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

No, Jeremy Corbyn won’t ‘bankrupt the UK economy’ By Tom O’Leary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What can the left do in government?

By Tom O’Leary

The recent controversy over economic policy in Portugal is very important as it holds extremely valuable lessons for the entire anti-austerity left in Europe as a whole. The left in Portugal has achieved something unique in the current period, operating in government to end austerity. In the broadest sense this is the prospectus for a Corbyn government. It should be for the entire left in Europe. Therefore the entire experience bears close scrutiny.

Owen Jones began the controversy with a simple statement of fact, that the Portuguese experience shows that austerity was not necessary. Policies supporting growth were far preferable, and among other things also led to a reduction in the public sector deficit.    Jones has come under attack from a number of quarters. Jolyon Maugham, a widely followed commentator on twitter led the charge, with a series of tweets in a complete defence of the EU’s actions.

The tweet is a model of brevity, containing at least three errors in less than 140 characters. Most importantly, it was not ‘Portugal’ which was bailed out but its creditors. The government still bears those debts from that period, and these were made worse by the austerity programme that accompanied it. The EU Commission is one of the culprits, along with the IMF, the ECB, local politicians (including those from the Socialist Party which is now leading the current left coalition), as well as the ratings’ agencies, the domestic and international banks and of course the creditors. Like the LibDems, in defending EU membership Maugham goes further and defends EU austerity.

The Portuguese recovery comes despite the imposition of the austerity programme imposed, not because of it. But the most important questions for the left now are how can recovery be achieved, and how can it be sustained.

Economic performance

The IMF is forecasting 2.1% real GDP growth in 2017, which would be the strongest rate of growth since the crisis began in 2008. But the growth rate has been 2.8% in the first half of 2017 compared to the same period in 2016, exceeding the EU or the Euro Area average. There is no doubt that growth is accelerating and has done so since the coalition of the social democrats and far left parties came to office.

Portuguese GDP Growth, % change year-on-year
Source: Eurostat

The first conclusion must be that ending austerity does not lead to disaster. Instead it has led to accelerating growth (and lower public sector deficits). The second conclusion is that it is possible for a left government to end austerity while in the EU and even the Euro Area, at least within certain limits.

The limits on growth are set by the accumulation of capital, the growth in the means of production. Since the left coalition came to office the level of Investment (Gross Fixed Capital Formation) has risen by 7.7% (data for the 2nd quarter of 2017 is not yet available). Over the same period real GDP has grown at less than half that pace. Investment has led growth.

The government has contributed to this rise in Investment, but the bigger contribution has come from the private sector. As anticipated profits are the driver of private investment it is likely that government measures to boost Consumption, combined with its own modest increase in Investment have had the effect of boosting the anticipated level of profits. In short, stimulus measures have kick-started the economy.

This is far preferable and more effective than austerity. But this is not sustainable over the long-term. The boost to Consumption has not been supported by rising incomes and wages. Instead, Eurostat reports that the household savings ratio has slumped. The trend in Portuguese household saving is shown in Table 1 below, along with Eurostat forecasts for 2017 and 2018. (For reference, Eurostat forecasts the UK household savings rate will fall to 3.7% in 2018, versus an EU average of 9.9%).

Table 1. Portuguese Household Savings Ratio, %
Source: Eurostat

This run-down in household savings is unsustainable. Even current levels of Consumption, which have encouraged increased private sector Investment cannot be sustained. Real wages have been falling. At a certain point, without real growth in incomes and wages households will take fright and rein in their spending.

In order to sustain the recovery as a whole and to lift real wages, Investment growth must be sustainably increased. This is unlikely to come from the private sector if consumer spending flags. Therefore government will have to find ways in which it can increase public sector Investment.

Without much more detailed knowledge of the Portuguese economy, it is impossible to provide a blueprint for a public sector-led investment programme. But there are a number of potential sources of funds. These include but are not exhausted by the following:

  • The large number of corporations that remain in public hands increasing their investment (using either reserves, or new borrowing)
  • Requests to the European Commission to accelerate/increase its capital spending programme
  • New infrastructure and other projects funded by the European Investment Bank
  • New taxes on the extremely rich and big companies to fund investment
  • Removal of subsidies to business to free up funds for public investment
  • Additional government borrowing where possible

The scale of the Investment needed is very high. In 2000 GFCF as a proportion of GDP reached 28% and is effectively half that currently. But every significant step in that direction puts the recovery on a more sustainable basis.

The Portuguese left government has indeed shown that there is an alternative to austerity. But stimulus wears out. To sustain the recovery and show that the alternative to austerity is Investment, bolder measures will be needed.

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

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

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

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

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

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

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

The economic growth rate of the Latin American and Caribbean countries as a whole has changed dramatically from the beginning of this century. Living standards have improved after a lost generation from the 1980s onwards. Tens of millions have been lifted out of absolute poverty and many more have seen their lives transformed. It is important both to learn from this process and to understand the threats to it. 
The World Bank offers a variety of measures of real GDP. For a continent such as Latin America it is important to use a single international currency, in this case US Dollars. On this basis, in real terms the growth rate of the entire continental economy accelerated sharply in 2000. In the 20 years from 1980 to 2000 the average annual real growth rate was just 2%. From 2000 to 2013 this has increased to over 3.3% per annum. The change in the trend growth is shown in Fig. 1 below. 

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

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

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

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

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

A similar pattern is evident from a range of indicators. The numbers living on less than $4 a day has fallen over the same period from 236 million to 159 million since 2000. This is crucial. The rise to $2 a day means that people can generally expect to eat most days. Above $4 a day people can also begin to move beyond basic necessities and establish at least some quality of life. Most important of all average life expectancy at birth has risen by 3 years, from 71 years to 74 years. This is the most fundamental social indicator of all indicating improvement in living conditions and prosperity and is only possible with a combination of increased access to a range of foodstuffs, improved healthcare and housing. 
There are a large number of indicators of poverty reduction and social progress which point in the same direction, although some important indicators of the position of women have not improved or have even gone backwards. These are significant omissions which need addressing. But taken as a whole the improvement in the economy, the general well-being of the population and its poorest members have also shown remarkably rapid and dramatic improvement since the beginning of this century. 

Source of growth

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

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

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

Table 1. Latin America & the Caribbean, Growth of GDP & Its Components, 2000 to 2016 (Forecasts)
For most of the period 2000 to 2012 exports were one of the weaker components of GDP growth. Over the period as whole they grew more slowly than GDP itself. Furthermore for the entire period exports grew more slowly than imports. As a result net exports actually subtracted from growth.

