By John Ross
This US propaganda claim of ‘strong growth’ is in fact the reverse of the facts.
But establishing these facts is critical for judgement of the situation in the trade dispute with the US. .
The entirely false economic claims of Trump
US Post-War Business Cycles
Growth under Trump – the US method of measurement
Real US year on year growth
The state of the US business cycle
The above article was published first in English by New Cold War.
.947ZAusterity isn’t over. It will resume, but it has been suspended for one yearBy Tom O’Leary
The claim for the latest Tory Budget is that ‘austerity is coming to an end’, and has been dutifully echoed by the Tory press and the BBC.
In reality austerity policies will continue long into the future, extending the longest recorded fall in living standards in this country. The exception is the calendar year 2019, where both Government Consumption and Investment will rise as a one-off, before planned cuts in future years.
The Table shows there is an increase on both Government Consumption and Government Investment in 2019. They are both much higher, relatively speaking than in the two preceding years 2017 and 2018. It is also important to note that the growth rate of both these sector of Government outlays fall away again in subsequent years. Both of these were also revised substantially higher solely for 2019, compared to the March 2018 Spending Review, whereas other years have almost all been revised lower compared to March.
The OBR Table also reveals a deep and abiding pessimism about economic prospects. By 2023 this business cycle will be very mature, as the last recession ended in mid-2009. Yet even without a renewed downturn real GDP growth is officially projected to average no more than 1.5% annually over the entire period. Chancellor Hammond explicitly states that the trend growth rate for the economy has been lowered by the financial crisis. On official forecasts, sluggish growth is the new normal.
The driving force of the economy is Investment, and with it the increasing participation in the division of labour through foreign trade. This is not the OBR’s framework, which remains stuck in a neoliberal/Treasury paradigm that Consumption drives growth. Even so, the OBR’s forecasts are noteworthy for expecting no increase in net trade, and the worst ever growth rate of fixed Investment over such a prolonged period.
Without better growth than is forecast, it is extremely difficult for living standards to rise.
Crucially, the OBR expects corporate profits to slow even further from 3.5% growth recorded in the first half of 2018. It projects that the slowdown will continue with just 2.8% profits’ growth in 2019 and only matching the average real GDP growth rate for the economy in further years.
It also notes that business Investment has risen by just 1.9% in the two years since the EU referendum and fell outright in the first half of this year. If the OBR is even close in its assumptions about profits, it is difficult to see where any rebound in business Investment will come from.
In fact, with weak growth from both business Investment and the Government, the OBR’s entire forecast even of very weak growth rest on a renewed increase in household indebtedness. The Chart below is Chart 3.23 taken from the OBR’s Economic and Fiscal Outlook to accompany the Budget.
By Tom O’Leary
The overwhelming majority of this rise has been in the same two categories, Professional and Professional and technical occupations. Together over the last 17 years the number of people in these two occupational categories has increased by 4.2 million workers. This represents most of the net change in jobs over the last 17 years. The Professional category alone has almost doubled over 17 years.
Other important changes have also taken place, aside from these skills-based changes. Table 1 sets out some of the key changes in the composition and terms of employment over the same period. Rounding means some categories will not sum to the total.
The conscious and persistent efforts to widen the casualisation of the workforce have registered some victories over the period. Despite this it is important to note that the biggest single change in the workforce has been in the growth of full-time workers, representing more than two-thirds of the total increase.
They are not ‘Managing Directors’, senior bank executives, or managers of NHS Trusts and so on. These are in the first ONS category of Managers, Directors and Senior officials, and their number has sharply declined over the period, as shown above. Instead, they are teachers, doctors, nurses, accountants, finance and ICT professionals.
The five biggest categories of professional jobs all range between approximately 1 million and 1.5 million workers. In descending order, business and statistics (eg, accounting/auditing), teaching, health, ICT and sales jobs account for 6.57 million workers. This is of a total of 11.19 million workers in these Professional categories.
Clearly, there are different trends at work. The growth of the already outsized British finance sector has continued, registering little impact of the financial crisis. In addition, the tightening or at least greater complexity of the regulatory and accounting regime governing British firms continues to generate jobs, although the performance of British firms or their regulation has not noticeably improved. But firms are also increasing their capacity in certain limited areas, such as IT and in sales. At the same time, certain key (mainly public sector) jobs continue to grow in health, teaching and social welfare (including social work and housing).
