-isolate or lock down, prevent evictions and job losses and to keep businesses and other employers afloat.

Working people must not be made to pay for this crisis and this means ratcheting up the pressure on key campaign points in the next period, including on fixing furlough so everyone is paid at least the minimum wage, increasing statutory sick pay and making sure everyone who needs it can get it and not going ahead with the planned cut to universal credit which will throw millions of people further into poverty.

In terms of the structural changes our economy needs, the Labour Assembly Against Austerity’s People’s Plan provides a framework we can unite behind in terms of the need to protect jobs and livelihoods and for investment in the future.

There are proven steps that can defeat this virus, protect lives and clear the path to economic recovery and the imminent arrival of vaccines will make that even easier to achieve.

For our public health, economy and society it is long past time for the zero-Covid policy we need and know works — it is time we were Covid-19-free.

Follow Ken at www.twitter.com/Ken4Londonhttp://www.twitter.com/Ken4London and www.facebook.com/KenLivingstoneOfficial.

Join over 15,000 other in signing the #PeoplesPlan at bit.ly/planforthepeople.

This article was originally published by the Morning Star.

By Michael Burke

The Tories have no real plan to get out of the current economic crisis, but they are determined that the working class will foot the bill.  In that way, their hope is that the end result of this economic slump will be much lower wages across the board and that profits for the remaining companies will significantly increase as a result.

Scale of the crisis

According to the Office for Budget Responsibility (OBR), having presided over the worst public health crisis for 90 years, the Tories have also allowed the worst economic crisis for over 300 years.  The policy of letting people die to protect the economy, © Dominic Cummings, is not only outrageous and morally indefensible but turns out to be completely muddleheaded.  The depth of the economic slump is because of the failure to contain or suppress the pandemic. 

The UK has one of the worst per capita death tolls in the world.  With an OBR forecast of a contraction in GDP of 11.3% it also has an economic slump of the same magnitude. The OBR reckons it is the worst for over 300 years.

Chart 1. OBR: The Worst Slump since the Great Frost of 1709

This slump is treated by ministers and commentators alike as if it is an act of God, rather than a consequence of government failure.  However, its alleged effects fall into a different ‘something must be done’ category.  In particular, the propaganda campaign on the deficit in government finances has begun, in a farcical re-run of the drive to austerity from 2009 onwards that led to austerity, the BBC’s chief political correspondent Laura Kuenssberg plays an especially prominent, pernicious role with bulletins filled with talk of “we can’t afford” to support jobs and families during and after the pandemic, that there is “no money left”, that we’ve “maxed out the nation’s credit card”, that we’re “loading debt onto our children”. Even mainstream economists such as Jonathan Portes describe this all as ‘economically illiterate nonsense’.

As Chart 2 shows, public debt is rising but it is far from unprecedentedly high.  Crucially debt interest as a proportion of GDP is close to its all-time lows because global interest rates remain so low.  The debt is currently easily affordable, because interest payments are so low.

Chart 2: OBR: Debt and debt interest payments as a proportion of GDP

The scaremongering about the debt and deficit levels serve another purpose altogether. This is the attempt to justify the freeze in public sector wages, which is a cut in real terms (after inflation).  This is the one big ‘saving’ announced in the Spending Review, along with further big cuts in spending on public services in later years.

Yet it is not a big saving at all.  Unusually, the Chancellor did not provide a specific estimate of the ‘saving’ in his review of Policy Costings.  But an approximate estimate (current author’s calculation) is an annual saving of £3billion to £4billion. 

This is a pitifully small amount relative to government finances in aggregate. The total forecast deficit for this year is £394 billion, so the entire cut to public sector wages falls with the scope of accounting errors.  The Chancellor boasted that £280 billion had already been spent, largely on supporting businesses.  And it should not be forgotten that the public sector workers’ wages have already been earmarked as a contribution towards a £26.4 billion increase in military spending.

As SEB has argued previously the purpose of the public sector pay freeze (a real terms cut) is not to reduce the deficit.  With these magnitudes it would take over 100 years, even assuming there were no indirect negative economic consequences arising from it.  The real purpose of the public sector pay freeze to attempt to set a ceiling on all pay after the crisis is over, and thereby lower all wages in real terms.

