Socialist Economic Bulletin

By John Ross

GDP data for China, the U.S., and the other G7 countries for the year 2023 has now been published. This makes possible an accurate assessment of China’s, the U.S., and major economies performance—both in terms of China’s domestic goals and international comparisons. There are two key reasons this is important.

First for China’s domestic reasons: to achieve a balanced estimate of China’s socialist economic situation and therefore the tasks it faces.

Second, because the U.S. has launched a quite extraordinary propaganda campaign, including numerous straightforward factual falsifications, to attempt to conceal the real international economic facts.

The factual situation is that China’s economy, as it heads into 2024, has far outgrown all other major comparable economies. This reality is in total contradiction to claims in the U.S. media. This in turn, therefore, demonstrates the extraordinary distortions and falsifications in the U.S. media about this situation. It confirms that, with a few honourable exceptions, Western economic journalism is primarily dominated by, in some cases quite extraordinary, “fake news” rather than any objective analysis. Both for understanding the economic situation, and the degree of distortion in the U.S. media, it is therefore necessary to establish the facts of current international developments.

China’s growth targets

Starting with China’s strategic domestic criteria, it has set clear goals for its economic development over the next period which will complete its transition from a “developing” to a “high-income” economy by World Bank international standards. In precise numbers, in 2020’s discussion around the 14^th Five Year plan, it was concluded that for China by 2035: “It is entirely possible to double the total or per capita income”. Such a result would mean China decisively overcoming the alleged “middle income trap” and, as the 20^th Party Congress stated, China reaching the level of a “medium-developed country by 2035”.

In contrast, a recent series of Western reports, widely used in anti-China propaganda, claim that China’s economy will experience sharp slowdown and will fail to reach its targets.

Self-evidently which of these outcomes is achieved is of fundamental importance for China’s entire national rejuvenation and construction of socialism—as Xi Jinping stated, China’s: “path takes economic development as the central task, and brings along economic, political, cultural, social, ecological and other forms of progress.” But the outcome also affects the entire global economy—for example, a recent article by the chair of Rockefeller International, published in the Financial Times, made the claim that what was occurring was China’s “economy… losing share to its peers”. The Wall Street journal asserted: “China’s economy limps into 2024” whereas in contrast the U.S. was marked by a “resilient domestic economy.” The British Daily Telegraph proclaimed China has a “stagnant economy”. The Washington Post headlined that: “Falling inflation, rising growth give U.S. the world’s best recovery” with the article claiming: “in the United States… the surprisingly strong economy is outperforming all of its major trading partners.” This is allegedly because: “Through the end of September, it was more than 7 percent larger than before the pandemic. That was more than twice Japan’s gain and far better than Germany’s anaemic 0.3 percent increase.” Numerous similar claims could be quoted from the U.S. media.

U.S. use of “fake news”

Reading U.S. media claims on these issues, and comparing them to the facts it is impossible to avoid the conclusion that what is involved is deliberate “fake news” for propaganda purposes—as will be seen, the only alternative explanation is that it is disgracefully sloppy journalism that should not appear in supposedly “quality” media. For example, it is simply absurdly untrue, genuinely “fake news”, that the U.S. is “outperforming all of its major trading partners”, or that China has a “stagnant economy”. Anyone who bothers to consult the facts, an elementary requirement for a journalist, can easily find out that such claims are entirely false—as will be shown in detail below.

To first give an example regarding U.S. domestic reports, before dealing with international aspects, a distortion of U.S. economic growth in 2023 was so widely reported in the U.S. media that it is again hard to avoid the conclusion that this was a deliberate misrepresentation to present an exaggerated view of U.S. economic performance. Factually, the U.S. Bureau of Economic Analysis, the U.S. official statistics agency for economic growth, reported that U.S. GDP in 2023 rose by 2.5%—for comparison China’s GDP increased by 5.2%. But a series of U.S. media outlets, starting with the Wall Street Journal, instead proclaimed that the “U.S. economy grew 3.1% over the last year”.

This “fake news” on U.S. growth was created by statistical “cherry picking”. In this case comparing only the last quarter of 2023 with the last quarter of 2022, which was an increase of 3.1%, but not by taking GDP growth in the year as a whole “last year”. But U.S. growth in the earlier part of 2023 was far weaker than in the 4^th quarter—year on year growth in the 1^st quarter was only 1.7% and in the 2^nd quarter only 2.4%. Taking into account this weak growth in the first part of the year, and stronger growth in the second, U.S. growth for the year as a whole was only 2.5%—not 3.1%. As it is perfectly easy to look up the actual annual figure, which was precisely published by the U.S. statistical authorities, it is hard to avoid the conclusion that this was a deliberate distortion in the U.S. media to falsely present a higher U.S. growth rate in 2023 than the reality.

It may be noted that even if U.S. GDP growth had been 3.1% then China’s was much higher at 5.2%. But the real data makes it transparently clear that China’s economy grew more than twice as fast as the U.S. in 2023—showing at a glance that claims that the U.S. is “outperforming all of its major trading partners”, or that China has a “stagnant economy” were entirely “fake news”.

Many more examples of U.S. media false claims could be given, but the best way to see the overall situation is to systematically present the overall facts of growth in the major economies.

What China has to do to achieve its 2035 goals

Turning first to assessing China’s economic performance, compared to its own strategic goals of doubling GDP and per capita GDP between 2020 and 2035, it should be noted that in 2022 China’s population declined by 0.1% and this fall is expected to continue—the UN projects China’s population will decline by an average 0.1% a year between 2020 and 2035. Therefore, in economic growth terms, the goal of doubling GDP growth to 2035 is slightly more challenging than the per capita target and will be concentrated on here—if China’s total GDP goal is achieved then the per capita GDP one will necessarily be exceeded.

To make an international comparison of China’s growth projections compared with the U.S., the U.S. Congressional Budget Office (CBO), responsible for the official growth projections for the U.S. economy on which its government’s policies rely, estimates there will be 1.8% annual average U.S. GDP growth between 2023 and 2033—with this falling to 1.6% from 2034 onwards. This figure is slightly below the current U.S. 12-year long term annual average GDP growth of 2.3%—12 being the number of years from 2023 to 2035. To avoid any suggestion of bias against the U.S., and in favour of China, in international comparisons here the higher U.S. number of 2.3% will be used.

The results of such figures are that if China hits its growth target for 2035, and the U.S. continues to grow at 2.3%, then between 2020 and 2035 China’s economy will grow by 100% and the U.S. by 41%—see Figure 1. Therefore, from 2020 to 2035, China’s economy would grow slightly more than two and a half times as fast as the U.S.

FIgure 1

The strategic consequences of China’s economic growth rate

The international implications of any such growth outcomes were succinctly summarised by Martin Wolf, chief economics commentator of the Financial Times. If China’s economy continues to grow substantially faster than Western ones, and it achieves the status of a “medium-developed country by 2035”, then, in addition to achieving high domestic living standards, China’s will become by far the world’s largest economy. As Wolf put it: “The implications can be seen in quite a simple way. According to the IMF, China’s gross domestic product per head (measured at purchasing power) was 28 per cent of U.S. levels in 2022. This is almost exactly half of Poland’s relative GDP per head… Now, suppose its [China’s] relative GDP per head doubled, to match Poland’s. Then its GDP would be more than double that of the U.S. and bigger than that of the U.S. and EU together.” By 2035 such a process would not be completed on the growth rates already given, and measuring by Wolf’s chosen measure of purchasing power parities (PPPs) China’s economy by 2035 would be 60% bigger than that of the U.S. But even that would make China by far the world’s largest economy.

Wolf equally accurately notes that the only way that such an outcome would be prevented from occurring is if China’s economy slows down to the growth rate of a Western economy such as the U.S. Clearly, if China’s economic growth slows to that of a Western economy, then, naturally, China will never catch up with the West—it will necessarily simply stay the same distance behind. Therefore. as Wolf accurately puts it the outcomes are:

What is the economic future of China? Will it become a high-income economy and so, inevitably, the largest in the world for an extended period, or will it be stuck in the ‘middle income’ trap, with growth comparable to that of the U.S.?

The progress in achieving China’s strategic economic goals

Turning to the precise figure required to achieve China’s 2035 target, China’s goal of doubling GDP required average annual growth of at least 4.7% a year between 2020 and 2035. So far China, as Figure 1 shows, is ahead of this goal—annual average growth in 2020-2022 was 5.7%, meaning that from 2023-2035 annual average 4.6% growth is now required.

China’ 5.2% GDP increase in 2023 therefore once again exceeded the required 4.6% growth rate to achieve its 2035 goal—as shown in Figure 1. From 2020 to 2023 the required total increase in China’s GDP to hit its 2035 target was 14.9%, whereas in fact its growth was 17.5%. This is in line with the 45-year record since 1978’s Reform and Opening Up, during which entire period the medium/long term targets set by China have always been exceeded.

Therefore, to summarise, there is no sign whatever in 2023, or indeed in the period since 2020, that China will fail to meet its target of doubling GDP between 2020 and 2035—China is ahead of this target. Such a 4.6% growth rate would easily ensure China becomes a high-income economy by World Bank criteria well before 2035—the present criteria for this being per capita income of $13,846.

It should be noted, as discussed in in detail below, that a clear international conclusion flows from this necessary 4.6% annual average growth rate for China to achieve its strategic goals. It means that China must continue to grow much faster than the Western economies throughout this period to 2035—that is in line with China’s current trend. However, if China were to slow down to the growth rate of a Western economy, then it will fail to achieve its strategic goals to 2035, may not succeed in becoming a high income economy, and will necessarily remain the same distance behind the West as now. The implications of this will be considered below.

Systematic comparisons not “cherry picking”

Having considered China’s performance in 2023 in terms of achieving its own domestic strategic goals we will now turn to actual results and a comparison of China with other international economies. This immediately shows the factual absurdity, the pure “fake news” of claims such as that the U.S. has “the world’s best recovery“ and “the United States… is outperforming all of its major trading partners.” On the contrary China has continued to far outgrow the U.S. economy not only in 2023 but in the entire last period. China’s outperformance of the other major Western economies, the G7, is even greater that of the U.S.