Politics and workers
The current categories were re-designated in 2010 to reflect changing skills (nursing saw a big rise in required skill levels) but the current types of classifications were introduced in 1990. Other versions go back much further.
These categories are over 50 years old and are tool of advertising analysis used by publishers and advertisers in the National Readership Survey, solely in Britain. These are completely non-Marxist, that is non-scientific categories. It is arguable that there may have been some alignment between these categories and social classes when the NRS was formulated, but now they lead only to utter confusion.
The categories C2DE include both lesser-skilled workers, as well as those at the margin of the workforce and pensioners. It should come as no surprise to any observer of British politics that, unfortunately, pensioners overwhelmingly do not vote Labour. They are also the single biggest category, with over 12.5 million pensioners in the UK.
Similarly, it is widely arguedthat the Leave vote was a workers’ vote on the same spurious basis, and that the Remain vote was concentrated among the liberal, metropolitan elite. Northern Ireland and Scotland are not normally included in such categories, and they both voted Remain by some margin. So too did most of the cities including London, Leeds, Glasgow, Edinburgh, Bristol, Manchester, Cardiff and Belfast, Leicester and Newcastle. In general, workers live in cities and predominate there.
Class categories are actually based on social relationship to the means of production. Owners of the means of production are the capitalist class. Those who own virtually nothing except their own labour which they are obliged to sell are proletarians. Others form intermediary layers. The last several decades have in part actually been characterised by the proletarianisation of many professions, including teachers and doctors and other medics, as well as the numerical growth of those professions.
Likewise, a Labour victory depends on appealing to that combination of the workers and all the oppressed. These must first be correctly identified, taking account important changes and building support by championing the interests of the workers and the oppressed in their totality.
By Tom O’Leary
Portugal is finally on the brink of ending the slump that began with the Great Recession at the start of 2008. But the economy remains far from a full recovery and important challenges lie ahead for the Left-supported government.
In the 1stquarter of 2018 the level of Portuguese GDP rose once more and is now just 0.75% below its level of the 1st quarter of 2008, which was immediately followed by recession. At some point this year the economy will finally surpass its pre-recession peak level. The low-point of the recession was reached in 4th quarter of 2012.
From the pre-recession peak in early 2008 to the low-point of activity and the end of 2012 the economy contracted by 9.6%, one of the sharpest falls in the whole of Europe (although less than half the depth of the Greek catastrophe). Since the end of 2012 the economy has been expanding.
The content of the crisis was twofold. Consumption fell by €15.1 billion, taking both government and private Consumption together. Investment fell by the even greater amount of €16 billion, even though Investment was a far smaller proportion of GDP. In percentage terms Consumption (private and government combined) fell by 9.7% in the slump, in line with economy as a whole. Investment fell by a far greater amount in percentage terms, down 36.25%.
As with other countries, the main driving force of the Portuguese crisis was therefore the slump in Investment. Chart 1 below shows the change in real GDP and its components during the slump. Net exports rose over the period, partly off-setting the sharp falls on other GDP components. But this was overwhelmingly due to a slump in import demand, not a surge in exports.
The impositions of the Troika have had a devastating effect on the Portuguese economy. The ‘bailout’ was not for Portuguese workers and the poor. It was a bailout of the creditors of the Portuguese government, who included both Portuguese and international banks, as well as investment and hedge funds, and other vultures. Vicious austerity was the price the Portuguese population was made to pay. They were also burdened with the debts of the creditors.
It is important to register the actual timeline and causality of the crisis. The Portuguese government did not apply for Troika a bailout until April 2011. The government had already imposed austerity measures of its own under the pressure of European Central Bank, the ratings’ agencies and others. Before the bailout of creditors the economy had already contracted by 3.1% and Investment had fallen by 20%. This was a crisis initiated by Portuguese and international big business, and a government acting in their interests. The Troika formalised and deepened that process.
Turning to the recovery, as Chart 2 below shows, that expansion has clearly accelerated since the beginning of 2016. This coincides with the new government in office, the Socialist minority government supported by the Left Bloc, the Communists and the Greens.
The acceleration under the Socialists is clear from the evidence. In the first 3 years since the economy began to expand once more, from 2013 to 2015 GDP rose by just 4.2%. But the signifcant acceleration in growth from 2016 onwards means the economy has expanded by 5.3% in little over two years.