This was its purpose in the austerity offensive from 2010 onwards.  This had the desired effect of lowering real wages for a period, but the electoral timetable combined with very low unemployment meant that holding down wages could not be maintained.  The current plan is to solve that problem of wages creeping higher while there is low or zero productivity growth, and which prevents the growth of profits.  This is the return to mass unemployment.

The OBR’s central forecast is that 2.6 million people will be made unemployed and that the unemployment rate will rise to 7.5%.  Its worst-case scenario is that the unemployment rate rises to 11%, or almost 4 million people.  This is getting into Thatcher territory.

Chart 3. OBR: Forecasts for fall in GDP, rise in unemployment

In this way, this government will hope to combine the Thatcherite effort to lift profits by deindustrialisation, with the cuts to real pay under the Tory-led Coalition.  Of course, neither of these strategies worked even in their own terms, as profits did not rise sufficiently to restore UK competitiveness or spark an investment boom. 

Yet the current Tory strategists will be hoping that by combining this worst of both worlds, cutting real pay and mass unemployment, they can achieve something their predecessors could not.  They aim to get wages down and keep them there. We shall see if this toxic mixture has the desired effect.  But millions of people will face misery, increased poverty and unemployment if their plan is put into action.

By Michael Burke

The experience of this country (both positive and negative) and many others shows that there should be a compete lockdown to combat the pandemic. This means all non-essential work stopped, all leisure and other services halted, schools closed and all possible higher education moved online.  There should also be proper compensation for workers, who should receive 100% of their pay, not the 80% currently (or none at all for some freelance and other workers). That compensation should be for the duration of the furlough itself, at first approximately 8 weeks and until new cases reach levels where they can be suppressed, and then extended for the necessary period while the gradual back to work process is completed.

A combined crisis

The public health crisis caused by the Covid-19 pandemic has led in turn to an economic crisis.  There is no possibility of ‘saving the economy’ while a pandemic is raging.  Services account for approximately 70% of the economy and the demand for many of these is discretionary.  You cannot force people to go to pubs, cinemas or restaurants in a pandemic.  On the experience of this country and many others, the majority of people will simply refuse to take up their normal leisure and cultural activities.  It is not the restrictions that are killing these businesses and workers’ jobs.  It is the pandemic itself.

Similarly, there is no ‘trade-off’ between combatting the virus and protecting the economy, as ministers and others frequently claim.  The UK’s own disastrous record on both demonstrates that.  The UK has one of the worst death tolls per capita of any large country in the world, and the worst total in Europe despite both waves of the virus hitting this country later than continental Europe. It has also the worst economic performance any major Western economy (see Chart 1 below).

Chart 1. UK GDP, Largest Contraction Among the Major Western Economies

By contrast, it is clear that all the countries that have effectively eliminated the virus are also the economies that will grow the strongest this year, as shown in Table 1 below.

Table 1.  IMF Real GDP Growth Forecasts for 2020

Country/Region	Real GDP Forecast, %
China	+1.9
Viet Nam	+1.6
USA	-4.3
EU	-7.6
UK	-9.8

Source: IMF World Economic Outlook

At the same time there is a public health imperative to combining full lockdown with full pay for all furloughed workers.  Many workers are already in poverty even at 100% of their usual pay.  Excluding pensions, most benefit claimants are people in work and 56% of those in poverty before the pandemic were in work.  Put simply, millions of a were already poor when being paid at 100% of their wages.  Reducing it to 80% increases the probability of outright destitution for millions.

The pay cut also compels many to ignore lockdown restrictions, even when they know they are putting themselves and their loved ones at risk.  80% of breadline wages is insupportable. People are then forced to seek additional work, in breach of the requirement to close all non-essential workplaces.  It is morally unjustifiable to cut those wages, including those on the National Minimum Wage, as this government is doing.  It is in the interests of the whole of society that people are able and do adhere to strict lockdown measures.

‘There is no money left’

The main objection to 100% pay for all furloughed workers is cost.  But the additional outlay for full pay is tiny in comparison to other levels of expenditure, including a £300 billion bank loan guarantee scheme and the initial £110 billion support for businesses (via the Job Retention Scheme, the bounce back loan scheme, the business rates holiday and other measures).

The estimated cost of the initial furlough scheme which ran from March to the beginning of October was £40 billion.  Using simple maths, the total cost of a scheme offering 100% of wages is only marginally more at £50 billion.  Of course, the government cap can continue to apply at £2,500 pay per month. 