Entirely misleading claims regarding such international comparisons, used for propaganda as opposed to serious analysis, are sometimes made because data is taken from extremely short periods of time which are taken out of context—unrepresentative statistical “cherry picking” or, as Lenin put it, a statistical “dirty business”. Such a method is always erroneous, but it is particularly so during periods which were affected by the impact of the Covid pandemic as these caused extremely violent short-term economic fluctuations related to lock downs and similar measures. China’s assertion of superior growth is based on its overall performance, not an absurd claim that it outperforms every other economy, on every single measure, in every single period! Therefore, in making international comparisons, the most suitable period to take is that for since the beginning of the pandemic up to the latest available GDP data. As comparison of China with the U.S. is the most commonly made one, and particularly concentrated on by the U.S. media campaign, this will be considered first.

China’s and the U.S.’s growth in 2023

It was already noted that in 2023 China’s GDP grew by 5.2% and the U.S. by 2.5%—China’s economy growing more than twice as fast as the U.S. But it should also be observed that 2023 was an above trend growth year for the U.S.—U.S. annual average growth over a 12-year period is only 2.3% and over a 20-year period it is only 2.1%. Therefore, although in 2023 China’s economy grew more than twice as fast as the U.S., that figure is actually somewhat flattering for the U.S. Figure 2 shows that in the overall period since the beginning of the pandemic China’s economy has grown by 20.1% and the U.S. by 8.1%—that is China’s total GDP growth since the beginning of the pandemic was two and half times greater than the U.S. China’s annual average growth rate was 4.7% compared to the US’s 2.0%.

Figure 2

Economic performance of China and the three major global economic centres

Turning to wider international comparisons than the U.S. such data immediately shows the extremely negative situation in most “Global North” economies and China’s great outperformance of them. To start by analysing this in the broadest terms, Figure 3 shows the developments in the world’s three largest economic centres—China, the U.S., and the Eurozone. These three together account for 57% of world GDP at current exchange rates and 46% in purchasing power parities (PPPs). No other economic centre comes close to matching their weight in the world economy.

Regarding the relative performance of these three major economic centres, at the time of writing data has not been published for the Euro Area for the whole year of 2023 —which would be the ideal comparison. However, it has been published for the Euro area for the four quarters of 2023 individually and trends can be calculated on that basis. These show that in the four years to the 4^th quarter of 2023, covering the period since the beginning of the pandemic, China’s economy has grown by 20.1%, the U.S. by 8.2%, and the Eurozone by 3.0%. China’s economy therefore grew by two and a half times as fast as the U.S. while the situation of the Eurozone could accurately be described as extremely negative with annual average GDP growth in the last four years of only 0.7%.

Such data again makes it immediately obvious that claims in the Western media that China faces economic crisis, and the Western economies are doing well is entirely absurd—pure fantasy propaganda disconnected from reality.

Figure 3

Relative performance of China and the G7

Turning to analysing individual countries, then comparing China to all G7 states, i.e. the major advanced economies, shows the situation equally clearly—see Figure 4. Data for China and all G7 economies has now been published for the whole of 2023. The huge outperformance by China of all the major advanced economies is again evident.

Over the four years since the beginning of the pandemic China’s economy grew by 20.1%, the U.S. by 8.1%, Canada by 5.4%, Italy by 3.1%, the UK by 1.8%, France by 1.7%, Japan by 1.1% and Germany by 0.7%.

In the same period China’s economy therefore grew two and a half times as fast as the U.S., almost four times as fast as Canada, almost seven times as fast as Italy, 11 times as fast as the UK, 12 times as fast as France, 18 times as fast as Japan and almost 29 times as fast as Germany.

In terms of annual average GDP growth during this period China’s was 4.7%, the U.S. 2.0%, Canada 1.3%, Italy 0.8%, the UK 0.4%, France 0.4%, Japan 0.3% and Germany 0.2%.

It may therefore be seen that China’s economy far outperformed the U.S., while the performance of all other major G7 economies may be quite reasonably described as extremely negative—all having annual average economic growth rates of around or even under 1%.

Figure 4

Comparison of China to developing economies

A comparison using the IMF’s January 2024 projections can also be made to the major developing economies—the BRICS. Figure 5 shows this, using the factual result for China and the IMF projections for the other countries. Over the period since the start of the pandemic, from 2019-2023, China’s GDP grew by 20.1%, India by 17.5%, Brazil by 7.7%, Russia by 3.7% and South Africa by 0.9%.

This data confirms that the major Global South economies are growing faster than most of the major Global North economies, which is part of the rise of the Global South and draws attention to the good performance of India. But China grew more than two and half times more than all the BRICS economies except India—China’s growth was 15% greater than India’s. It should be noted that India is at a far lower stage of development than the other BRICS economies—all the others fall in the World Bank classification of upper middle-income economies whereas India falls into the lower middle income group.

Figure 5

Comparison of China’s growth to Western economies

Finally, this outperformance by China casts light on what is necessary to achieve its own 2035 strategic targets. China’s 4.6% growth rate necessary to meet these goals means that it must continue to maintain a growth rate far higher than Western economies—Figure 6 shows this in overall terms in addition to individual comparisons given to major economies above. Whereas China must achieve an annual average 4.6% growth rate the median growth rate of high income “Western” economies is only 1.9%, the U.S. is 2.3%, and the median for developing economies is 3.0%. That is, to achieve its 2035 goals China must grow twice as fast as the long term trend of the U.S., almost two and a half times as fast as the median for high income economies, and more than 50% faster than the median for developing economies. As already seen, China is more than achieving this.

But such facts immediately show why it is an extremely misleading when proposals are made that China should move towards the macro-economic structure of a Western economy. If China adopts the structure of a Western economy then, of course, China will slow down to the same growth rate as Western economies—and therefore fail to achieve its 2035 economic goals. China will be precisely stuck in the negative outcome of the situation accurately diagnosed by Martin Wolf.

What is the economic future of China? Will it become a high-income economy and so, inevitably, the largest in the world for an extended period, or will it be stuck in the ‘middle income’ trap, with growth comparable to that of the U.S.?

Figure 6

Conclusion

In conclusion, in addition to objectively analysing 2023’s economic results, it is also necessary in the light of this factual situation to make a remark regarding Western, in particular U.S. “journalism”.

None of the data given above is secret, all is available from public readily accessible sources. In many cases it does not even require any calculations and simply published data can be used. But the U.S. media and journalists report information that is systematically misleading and in many cases simply untrue. While it lagged China in creating economic growth the U.S. was certainly the world leader in creating “fake economic news”! What was the reason, what attitude should be taken to it?

First, to avoid accusations of distortion, it should be stated that there were a small handful of Western journalists who refused to go along with this type of distortion and fake news. For example Chris Giles, the Financial Times economics commentator, in December, sharply attacked “an absurd way to compare economies… among people who should know better.” Giles did not do this because of support for China but because, quite rightly, he warned that spreading false or distorted information led to serious errors by countries doing so: “Coming from the UK, which lost its top economic dog status in the late 19^th century but still has some delusions of grandeur, I can understand American denialism… But ultimately, bad comparisons foster bad decisions.” But the overwhelming majority of U.S. and Western journalists continued to spread fake news. Why?

First, the fact that identical distortions and false information appeared absolutely simultaneously across a very wide range of media makes it clear that undoubtedly U.S. intelligence services were involved in creating it—i.e. part of the misrepresentation and distortions were entirely deliberate and conscious, aimed at disguising the real situation.

Second, another part was merely sloppy journalism—that is journalists who could not be bothered to check facts.

Third, supporting both of these factors was “white Western arrogance”—an arrogant assumption, rooted in centuries of European and European descended countries dominating the world, that the West must be right. Therefore, such arrogance made it impossible to acknowledge or report the clear facts that China’s economy is far outperforming the West.

But whether it was conscious distortion, sloppy journalism, or conscious or unconscious arrogance, in all these cases no respect should be given to the Western “quality” media. It is not trying to find out the truth, which is the job of journalism, it is simply spreading false propaganda.

It remains a truth that if a theory and the real world don’t coincide there are only two courses that can be taken. The first, that of a sane person, is to abandon the theory. The second, that of a dangerous one, is to abandon the real world—precisely the danger that Chris Giles pointed to. What has been appearing in the Western media about international economic comparisons regarding China is precisely abandonment of the real world in favour of systematic fake news.

This is a shortened version of an article that originally appeared in Chinese at Guancha.cn.

About John Ross

John Ross is a senior fellow at Chongyang Institute for Financial Studies, Renmin University of China. He was formerly director of economic policy for the mayor of London.

The above article was originally published here by Monthly Review.

By Tom O’Donnell

Einstein’s definition of insanity is repeating the same experiment and expecting a different outcome. Yet this is what is planned by the Labour front bench in terms of economic policy, a front bench who will be overseeing economic policy in the next parliament.

Labour has previously set out a minimal level of fiscal rules to be applied in office. They are extremely limited and can be read in full here (£). The rules consist of just 3 points:

1. Big changes in fiscal policy must be assessed for their impact by the Office for Budget Responsibility and there will be an Autumn Budget every year
2. There will be no borrowing for day-to-day (or current) spending and national debt will fall over time
3. Adopting an industrial strategy which offers subsidies to business.

There are some difficulties with each of these rules. But the first point to note is the Labour frontbench policy now goes way beyond the limits set by the fiscal rules, and in a way which is deeply damaging to the wider economy. Effectively, Labour is promising to extend and deepen austerity.

This can be shown in three ways. First, Labour has decimated its own plans for investment by scrapping the £28 billion a year green investment plan. It should be noted that the fiscal rules place no limits in advance on government Investment spending at all. Nothing in Labour’s fiscal rules, or indeed in any fiscal rules based on logic, prevents borrowing for Investment as Investment is the main determinant of the growth of the economy (and therefore a key factor in its fiscal position). There is now no meaningful plan to increase public Investment beyond its current miserably low level.

Secondly, Labour has recently declared that all types of new potential revenue-raising measures have been ruled out. Once again, this has nothing to do with the fiscal rules, which only state that there should be no deficit on day-to-day spending. It is therefore clearly a matter of choice whether a balance is achieved on current spending either through spending cuts (austerity) or by revenue-raising measures on big business and the rich (redistribution). A string of revenue-raising measures have been ruled out including; increases in Corporate (profits’) Tax, income taxes, including for the very high paid, wealth taxes and there are reports that even the small-scale policy on non-dom status is being watered down.