The sharp change of policy under the new government is associated with the acceleration of growth. The Socialists, and the other parties supporting it in forming a government, stopped imposing new austerity measures. This alone has been enough to prompt an economic recovery.
To be clear, it is not increased government spending which has caused a recovery. The government has not increased its own Consumption at all. According to OECD data the annual level of government Consumption was €34.256 billion in the 4thquarter 2015, the last of the outgoing government. It was barely changed at €34.494 billion in the 1st quarter of 2018. The idea that increased government ‘stimulus spending’ has prompted Portugal’s recovery is not factually correct.
Instead, the government stopped imposing new austerity measures. This allowed a rise in private Consumption, and an increase in Investment, which is shown in Chart 3 below. Investment remains very far from recovery. But it has been on an accelerating trend. In the 3 years after 2012 when the economy began to expand once more, Investment rose by 9.0%. In little more than two years of the Socialist minority government investment has increased by 14.6%.
The decisive factor in continuing to ensure sustained growth will be to extend and improve this upturn in Investment.
As already shown, the fall in Investment was the decisive element in provoking the recession. The major fall in living standards came later, imposed by the Troika. In order to maintain recovery, raise living standards and undo the impact of the crisis, the further expansion of Investment is required.
Before the crisis, Investment comprised over 22% of GDP. It is now just 16% of GDP. If that Investment share of GDP is not restored or improved, it will be difficult to sustain the same pre-crisis levels of growth in living standards. General government Investment (Gross Fixed Capital Formation) has only just begun to turn up. Chart 4 below shows the Nominal level of general government Investment.
Given the time leads for Investment (in transport, infrastructure, affordable housing, ports and so on) the new government can only be responsible for the level of public Investment in 2017. This showed a modest upturn.
The private sector cannot be relied on to maintain increased Investment. The Government must significantly increase its own Investment to maintain recovery over the medium-term, and to underpin rising living standards.
The IMF has called on the government to increase lending to small and medium-sized enterprises (SMEs). This is entirely the wrong prescription. SMEs will never deliver the large-scale Investment the economy requires, or direct towards the areas required, in housing, infrastructure, transport, new technologies and so on. Instead, the government should invest on its own account to achieve the increase in the productive capacity of the economy that is required.
How precisely that is achieved would require detailed knowledge greater than the current author’s. But the following options would come under consideration:
*Borrowing for investment – a public sector budget surplus is now expected and Eurozone government interest rates are extremely low
*Pressing for increased investment from the European Investment Bank and other supranational bodies
* Using remaining state-owned companies to increase their own investment
*Encouraging productive (not speculative) Investment in the real economy through Foreign Direct Investment.
By Tom O’Leary
The multi-faceted attack on Jeremy Corbyn’s leadership of the Labour Party continues to include unjustified attacks on his economic policy. The liberal press, led by The Guardian and The Independent mounted a completely specious attack on his economic policy, even claiming that he was adopting the economic nationalism of Donald Trump.
Anyone who read the speech would know this is untrue. Instead, Corbyn was offering a sharp critique of the ruling economic ideology, which has for decades argued that finance and banking was the key to prosperity. “We’ve been told that it’s good, even advanced, for our country to manufacture less and less and to rely instead on cheap labour abroad to produce imports while we focus on the City of London and the financial sector,” Corbyn said.
But advocates of that economic model Britain, which has effectively adopted since Margaret Thatcher in the 1980s, also hit back. Because of the crash, their overt rallying cry cannot be to subordinate everything to the banks and the finance sector, which was Thatcher’s rallying call. Instead, it is to downplay the role of manufacturing and deride any attempt to revive it. It is also claimed that services are much more important. As banking, finance and their related services such as financial accounting, financial law and so on, are the largest, most profitable parts of the services sector, it is easy to see that this is the Thatcherite argument in a new, less open form.
The verdict of history
The verdict is clear. In the 30 years prior to Thatcher UK GDP rose by 145%. In the 30 years including her tenure and subsequently the economy grew by just 114%.
Far from reversing the relative decline of the British economy, the Thatcherite model accelerated it.
Why manufacturing matters
The Thatcherite, or neoliberal argument against manufacturing is that it is old-fashioned and outdated. Modern economies, it is argued are increasingly based on services.