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

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

Problems caused by the US

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

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

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

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

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

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

New challenges

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

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

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

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

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

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

Capital outflow

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

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

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

Responding to the new threats

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

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

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

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


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

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

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

The ‘Anglo-Saxon’ Political Crisis – from Reagan & Thatcher to Trump & Brexit

By John Ross

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

The UK political crisis, with the loss by Theresa May’s government of its parliamentary majority, coming only a year after the economically irrational referendum vote for Brexit and resignation of Prime Minister Cameron, is less globally decisive than US political instability but an important factor in European politics and strikingly confirms the crisis in the main ‘Anglo-Saxon’ countries.
This US/UK political crisis has major lessons. Because these ‘Anglo-Saxon’ countries were the ones in which neo-liberal policies were most famously implemented. The fact that deepening political instability has broken out in the two major countries where neo-liberal policies were inaugurated by their most famous representatives, Reagan and Thatcher, is evidently not accidental. However, while numerous analyses have been made of the economic aspects of neo-liberalism less attention has been paid to the present clear demonstration of its dangerously destabilising political consequences. This article therefore analyses in detail the relation between the economics of neo-liberalism and the deepening US/UK political destabilisation.

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

Historical position of the Anglo-Saxon economies

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

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

Pax Britannica

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

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

Figure 1

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

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

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

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

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

To avoid the UK data being dominated by purely short-term movements, and therefore to allow the trend to be seen clearly, a five-year moving average of the UK balance of payments is shown in Figure 2. As may be seen after 1913 the UK never regained its position as a massive exporter of capital and therefore lost its ability to stabilise the world economy. This role passed to the other great Anglo-Saxon power, the US – which is analysed in the next section.
Figure 2

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

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

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

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

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

The date of this sharp decline in US international competitiveness is of course significant as it is the period in which Reagan was president. It is equally extremely striking that the US moved into balance of payments deficit, that is the international competitiveness of its economy declined, at exact the same time as the UK – in the 1980s. The leaders of the US and UK during this fundamental decline in economic competitiveness being, of course, Reagan and Thatcher.

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

Figure 3
Figure 4

The Anglo-Saxon economic ‘black hole’

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

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

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

Figure 5

Decline of US international competitiveness

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

This sharp decline in US international competitiveness under Reagan, and the creation of a large US trade/balance of payments defict, necessarily had major consequences for the domestic economic structure of the US and US political stability which logically culminated in the Trump period. As a higher proportion of US goods were imported, due to the widening balance of payments deficit, jobs were lost in the US in industries which had previously produced for the home market those products which were now imported. This created the beginning of the notorious phenomenon of the US ‘rust belt’ – whole regions of the country characterised by shut down industries and unemployment. These ‘rust belt’ regions voted for Trump in 2016. However, before analysing these political consequences, a decisive feature of the Reagan period, in addition to loss of international competitiveness, will be examined – Reagan’s commencement of the massive build up of US debt.
Figure 6

Reagan and the accumulation of US debt

The declining international competitiveness of the US economy illustrated in Figure 6 shows that from Reagan onwards the US became increasingly dependent on inflows of capital from abroad – i.e. on external sources of capital. Figure 7 however shows that Reagan also simultaneously commenced large scale US domestic borrowing and debt build up .

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

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

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

Figure 7

Rising US household debt

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

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

Figure 8

Overall rise in US debt

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

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

Figure 9

Trends in US income inequality

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

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

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

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

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

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

Table 1

US median incomes

Finally, the trends after the international financial crisis undoubtedly exacerbated the trends in US inequality already established under Reagan. As Figure 10 shows US median household incomes by 2015 were still below the level of 16 years previously in 1999. At the trough of incomes in the Great Recession, in 2012, US median household incomes were more than 9% below their 1999 peak level. The US population had therefore suffered more than a decade and a half serious fall in incomes – which would produce deep political discontent and anger in any country.
Figure 10