Thirdly, and this one of the most unremarked parts of the new austerity drive, is that Labour has no plans to reverse the huge imposition of austerity that took place over 2023 in the Budget and Autumn Statement. These delayed cuts are in effect ‘paying for’ the giveaways in the Budget and Autumn Statement. These cuts to services amount to a cumulative £78 billion over the 5-year period which mainly takes place in the next parliament. As the nominal amount of spending is fixed in the budgets which Labour accepts, the real terms cuts to departmental spending will be even deeper if inflation turns out to be higher than the official forecasts, as is already the case.

The depth of cuts is shown in the chart below from the Institute for Fiscal Studies (IFS). The totals in yellow are new tax cuts and spending on other areas. As SEB wrote at the time, this new spending was in four areas; subsidies to businesses, tax cuts for the higher paid, an ill-conceived scheme to increase demand for childcare without increasing supply, and military spending.

Chart 1. Middle and low-income earners are paying for the Tories’ priorities

Source: IFS

Clearly, these choices reflect Tory priorities in a pre-election period. They are a pointer to what might be expected from the coming Budget in March. Labour sticking to them suggests these priorities are shared with the Tories.

The big winners from these policies are inefficient businesses and the high paid. Owners of medium or large childcare facilities are also winners, along with military contractors. Everyone else is worse off once more.

The wrong framework and the wrong policies

To plan for more austerity is to plan for increasing misery, economic stagnation and further deterioration in public services. The arguments being made once more in favour of greater private sector involvement in the provision of public services and further deregulation are simply warmed-over Thatcherism. If privatisation and deregulation were an economic panacea, Britain would be close to an economic powerhouse now. As it is, under these policies the economy has shifted down a further gear, from very slow to an outright crawl.

Rather than attempt to alter the current economic trajectory, the Labour leadership has adapted to it. Its own fiscal rules are both flimsy and contradictory. There is no need, for example for debt to fall outright over time; it only needs to be manageable, which is guaranteed if the rate of return on Investment comfortably exceeds borrowing costs. It is also completely wasteful to subsidise companies who refuse to invest. 100% investment is guaranteed if the public sector undertakes the Investment itself.

But it should be clear that it is not these fiscal rules that are preventing logical and reasonable aims such as the £28 billion green investment programme. It is simply false to invoke the fiscal rules when they do not prevent Investment at all.

Instead, the Truss/Kwarteng debacle is repeatedly invoked by Labour frontbenchers as if a collapse in the financial markets is the inevitable consequence of doing anything other than the same as the Tory government. This is false and ignorant on two grounds.

Truss and Kwarteng’s mini-Budget was reckless and did lead to a collapse in financial markets, pushing both inflation and borrowing costs much higher. But borrowing for Consumption (unfunded tax cuts) is clearly reckless because there is no return on Consumption. Borrowing for Investment is completely different because there is an economic and financial return. No market slump is likely to follow.

Chart 2. UK 10-Year Government Bond (‘Gilt’) Yields

Source: FT

The Truss/Kwarteng Budget effectively of September 2022 doubled 10-year gilt yields from 2% to 4%, a large increase in borrowing costs, as shown in Chart 2 above. But there are two points to note. The first is that yields (the borrowing cost to the government) have since returned to that level. If lack of confidence was the key factor in pushing yields higher in the autumn of 2022, there is no greater confidence now under the current regime of permanent economic stagnation.

But the argument for doing nothing on borrowing or Investment made by the Labour frontbench neglects completely the real cost of borrowing. Adjusted for inflation, borrowing costs are close to zero. As the chief economics commentator for the Financial Times Martin Wolf once remarked in relation to the Osborne-Camron austerity, “if there are no potential investment projects with a return greater than zero, capitalism really is doomed.”

The paradox of the new Labour position on the economy is that, in the name of stability and prudence, a reckless new round of austerity is threatened, with all the misery and instability that will follow.

By John Ross

It is vital to have an accurate analysis of the international economic situation. This means an analysis without exaggeration in any direction – in serious matters neither “optimism” or “pessimism” is a virtue, only strict realism is.

Recently US President Bident said that China is “a ticking time bomb” because of its economic weakness. By contrast, the White House’s own verdict is that ‘Bidenomics is working’ (pdf).

This US type of misanalysis has been widely aired in the international media and relies on data taken from extremely short periods of time – statistical “cherry picking”.

This is always an error, but it is particularly so during periods affected by the impact of the Covid pandemic, as these caused extremely violent short-term economic fluctuations related to lock downs and similar measures. Therefore, to make international comparisons, the most meaningful period to take is the whole of the pandemic up to the latest GDP data – the third quarter of 2023.

The first feature which shows up from such data is the extraordinarily negative situation in most of the economies of the Global North – the advanced capitalist economies, more popularly known as “the West”. China’s economy continued to far outperform all major Global North economies.

To see this, the first chart below shows the developments in the world’s three largest economic centres – China, the U.S., and the Eurozone. These three together account for 57% of world GDP at current exchange rates and 46% in purchasing power parities (PPPs). Therefore, no other economic centre comes close to matching their weight in the world economy – indeed, at current exchange rates they account for the majority of the world economy, and in PPPs for almost half the world economy.

The relative performance of these major economic centres is clear. In the last four years, covering the pandemic, China’s economy has grown by 20.2%, the U.S. by 8.1%, and the Eurozone by 3.0%. China’s economy has therefore grown by two and a half times as fast as the U.S.. In turn, the situation of the Eurozone could accurately be described as extremely negative with annual average GDP growth in the last four years being under 1% – to be exact at 0.7%.

Turning to individual countries, and comparing China to all G7 states, the situation is equally clear – as shown in the second chart below. Over the four years to the 3^rd quarter of 2023 China’s economy grew by 20.2%, the U.S. by 8.1%, Canada by 3.9%, Italy by 2.7%, the UK by 1.8%, France by 1.3%, Germany by 0.6%, while Japan’s economy shrunk by 0.4%.

In the period since the beginning of the pandemic China’s economy has therefore grown two and a half times as fast as the U.S., more than five times as fast as Canada, more than seven times as fast as Italy, 11 times as fast as the UK, more than 15 times as fast as France, more than 33 times as fast as Germany while Japan’s economy has shrunk.

In terms of annual average GDP growth during that period, China’s was 4.7%, the U.S. 2.0%, Canada marginally under 1.0%, Italy 0.7%, the UK 0.4%, France 0.3%, Germany 0.2%, and Japan -0.1%.

It may therefore be seen that China’s economy far outperformed the U.S., while the performance of all other major G7 economies was disastrous – with all of them having annual average economic growth rates of under 1%.

In Europe and the U.S. this rate of economic growth, much lower than China, has led to social and political instability – unpopularity of almost all European governments and intense political fighting between supporters of Biden and Trump in the U.S..

Two clear conclusions, therefore, follow from an analysis of the performance of the G7 economies and their comparison to China.

First, the performance of six out of the seven of the G7 economies is less than 1% a year annual average GDP growth in the last four years – a situation which may accurately be described as disastrous.

Second, China is far outperforming the U.S., but U.S. economic growth, an annual average 2.0% a year, is the only one out of the G7 which cannot be described as disastrous. Future posts in this series will, therefore, focus on the U.S. economy and its comparison to China.

By Tom O’Donnell

China’s socialism has achieved the greatest improvement in the living conditions of any major country in world history.

As a result, the economic policy of China in the construction of socialism should be studied closely, not just by socialists but also by anyone interested in economic development, increasing well-being for the population as a whole and in poverty reduction.

It is worth briefly restating some of those key improvements in living conditions, which ought to be the prime consideration for all economic policy making.

In 1949 China was one of the poorest countries in the world in terms of per capita GDP (Maddison).  It has since already achieved ‘moderate prosperity’ using IMF designations and is on course to become a high-income economy on the same basis. In 1950, China accounted for just 4.6% of world GDP (Maddison) and now accounts for 18% of world GDP (World Bank data for 2022).

China has also provided the greatest increase in life expectancy in the shortest period of time in human history. At the time of the Revolution in 1949, average life expectancy was just 35 years.  Now it is just over 78 years.

Finally, China has achieved unparalleled success in reducing and then eliminating absolute poverty. China has lifted more than 850 million people out of World Bank-defined poverty in 40 years, which is by far the greatest poverty reduction achievement in human history.  It has also now, after considerable focused effort, achieved the elimination of absolute poverty.

Unsurprisingly, these achievements have sparked a growing interest in China’s economy policies as a key to economic development. In addition, in most parts of the world China’s economic advances have fostered the growth in trade. So there are reasons of enlightened self-interest in understanding these developments even among those who would never describe themselves as socialists.

In the Global South there is widespread interest in the mechanics of China’s progress. On a very much smaller scale, there has also been the emergence of a committed band of supporters of China in the main Western economies. Most, but not all, are socialists or communists, who identify with the gains of the Chinese revolution and who oppose the new Cold War encirclement of it.

This article is addressed to these two groups, in the Global South and the smaller forces in the Western economies who are certainly not opposed to China’s rise and in many cases are strong and consistent defenders of it. Therefore, any differences or disagreements with them on economic policy in China should be understood as ‘contradictions among the people’; that is a debate about the shared goal of the best way to proceed.

Yet among those supporters of China and their many accounts of its progress there are repeated analytical gaps, particularly around ‘reform and opening up’, as well as a concerted effort to claim there has only been continuity, not discontinuity in the evolution of China’s economic policy. This is not supported by the Communist Party of China, and it does not correspond to the facts.

The point is not to generate heat where there should be greater light. Instead, given the enormity of China’s economic advances, it is extremely important that a rounded and accurate view of them is presented, so that anyone wishing to learn from the Chinese economic marvel can apply its lessons accurately.

The present author has relied on four important publications written by supporters of China’s economic achievements, as well as on economic data. As will be shown, even among strong sympathisers or supporters of China’s achievements there remains a degree of confusion about the mechanics of those achievements.

In this analysis there are four points that are paramount. They are necessary for an accurate understanding of the decisive factors which propelled China’s economic development. Taking the most important factors:

1. Was the de-collectivisation of agriculture after 1978, that is the introduction of the household responsibility system right or wrong?
2. Was the decision to remove medium and small companies from state ownership right or wrong?

But once these two fundamental and structural questions have been answered, they entail further huge consequences, which themselves pose further questions:

• If agriculture is de-collectivised and small and medium enterprises are removed from state ownership, and as these are the largest in terms of employment, then large parts of the economy cannot be subject to planning, even if it was desirable. Is planning in the small and medium-sized enterprises more important than their economic development?
• Was the opening up of the economy to international trade right or wrong? Of course, if the economy is open to trade it is not possible to fully plan the economy because the international economic situation cannot be controlled by the central planners.