The National Institute for Economic and Social Research (NIESR) estimates that the scheme is self-funding.  This is because over the long-term it helps to preserve jobs and all the tax revenues that they generate. Furlough payments are like an insurance policy, helping to ensure the continuation of that future tax revenue stream dependent on jobs.

But the furlough scheme, and increasing it to 100% of pay, is also largely self-financing even in the short-term.  Over the period of the first half of the Financial Year (FY), which approximately coincides with the bulk of the initial furlough scheme from April to the end of September, government revenues declined by £42.6 billion.  As the biggest contributors to tax revenues are from personal income taxes and indirect taxes on personal consumption, it is clear that government revenues are lowered by reduced employment and reduced pay.  So, in the first 6 months of this FY, taking just VAT, income tax and social security together, government revenues fell by £23 billion compared to the first half of the last FY.  The shortfall would be even greater adjusted for inflation.

The increase to 100% furlough pay is easily affordable.

It would also be an important part of a genuine lockdown, which could break the back of the virus as has been done elsewhere (and which was almost done here until lockdown was ended too early in June). 

There may be a more valid objection about fairness, especially for essential workers who would continue at work even during a properly effective lockdown.  But that should be dealt with in other ways, such as large bonuses and substantial above-inflation pay rises when the pandemic is finally ended.

The labour movement should argue for 100% of pay in a complete lockdown.  Full lockdown and full pay now!

By Tom O’Leary

Recently the Chancellor Rishi Sunak won widespread plaudits for altering the terms of his financial support for workers whose jobs are under threat because of the restrictions introduced in response to the pandemic.  The furlough scheme is back, leaving the workers affected with just 80% of their wages, rather than 67%. 

This was simply a tactical retreat.  The government has clearly signalled it is conducting a ferocious attack on living standards but has had to recalibrate what it can impose right now. 

It should be clear that the scale of this attack on the living standards of the working class and poor, is much more ruthless than the austerity of 2010 or in some respects even than Thatcher in the 1980s.  As a result, it should be equally clear that success for the government would be a decisive shift in favour of big business and the rich, at the expense of workers and the poor. 

Since class warfare is being waged, anyone who preaches social peace now is simply making it harder for the working class and its allies to defend themselves against a major defeat.

Ratcheting down, not levelling up

The claims that the Boris Johnson government is engaged in ‘levelling up’ poorer areas of the country belong with the falsehoods that he is ‘implementing Corbyn’s policies’, is ‘spending like a socialist’, has ‘abandoned austerity’.  They are all pure hokum. They are proposed by those wishing to blunt any opposition to the government, and repeated by those who clearly do not understand what is going on around them.

All these claims fall apart as soon as the government meets any resistance, as the excellent campaign for free school meals by Marcus Rashford and others shows.  Donating £12 billion to SERCO, Deloitte’s and other private sector companies, most of whom are intimately connected to the Tory Party, while they for long refused £120 million for free school meals is not levelling up, implementing Corbyn’s policies or socialist spending or any other of the spurious claims.

Austerity is properly understood as a transfer of incomes and wealth from poor to rich, from labour to capital. So, in the very first austerity Budget by Osborne and Cameron there were £12 billion in cuts to social security while business taxes were cut by almost exactly the same amount.  Clearly, even in simple accounting terms (leaving aside any economic effects) this had nothing to do with reducing the deficit, as was claimed.  But it did transfer government spending from the poor to the rich. Austerity has continued in the same vein, with varying intensity ever since. Previously, Thatcherism used the cloak of monetarism in order to effect exactly the same type of transfer, largely through an assault on the unions and tax breaks for the rich.

In the same fashion, the overwhelming bulk of every package announced in the current crisis is to benefit big business.  So, of the initial £330 billion emergency package that was finally announced after the March Budget, £300 billion was in the form of loan guarantees to the banks to avoid losses on their business lending.   In contrast, just £1.6 billion is for local authorities who are under enormous pressure both from reduced revenues and much higher outlays to meet the mounting effects of the crisis caused by the pandemic.

The attack on the working class

The centrepiece of the class warfare being waged by big business and their government is on wages, hours and employment.  Here, the ratchet down effect is the most wide-ranging in its effects.

This is easy to demonstrate.  Before the crisis began, however low wages were for workers across many sectors, they did at least receive 100% of those wages.  Under furlough conditions, where work was supposed to be suspended, this has been reduced to 80%.  At the same time, and completely against the rules, many companies committed fraud by forcing staff into work for no additional pay. Up to a third of all employees were asked or forced to come in, according to one estimate.