Summary of US trends

The Reagan period was therefore characterised by the following features:
  • A major fall in the international competitiveness of the US economy;
  • The US economy losing its previous position as a large-scale exporter of capital and it becoming dependent on imports of capital;
  • A very sharp increase in US state debt;·
  • An increase in US household debt,
  • Sharply increasing inequality
These fundamental trends established under Reagan were continued by his successors.
Data confirms that Thatcherism was essentially a smaller scale version of Reaganism – naturally with certain specific national features.
  • The first fundamental parallel between Thatcherism and Reaganism was the sharp deterioration in the UK’s international competitiveness under Thatcher. This was already shown in Figure 1 above. The UK moved from a balance of payments surplus of 0.6% of GDP in 1978, the year before Thatcher came to office, to a deficit of 3.6% of GDP in 1990, the year she left office. Therefore, under Thatcher the UK balance of payments deteriorated by 4.2% of GDP. This worsening of UK international competitiveness under Thatcher was consequently even worse than the US under Reagan – the UK’s balance of payments situation deteriorating by 4.2% of GDP compared to 2.4% for the US.
  • This rapid deterioration of the UK’s international competitiveness under Thatcher, the increasing proportion of products which were imported, necessarily produced the same phenomenon as the growth of the ‘rust belt’ under Reagan. In the case of the UK it was the north of England that suffered massive unemployment and closure of industries. The political destabilisation and anger produced by this began the process leading to these regions voting in favour of the economically irrational policy of Brexit as a protest.
  • UK unemployment rose dramatically under Thatcher – increasing from 6% when Thatcher came to office to 12% by the mid-1980s. Under the impact of rising unemployment and regressive tax changes introduced by Thatcher UK inequality rose rapidly. The Gini coefficient went from 0.25 in 1979 to 0.34 in 1990. Under Thatcher, as under Reagan, a massive increase in proportion of income going to the better off occurred. The real income of the bottom 10% of the population fell by 2.4 per cent, so the poor were worse off in 1990 than in 1979, while the income of the top 10% of the population rose by 48%. As a result, the number of those living in poverty under Thatcher rose sharply. Taking a standard UK measure of poverty, those with incomes below 60% of median incomes before housing costs, in 1979, 13.4% of the population were in this category while by 1990 this had almost doubled to 22.2%.
Thatcher enjoyed one major advantage compared to Reagan. In the 1980s, due to the discovery of North Sea Oil, the UK became a massive oil exporter. This economic windfall, due to geography not economic innovation, became even more valuable after the huge international oil price increase of 1979. The great tax revenues from oil and gas meant that Thatcher was able to avoid the large-scale build-up of state debt which occurred under Reagan. But, as can be seen from the increasing UK balance of payments deficit in this period, despite the enormous economic windfall from North Sea oil and gas this was not used to improve the competitiveness of the UK economy – on the contrary the international competitiveness of the UK economy substantially worsened under Thatcher.
With the worsening of the competitiveness of the UK economy which had begun under Thatcher, and which continued to worsen after her, Thatcher’s successors were not able to avoid a huge debt build up. Therefore, with a certain delay, the Reagan pattern of not only worsening international competitiveness and sharply rising inequality but also a huge build up of debt was replicated in the UK – making the parallel of the economic courses launched by Reagan and Thatcher complete.
In summary, the Thatcher period, as with the Reagan period, saw:
  • a massive deterioration in UK international competitiveness, and in consequence an increasing dependence of the UK economy on capital from abroad;
  • an extremely rapid rise in inequality.
Destabilisation of US & UK domestic politics
Having analysed the key trends under Reagan and Thatcher it is abundantly clear why their policies led directly to the domestic political instability which is currently gripping the US and UK.
  • The drastic loss of international competitiveness of both the US and UK economies under Reagan and Thatcher led necessarily to elimination of jobs in industries which had previously supplied the domestic market as imports replaced domestically produced products. This culminated in the creation of the ‘rust belt’ in the US, which voted for Trump in 2016, and economic depression in the North of England – which voted for Brexit in 2016.
  • Inequality rose dramatically under both Reagan and Thatcher, inaugurating the trend which has deepened further since.
  • Reagan immediately launched a course of massive build-up of US private and state debt and, with a certain delay, a huge debt build-up also developed in the UK.
Global destabilisation
Finally, it should be noted that in one sense Reagan and Thatcher merit being considered as fundamental turning points – in the sense that they inaugurated policies which their successors continued. The deterioration of US and UK international competitiveness which began under Reagan and Thatcher became worse under their successors. While Reagan took the US balance of payments from surplus to a maximum balance of payments deficit of 3.4% of GDP, George W Bush took the US to a maximum deficit of 6.3% of GDP. The massive US debt build-up which began under Reagan became worse in the private sector under Clinton, and worse in both private and state sectors under George W Bush. The simultaneous accumulation of state and private debt which the UK had been able to avoid under Thatcher, due to revenue from North Sea Oil, became dramatic under Blair and his successors.
The inevitable result of this domestic and international destabilisation launched by Reagan was the 2008 international financial crisis – as both US reliance on foreign sources of capital and the build up of US personal debt had become unsustainable. The resulting international financial crisis forced retrenchment on the US both internationally and domestically:
  • The US balance of payments deficit contracted from 4.3% of GDP in the last quarter of 2007 to 2.4% of GDP in the 2nd quarter of 2009 – while in the 1st quarter of 2017, the latest available data, the US balance of payments deficit was 2.5% of GDP.
  • US total debt stopped rising after it reached 250% of GDP in the 3rd quarter of 2009 – but the financial resources available to US households sharply contracted with debt falling from 98% of GDP at the beginning of 2008 to 78% of GDP by the 1st quarter of 2017.
This forced retrenchment of the US of course produced the deepest US recession since the Great Depression – and shook the entire global economy in the international financial crisis.
Geopolitical and domestic political destabilisation
The international financial crisis in turn destabilised not only US/UK domestic politics but the entire international situation. The course of increasing international political instability after 2008 is extremely clear:
  • In 2010 the Arab Spring and the generalised destabilisation of the Middle East began;
  • Following the collapse of Gaddafi’s Libyan regime in 2011 ‘jihadists’ were powerfully reinforced in West Africa;
  • In 2012 the electoral breakthrough of Marine in Le Pen in France began the rise of ‘populist’ movements in advanced countries;
  • In June 2016 the UK voted for Brexit;
  • In November 2016 Trump was elected US President, against the opposition of the establishment of both Republican and Democratic Parties, inaugurating almost continual severe political clashes in US politics;
  • In May 2017 Macron was elected French President against the opposition of both right and left wing traditional political parties, and then Macron proceeded to crushingly defeat the traditional French parties in the legislative elections,
  • In June 2017 Theresa May lost her Parliamentary majority in UK general election.
In short, the course embarked on by Reagan and Thatcher culminated in the destabilisation of not only domestic but international politics. This is of course why US the domestic political turmoil around Trump has been intertwined with international geopolitical destabilisation.
Why the delay in destabilisation?
Finally, the economic policies of Reagan and Thatcher clearly explain why the temporary ‘feel good factor’ while they were in office was replaced by deepening economic and political destabilisation ever since. As noted above Reagan and Thatcher may be compared to drunken ‘credit card bingers’. While the spending spree on credit goes on the drunk feels good because of all the things they are buying on debt but while simultaneously the strength of their business, their international competitiveness, is weakened by excessive consumption. But the drunk then feels terrible when they suffer first the hangover and then the extraordinary financial hardship involved in repaying the massive debts that have been run up – and when this has to be done under conditions in which their business is now far less internationally competitive than it was previously.
The world is still paying a terrible price for the drunken credit card binge of Reagan and Thatcher and the global financial ‘black hole’ it created in the Anglo-Saxon economies. The deep political instability now wracking the US and UK is the indelible legacy of Reagan and Thatcher.
Numerous correct economic critiques of neo-liberalism have been published, including in China – and therefore these analyse why China must avoid its damaging consequences. But another dimension is that the deepening political destabilisation playing out in the US and the UK, the historic homes of neo-liberalism, also gives another warning of why neo-liberalism is so dangerous and damaging. China and other countries must also clearly avoid the damaging political consequences of neo-liberalism.
* * *
This article was previously published on Key Trends in Globalisation and originally in Chinese at on 8 August 2017. For an international audience a few references to purely domestic Chinese issues have been omitted.

Why the UK can’t be Singapore

By Tom O’Leary

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

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

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

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

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

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

Chart 1. UK, Singapore Gross Fixed Capital Formation, % GDP

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

Chart 2. UK, Singapore Merchandise Trade as % GDP
To be clear, this is not an ‘export-led’ growth where exports grow and import growth is suppressed. Throughout the earlier period, from 1960 to the mid-1980s Singapore’s imports were larger than its exports, as shown in Chart 3 below. Exports have only pulled ahead of imports in the later period, as overall growth has slowed.
Chart 3. Singapore Exports and Imports, % of GDP
Instead, the growth of the of the Singaporean economy has been ‘trade-led’. That is, the economy has become more thoroughly integrated into the world economy where both imports and exports have grown rapidly as the economy has industrialised and become more thoroughly integrated with regional and global supply chains.

The specific weight of the contributing factors to Singapore’s growth have been analysed, most recently in Vu Minh Khuong’s excellent ‘Dynamics of Asian Growth’. This should be closely studied by all those interested in economic development, but its fundamental analysis could be applied equally well to a country looking to revive growth and re-industrialise, such as Britain, as to developing countries. In summary, Vu found that 59 percent of Singapore’s economic growth came from capital investment, 34 percent from growth of labour inputs, and only 8 percent from productivity (Total Factor Productivity) increases.

But the scale of the growth of all these inputs and of real GDP and per capita GDP was only possible because of the size of the market in which Singapore increasingly operated, the regional Asian market and the global market. As Adam Smith remarked, it is the size of the market which sets the limit on the scope of the division of labour.

None of this is what is planned by any of the Tories. The bluster that leaving the EU will allow the UK to trade more with other countries is just that. In fact, the UK is currently the EU’s second most important exporter of goods outside the EU, after Germany. But its non-EU exports are little more than a third of Germany’s. At the same time, UK imports from outside the EU are almost on a par with Germany’s, as shown in Chart 4 below. The UK’s chronic difficulties on trade have nothing to do with limited global access arising from EU membership; German non-EU exports are thriving. It has everything to do with a lack of British competitiveness caused by chronic lack of investment.

Chart 4. Export and Import Share of EU Economies to Non-EU Markets
To follow Singapore, which would mean to achieve (re-)industrialisation in the case of the UK, would require large-scale state intervention in the economy in order to direct investment to a qualitatively higher level combined with an increased openness to international trade. The Tories are in favour of lower state intervention and privatisation, they are cutting state investment and with Brexit they will be cutting this economy from its largest market without any means even of replacing the trade lost.

No, the UK will not be turning into Singapore any time soon.