If China is judged to be wrong on the de-collectivisation of agriculture and the removal of small and medium enterprises from state ownership, then the authors making those judgments do not agree with China’s economic reform. Yet, if China was correct to take these decisions then it does not have an economic structure that was the same as the USSR after 1929 right up to its collapse.

This is because, despite heroic efforts to claim otherwise there is not a continuity of China’s economic policy either to the USSR or to the pre-1978 China economy.

Each of the publications referred to below is valuable, even though there are many disagreements. These are: Reform and opening up: Chinese lessons to the world (pdf), De Freitas; China’s quest for a socialist future, Hammond, Becker, Puryear; The East is still red, Martinez;and China’s great road, Ross.

Worth studying and emulating

No country could possibly copy the Chinese model of growth in all its particulars, as each country has its own unique combination of general economic factors which must be considered. However, how China has handled its own unique combination of those economic factors may hold general lessons for the economic development of all.

Shortly after the Chinese Revolution took place in 1949 the average annual per capita GDP was equivalent to $448 (Maddison). Almost no other country was poorer than this. Since landlords, usurers and other parasites were still numerous, naturally the incomes for tens of millions was far below even this average. For comparison, the average annual per capita GDP in Western Europe in the year 1,000 (after the fall of Western Roman Empire) was equivalent to $425 (Maddison). Yet, by 2008 per capita GDP had reached $6,725 in China, the same level as the leading Western European economies in 1957.

That is, almost 1,000 years of Western economic development had been achieved in 60 years. That is the scale of the Chinese economic advance.

China is now poised to become a high-income country according to World Bank designations. This means that the majority of the world will have average incomes below China, some very substantially so. As a minimum, residents of those countries, who are the vast majority of humanity, have every interest in studying the dynamics of China’s economic growth.

For socialists and all those simply interested in poverty alleviation, China also offers the greatest example of poverty eradication in human history. Using World Bank criteria, it has lifted 800 million people out of poverty. Its rise has transformed the lives of the greatest proportion of the world’s population in history. It also did so more rapidly than other periods of fast growth historically, in the Industrial Revolution, or with American, ‘railroad-isation’, or the Russian Revolution. China’s rapid advance after the introduction of ‘reform and opening up’ directly impacted 22.3% of the world’s population.

Most importantly, As John Ross said, “this unmatched speed and scale of China’s economic development was achieved by a socialist and not by a capitalist country and economy.”

3 phases of development

There are three distinct phases of China’s economic development post-1949. The first was the enormous social and economic achievements of the period from 1949 until Mao’s death in 1976. The second was the period of ‘reform and opening up’ from 1978 onwards primarily under the leadership of Deng Xiaoping. The third phase effectively begins with the appointment of Xi Jinping as general secretary of the Communist Party of China (CPC) in 2013, and addresses the problems of development from a moderately prosperous to a high-income economy.

This third phase is beyond the scope of this article. Unfortunately, these problems are not ones that most of the world as yet deals with. This article concerns itself with the earlier phases of economic development.

First, it must be acknowledged that the period of Mao’s leadership was quite extraordinary in terms of human development.

In the publications referred to above, there is a general consensus about how extraordinary these are (only De Freitas could be described as somewhat lukewarm). This should not be surprising.

Contrary to the myth of Mao the monster (which Martinez debunks easily) the accurate picture is one where there were huge advances in infant mortality, in longevity, in literacy, the position of women, the position of national minorities and a host of other indicators under Mao’s leadership.

Of course, it can be objected that, having defeated the warlords, the foreign occupiers and their allies, reunified the country and establishing peace, some of these indicators at least were bound to improve. But since all of these were a product of the Chinese Revolution itself, led by Mao, this simply demonstrates the extraordinary scope of the impact on people’s lives under Mao’s leadership, political, military, social and economic.

Amongst supporters of Chinese socialism these matters are largely uncontested. These achievements are so enormous that anyone who failed to recognise them should not be expect to be taken seriously either in China or as an analyst of it.

Why was reform and opening up necessary?

The table below shows the real GDP growth of the Chinese economy and the world economy in the period 1950 to 1978 (two years after Mao’s death, when ‘reform and opening up’ was introduced).

Table 1. Changes in World and China GDP,

1950-1978, Real international $bns

	1950	1978	Average annual % change
World	5,336	18,955	3.55
China	245	935	3.81

Source: Maddison, author’s calculations

Over the period after the Revolution and until the mid-1970’s the real GDP growth of the Chinese economy was steady but unspectacular. In effect, there was no qualitative difference between the growth rate in China and the average in the rest of the world. Crucially, Chinese growth was also substantially lower than some other countries in the region.

The implication is that the enormous social advances under Mao’s leadership (which were not at all generally taking place in the rest of the world) were primarily a product of policies of socialist redistribution. This reflected a conscious effort towards improving the lives of the poorest masses, with spectacular results.

But the fruits of redistribution begin to dwindle over time if there is not also a rise in production. For a poor socialist country such as China, this must also be through demonstrating the superiority of socialist production simply in order to catch up.

Both Martinez and Hammond et al obscure this truth by emphasising only the continuities of the socialist redistribution policies. What is largely ignored or downplayed is both the necessity of the reform and opening up process and its impact on growth and prosperity.

The astonishing successes of reform and opening up

In 1978 when the CPC, now under the primary leadership of Deng Xiaoping, introduced reform and opening up, China was still an agricultural society in which the peasantry numerically dominated.

Because of the predominance of agriculture, reform had to have as its foundation land reform and changes to the system of production. This was the corner-stone of the entire process and is frequently overlooked altogether.

Before outlining the process, the impact of it should be shown. This determines its objective importance, as well as its value as 1) the mechanism which has lifted hundreds of millions of people out of poverty, and 2) a process which can be learnt from and adapted to achieve similar results elsewhere.

The comparison in Table 1 is now reproduced, but this time it is the impact of the reform process that is shown by comparison from 1978 onwards.  

Table 2. Changes in World and China GDP,

1950-2008, Real international $bns

	1978	2008	Average annual % change
World	18,955	50,974	2.69
China	935	8,909	9.52

Source: Maddison, author’s calculations

The effects are clearly transformative. The growth rate of the Chinese economy is far greater than in the earlier and comparable period (which are roughly equal, 28 years versus 30 years). It also vastly outstrips the growth rate of the world economy, which had slowed over the period, while the Chinese economy sharply accelerated.

The post-Revolution economy moderately outperformed the world economy prior to reform and opening up. But after reform and opening up, it blew away the rest of the world’s growth rate.

Whereas in 1950 to 1978 the growth rate of the Chinese economy was barely above the world average (and therefore below many countries), now there is no major economy in the world which has matched China’s growth. From this basis, it is possible to vastly improve the lot not just of the average Chinese citizen, but particularly to vastly improve the position of the very poorest. This is exactly what the poverty eradication programme has achieved.

The mechanics of reform and opening up

Given the predominance of agriculture in employment, reform had to have as its foundation land reform and changes to the system of agricultural production. This was the cornerstone of the entire process. Yet it is frequently overlooked altogether even among supporters of China, such as Hammond et al and Martinez.

Yet if the key reforms are downplayed, there is no credible explanation offered either for the necessity of reform or its startling success. If China was going to accelerate beyond the average growth rate, major reform was required. As will be shown below, while these reforms have proved enduringly controversial, so much so that they are not endorsed by many China supporters, they are perfectly in line with the application of Marx and Engel’s thought (as well as Adam Smith’s).

Deng de-collectivised agriculture and stressed household responsibility, allowing peasants to exercise formal control (but not individual ownership) over land if they sold a contracted portion of their crops to the government.

The effect was to guarantee (crops permitting) the output from the agricultural sector which had previously passed into state hands for distribution among the population. At the same time the peasantry was provided with incentives to increase production beyond that portion which had already been contracted to an arm of the state. This led to a general, large and persistent increase in the output of the agricultural sector.

The growth in living standards arising from reform and opening up was decisively due to the success of these reforms.

Chart 1. Agricultural output in China, 1960 to 2022, (US$ 2015)

Source: World Bank

The sharp acceleration in China’s economic output through reform and opening up is evident from the chart above. It took 19 years, from 1960 to 1979 for China’s agricultural output to double. But it doubled again in the following 14 years, then doubled again in the subsequent 8 years.

In parallel industry was reformed. Private businesses were allowed, administered prices for goods were abolished, foreign capital and know-how was attracted in order to develop production.

It should also be noted what was not done (on which there is general consensus among China supporters). The main banks all remained state-owned, as did the majority of the state-owned enterprises in sectors such as major transport, energy production and distribution.

The state remained in control and ownership of the ‘commanding heights’ of the economy. The paramount peak in the banking sector, which allows some direction of private investment but crucially, the state-owned sector as a whole can regulate the level of investment in the economy.

As investment is decisive for growth in the means of production, the state’s ability to regulate the level of investment is decisive for economic development as a whole. In doing so, China has not abolished the capitalist business cycle. It has simply not allowed it to determine the economy as a whole.

The land reform itself required further reforms. If this was not to be a one-off trick to hoodwink the peasantry, then the additional output had to be sold to the market. This meant the growth of private markets in the agricultural produce. It also meant representative prices, market prices which are integral to those markets and determine how the peasantry was to be rewarded.

A similar approach was adopted with regarded to vast numbers of private small producers, who were allowed to establish businesses, charge for their services, use market prices and competition to win customers. What may have started as a sector dominated by blacksmiths and motor mechanics now includes accountants, lawyers, hairdressers, and so on.

It was the surge in output of all kinds, the increase in economic activity in general across all sectors and the consequent rise in tax revenues which also contributed to the state’s large resources to intervene in and develop the means of production.

On all of this, many of China’s supporters are completely silent. It seems probable that some have in mind an alternative economic model – the ending of the New Economic Policy in the Soviet Union, followed by the forced collectivisation of the land, the exclusion of foreign investors and nationalisation of the overwhelming majority of the economy, all of which largely took place under Stalin.

Now, many have argued that this was all necessary in the certain knowledge that war was coming. It is not obvious that this policy was a complete success when the Red Army was defeated by the far smaller Finnish army in 1940 (which so encouraged Hitler in his genocidal assault). But it would require vast research and analysis to establish whether the policy of centralising production was the necessary response to inevitable war.