The greater output of manufacturing as compared to services sectors allows both greater reinvestment and higher pay. Crucially, manufacturing outputs are also the inputs for a host of other sectors, including energy, construction and many service sectors themselves, including transport, storage, communications and distribution. A weak manufacturing sector hampers the ability to develop all these other sectors.
This is nothing to do with economic nationalism. On the contrary, as an advanced industrialised economy, the manufacturing sector in Britain is one of the sectors most integrated with the world economy. It is often an important link in a Europe-wide or even global supply chains. To take the car industry, about one-third of all inputs to the British car industry are imports. At the same time, almost 80% of all cars produced here are for export, and 55% of all engines manufactured here are for export.
The complexity of these supply chains and the interconnection of markets can be highlighted in the following way: In 2016 the top 5 UK goods imports were all manufactures, electrical machinery, mechanical machinery, cars, ‘other manufactures’ and medicinal and pharmaceutical goods. Together they accounted for 42.9% of all imports and amounted to £185 billion. They are almost mirrored by the top 5 goods exports of mechanical machinery, cars, electrical machinery, medicines and pharmaceutical goods and aircraft, which together accounted for 45.4% of all exports and amounted to £132 billion.
It is not the case that British Minis are being sold Germany, while German BMWs are being sold here. The reality is that components of both are researched, designed, tested and manufactured in both countries, and many more besides. The value added per British car worker is almost £100,000 per annum, which as far greater than the UK workforce as a whole (by more than 50%). A decisive element of the high value-added is this integration in highly specialised multinational supply chains.
Participation in the international socialisation of production/division of labour is decisive for the development of the economy, on which prosperity depends. Anything that develops manufacturing, one of the sectors most linked to the world economy, will enhance that process, which is what Jeremy Corbyn proposes to do. By the same token, anything that blocks or interrupts the economy’s links to the rest of the world will also hit manufacturing hard.
The crisis in the NI economy never really ended
By Tom O’Leary
The latest release of key data for Northern Ireland (NI) has had business organisations wringing their hands about the weakness of the economy. The CBI said the economy “looks to be on the brink of recessionary territory” after the economy contracted in the 1st quarter of 2018. In fact, the economy has contracted in three of the last four quarters.
But this is not a short-term problem. Over the longer run, it is clear that NI economy has never recovered from the Great Recession. It remains in a crisis.
Chart 1 below shows a comparison of overall growth rates for NI, Scotland, for the UK and for the Irish Republic (RoI). It is reproduced from the Northern Ireland Statistical Research Agency (NISRA).
The Northern Ireland Composite Economic Indicator (NICEI) is very far from being as authoritative as a measure of GDP. But it is the most advanced measure so far developed, and movements in the Index are likely to be good indicators of the trends in NI output overall.
The chart shows that the overall level of output in NI has been exceptionally weak even on a comparative basis. This is highlighted in the table below, which shows the level of growth since the low-point of the recessions in the respective countries or regions, as well as the level of growth since the 1st quarter of 2006, the first available data.
**NICEI, others GDP
Even if the data for RoI is disregarded entirely, based on the widely remarked upward distortions to GDP, the comparative performance of the NI economy has been miserable. This is despite the fact that UK-wide and Scottish growth rates have themselves been extremely weak over the period.
[The economy of the RoI has hugely inflated GDP levels, based on the government policy of attracting spurious investment from overseas, which is in reality a tax avoidance scheme. As a result, much economic data is meaningless. However, on one real measure RoI’s total real wages have risen by a very slow 7.4% over the last 10 years. Yet even this miserable level compares favourably to -3.75% for the UK over the same period].
As the Table shows the NI recession lasted 3½ years to 4 years longer than elsewhere. The NI recession only ended in the 2nd half of 2013. The recovery since that low-point has also been minimal. And the level of output in the NI economy still remains more than 4% below its pre-recession peak. The other economies have all recovered, at least to some extent.
Looking wider, most of the EU countries hit hardest by the Great Recession have made some sort of recovery, including Spain and Portugal. Italy is one of the worst-performing major economies in the world. Since the 1st quarter of 2006 the Italian economy has contracted by 2.4%. But the NI economy has been even worse. Only the ravages inflicted on Greece in the interests of its creditors put it in a separate category, having contracted by 21% since the beginning of 2006.