Stagnant economy, falling investment and profits

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

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

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

Relative performance

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

Table 1. UK versus World GDP, percentage change from 2007 to 2016
Source: World Bank

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

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

Table 2. UK versus OECD Real Per Capita GDP, percentage change from 2007 to 2016
Source: World Bank

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

How did we get here?

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

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

Chart1. UK Real Capital Stock in Manufacturing 1995 to 2015

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

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

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

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

Chart 2. UK Profitability, Investment & GDP

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

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

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

China Faces Slower Western Growth than in the Great Depression

By John Ross

Introduction – the situation in the global economy since 2008
​China is used, after repeated experiences, to the ‘China is in/about to enter a deep crisis/hard landing’ genre in sections of the Western media.(1) The picture presented in such claims is that in contrast to a ‘stagnant’ China the West, in particular the US, is showing economic dynamism driven by a wave of innovation. This situation allegedly interrelates with China’s domestic trends. Such analysis is repeated in parts of the Chinese media by what might be referred to as China’s ‘comprador intelligentsia’. These analyses, for reasons that will become speedily apparent below, are invariably characterised by lack of any systematic factual analysis.
Regular accurate refutations of such claims appear in China’s media and therefore the aim of the present article is rather different. It goes beyond individual cases to examine systematically the fundamental situation of the Western economies. The results show clearly why the anti-China material referred to above lacks any systematic factual analysis of the global economy – because such examination shows that their claims are the precise opposite of the facts. Far from ‘dynamism’, the fundamental reality of the West today is very slow economic growth, the extremely striking character of which becomes apparent by comparing it to previous economic periods in the global economy during the last century. The factual reality is that the Western economies are in the midst of what is best described historically as a ‘Great Stagnation’ – to be precise it will be shown that in the present overall period, commencing with the international financial crisis, the growth rate of the Western economies is actually slower than in the ‘Great Depression’ after 1929. The data used to establish this does not come from any Chinese or peripheral sources but from the bastion of international economic orthodoxy – the latest report on the global economy by the IMF.
To avoid any misanalysis it is shown below that of course the violence of the onset of the Great Depression in 1929 was much greater than after the international financial crisis in 2008. The feature of the present period is of a prolonged phase of slow growth, rather than of a violent recession followed by relatively rapid growth as occurred in most major economies after 1929. Nevertheless, this does not alter the reality that the present period as a whole is actually seeing slower average Western economic growth than during the Great Depression. This economic trend also means that whereas the political crisis after 1929 was rapid and violent the development of the crisis after 2008 is much slower and cumulative.
Clearly establishing this real factual situation of slow growth in the Western economies, however, does not only cast light on short term processes. It creates an integrated framework for understanding the relation of the current period in China with international trends. In particular:
  • This relative stagnation of the Western economies explains the interconnection between underlying economic trends and immediate events such as US actions in Syria, US policy to North Korea, major Western political events such as Trump’s election and Brexit, China’s current economic situation, and strategic developments such as One Belt One Road (OBOR), etc.
  • Key new initiatives in China’s policy launched by Xi Jinping are coherently interrelated with the objective changes in the global economy since 2008.
  • The international financial crisis of 2008 inaugurated a new period of the global economy, and therefore of China’s interrelation with it, compared to the preceding ones since the creation of the People’s Republic of China (PRC). It will be demonstrated that this response is an integrated response to the new period of the global economy since the international financial crisis. A brief analysis of some of the key consequences for countries outside China, and their interrelation with China’s foreign policy, will be given.
  • It should be made clear that in this article only some international features of China’s policies are analysed – other domestic ones, such as the struggle against corruption are equally important but beyond this article’s scope, while some are domestic Chinese matters it is inappropriate for a non-Chinese citizen to comment on. But, despite this limitation, it is hoped an international analysis focusing on the new period in the world economy, as it interrelates with China, throws some light on developments both in China and internationally.
IMF data indicates predicts West’s economic stagnation will be worse than the Great Depression
To establish the fundamental features of the present period of the world economy, and given that the post-1929 Great Depression is generally regarded as the worst crisis in the history of the advanced ‘Western’ economies, a careful comparison of the similarities and differences of trends since the international financial crisis of 2008 with post-1929 developments will help produce clarity.(2) It will be shown that a 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. It will be demonstrated that 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 following 1929. Such extremely slow growth of the Western economies since the crisis of 2008 clearly has profound effects on the entire international situation and therefore analysing it casts a clear light on current trends facing China. The practical conclusions following from this are analysed below.
First, however, the key facts must be established. To do 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
In this section the factual data will be focussed on – IMF projections will be analysed below.
The ‘Great Depression’ compared with the ‘Great Stagnation’
Figure 1 confirms the well-known fact that the onset of the ‘Great Depression’ after 1929 was much more violent than what will be referred to as the ‘Great Stagnation’ which commenced with the 2008 international financial crisis. After 1929, during only three years, overall GDP of the advanced economies plunged by 16%. Taking the dominant capitalist economies, and measuring from 1929 until the bottom of the economic decline in each country, US GDP fell by 29% in 1929-33, German GDP fell 16% in 1929-32, UK GDP fell 6% in 1929-31, and Japan’s GDP fell 7% in 1929-30 – overall West European GDP fell 9% in 1929-32.
Figure 1
As is equally well known the very rapid post-1929 economic collapse created immediate political crisis:
  • In September 1931 Japan invaded Manchuria, beginning its military attack on China.
  • In September 1931 Britain abandoned the gold standard, resulting in collapse of the then existing international financial system.
  • In November 1932 Roosevelt was elected US President, leading to the ‘New Deal’.
  • In January 1933 Hitler became German Chancellor.
But alongside these well-known and accurate facts 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. This makes historical comparison particularly easy – and clarifies why the present period is most clearly thought of as a ‘Great Stagnation’.
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 GDP of the advanced economies as a whole was 7% above its 1929 level.
The US was an exception – US GDP in 1938 was still 5% below its 1929 level.
Therefore as Figure 1 shows the ‘Great Depression’ in the advanced economies was in reality a very steep ‘V’ shaped economic development – with the rising leg of the ‘V’ significantly higher than the falling one. Economic activity fell extremely sharply after 1929 and then rose sharply – the US being the chief exception.
The term ‘Great Depression’ is therefore, with the exception of the US, slightly misleading – its use reflects the dominance of analysis of the US in studies of the period rather than examination of the trends in the majority of advanced economies. After 1929, most advanced economies experienced first an extremely rapid fall in output followed by a strong and rapid recovery. The term ‘Great Depression’ is entirely accurate in the case of the US but not most other major economies.
The situation after the international financial crisis
Comparison of present trends since the international financial crisis of 2008 with those after 1929 immediately makes clear both similarities and differences. These may be seen in Figure 1 and can be summarised in three fundamental facts:
The fall in output in the advanced economies after the international financial crisis of 2008 was far less severe than after 1929 – the maximum fall in GDP after 2007 was only 3.3% compared to 15.6% after 1929.
However, 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 pre-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, as analysed in the next section, 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%.
It is this very slow growth in the advanced economies since 2007 which means that the present period is best characterised as a ‘Great Stagnation’.(3)
For analysing trends after 2016 economic projections must be used. Those analysed here are the IMF’s latest projections made in April 2017. There are three reasons for using this data.
The IMF’s data on the advanced economies is not in any sense controlled by China or ‘anti-Western forces’ – there cannot be any accusation the data is biased against the West.
The IMF’s are the most widely used international economic growth projections;
IMF projections have persistently projected more rapid growth in the advanced Western economies than has actually occurred – particularly in the US.(4)
Taking the five-year predictions of the IMF for the period 2016-21, and making a comparison for the entire period 2007-2021 to the period after 1929, leads to clear and extremely striking conclusions:
From 2016-2021 the IMF predicts total growth in the advanced economies of 9.6% – an annual average 1.5%. Regarding individual countries, the IMF predicts annual average growth of 1.8% for the US, 1.4% for the UK, 1.2% for Germany, and 0.6% for Japan. Total growth for the advanced economies over the entire fourteen-year period 2007-2021 will be 20.6%.