In addition, a large number of firms are in the process of making that reduction permanent.  Three high profile employers, British Gas, British Airways and the BBC have all launched fire and rehire schemes to reduce wages and conditions.  Many others are following suit but are less well known.  As the end of the previous furlough scheme approached, the government tried to enforce a reduction to 67% of wages for some topped up by 5% from employers, and no support at all for those caught in the spurious ‘Tier 2’ restrictions.  The fear over the probable immediate collapse in jobs forced a tactical retreat.  

Now that furlough is back, there has been a return to 80%, at least for the time being. But even if this is the full extent of the reduction, it still represents an enormous and dramatic shift from labour to capital.  Nothing on this scale was achieved under austerity.

The intention of the ruling class and the Tory government is as far as possible to make this reduction permanent.

Mainstream economists have long studied the issue of the determinants of wages for obvious reasons.  There is a whole literature devoted to what they describe as the problem of rigidities that lead to ‘sticky’ wages, that is the difficulty in driving down nominal wages (here is just one example pdf, there are innumerable others).

This ‘stickiness’ of wage growth is shown in Chart 1 below.  The annual growth in wages in nominal terms is shown in orange, the growth in wage in real terms (after adjusting for inflation) is shown in blue.  Nominal wage growth hardly fell at all in the last recession.  The brief dip in wages occurred in the first few months of 2009 and began to recover very slowly in later months.  It was only the simultaneous fall in the value of the pound, which drove up prices in an economic slump, which caused real wages to fall over a more prolonged period, from mid-2008 to the end of 2009.  But even wages in these terms began to recover in early 2010.

Real wages for public and private sector workers fell after the June 2010 ‘emergency Budget’ all the way through to October 2014.  This was a result of government policy.  Only as the Coalition government geared up for an election the following year by loosening government spending did real wages start to crawl higher.  The austerity policy was highly successful in cutting real wages, as it was designed to do.

Chart 1.  UK Nominal and Real Wage Growth, % change

If everything else is unaltered, the combination of economic weakness, rising import prices and rising real wages from 2010 onwards was bound to damage profits severely. The centrepiece of the austerity policy was to combat this profits-damaging combination of factors. 

The chosen method was a public sector pay freeze.  Not only did this have the direct impact of cutting real wages (as well as cuts to pensions) for approximately 1 in 6 UK workers (over 5 million of them) in the public sector where union densities are highest, but it also had a ‘demonstration effect’ (pdf), of setting a nominal wage freeze or similar in the private sector as well. With prices still rising because of the effects of the weakness of the currency, real wages for workers started to fall once more. 

However, as appealing as it may be to employers to cut wages if they can, this does not by itself resolve the issue of profitability especially if the overall business conditions are characterised by sluggish growth and rising import prices. The austerity policy of driving down wages was only successful in raising the level of misery. It was not successful in its overall aim of raising profits.

Worse, from the perspective of the architects and supporters of austerity, nominal wage growth continued to rise at a very modest pace after 2014 and continued to rise until the current pandemic began.  Real wage growth was more erratic, undercut by rising inflation once more in 2017.  But even so, no blow had been struck which cut wages sufficiently to raise profits on an enduring basis.

This trend in profits is shown in chart 2 below.  Initially, profits fell as they tend to during a recession.  Sales were falling and as noted above wages remain ‘sticky’.  (The ONS data shown is actually a measure of the rate of return on capital, not strictly profits, but it is a useful guide to profitability).  Subsequently profitability did recover but only moderately. 

Yet profitability continues to remain below 2008 levels. And, as regular readers of SEB will know, profitability never rose sufficiently to spark an upturn in private sector investment. From the perspective of the capitalist class as a whole, there is no incentive to raise investment, which means adding to the productive capacity of the economy, if the rate of return on existing investments is depressed below usual levels.

Chart 2.

The reserve army of labour

In the last recession and under the austerity policy real wages fell initially by 6% and only recovered over a very prolonged period. Under Thatcher, real earnings for those in work did not fall at all.  Instead, her policy addressed the problem of low profitability by massive deindustrialisation that created 3 million unemployed.