Disastrous public-private partnership
The disastrous performance of the NI economy has two sources, both the private sector and the public sector. As Chart 2 below shows, both the private and the public sectors have contracted since 2007. When the Tories came to office in 2010 they abruptly reversed the growth in the short-term rise in the public sector, which had been promoted in 2009 in response to recession.
Meanwhile, the NI private sector went into recession at the beginning of 2007, probably reflecting its links to and dependence on the private sector in RoI, where the recession began before the recession in the UK.
By John Ross
· The author is a specialist on China’s economy – having written over 200 articles on it, published in English, Chinese, Spanish, Portuguese, French and Russian over a 26-year period.
· He was directly involved in some economic discussion in Venezuela during the period of Chavez, including directly with President Chavez (articles related to this in Spanish and English may be found at http://thevenezuelaneconomy.blogspot.com/).
However, the author has insufficient knowledge of the detailed situation in all Latin American countries and this article does not deal with directly political issues. This article therefore only deals with certain key economic issues which can be clearly seen both in the trends in Latin America and in comparison, to Asian countries – particularly China. It is therefore circulated for discussion in the expectation of inevitable criticism and improvement – these are greatly welcome.
The new wave of social struggles in Latin America
· The election of the new left President of Mexico, Andrés Manuel López Obrador, popularly known as AMLO, is an important advance for the whole left internationally, especially in the Americas.
· Polls show that in Brazil Lula would win the Presidential election – which is why a fraudulent state policy is being carried out to imprison him and ban him from the election.
· A new economic crisis in Argentina has forced its neo-liberal government to humiliatingly go to the IMF – discrediting it and launching a new round of social struggles.
Confronted with this situation the Latin American right is increasingly using a strategy proposed by the US of ‘lawfare’ – that is the use of an unelected judiciary, which in reality is controlled by the right and the US, to block popular politicians.
The ‘Brazil Wire’ news service carried an excellent description of strategy noting: ‘ The US has launched a new kind of war on Latin America and it’s called “lawfare”: using the local legal system to oust unfriendly but democratically elected politicians while ignoring corruption by their allies on region’s far right.’
This noted the launching of this strategy to deal with the ‘pink tide’ of the election of left wing governments in Latin America: ‘Hillary [Clinton] gave a speech in 2009 in which she said, “having a functioning democracy isn’t enough in Latin America, we have to support these countries to have strong, independent judiciaries.”’
This strategy also drew on the experience of the right wing in Italy, where similar methods were used a decade earlier to install entirely corrupt governments which carried through massive privatisations. There is a direct link of this to the Lava Jato (Car Wash) campaign being used against the left in Brazil: ‘in 2004 Lava Jato’s inquisitor judge Sergio Moro published a paper called “Considerations of Mani Pulite”, his interpretive thesis on the 1990s Italian – with US cooperation – anti-corruption probe which decimated Italy’s political order, in particular its center-left, and paved the way for both the political emergence of Silvio Berlusconi, the most corrupt leader in its history, and a wake of privatizations of its massive public sector nicknamed “the pillage of Italy”. Mani Pulite in particular, its use of the media to whip up public indignation and support of convictions served as the prototype for Moro’s own operation Lava Jato, launched a decade after his paper…. this new intensified order of privatization, all starting with a scam corruption trial causing media indignity and the overthrow of democratically elected governments with social welfare programs, only to be replaced by truly corrupt leaders who sell off all the goods’’
The bias in such right wing campaigns was blatant: ‘two of the former presidential candidates from the conservative PSDB party, which is the main conservative opposition to PT in Brazil and a long time friend of the United States, have been implicated in tens of millions of dollars worth of bribes with audio and video evidence and had all charges thrown out against them, even though you can just go online and see the evidence yourself, whereas ex-president Lula was given a 9.5 year prison sentence for supposedly receiving $200,000 worth of reforms on a luxury apartment that the prosecutors and judges – who are the same people in this investigation – cannot prove that he ever owned or set foot in. There’s no proof. Lula himself recently said in a speech, “the least they could do is give me the deed to this place.” So it is very selective. You don’t see any politicians from the conservative PSDB party going to jail in Brazil over this…
‘there is a general consensus among the majority of the Brazilian people that this is a witch hunt against Lula. The majority of the people consider him to be innocent. 96% of the Brazilian people reject the Coup president Michel Temer. He’s got a 4% approval rating. And I would also say that most people, probably slightly over a 50% majority, believe that Lava Jato is a witch hunt targeting the PT party, that has had disastrous results for the Brazilian economy.’