In comparison, in the fourteen years after 1929 total growth in the advanced economies was 49.8% – growth in the advanced economies after 1929 was therefore more than two and a half times their projected growth in the fourteen years after 2007. (5)
To give a scale of comparison, and to confirm the character of the present period, only if annual growth in the period 2016-2021 rose to 6.4%, instead of the IMF’s projected 1.5%, would economic growth in the advanced economies in the 14 years after 2007 be equal to that in the 14 years after 1929 – such a scale of acceleration is evidently completely implausible. There is therefore an inescapable conclusion for characterising the present trend in the world economy:
The period 2007-2021 will see far slower average growth in the advanced economies than during the period after 1929 – i.e. the ‘Great Stagnation’ will see far slower growth over this period than the ‘Great Depression’.
It is correct to point out that rapid economic growth after 1938, the final phase of recovery from the crash of 1929, was not achieved by ‘normal’ peaceful means. The period after 1938 was characterised by massive state intervention in the economy to prepare for and then wage war. In particular, in the case of the US, as analysed in The Great Chess Game (一盘大棋? ——中国新命运解析): ‘the US state largely took over from the private sector as the driving force of fixed investment – by 1943 83% of US fixed investment was carried out by the state…. the most rapid period of expansion in US economic history, the one which established it as the undisputed economic superpower, was driven not by private but by state investment…. It was the ‘visible’ hand, not the ‘invisible’ one that propelled the US to a position of unparalleled global economic dominance.’
But this fact does not alter economic reality. Economic expansion produced by massive state intervention, or oriented to war, is still economic growth. Furthermore, this growth, with the exception of the US, built on the rapid recovery already taking place after the post-1929 collapse. Nor does it alter the fact that the period after 2007 will see far slower average growth than following 1929.
The reality is therefore clear. In terms of slowness of economic growth the ‘Great Stagnation’ will be worse than the ‘Great Depression’. Only the gigantic crisis surrounding World War I, in the whole history of modern capitalism, has seen a slower period of economic growth than that since the international financial crisis – the extreme depression of economic growth in that earlier period being due to the onset of World War I leading to a major decline in output in advanced economies. Clearly these facts of the deep stagnation of the Western economies has major strategic and immediate consequences for China – some of which will now be analysed.
Periods in China’s development
Having established the factual situation of the global economy first and most fundamentally such analysis of global economic trends makes clear the interrelation between international processes and China’s own development. The simultaneous existence of both international and domestic factors makes it clear why it is necessary to put forward an overall analysis of the present period.
Taking such a starting point integrating international and domestic developments, however, creates a somewhat different perspective on the periodization of China’s development than that sometimes used in China. More specifically:
Based on purely domestic events frequently in China five phases since the creation of the People’s Republic of China (PRC) are noted – each corresponding to the chief figures in the country’s leadership of that period.
However, based on the interrelation of global economic developments with China, three fundamental periods may be seen since the creation of the PRC – these being 1949-78, 1978-2008, and from 2008 onwards.
The three fundamental phases during the development of the PRC, in their interrelation with international trends, may be clearly identified by analysing the relation of trends in China with these different periods in the global economy. To illustrate this Figure 2 shows these periods and gives data on the advanced economies prior to the creation of the PRC. Exact dating is analysed below, and there is naturally some very small differences in precise timing between phases internationally and those in China, but the fundamental periods in the development of the international economy and their interrelation with China are clear. Taking first the global economic trends these periods are:
  • 1913-1950 – period of slow average annual growth in the advanced economies (2.0%)
  • 1950-1978 – period of rapid average annual growth in the advanced economies (4.4%)
  • 1978-2007 – period of slower but still relatively rapid average annual growth in the advanced economies (2.6%)
  • Period commencing after 2007 – very slow average annual growth in the advanced economies (1.1% in 2007-16, and IMF projected 1.3% in 2007-21)
The data in Figure 2 therefore shows clearly why the situation since 2008 should be considered a new and integrated period in China’s development interrelated with a new period in the global economy.
Figure 2
Analysing these very sharp differences between fundamental periods in the global economy also demonstrates clearly the interconnection of international developments with those in China. To show this interconnection:
First the fundamental periods in the development of the global economy and their interrelation with China will be briefly considered;
Then the light these trends cast on the features of the present situation will be analysed.
Four periods in the development of the international economy
The four distinct economic periods in the global economy during the last century each also had clear consequences for and was interrelated with trends in China. In chronological order:
  • The first period, commencing after 1913, is the crisis of the international economic system marked by World War I, the 1929 crash, and World War II – this period of fundamental instability definitively ended with the beginning of the stable post-World War II boom in the advanced economies. This period was characterised by radical fragmentation of the world economy both by war and by generalised protectionism after 1929. The starting point of this period is World War I while its international conclusion, the commencement of a stable post-World War II boom, may be put at approximately 1950. Developments within China culminating in the creation of the PRC were clearly not autonomous from these processes in the international economy but were related to international events and their geopolitical consequences. The creation of the PRC in 1949 was directly related to this period – its culmination in a fundamental historical sense. During this historical period, average annual growth in the advanced economies was low – an annual 2.0%. However, this was not a low stable average but the statistical result of extreme fluctuations between strong booms and severe recessions. This overall international period may therefore be taken as 1913-1950.
  • The second global period is the stable post-World War II ‘golden age’ boom in the advanced Western economies. The pure ‘boom’ phase of this, characterised by relatively uninterrupted rapid economic growth in all major advanced economies, was from 1950-73 – during this period ‘Keynesian’ economic techniques were dominant in Western economies. After 1973 there was economic instability, following which in 1979/80 a radically new economic policy was embarked on by Reagan/ Thatcher – with the reintroduction of ‘neo-liberal’ methods into the Western economies and a clear break with Keynesianism. Almost simultaneously in 1978 China embarked on a radically new, and very different economic policy to neo- liberalism, with a ‘socialist market economy’ created by ‘reform and opening up’. This economic period could therefore be taken as either 1950-78, in line with domestic Chinese developments, or as 1950-1980 in line with international ones – the last date being Reagan’s election. As this article’s focus is the interrelation of international with China’s domestic trends 1950-78 will be used for statistical purposes – although it would make no major difference if it were defined as 1950-80. During this period 1950-78 average annual growth in the advanced capitalist economies was high at 4.4% and until 1973 without severe recessions. In China, this was the period of the planned economy which produced average economic growth only very marginally higher than that for the world economy – in the period 1950-78 world economic growth was 4.6%, growth in the advanced economies 4.4%, and China’s growth 4.9%.
  • The third economic period lasted from 1978 to the onset of the international financial crisis in 2008. In the advanced economies, this period was characterised by the neo-liberal policies inaugurated by Reagan/Thatcher and in contrast in China by the ‘socialist market economy’ policies inaugurated by Deng Xiaoping. In this period growth in advanced economies slowed significantly compared to the post-war boom, to an annual average 2.6%, but remained higher than the period of deep crisis commencing with World War I. In this period, China’s socialist market economy model far outperformed neo-liberal policies in the advanced economies – China’s annual average growth in 1978-2007 being 9.9%. To enable a comparison with analysis more usually used in China, it may be noted this internationally defined period 1978-2007 takes in most of three of the domestically defined five leadership periods.
  • In 2008, the international financial crisis commenced. As already analysed growth in the advanced economic since then is extremely low – an annual average 1.1% in 2007-2016 and on IMF projections 1.3% in 2007-2021. This average growth rate is actually significantly lower than in the period of great crisis in the advanced economies commencing with World War I. But the low average in the present period is created, after the 2007-2009 recession, by very slow but relatively stable growth rather than a low average created by extreme fluctuations of boom and recession seen in the crisis commencing with World War I. Because of this extremely slow recovery after the international financial crisis the term ‘Great Stagnation’ most fits the present period since 2008. This phase in the global economy, of course, provides the international context for the ‘new normal’ in China.
The interrelation between international and domestic factors for China is clear in all these periods – the aim of the earlier part of this article being merely to establish the international features of the third period of this development starting with the international financial crisis of 2008. To be precise:
  • No serious scholar suggests that the PRC’s creation in 1949 was unrelated to the great period of international crisis starting with World War I, proceeding through the Great Recession after 1929, and culminating in World War II.