There is, though a real-world verdict on whether this policy worked in the post-World War II period. In a parallel with the post-Revolution period under Mao in China, in the first twenty years after the 1945, the Soviet model clearly outstripped the growth of the world economy. The world economy doubled in size over that period, while the Soviet economy trebled.

Yet from the early 197Os that stronger performance went into reverse, even though the world’s main capitalist economies were themselves suffering a sharp crisis (especially after the US tore up the post-WWII Bretton Woods economic order because it could no longer pay for social peace at home and pursue the Viet Nam War). Essentially, the comparative growth rates were reversed in that period. The capitalist world grew more rapidly than the economy of the Soviet Union.

It is possible that the Soviet economic model was a necessary retreat from Marxism in preparation for war. That is unproven. But the peacetime verdict on the same model (discounting individual and secondary policy choices) was not even as robust as a global capitalism in crisis. We can be certain that this model is not optimal, because, unlike China’s, it could not survive the international capitalists’ peacetime onslaught.

That the Chinese policy of reform and opening up were perfectly aligned with Marxism will be outlined in the next and final section of this piece.

But there is one further point that should be addressed in relation to a widespread misinterpretation of the reform and opening up process. This is the incorrect claim that Foreign Direct Investment (FDI) was largely responsible for providing the resources for investment in the means of production that industrialised the economy and was the main spur to growth. This claim is made by De Freitas, Hammond et al and Martinez.

Naturally, if the transformational impact of reform and opening up is disregarded or downplayed, then logically there must be another factor at work which explains China’s extraordinary growth after 1978.

However, the explanation that it is FDI which played this role runs into two problems. The first is, it did not happen on anything like the scale required. The second is it assigns a magical role to the efficacy of private capital which it simply does not possess.

Chart 2.  China Foreign Direct Investment as % of GDP, 1980-2022

Source: World Bank

Chart 2 shows the rate of FDI in China as a proportion of GDP. Contrary to widespread assertion, it is not a determining or even highly significant factor in China’s economic growth. It only exceeded 1% of GDP in 1992, long after China’s extraordinary economic acceleration had begun.

In addition, 1992 to 1999 was the only period in which China’s FDI was above the world average rate. Needless to say, the rest of the world did nothing to match China’s economic growth rate despite generally receiving higher levels of FDI.

More fundamentally, China has experienced double-digit GDP growth over large sections of that period. This is simply not feasible on the back of FDI rates that have mostly fluctuated between 1% and 3% of GDP.  Even among strong supporters of investment in the means of production as decisive for growth, the textbooks would have to be torn up if such rates of return were possible.

Reform and opening up confirms Marxism

Finally, the reform process in China should not be treated as a deviation from Marxism, however successful. The truth is that Chinese economic policy and its success is precisely the application of longstanding Marxist economic theory on the development of socialism.

“The proletariat will use its political supremacy to wrest, by degree, all capital from the bourgeoisie, to centralise all instruments of production in the hands of the State, i.e., of the proletariat organised as the ruling class; and to increase the total productive forces as rapidly as possible.” – The Communist Manifesto, Marx and Engels

“Right can never be higher than the economic structure of society and its cultural development conditioned thereby.” – Critique of the Gotha Programme, Marx

Adam Smith first identified the decisive role of the division of labour in developing the productive capacity of the economy. Famously, he showed a single person working on their own could not even produce a pin without the inputs of a large number of other producers.

Marx adopted and revolutionised this finding with the concept of the socialisation of production, including both the living labour of others and accumulated or dead labour through the means of production.

Therefore, in theoretical terms, a decisive question for all producers, including the hundreds of millions of isolated and impoverished Chinese peasants after the Revolution was how to connect them to the wider economy and allow them far greater participation in the division of labour.

For the workers of the countryside and the smaller number of workers in the towns and cities, the question of the socialisation of production was paramount if they were to achieve higher living standards, and so too, in all probability was the question of the survival of the Revolution.

But, as Marx argued (in one of his most widely misquoted passages) in the Critique of the Gotha Programme, the transformation in the direction of ‘right’; meaning fairness and equality could only begin on the basis of the already existing economic and social conditions.

There was no basis for large-scale investment in mechanised agriculture to produce an abundance of food in post-Revolutionary China. The level of accumulation was too low.

The route to the socialisation of agriculture under these circumstances would come from connecting that great mass of peasants and other small producers to the market. With contractual safeguards in place for the continued output of foodstuffs to the state for redistribution, peasants would be allowed to produce for their own account, and sell that produce at market prices.

It was understood too that de-collectivisation and incentives to production for the market would lead to inequality.  This too is perfectly in line with Marx’s arguments in the Critique of the Gotha Programme, where the goal of communism would be to transform society ‘from each according to their ability, to each according to their needs’.

But this would only take place after a period where the old society determines the scope of that progress, and where labour is rewarded for its output.  That is, for a more or less prolonged period, rewards would not be on the basis of need.

“In the first phase of communist society, The right of the producers is proportional to the labour they supply; the equality consists in the fact that measurement is made with an equal standard, labour.

“But one man is superior to another physically, or mentally, and supplies more labour in the same time, or can labour for a longer time; and labour, to serve as a measure, must be defined by its duration or intensity, otherwise it ceases to be a standard of measurement. This equal right is an unequal right for unequal labour. …..But these defects are inevitable in the first phase of communist society as it is when it has just emerged after prolonged birth pangs from capitalist society. Right can never be higher than the economic structure of society and its cultural development conditioned thereby.”

In addition, because the new society is born out of the old, capitalist system, with all its terrible defects, shortages and anarchy, then the task for the workers must be first the seizure of power then set about the twin tasks of wresting, by degree, all capital from the bourgeoisie and develop the productive capacity of the economy as rapidly as possible. As noted, above, this was the verdict of the Communist Manifesto, written long before the Critique of the Gotha Programme.

Note too, the differing timescales over the era after the seizure of power. The productive forces must be developed as rapidly as possibly, while capital must be wrested from the bourgeoisie by degree (emphases added -author).

This is precisely what happened in the period of ‘reform and opening up’. The Deng policy was obliged to include a partial reversal of the previous strategy for full collectivisation of the land. It had not worked, as it did not allow the vastly underdeveloped agricultural sector to participate fully in the socialisation of production on the basis of its existing economic and social conditions.

Finally, in the practical implementation of these policies there is no greater experience and no higher authority than the CPC itself. It is well-known (at least in pro-China circles) that it has issued a stinging criticism of the Cultural Revolution. It says,

“The Cultural Revolution was “the most severe setback suffered by the Party, the State and the people since the founding of the People’s Republic”. –

Resolution on certain questions in the history of our party since the founding of the People’s Republic of China

But in its (significantly less stringent) criticism of the Great Leap Forward, it also makes this important argument, that as late as 1958, “While leading the work of correcting the errors in the Great Leap Forward and the movement to organize people’s communes, Comrade Mao Zedong pointed out that there must be no expropriation of the peasants; that a given stage of social development should not be skipped; that equalitarianism must be opposed; that we must stress commodity production, observe the law of value and strike an over-all balance in economic planning; and that economic plans must be arranged with the priority proceeding from agriculture to light industry and then to heavy industry.”

These are the essential tenets of the reform and opening up process under the main guidance of Deng Xiaoping 20 years later.

But, more than the authority of any quotation or document, is the verdict of historical experience. China’s astonishing economic success took place because of these reforms, which correspond to the Marxist programme. The Chinese economy continues to thrive because the CPC has successfully applied the lessons of Marxist economic theory and practice to its own historical and national conditions.

If others want to learn from China’s experience in order to apply those lessons to suit their own economic and social conditions, the factual account must take precedent.

By Tom O’Donnell

The G20 summit was an historic one. It marked a decisive change in the relative weight of the imperialist countries versus the Global South, to the benefit of the latter.

The G7 countries led by the US approached the G20 summit in India hoping for a repeat denunciation of Russia and its invasion of the Ukraine as in the Bali summit last year. A comparison of the 2 statements coming out of those summits indicates how much the world has changed in just a year. Then, the statement added to its denunciation of Russia claims that the majority of countries opposed Russia. But in a 34-page statement (pdf) the sole mentions of Russia were in relation to the negotiations brokered by Turkey between Russia and Ukraine around grain and other shipments, with hopes for their success.

The British government in particular was caught out by the changing alignments. PM Sunak had told the world, via the front page of The Times, that he was going to be lecturing PM Modi to ‘get off the fence over Russia’. Instead, there was no such instruction, and it might be said that the G20 as a group climbed up on the fence over Russia.

Of course, the change from one year to the next cannot be ascribed to long-term economic shifts. Politics takes primacy. Yet there are fundamental economic reasons why British Prime Ministers can no longer dictate to the Indian authorities. India has long since surpassed the British economy. And this relative weight in the world underpins the real relationship of forces between the two countries. This change in relative weights is so important it should be examined in a little detail.

In real terms and adjusted for Purchasing Power Parities (PPPs) the Indian economy re-surpassed the British economy in 1995 and is now more than 3 times greater in size, as shown in the chart below.

Chart 1. Indian and British real GDP in PPP-adjusted international $, 1990-2022

Source: World Bank

But the relatively sharp diminished size of the British economy means that this example has only an illustrative purpose. Naturally, the US remains the most import of the G7 countries and was the one pressing hardest for condemnation of Russia.

It is widely, if not universally accepted that the Chinese economy has re-surpassed the economy of the United States. It is certainly true using the same real, PPP-adjusted measures as earlier. According to World Bank data this happened in 2017. Now the Chinese economy is estimated to be almost 20% larger than the US, as shown in Chart 2 below.

Chart 2. China real GDP and United States real GDP in PPP-adjusted international $, 1990-2022

Source: World Bank

This is the most import change in the relative weights in the world economy. The renewed surpassing by China of the US economy is the leading factor in the transformation of the relative weights of key groups of countries internationally.

So, it is now a remarkable fact that, using the same measures of real PPP-adjusted GDP, that the BRICS countries have now surpassed those of the G7 economies as a group. BRICS comprises Brazil, India, Russia, China and South Africa.

According to World Bank data, 2022 saw the BRICS GDP rise to 43.83 trillion international dollars. This compares to the total for the G7 of 42.03 trillion international dollars. The scale of this transformation, led by China, can be indicated by reference to the relative sizes of the two groups of economies in 1990.