The current policy is a combination of these two.  Through government policy wages are being slashed by 20% for very large parts of the workforce, even including those on the National Minimum Wage.  At the same time there is a sharp rise in the level of unemployment, and some businesses will fold.  The combination of these two factors, the sharp reduction of wages and the surge in unemployment is government policy.  It is a new development and its architects will be hoping that one reinforces the other, that much higher unemployment will be a decisive factor in keeping wages low long after the public health crisis is over.

This mechanism was first analysed by Marx as the creation of the ‘industrial reserve army’ of labour. Marx says the reserve army of the unemployed exists in no previous form of society except in capitalism, and is integral to it. 

“The industrial reserve army, during the periods of stagnation and average prosperity, weighs down the active labour-army; during the periods of over-production and paroxysm, it holds its pretensions in check. Relative surplus population is therefore the pivot upon which the law of demand and supply of labour works. It confines the field of action of this law within the limits absolutely convenient to the activity of exploitation and to the domination of capital.” – Karl Marx, Capital, Volume One, Chapter 25

In general, high or sharply rising unemployment holds the risk that it may produce social unrest and political discontent.  The government of an advanced industrialised country may choose to engineer a sharp rise in unemployment in an attempt to restore profitability, or it may choose to try to cut wages.  But both stratagems entail high risk.  Combining the two is exceptionally high risk.  Only in a period of desperation and generalised crisis would they be attempted or could they be potentially successful.

Under the cloak of the public health crisis which their own policies have helped to create, the current government is attempting such a strategy. Naturally it is in the interests of all workers, all the oppressed and vast majority of society that they are not successful.

In the West the population is at present sheltering to protect itself from Covid, entering the greatest economic downturn since the Great Depression, and facing the threat of unemployment and reduced living standards. On the other side of the world in China, something going in exactly the opposite direction is occurring. China unveiled its new Five-Year Plan. This will take a country which in 1949 was almost the poorest in the world, and its almost 1.4 billion population, into the ranks of high-income economies by international classification – with all the steps forward in life expectancy, living standards, health, education and social conditions this brings with it.

There has never been such a large scale economic and social ‘miracle’ in the entire history of humanity – the population of China is larger than the combined population of all other high-income economies in the world.

This transformation therefore poses the most profound possible questions for socialists, socialist theory, and the international left. If, as some on the left claim, China is a capitalist country then the only conclusion that can be drawn from these facts is that capitalism remains a progressive system. If capitalism can raise almost one fifth of humanity from nearly the world’s most grinding poverty to high income status in 70 years, that is within a single lifetime, it is nonsense to claim that capitalism has exhausted its possibilities. If capitalism had delivered 850 million people from internationally defined poverty, as China has, then capitalism would have delivered gigantic progress for humanity. Capitalism would have delivered an immense improvement, a qualitative step forward in life, for a higher proportion of humanity than the European Union and the US combined.

Furthermore this capitalist system would also have been demonstrated to be able to deliver similar results not only to China but to be a path that could be followed by other major countries – for example Vietnam, a country of almost 100 million people, is delivering economic growth and reduction of poverty at a rate, if at an earlier stage of development, essentially the same as China’s. If capitalism can deliver such benefits it is utopian not to support capitalism.

But in that case, there is an impossible mystery. Why has such unparalleled economic development and improvement in living conditions not been delivered by the other countries following the capitalist system?

In summary, the ‘leftist’ claim China is a capitalist country paradoxically, and doubtless against the subjective intentions of those on the left who put it forward, leads to the conclusion that capitalism can deliver historically unparalleled improvements in living standards!

There is in fact no such mystery because China, and Vietnam, are not capitalist but socialist countries. That is why such progress has been made. And this is why the left has a real model for economic development across the world – something it is vital for the left to understand, most immediately in developing countries. Socialism is not a utopia, it is not a dream, it is not something which was achieved in 1917 in Russia and has never been achieved since. It is something real, totally practical, and which delivers immediate benefits to truly gigantic numbers of people.

The following article by John Ross, which appeared in China.org.cn, on China’s new Five Year Plan analyses the historical facts which have to explained by any analysis of China, the nature of its new plan, and the step forward that this represents as the country enters the stage of development of a high income economy.

*   *   *

The press conference which followed the Plenary Session of the CPC’s Central Committee put forward guidelines not only for China’s next Five-Year Plan, for 2021-2025, but also for more medium-term development of China up to 2035. The two are interrelated because the next Five-Year Plan will inaugurate a qualitatively new period in China’s economic development which is of global significance. This goes beyond the fact that China’s short-term economic prospects are better than for any other major country – the IMF estimates in 2020-2021 it will account for 60% of global growth. The new Five-Year Plan inaugurates a fundamental transition.