  • All analysis in China notes the great turning point of 1978 and Deng Xiaoping’s ‘Reform and Opening Up’. While in some literature insufficient attention is paid to the fact that this coincides almost exactly in time with the great turn in the Western economies in 1979/80 inaugurated by Reagan/Thatcher the present writer’s experience is that immediately this is pointed out Chinese scholars note that such a fundamental turn in both China and the Western economies occurring at almost exactly the same time cannot be a coincidence. Whatever explanation is then given it is therefore evident that 1950-1978/80 constitutes a period in the history of both China and the Western economies and a new one started with 1978/80.
  • It is noticed inside and outside China that the international financial crisis of 2008 was the greatest peacetime financial crisis since 1929. But in some analysis this is inaccurately treated, explicitly or implicitly, as simply a temporary episode, a somewhat large ‘blip’ in the advanced economies which will be followed by a ‘return to normal’. Put in terms of a comparison to a well-known discussion in China it is explicitly or implicitly suggested that the advanced economies after 2007 entered a ‘V’ shaped period – a sharp downturn followed by a return to a relatively rapid rate of growth.(6) It has instead been established earlier in this article that, to make a comparison to discussion in China, in terms of growth rates the advanced economies after 2007 entered more an ‘L’ shape – a downturn without this being followed by a return to a rapid average rate of growth. The facts given demonstrate that the years since the international financial crisis of 2008 constitute a single historical period characterised by a new low average growth rate in the advanced economies. This constitutes a new period of the international economy and therefore its interrelation with China.
It is clear this situation in the advanced Western economies has major implications for the situation which confronts China. It is also for this reason, as analysed above, that the development of the PRC from the point of view of international trends may be analysed as in three periods:
  • 1949-78
  • 1978-2007
  • 2008-
In that framework, China’s current policy is a response to this new period since the international financial crisis.
Key trends in the new international period facing the Chinese economy
The fact that China faces a protracted period of slow growth in the advanced economies establishes a coherent link between the overall character of the period and immediate events. It also shows that international initiatives by China are not individual or uncoordinated but form a coherent pattern. However, to complete this picture these international trends must be integrated with cumulative Chinese domestic economic achievement – because it is clear that each of these fundamental international periods also corresponds to a phase of China’s domestic development:
  • 1949-78 in China was a period of a ‘social miracle’ without precedent in world history. Life expectancy, well known in economics as the most sensitive overall indicator of social conditions, as it sums up in a single figure all positive trends (prosperity, good education, good health provision, environmental protection etc.) and negative trends (poverty, poor education, bad health care, pollution etc.), rose in China by 29 years from 1949 until Mao Zedong’s death in 1976 – from 35 to 64. China’s life expectancy increased by more than one year for each chronological year that passed, rising from 73% of the world average in 1950 to 105% in 1976. However, this period’s stupendous social achievement was not accompanied by exceptionally rapid economic growth. As already noted in 1950-78 China’s overall GDP growth was only marginally above the world average – China’s GDP rose by an annual average of 4.9% compared to a world average of 4.6%, and China’s annual average increase in per capita GDP was 2.8% compared to a world average of 2.7%.
  • In 1978-2007 China’s socialist market economy far outperformed the economic growth rate of the Western economies – China’s annual average GDP growth rate was 9.9% compared to 2.6% in the advanced Western economies. By this very rapid economic growth China successfully achieved the transition from a ‘low income’ to an ‘upper middle income’ economy by international classification – and was taken to the threshold of achieving ‘high income status’.
  • The period from 2008 onwards has seen China rise towards achieving ‘moderate prosperity’ by 2020 and attaining ‘high income’ status by World Bank criteria shortly thereafter. In short, the period of the ‘Great Stagnation’ in the Western economies will simultaneously see China rise into the ranks of high income economies – this transition to ‘moderate prosperity’ and then to ‘high income’ status by international criteria constitutes a key domestic feature of the present period.
In summary, this new period since 2008 is characterised by:
  • From the domestic economic viewpoint, the transition of China from ‘high middle income’ status to ‘moderate prosperity’ and then ‘high income’ status by international criteria.
  • From the viewpoint of international economic development by very slow growth in the advanced Western economies.
This combination is of course in economic terms significantly different to either of the earlier periods 1950-78 or 1978-2007.
Implications of the new period
There are numerous implications from the interaction of these domestic Chinese factors and the current extremely slow growth in the Western economies, which are too numerous to analyse here, but the following provide key examples. First, purely economic trends will be analysed, then their geopolitical consequences, and finally their implications and attractions for countries other than China:
  • The characteristic of the present period in the advanced economies is slow average growth but not violent oscillations of expansion and crash – as in the last period of very slow growth in the advanced economies commencing with World War I. While no major acceleration of the advanced economies is to be expected neither is there reason to anticipate a massive economic crisis of the 1929 type – the crisis commencing with World War I was produced by the disintegration of the global economy amid both war and then after 1929 due to generalised protectionism. These conditions do not currently exist. Prolonged slow growth in the advanced economies, not sudden deep crisis, is therefore the central perspective.
  • As China faces a substantial period during which growth in the advanced Western economies will be low, while no sharp crisis is expected the prospects for the growth rate of China’s exports to these countries will be relatively limited.
  • Continued slow growth of the US economy creates protectionist trends within it – although other advanced economies, most importantly in terms of size the EU, remain strongly opposed to this.
  • These international trends provide the overall global context for China’s ‘new normal’.
To avoid any misunderstanding, it should be made clear that this analysis, as with all others in this article unless otherwise specified, is of medium term economic trends. The average very slow growth in the advanced economies in the period since the international financial crisis does not mean that there may not be individual short phases of somewhat faster growth within an overall period of slow growth. For example, as analysed in ‘The economic logic behind Trump’s foreign policy – why the key countries are Germany and China’ US economic growth was so slow in 2016, at 1.6%, that it is likely that there may be some improvement in 2017 for purely statistical reasons. What is precluded by overall trends is a major sustained upturn in growth. What are dealt with here are cumulative characteristics of the period as a whole, not purely short term economic predictions.
Turning from purely economic trends to geopolitical consequences:
  • As advanced economies are in a period of very slow growth US neo-cons, and others who think not in terms of ‘win-win’ outcomes but of zero sum games, cannot deal with rising ‘competitors’ such as China by accelerating their own economies. The competitive strategy of those such as US neo-cons which think in such negative terms therefore has to be to attempt to slow other economies such as China. This point is analysed in detail for US relations with China in 一盘大棋? ——中国新命运解析. In relation to China, this means that the previous US strategy was to attempt to undermine and disintegrate China by fake campaigns on ‘human rights’, finding and supporting a ‘Chinese Gorbachev’ etc. – i.e. centring on political offensives. This perspective was, however, almost immediately blocked by Xi Jinping with the ‘four comprehensives’, the emphasis on the role of the Communist Party of China (CPC) etc. Given the present situation of the US and advanced economies, which precludes any major sustained acceleration in economic growth, US neo-cons have instead to seek to achieve their strategic goals by attempting to slow and create crisis within China’s economy.
  • A prolonged period of slow growth in the advanced economies necessarily creates political instability within them. Developments such as Trump’s coming to office against the wishes of the majority of the US political establishment, the UK’s economically irrational Brexit decision, the lesser but still significant upheavals in other Western countries (e.g. rise of Le Pen’s National Front in France, ‘left’ leaders such as Sanders or Corbyn, strength of overtly xenophobic currents in a number of EU states etc) must therefore not be understood as temporary but should be expected to persist.
  • Given very slow growth in the advanced economies, the US is less able to use its old post-World War II/Cold War policy of large scale economic aid to developing countries to stabilise them – i.e. the US is less able to use an economic ‘carrot’ as well as a militarily ‘stick’. The US is therefore increasingly forced to rely solely on military force in attempting to ensure carrying out of its policies in developing countries. This policy, shown in the bombing of Serbia, invasion of Iraq, and the bombing of Libya would be further intensified if Trump’s budget policy of drastic reductions in foreign aid and large increases in military expenditure is ratified by the US Congress.
  • While a number of major developing economies continue to grow rapidly, very slow growth in major advanced economies necessarily produces stagnation and chaos in some weaker developing economies or those which are struck by side effects of the advanced economies slowdown – for example oil and commodity producing states are severely affected by low commodity prices. This produces social instability and in some cases war. An area defined by different levels of military conflict now extends from West Africa, through parts of North Africa, into the Middle East, upward into Ukraine and, stepping over relatively stable Iran, into Afghanistan. Given the slow growth in the advanced economies, and the inability of the US to pursue its old post-World War II policy of using economic means to stabilise situations, such instability and military conflicts may be expected to continue in the coming period – although the regions and countries in which such conflicts take place may change. US foreign policy has shown, in Iraq and Libya, that in a number of cases it prefers ‘failed states’, even if this leads to strengthening of ‘jihadism’, to the existence of stable regimes which do not follow US interests. This clearly has geopolitical and even military consequences for China.