Then the G7 economies’ real GDP was 23.87 trillion international dollars, while the BRICS countries’ GDP was just 7.38 trillion international dollars. Over the span of 32 years, the G7 economies have not quite doubled. Over the same period the BRICS economies have grown nearly sixfold.

Without some disastrous intervention such as war, we should not expect these trends to alter. Sustained stronger growth over a 32-year period strongly suggests that the BRICS economies will continue to grow more rapidly than the G7 over the medium-term.

But there is also an important historical precedent. For much of recorded history, China and India were the two largest economies in the world. This is a natural outcome of being the two most populous countries in the world. It required military intervention in the form of invasion and colonisation to halt and then reverse their weightings in the world economy.

According to Angus Maddison data, China and India together accounted for almost 60% of world GDP from AD 1 and were still responsible for half of world output in AD 1,000. This remained true until the beginning of the 19^th century. It was only after India’s colonisation by Britain and China’s dismemberment by a series of colonial powers in the mid-19th century that this position of economic leadership was challenged and then reversed.  Even so, it was not until the end of the 19^th century that the British economy surpassed the Indian economy and the US surpassed China. As recently as the late 1930s, the Chinese economy, despite all its ravages and humiliations, was still larger than Britain’s.

Therefore, in addition to stronger medium-term momentum, it is possible to say that the relatively stronger growth of the BRICS is a restoration of the natural global economic order, a return to the world on its proper axis.

The BRICS economies have history on their side, as part of a restoration and regeneration that began with decolonisation at the end of the Second World War. This has far-reaching implications for humanity as a whole, and international relations within it.

It should also be said that every non-economic measure taken to prevent this return to the natural order is by its nature reactionary and should be vigorously opposed.

By Michael Burke

The rise in inflation is a global trend, but some countries have experienced far worse inflation than others. Britain is one of those; the only country in the G7 where inflation is not currently subsiding. This is because of fundamental economic reasons, related both to G7 policy and to Britain’s economic history.

In the near-term the outlook for inflation in Britain is grim. A number of commentators pointed out that in the most recent monthly data to May the annual rate of inflation was unchanged at 8.7%. This means inflation is now higher than France, Germany and the EU as a whole, and much higher than the US, as shown in Chart 1 from the Office for National Statistics (ONS).

Chart 1. Declining Inflation rates in the G7 but not UK

They also point out that ‘core’ inflation, which excludes food and energy prices because of their volatility actually rose on an annual basis in May. Worse, and mostly overlooked, in the latest 4 months data consumer price inflation (CPI) data have risen by 3.9%. That is an annualised inflation rate of over 12%!

Yet it is a startling fact that cost pressures on producers have been falling for over a year.  Producer price inflation (PPI) records changes in the prices of goods bought and sold by British manufacturers including price indices of material and fuels purchased (input prices) and factory gate prices (output prices). Both of these peaked in June 2022, and have now been falling for almost a year. In the most recent monthly data input prices had risen only 0.5% from a year ago and the decline in output price inflation was only moderately less dramatic at 2.9%.

Chart 2. Annual UK input and out PPI inflation rates

SEB has previously shown that all explanations which place the Ukraine war at the centre of the global inflationary trend fall apart confronted with the fact that global inflation began in the US in Spring 2020, almost 2 years before the war began.

That evidence is confirmed in Chart 2, with input price inflation in Britain rising from -4.7% in the 12 months to April 2020 to a peak of 24.4% in June 2022.

This data also explodes the myth that there is any ‘wage-push’ inflation in the economy (in fact a recent study shows that there is barely any historical evidence of wage-push episodes at all).  Currently, private sector wages are running ahead of those in the public sector, although both are falling in real terms. It is logically impossible for falling real wages to contribute to rising prices. If there were any evidence of it, it would be shown above all in manufacturing output prices. As shown, output price inflation is low and declining rapidly.

Therefore, the situation in this country is one where price pressures on producers are declining rapidly, yet price pressures on households are rising rapidly.  For example, it is virtually impossible now for the Sunak government to meet his pledge to halve the inflation rate to 5% by December.  Average monthly rises in the CPI index would need to be 0.2% for the rest of this year, compared to average monthly rises of almost 1% in the last 4 months.

Of course, the key variable between low output prices and rapidly rising consumer prices is profit margins. These have been soaring over recent months. This has become known popularly as ‘greedflation’, and is acknowledged as a real or even the dominant factor by a string of mainstream bodies such as the European Central Bank (ECB), the IPPR, bankers at UBS (pdf), as well as in the pages of the Financial Times (£).

The rise in profit margins has been conclusively demonstrated in research from University of Massachusetts Amherst, which shows US (after-tax) profit margins for non-financial firms at their post-World War II highs. The researchers’ chart is reproduced below.

Chart 3. Soaring profit margins in the US

It should be noted that this surge in US profits is not mirrored elsewhere in the G7, where profits in some cases are stagnating or even declining. It seems as if the US profits’ recovery is largely at the expense of G7 countries, and others.

The fundamental driving force behind the global inflationary wave was the policy mix adopted by the G7 countries coming out of lockdown, led by the US. Both monetary and fiscal policy were used, sometimes in an unprecedented way, to stimulate Consumption without any corresponding policy to boost Investment. The words of Agustin Carstens, General Manager of the Bank for International Settlements bear repeating,

 “….monetary and fiscal policy stimulus deployed during the pandemic gave inflation an even larger, and certainly more enduring, unexpected push. As a reminder, policy interest rates were lowered to zero, and often below. Central bank balance sheets ballooned. Fiscal stimulus since the start of the pandemic has exceeded 10% of GDP in many advanced economies – a push previously seen only in wartime.”

This stimulus to Consumption without any Investment to meet it sparked the global inflation wave. In the G7 countries themselves it also followed a prolonged decline rate of Investment (Gross Fixed Capital Formation), as shown in Chart 4 below

Chart 4. Decline In Rates of Investment (GFCF) in US, Euro Area, Japan, and UK

Source: World Bank

In a country such as Britain, with the persistently lowest level of Investment of all, the inflationary wave has naturally been one of the strongest of all. This is because the gap between the stimulus to Consumption and the structural level of Investment is the widest of all.

In terms of the policy response, the approach of the government was to provide huge fiscal benefits to companies in the form of tax breaks in each of the Budgets since lockdown.

The central bank response has been to realign Investment and Consumption by decimating the latter through high interest rates. As this fails to tackle the underlying cause of the crisis, a dearth of Investment, the only way for this policy to succeed is through potential slump. In neither case has there been any recognition of the cause of the crisis, just lots of propaganda about ‘wage-price’ inflation. As a result, the outlook for the economy is that inflation will remain persistently high and will be broken only by slump or outright recession. The result is that British economy is facing either high inflation or economic contraction or even some combination of the two.

By Paul Atkin

Irrespective of what stance you take on the war in Ukraine, or anywhere else, in March last year, US author Meehan Crist wrote the following in the London Review of Books, “One of the worst outcomes of the war in Ukraine would be an increasingly militarised response to climate breakdown, in which Western armies, their budgets ballooning in the name of “national security” seek to control not only the outcome of conflicts but the flow of energy, water, food, key minerals and other natural resources. One does not have to work particularly hard to imagine how barbarous that future would be”.

Crist’s point is simply to describe the world we already have, but a bit more so; and her prediction is exactly what is happening.

• The US has raised military spending to $858 billion this year; up from $778 billion in 2020.
• France has announced an increase from a projected E295 billion to E413 billion in the next seven years (an average of E59 billion a year).
• German spending is rising sharply, from E53 billion in 2021 to E100 billion in 2022 and is set to go further.
• Japan aims to double its military spending by 2028 and is also debating whether to start deploying nuclear weapons.
• In the UK, the government’s aim to increase military spending from 2.1% of GDP to 2.5% by 2030 comes on the back of what is already among the highest per capita military spends in the world.

• NATO, the core alliance of the Global North, already accounted for 55.8% of global military spending in 2021 before any of these increases.
• Other direct US allies – with a mutual defence pact – accounted for another 6.3%.
• So, the direct US centred military alliances account for three fifths of global military spending and yet they are now raising it further at unprecedented rates. These are the world’s dominant imperial powers, acting in concert to sustain a “rules based international order” in which the rules are written in, and to suit, the Global North in general and Washington in particular.

The carbon boot print of these militaries is not measured under the Paris Agreement. It is, nevertheless, huge and growing; and we can’t pretend it isn’t. At the moment, the carbon boot print of the US military alone is the same as that of the entire nation of France. This is incompatible with stopping climate breakdown; both in the direct impact of production and deployment, the diversion of funds which are urgently needed to invest in the transition, and the potential impact of their use – which could kill us all very quickly; particularly if nuclear weapons are used. John Bellamy Foster’s Notes on Exterminism for the Twenty First Century Ecology and Peace Movements should be required reading for both movements.

Because this military is not sitting idle. The first phase of the Wars for the New American Century – in the form of the War on Terror since 2001 – have been calculated by Browns University at 4.5 million people; three quarters of them civilians killed by indirect impacts of US and allied military interventions. The scale of this is because doctrines like “shock and awe” are not simply an impressive displays of explosive power, but specifically designed to smash energy and water systems, both clean water supply and sewage treatment, within the first twenty four hours of an intervention to reduce surviving civilian populations to a state of numbed misery and demoralisation. “Why do they hate us?” I wonder. 4.5 million people is about half the population of Greater London, or three quarters of the population of Denmark and twenty two times as many as have died in the Ukraine war so far (assuming total casualties of 200,000, most of them military on both sides). It’s a lot of people. *

Their deployment and use more widely against opponents that are more resilient than Iraq, Afghanistan or Libya- which this escalation of expenditure and increased integration of alliances makes possible – would, even if it did not go nuclear, be catastrophic both in its direct loss of lives but also in the disruption of global supply chains leading to widespread economic unravelling. According to the Australian Strategic Policy Institute, a war in the South China Sea that closed down shipping lanes would have a rapid impact regionally – “Taiwan’s economy would contract by a third, while Singapore’s economy would fall by 22%, according to the baseline estimate. Hong Kong, Vietnam, the Philippines and Malaysia would suffer falls of between 10% and 15%” – but would have a knock on effect everywhere else affecting 92% of global trade. The attempt in the Global North to set up “secure supply chains” – defining economic policy increasingly around military imperatives (“securonomics”) is not to avert such a conflict, but to make it economically manageable, and therefore more likely.