China in 2020 became a ‘moderately prosperous’ economy by its own national classification – also achieving its goal of the elimination of absolute poverty. But most countries use World Bank classification in making international comparisons – dividing economies into low, medium and high-income groups. By this criterion in approximately 2022-23, the middle of the next Five-Year Plan, China will enter the ranks of global ‘high income economies.’

Achieving this new level of development determines the Five-Year Plan’s nature. Previously China planned for escaping underdevelopment, whereas this plan centres on the different tasks of building a high-income economy. Furthermore, due to US actions, it will do so in a different international context and where serious challenges face humanity – particularly the threat of climate change and of economic recovery from a pandemic which Western failure to control has created the deepest global economic downturn since the Great Depression.

To understand this Five-Year Plan’s place in China’s national development, the almost incredible character of what has been achieved must be understood. In 1949 China was almost the world’s poorest country – only 10 counties had lower per capita GDPs. Only 73 years later, the span of a single lifetime, China will count among the world’s high-income economies.

When the Communist Party of China took power in 1949 in essence it put forward a promise to China’s people: ‘if China adopts our methods the Chinese people will be taken from a century of humiliation, regain control of their own destiny and rejuvenate their country.’ The achievement by China of high-income international status during the next Five-Year plan is a key symbol on the economic field that this promise was delivered – following similar achievements in national unification, elimination of foreign military forces, gigantic improvements in health, life expectancy, education, culture and numerous other fields.

Internationally the scale of what is represented by the new Five-Year Plan is clearly understood by historical comparison. Today, by World Bank classification, only 16% of the world’s population lives in high income economies. But China is 18% of the world’s population. China becoming a high-income economy will therefore more than double the proportion of the world’s population living in such states. It is a fact that no such comparable single improvement in the position of such a large proportion of humanity has ever taken place in the whole of history.

This staggering achievement brings new challenges. Some are internal – a high income economy is far more complex than a low or medium one. But some are external. The US has embarked on an  attempt to block China’s development. This path was launched by Trump with tariffs and technology bans. But there is no indication that US policy will fundamentally change no matter who wins the US presidential election.

This is what makes the much-discussed concept of a ‘dual circulation’ economy so crucial in the new plan. Many US analysts consider Trump made tactical errors in his attack on China. That the tariffs were a mistake as they were paid by the US population and attacked China on terrain where it was strong, and the US could not compete – good quality medium technology manufacturing. Instead, it was argued, the US attack should be concentrated on its strong point – high technology. The US should concentrate on weakening China’s most high technology companies as with Huawei and Tiktok. Trump and Biden are therefore urged to create a ‘technology blockade’ of China.

There are certainly doubts whether the US can achieve this goal – it is against the interests of other countries and its own high technology companies which previously had strong markets in China. But it would be a naïve, unrealistic, strategy for China to base its policy on an assumption that US policy will collapse due to its own contradictions. Therefore, to progress as a high-income economy, China will have to increasingly rely on its own technology. Every part of the production chain must be potential achievable in China – best described as ‘domestic circulation’. This is different to the 1978-2016 period in which China could rely to a great extent on importing technology.

China remains committed to globalisation, which would be the best path of development for the world, and uses every opportunity for internationalisation, but in the new situation its domestic economy will dominate.

Obviously, this requires great national effort – money has to be poured into R&D and scientific research. Large investments are required to embody and produce new technology. Fortunately, China has the financial resources for this.

This issue overlaps with international problems which are not just due to US policy but also to common problems of humanity and particularly climate change. Regarding this it is China’s prowess in the field of renewable energy manufacturing technology that makes possible the meeting, and potential exceeding, of the goals of the Paris Climate Change accords.

China had outlined its goal of ‘ecological civilization’ conceptually previously but global attention was paid to Xi Jinping’s statement at the UN on 22 September that: ‘We aim to have [carbon dioxide] emissions peak before 2030 and achieve carbon neutrality before 2060.’ For example, Adam Tooze, one of the West’s most eminent economic analysts and historians, noted in the US Foreign Policy magazine: ‘with those two short sentences China’s leader may have redefined the future prospects for humanity.’

To achieve these goals, they will have to begin to be embodied in the new Five-Year Plan and globally these will be among the most eagerly noted of its targets.