  • There is a danger that a situation where the US is unable to break out of its slow economic growth, which faces acute political instability in parts of the less developed world, and in which China’s growth continues to far outperform it, will result in US military measures to attempt to resolve the problems facing it. The facts of the global economy make clear that Ian Johnson’s warning of an economy which ‘continues to stagnate’ and therefore of the risk of ‘overseas adventures and blaming foreigners for the country’s woes’ is highly accurate – but it applies to the Western economies. The strengthening of China’s military forces is therefore extremely necessary, and in the interests of global peace, as a counterbalance to the risk of such military adventurism by the US. The emphasis on modernisation and strengthening of China’s armed forces is a necessary response to this. Equally other countries, therefore, have an interest in the success of China against dangerous and adventurist tendencies which potentially flow from trends in the Western economies.
So far, the interrelation of the international economy and China has been analysed primarily from the angle of its consequences for China. However, there is of course an increasingly strong causal effect in the opposite direction – the impact of China on the global economy and on countries outside China. This in turn naturally affects China itself. This causal effect has grown greatly due to two mutually reinforcing processes since 2007:
  • The increasing weight of China in the world economy;
  • The slow growth in the Western economies.
The result of these processes is that in PPP terms from 2007-2016 31% of world GDP growth was due to China, compared to 10% for the US – at current dollar exchange rates 44% of world GDP growth from 2007-2016 was due to China. The IMF projects that in PPPs 27% of world GDP growth in 2016-2021 will be due to China compared to 14% for the US.
A new feature of the present period is therefore the very strong direct impact of China on the world economy and the objective interest of other countries in cooperating with this. This fact provides the clear interconnection between key international initiatives launched under Xi Jinping.
  • The emphasis on a ‘community of common destiny’ is correct from a fundamental theoretical and long term viewpoint – as it flows from the fact that the advantages of division of labour mean international economic cooperation is mutually beneficial. This cooperation corresponds to the reality that in economics, due to the advantages of international division of labour, ‘one plus one equals more than two’ and therefore there exist in reality ‘win-win outcomes’, not the ‘zero-sum game’ concept of US neo-cons. But more immediately the concept of a ‘community of common destiny’ is also opposed to the protectionist strategy of key members of the Trump administration. It is for this reason that Xi Jinping’s speech to the Davos World Economic Forum earlier this year emphatically defending globalisation received widespread international support.
  • Slow growth in the advanced economies creates the specific form of relation of other countries to both China and the US. China’s economy is much more rapidly growing than the US but the US retains global military superiority. Therefore, China’s attraction for other countries is strongly economic while the US possesses military power. Put in aphoristic terms China offers other countries inclusion in OBOR, or the AIIB, whereas the US offers the ‘stick’ of a military attack or the ‘carrot’ of military alliance.
  • The slow growth analysed above is specifically of the advanced economies. Growth in the developing economies is much faster. A specific characteristic of the present economic period is therefore of slow growth in the advanced economies and much more rapid growth in a number of developing economies. This clearly shows the strategic importance of key initiatives for China such as OBOR, the AIIB, the BRICS bank etc. The growth potential of the OBOR region, in both percentage and absolute terms, is much greater than either that of North America and Europe – giving other countries a strong incentive to participate in its benefits.
  • Very slow growth in the advanced economies provides the context of the ‘Washington Consensus’, which continues to be promoted by the US but which facts show has been far less successful in producing economic development than China’s socialist market policies and the increasing number of countries influenced by this – a detailed analysis of this was given in 世行数据中隐藏着一个秘密. It is therefore important that China actively promote its economic policies internationally. More rapid international economic growth resulting from this naturally benefits China but also aids those countries experiencing such growth.
The above data demonstrates that once the factual situation of the global economy is analysed the various trends of the present period are not separate but integrated and interrelated with domestic trends in China. Nor is China’s response to them simply a series of individual initiatives. On the contrary it flows coherently from the fundamental character of the new period of the global economy and its interrelation with China.
It should be noted that accurately understanding the trends operating both internationally and within China corresponds to the requirement in both Chinese and advanced Western thought that any situation must be understood in terms of the totality of forces operating in it – which includes both domestic and international ones. This is opposed to an erroneous analysis which attempts to analyse a situation by looking only at one or a few (normally domestic) forces operating in it.
As an aside it may be noted that this shows the continuing contemporary importance of Mao Zedong thought for analysis in China. For it was Mao Zedong who gave the most precise analysis of this requirement in his famous essay ‘On Contradiction’:
‘To be one-sided means not to look at problems all-sidedly, for example, to understand only China but not Japan, only the Communist Party but not the Kuomintang, only the proletariat but not the bourgeoisie, only the peasants but not the landlords, only the favourable conditions but not the difficult ones, only the past but not the future, only individual parts but not the whole, only the defects but not the achievements, only the plaintiff’s case but not the defendant’s, only underground revolutionary work but not open revolutionary work, and so on… There are many examples of materialist dialectics in Shui Hu Chuan, of which the episode of the three attacks on Chu Village is one of the best.
‘Lenin said: “… in order really to know an object we must embrace, study, all its sides, all connections and “mediations”. We shall never achieve this completely, but the demand for all-sidedness is a safeguard against mistakes and rigidity.”…
‘To be one-sided and superficial is at the same time to be subjective. For all objective things are actually interconnected and are governed by inner laws, but instead of undertaking the task of reflecting things as they really are some people only look at things one-sidedly or superficially and who know neither their interconnections nor their inner laws, and so their method is subjectivist.’
Applying this method to an integrated analysis of tendencies in the global economy and within China shows clearly the trends operating casts a clear light on the global economic perspectives facing China. Whether such an international analysis of the three fundamental periods of China’s development in relation with the international economy is useful for China itself is naturally is not for someone who is not Chinese to decide. However, it is clarificatory internationally in understanding the relation between trends in China and the fundamental periods of development of the global economy.
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This article was previously published on Learning from China and originally published in Chinese at
(1) The most notorious example of such ‘econofiction’ is Gordon Chang’s ‘The Coming Collapse of China’, the most widely quoted recent example is David Shambaugh’s ‘The Coming Chinese Crackup’, and a typical wild diatribe was by Ian Johnson in the New York Review of Books claiming China’s ‘economy continues to stagnate’ creating risk of ‘overseas adventures and blaming foreigners for the country’s woes.’ Such claims have been repeated for decades regardless of how regularly they are refuted by events.
(2) The term ‘advanced economies’ prior to 1980 constitutes the main advanced economic centres – the US, Western Europe, and Japan – plus Canada, Australia, and New Zealand as defined in Maddison’s Historical Statistics of the World Economy 1-2008 AD. After 1980, the IMF data from World Economic Outlook October 2016 adds to these countries a few economies which have more recently attained advanced economy status – e.g. South Korea and Singapore. However, the US, Western Europe and Japan are so overwhelmingly dominant in terms of weight within the advanced economies that this small geographical expansion makes no substantial changes to the results.​
(3) The present author wishes to make clear the term The Great Stagnation is used by Tyler Cowen as the title of a book. However, Tyler Cowen’s explanation of this stagnation is rooted in technology and entirely different to the data given here.
(4) Regarding the last point, it is an elementary rule that in analysing a development assumptions least favourable to a argument being tested should be used. If the IMF had underestimated growth in the developed economies use of its projections could be interpreted as excessively ‘pessimistic’. However, successive IMF forecasts, in its biannual World Economic Outlook, have over predicted growth in the advanced economies. Even more strongly, as will be seen, the trends are so clear that any deviation from IMF predictions within any reasonable order of magnitude would not alter the fundamental perspective.
(5) Taking the individual countries growth in the US in the 14 years after 1929 was 87.8%, in Japan 67.4%, in Germany 58.1% and in the UK 50.3%. In the years 1938-43 itself growth was exceptionally rapid. For the advanced economies as a whole total economic growth in the period was 39.5%, or an annual average 6.9%. Annual average growth in the UK in 1938-43 was 4.9%, in Japan 4.0% and in Germany 3.9%. In the US growth in the five-year period 1938-43 was an extraordinary 97.8%, an annual average 14.6% – the fastest growth over a five-year period in a major economy in human history.​
(6) This perspective is suggested by the term ‘Great Recession’ which, in contrast to ‘Great Depression’, suggests a downturn followed by a ‘return to normal’