This scale of military expenditure also dwarfs their domestic investment in combatting climate change, urgently needed because the wealthiest countries put the heaviest weight of emissions on the rest of the world, both historically and through their per capita footprints now: let alone helping Global South countries develop without reliance on fossil fuels. This has a wider implication, with the UN Sustainable Development Solutions Network reporting that progress towards the UN Sustainable Development goals has been static for three years.

Pledged to commit $100 billion a year to help the transition in the Global South, more than ten years ago, they have never been able to eke out this money, have never hit the target, have tried to use loans (debt trap) instead of transfers, sought to apply conditions and control. The US contribution to that is now aiming for just over $11 billion by 2024. This is now reckoned to be a tenth of what’s needed. This is despite 66% of their populations agreeing that this support should go in, and only 11% against. The contrast with the $77 billion they have stumped up to fight the Ukraine war with no trouble at all in the last year is quite startling. News that Finland is planning to cut development aid to countries in Africa that don’t line up behind the Western line on Ukraine is an ominous sign of how far backwards this could begin to go; with any attempt at global governance through structures like the UN abandoned and notions of international obligation and mutual humanity giving way to even more overtly colonial attitudes and practices than we already have. Although the notion that the Global North can “build a wall” and keep the human consequences of climate breakdown out is a fantasy – as the climate is breaking down behind the wall too – it probably won’t stop them trying.

The USA and its allies pose themselves as “Global Leaders”. They could and should be, as they are the countries with the greatest concentrations of wealth, power and technical know how, communications and education, but they are falling horribly short; because they see leadership as the same thing as dominance – and subordinate everything else to that.

In fact, in 2022, China – usually presented in our media as a negative force on climate – invested 70% more in renewable energy generation than the USA and EU combined, just under half the global total on its own. Next year, according to the International Energy Agency, China will account for 70% of new offshore wind, 60% of new onshore wind, and 50% on new solar PV installations. So, the “international leaders” have a lot of catching up to do.

The US and EU are some way behind, and nowhere near where they need to be. Instead of investing on the scale needed to hold the global temperature increase below 1.5C, they are tooling themselves up militarily to try to deal with the consequences of failing to do so; in an effort to sustain their global dominance. If they are leading us anywhere, its to Armageddon.

A report from the US military in 2019 sums up the paradox. Reflecting that, if climate breakdown continues at its present rate, countries that are already water stressed will be getting beyond crisis point within two decades and that this will lead to “disorder”. Their conclusion was that this means that

1. they will be intervening in these crises, and

2. will therefore need to build themselves in a secure supply chain of water so that the troops who are dealing with people in crisis because their environment has run out of it, will have enough to keep them going in the field!

Reflecting further, that on our current trajectory, climate impacts within the United States itself would lead to infrastructure breaking down, followed by the social order breaking down, followed by the military itself breaking down; as it faced overstretch trying to maintain order as civil society failed. Nevertheless, they also note that the rapidly increasing melt of the Arctic ice shelves and permafrost means that new sources of the fossil fuels that are causing the crisis in the first place to be available for exploitation and that a key task for them would be to make sure that the US gets the lion’s share of them. As a study in self defeating thinking, it can’t be beat.

To repeat the point at the beginning, regardless of anyone’s stance on any given war taking place now, and who should “win” it, its this drive and acceleration of military spending that the climate and peace movements should be combining to hold back – both to avert the growing risk of conflict, because arms races tend to end in wars on the momentum of their own dynamic (which requires a lot of demonisation and conflictual stances to fuel and justify it) and to allow saved funds to be used to avert the climate crisis itself. A bottom line demand is that the military carbon boot print must be accounted for in the Paris Process and a mechanism agreed for reductions to a common per capita level, combined with common measures and investments for increased global cooperation in lock step with it.

*Casualty figures in Ukraine are easy to come by but hard to trust. 200,000 assumes a parity between the Ukrainian and Russian militaries; whereas figures from Mossad, among others, indicate significantly lower Russian losses (at perhaps a fifth to a third of the Ukrainian level) so 200,000 may be a high estimate. One notable feature of this war is that civilian casualties have been a fraction of the military losses – the opposite of the trend from the mid twentieth century onwards; during which “there has been an increase in civilian fatalities from 5% at the turn of the 19th century to 15% during World War I (WW I), 65% by the end of World War II (WW II), and to more than 90% in the wars during 1990’s, affecting more children than soldiers”. From https://www.frontiersin.org/articles/10.3389/fpubh.2021.765261/full#B12

The above article was originally published here on Urban ramblings.

By Kerry Abel

In March Ipsos last published polling outlying public attitudes towards strike action but hasn’t followed up, despite rail strikes ongoing into June 2023 and nurses and junior doctors engaged in ballots for pay and against the under-funding of the NHS. Much of the media coverage has trailed off too. We can assume this is because all the trends show that working people standing up for fair pay through their trade unions still have support from the public.

It was clear at the height of the cost of living, trade union fight back when inflation was high and pay offers were low or non-existent that the Conservative government hoped to rely on the old tropes of blaming hard line unions and that the public would fall in line and agree with how inconvenient it all was. This has led the Tories to putting the Minimum Service Levels Bill through Parliament instead of focus on the job at hand of talks to resolve the disputes.

The public however didn’t agree and vox pop after vox pop showed the general public reluctant to disagree with the trade unions. Faced with a barrage of scandals from the Tory party over their handling of the pandemic, aided and abetted by a decade of Conservative austerity, when asked to choose on balance who they side with, the side that has come out winning in 2023 is trade unions.

What the polling says

YouGov provides some evidence of the trends over the last year, all pretty much saying the same thing. 

When asked a series of questions from several angles about support for trade unions, which sections of industry should be allowed to strike and where the Labour Party – the party set up by the trade union movement – analysis of the results point us in the same direction.

The chart below, from YouGov, tracks the opinions of all adults. For further details visit the YouGov site here: Do Trade Unions play a positive or negative role in Britain today?

The view that trade unions play a positive role has had greater support than the view that they play a negative role this last 12 months. Those thinking they play a positive roll edging up from 32% – 38% since June 2022 and those thinking trade unions play a negative role has also risen, from 26% to 33%. Despite the negative trend going up over 12 months, this has dipped since November 2022, the period which saw most of the strikes.

When YouGov asked for a breakdown of which workers should be able to strike, all groups of workers who’ve taken strike action over the last year were supported by 50% or more in May 2023, including doctors, nurses, rail and Tube workers, teachers, civil servants and air traffic controllers. In each of these groups of workers more people thought they should be allowed to take strike action than those who thought they should not be allowed. The only group of workers where more thought they should not be allowed to take strike action were police officers, however even here those who support police being allowed to strike has increased this past year from 38% to 44%. The charts below, from YouGov, tracks the opinions of all adults. For further details visit the YouGov site here.

When asked if trade unions face too many restrictions, public opinion has marginally more shifted towards the government’s view than the union as to whether it is too hard or too easy for the unions to take strike action, meaning slightly more have believed the government than the trade union side in the media battle of words on this issue. The chart below, from YouGov, tracks the opinions of all adults. For further details visit the YouGov site.

Whether the Labour Party – the party set up by the trade union movement – should align more closely with the trade unions. Analysis of the results point us in the same direction (see here: What relationship should Labour have with the Trade Unions?) And whilst it’s true that the highest percentage was ‘don’t know’. From those who did answer, those who think there should be a closer relationship has gone up starkly from 16% in June 2022 to 23% in May 2023 and those who think the link should be more distant or broken have gone down significantly losing 5 points and 4 points respectively in the same time period. The chart below, from YouGov, tracks the opinions of all adults. For further details visit the YouGov site.

The case is made by the government that trade unions are anachronistic and out of touch, however the public think differently. When asked Do Trade Unions reflect ordinary working people in Britain today? support for trade unions has gone up marginally in a year. Considering this has been a year of a huge upswell in strike action that has undoubtedly affected British people in the pocket, their travel and their healthcare, this is no small trend. And those saying they don’t think trade unions reflect working people has dipped since the strikes got going. The chart below, from YouGov, tracks the opinions of all adults. For further details visit the YouGov site.

By Michael Burke

The world economy as a whole is suffering a period of significant economic slowdown and surging prices. The effects of these trends are uneven. In general workers and the poor in the richest countries are getting poorer as real incomes fall. In many countries of the Global South the situation is much worse, with outright misery commonplace along with the growth in hunger.

The causes of the crisis have generally been obscured. A number of spurious explanations have been put forward as to the cause of the crisis; the war in Ukraine, ‘bottlenecks’, wage inflation, even bad weather.

The true cause of the crisis was the synchronised economic stimulation policies of the G7 countries, both monetary and fiscal policy, without any corresponding increase in Investment. Equally, as the G7 countries have largely been unwilling to unwind or reverse these policies the crisis has persisted for far longer than many had hoped or forecast. Inflation has generally remained persistently higher than forecast, and the policy response of higher interest rates will only exacerbate the slowdown without addressing the underlying cause of inflation.

Unless that policy mix in the G7 changes, prices will continue to rise at a destructive rate even as inflation slows and the world economy will remain sluggish or stagnant. Yet there is no sign of current policy being reversed.

Instead, there is a general trend, which began in the US to add protectionism to the toxic mix. This was marked by the introduction of the US’s ironically named ‘Inflation Reduction Act’, which is thoroughly protectionist. Other G7 countries and the EU as a whole are responding in kind. This is a recipe for deepening economic crisis, not alleviating it.

Exploding Myths

The myths about the causes of the crisis are now so well-established in both economic debate and popular discussion that it is necessary first to debunk them. Fortunately, this is a relatively easy task, by reference to the facts.

Chart 1. below shows the year-on-year growth rate of consumer prices (CPI) in the US economy. US CPI growth hit a low of 0.2% in May 2020 as the economy had slowed sharply following the failed attempts in curbing the Covid virus and lockdown. But once lockdown was ended and (as we shall see) economy policy changed, then US prices started to rise rapidly. By February 2022 CPI had reached 8%, and eventually peaked a few months later at 8.9%.

Chart 1.  US Consumer Price Inflation (percentage change, year-on-year)

February 2022 is an important date in the mythology of the current crisis, because it was at the end of this month that Russian forces moved into Ukraine and began this phase of the military conflict. The logical problem with ascribing the surge in prices to the war, as most Western commentators have done over a prolonged period, is that the inflation wave began almost two years earlier, in May 2020 as the Chart shows.

In addition, the bulk of the rise of in prices took place before the war, from 0.2% to 8%. Finally, inflation has actually been subsiding for most of duration of the war, from June 2022 until now.

A similar pattern is identifiable in the other advanced industrialised economies, with some national variation, as shown in Chart 2 below. The rise in inflation was not caused by the war. So the claims by President Biden and other who have called it, ‘Putin’s gas price rise’, are simply to deflect responsibility.

At most, some prices of some important commodities received an initial push higher because of the war, but that effect has long subsided.

Chart 2. US Consumer Price Inflation (percentage change, year-on-year)

The rise in inflation was not caused by the war

Another of the widespread false explanations offered is that there was a sharp rise in ‘bottlenecks’ that occurred during the lockdowns in the G7 countries and elsewhere. All manner of supply disruptions did take place during the lockdowns. But it is possible to discount genuine factors such as the difficulty of shipping finished goods, for example. An unwanted build-up of unsold finished goods would have the effect of lowering prices, as producers discounted prices to shift goods.

Conversely, if producers cannot easily access either basic commodities or intermediate goods (goods which require further manufacture before they become a finished good), then they will tend to bid up prices and so add to inflationary pressures.

Yet, according to data from the World Trade Organisation (WTO) the shortage of these inputs was both shallow and short-lived. Production bottlenecks did not cause the rise in global prices, as shown in the WTO chart reproduced below.

Chart 3. World Exports of Commodities and Intermediate Goods, quarterly, US$ trillions

Source: WTO

The remaining explanations advanced include the weather and wage inflation. It seems inevitable that climate change will cause large-scale and severe economic disruption. But the climate crisis is a continuous process and there are no specific weather patterns which would have caused such a sharp, global rise in prices. This is especially true as the major commodities initially leading prices higher were oil and gas. Climate change cannot explain the slow decline in inflation which is under way.

In contrast, there has been the rise in widespread labour shortages reported in many countries, and a genuine labour component of what can be described as ‘bottlenecks’. However, in the G7 countries which have led prices higher, there is no evidence of an effect on prices, particularly the price of labour.

Instead, what has taken effect is a large downward pressure on real wages in many of the G7 countries. This is inexplicable to those who argue that wages are set by the laws of ‘supply and demand’. If that were true shortages of labour would lead to higher wages. In reality, wages are set through the all-round struggle between classes. The policy pursued by the G7 governments is to lower real wages.

Chart 4. below is reproduced from the International Labour Organisation (ILO) Global Wage Report 2022-23.

It shows the medium-term growth in real wages globally. 2022 was unprecedented in falling global real wages. This did not occur even in the Global Financial Crisis of 2007-08. (Note too that global real wage growth in real terms is on average 0.6% lower when China is excluded. So much for the idea that China’s high levels of Investment are detrimental to popular prosperity).

Chart 4. Global Wage Report 2022-23 (ILO)

G7 policy caused this crisis

This factor is crucial in understanding the dynamic of the current crisis. Through the mechanism of inflation, in which real wages and other fixed incomes are lowered while profits are allowed to rise sharply, there is a sharp redistribution of incomes from workers and the poor towards big business and the rich.

The subsequent policy of raising interest rates by the central banks is billed as curbing an inflation that was created by official policy. But the further effect of those interest rate rises is to transfer incomes and wealth from small businesses, mortgage-holders and consumers to banks, big businesses and the owners of capital.

Naturally, G7 governments themselves are reluctant to accept the blame for the crisis. This leads to the string of explanations that have been offered that do not at all correspond to the facts.

However, in some of the more secluded areas of public debate where policy is discussed by those who advise policy makers in the leading economies and away from mass access, the veil has occasionally been lifted to reveal the true picture.

Below are small extracts from two research papers, which speak for themselves:

“Our findings suggest that fiscal stimulus boosted the consumption of goods without any noticeable impact on production, increasing excess demand pressures in good markets. As a result, fiscal support contributed to price tensions. Indeed, focusing on inflation through February 2022 which does not capture many disruptions associated with the war in Ukraine, we show that countries with large fiscal stimulus, or with high exposure to foreign stimulus through international trade, experienced stronger inflation outbursts.” –

Fiscal policy and excess inflation during Covid-19: a cross-country view, FEDS Notes, Board of Governors of the Federal Reserve System

And

“To mitigate the health and economic fallout from the COVID-19 pandemic, governments worldwide engaged in massive fiscal support programs. We show that generous fiscal support is associated with an increase in the demand for consumption goods during the pandemic, but industrial production did not adjust quickly enough to meet the sharp increase in demand. This imbalance between supply and demand across countries contributed to high inflation. Our findings suggest a sizable role for fiscal policy in affecting price stability, above and beyond what a monetary authority can do.” –

Demand-Supply Imbalance in the COVID-19 Pandemic: The Role of Fiscal Policy, Economic Research, Federal Bank of St Louis

Here the central bank economists and analysts could not be clearer: It was the role of G7 governments in stimulating the economy without any corresponding increase in production which caused inflation. Or, it can be put in another, starker way. The policy in the G7 was to stimulate Consumption, not Investment and the result was inflation.

However, it has been left to one of the world’s most senior central bankers to admit the role of the central banks’ monetary policy, not just government fiscal policy, in causing inflation:

“….monetary and fiscal policy stimulus deployed during the pandemic gave inflation an even larger, and certainly more enduring, unexpected push. As a reminder, policy interest rates were lowered to zero, and often below. Central bank balance sheets ballooned. Fiscal stimulus since the start of the pandemic has exceeded 10% of GDP in many advanced economies – a push previously seen only in wartime.”  –

Monetary and fiscal policy as anchors of trust and stability, speech by Agustín Carstens, General Manager, Bank for International Settlements, at Columbia University, New York, 17 April 2023.

In fact, it has for some time been shown that it was G7 policy, both excessive government Consumption and monetary stimulus without Investment, which was the real cause of the crisis. Under the self-explanatory title, Global economic destabilisation was made in the US not in Ukraine, John Ross demonstrated that it was the reckless monetary and fiscal policies of the US which was the main cause of the crisis.

To this we can now add the following subsidiary but important points:

• This completely reckless policy was shared across the G7 in varying degrees
• All other explanations for the crisis have been shown to be false
• That the crisis was caused by G7 policy is now admitted, discreetly, by the central bankers themselves.

What next?

The G7 central bankers have decided to attempt to curb inflation by increasing borrowing costs rather than reining in excessive monetary stimulus or publicly suggesting that governments do the same with fiscal stimulus (which has overwhelmingly gone to big business). Never once have they suggested addressing the ‘demand-supply’ imbalances they have identified by increasing supply, that is, by significantly increasing Investment.

In the process of pushing interest rates higher, it is widely understood that interest rates charged to borrowers have risen far greater than the savings rates. The result is a huge increase in the profit margins of the banks. Just as with the profiteering of energy firms and both food producers and retailers who have taken advantage of the initial price surge by fattening profit margins, G7 governments could step in and impose price controls and windfall taxes, nationalising those who will not comply. But they have chosen not to.

This itself reveals that the current crisis is an all-round class offensive, which in a period of economic stagnation blatantly enriches further big business and the rich at the expense of impoverishing workers and the poor.

As noted earlier, this same offensive now includes increasing protectionism. Biden explicitly sold the Inflation-Reduction Act as a measure to protect household incomes and American jobs. It will do precisely the opposite.

Trump’s earlier protectionism raised prices and did nothing to protect jobs. As tariffs are paid either by importing businesses or consumers, domestic prices rise. At the same time, jobs tend to be exported to lower-tariff markets. Trump boasted that his protectionism would push GDP growth to 4% or above. In reality, average annual growth in his presidency was under 2.3% and continued the long downtrend in US growth rates.

This was predictable and predicted. That type of protectionism (of existing industries) has never worked, and the last time it became universal policy in the industrialised countries in the 1930s it led directly to slump followed by world war.

Bidenomics embraces Trump’s protectionism on a larger scale. European and British leaders pretend to welcome the measures while pleading for special treatment and exemptions.  The upshot of this protectionism will be slower growth, fewer good jobs and higher prices than there would have been otherwise.

Global South debt

Yet, despite this level of economic difficulties, it is many countries in the Global South which will bear the brunt of the G7-induced crisis. In its recently released Global Economic Prospects the World Bank suggests that the economic growth of the Global South excluding China will fall from 4.1% in 2022 to 2.9% in 2023. The expectation is that the number of countries experiencing debt distress (and rising risk of default) will rise from the present number of 14.

The World Bank is clear that rising interest rates in the US are the cause of the nascent Global South debt crisis, even titling one chapter, ‘Financial spillovers of rising US interest rates’.  This is a valid assessment of the process, reflecting the fact that the overwhelming bulk of Global South international borrowing is denominated in US Dollars.

When US domestic interest rates rise, Global South borrowers are obliged to increase the premium they must pay over US debt. But this comes at a time when, as previously noted, growth is also slowing markedly. This economic slowdown also tends to depress US Dollar-denominated export earnings in the Global South economies. This in turn reduces their capacity to meet interest payments on existing debt or renew existing borrowing.

It is not the case that in general the Global South economies are relatively highly indebted. Taken in aggregate public debt in the Global South has been relatively stable and much lower as a proportion of GDP than in the advanced industrialised countries. This disparity is shown in Chart 5 below.

Chart 5. Public debt as a proportion of GDP in the advanced industrialised countries and in the Global South

Source: ILO

Naturally, there are specific instances of much higher public debt of some countries in both regions. But it cannot be said that it is generally high Global South indebtedness which is the cause of the debt crisis. It is the combination of factors of dependence on the slowing G7 economies, the impact of higher US interest rates and above all the existing levels of very high interest rates on public debt, whose gap over US domestic interest rates tends to rise even as US rates are rising.

In short, the crisis is caused by US dominance of global financial markets and the impact that has on the borrowing costs of the Global South. This aspect of the crisis is still developing and may have much further to run, depending on the trajectory of US domestic interest rates.

We are all going to pay the price for the failed economic ideology and reckless policies of the G7 governments and central bankers. But some will pay more heavily than others.