Britain’s lost decade

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.

Chart 1. Real GDP and Components, Q1 2008 to Q1 2007

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.

Chart 2. 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.

Trump’s economy – cyclical upturn and long term slow growth

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 1st 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 1st 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 1stquarter 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 2nd quarter 2016 – growth accelerating to 1.7% in 3rd quarter 2016, 2.0% in 4th quarter 2016 and 2.1% in 1stquarter 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
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.

Two key reasons for Corbyn’s stunning advance

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.

Chart 1. UK Poll of polls 2017

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.

Chart 2. European Left Vote in 2017 Elections

For a number of years numerous commentators and academics have claimed that UKIP primarily took votes from the Tories, that Labour was therefore ‘unelectable’ and even that UKIP ‘posed an existential threat to Labour’. All this was done to support the reactionary claim that Labour could only advance by being anti-immigrant, as this reflected the views of its core supporters. As the election result shows, none of this was true.

Labour primarily advanced because it promoted policies to defend living standards when they are falling once more and the Tories plan to deepen that. Labour eschewed all blame on migrants for the crisis, and the manifesto only had warm words for the contribution that migrants make to the economy and to society more widely.

Partly as result, where 41% of voters cited immigration as a key issue in 2015 only 6% thought it was a key issue in 2017, according to Ashcroft’s exit polls. In 2015 Labour had a ‘zero-based spending review’ and pledge to cut net migration but in 2017 it had policies to defend the living standards of the overwhelming majority and only warm words about migration. Labour rose by almost 10% in 2017.

As the economic crisis deepens and real wages continue to fall sharply the Tories will attempt to deflect the blame for their policies onto migrants once more. Labour is currently on course to win the next election because it has policies that defend the material interests of most people. Labour looks for solutions to the crisis from those who have caused and benefitted from it, big businesses who refuse to invest and the rich whose incomes have risen even in economic stagnation. In stark contrast to the Tories, Labour has not sought scapegoats. This is a winning formula.