The aim of this ‘lawfare’ is to prevent left wing politicians running for office who would be elected, or to attempt to block them in general from campaigning on policy within their countries. This anti-democratic ‘lawfare’ has seen:
· Lula blocked from running for president in Brazil – as already analysed.
· In Argentina former left President Cristina Fernández de Kirchner has been charged with treason, a crime punishable by 10 to 25 years in prison. The right-wing government, in office since 2015, was already unpopular before it signed a bailout deal with the IMF and its support is expected to further decline. Kirchner would be a strong candidate for next year’s Presidential election, so the aim is to block her from running.
· On 3 July the National Court of Justice of Ecuador ordered the preventive detention of the country’s former President Rafeal Correa and requested that he is extradited from Belgium where he is currently living.
Confronted with this assault on democracy and social progress the first and unconditional requirement is international solidarity from progressive forces in every country.
The second issue, however, is preparation of the struggles by an analysis of the strengths and weaknesses of the previous ‘pink tide’ in Latin America – the series of left wing governments that were elected across the continent from 2000 onwards.
Political success and economic success – Bolivia and Nicaragua
· In Bolivia Evo Morales was elected President in December 2005 and has been re-elected to office ever since. The Bolivian economy has grown in every year since Morales was elected with the total expansion of per capita GDP up to the end of 2017 during his term being 46% with an annual average growth rate of per capita GDP of 3.2%.
· In November 2006 Daniel Ortega was elected President of Nicaragua and has been re-elected to office since. The Nicaraguan economy has grown in every year since Ortega was elected with the exception of 2009 when it was hit by the international financial crisis. The total expansion of per capita GDP up to the end of 2017 during Ortega’s turn in office has been 38% with an annual average growth rate of per capita GDP of 3.0%.
It should be recalled that GDP is divided into two parts:
· Inputs into production, that is investment – in Marxist terminology Department 1 of the economy
· Consumption which, by definition, is not an input into production – Department 2 of the economy in Marxist terms.
As ‘nothing can come from nothing’, only inputs into production can increase economic output. Figure 2 shows how an increasing proportion of the economy devoted to fixed investment underpinned Bolivia and Nicaragua’s economic growth.
· The percentage of fixed investment in Bolivia’s GDP rose from 14.3% to 20.8%.
· The percentage of fixed investment in Nicaragua’s GDP rose from 24.9% to 30.1%.
This high/rising percentage of fixed investment in GDP is in line with the pattern, as will be shown below, of the successful Asian socialist economies such as China.
Economic success, political defeat due to betrayal– Ecuador
Rafael Correa was elected President in December 2006. He was re-elected President to three terms as president until 2017. His successor, Lenin Moreno, was the nominee of Correa’s party Alianza País. However, in office Moreno subordinated the country to the US. To attempt to block Correa’s support in the country the fraudulent arrest warrant already noted was issued in July 2018.
Despite great economic obstacles in Ecuador, which does not even have its own currency but uses the US dollar, great economic and social progress was made under the Correa government as clearly summarised by the US Center for Economic and Policy Research (CEPR).
· Annual per capita GDP growth during the past decade (2006–16) was 1.5%, as compared to 0.6% over the prior 26 years.
· The poverty rate declined by 38%, and extreme poverty by 47% percent. The reduction in poverty was many times larger than that of the previous decade.
· Inequality fell substantially, as measured by the Gini coefficient (from 0.55 to 0.47).
· The government doubled social spending, as a percentage of GDP, from 4.3% in 2006 to 8.6% in 2016.
· Public investment increased from 4% of GDP in 2006 to 14.8% in 2013, before falling to about 10% of GDP in 2016.
This increase in the proportion of fixed investment in GDP in Ecuador can be seen in Figure 2 above – it rose from 20.9% of GDP in the year before Correa was elected to a peak of 27.6% of GDP in 2013.
In 2015-2016, in addition to problems created by the increase in the exchange rate of the dollar, with no ability to devalue, Ecuador was struck by severe natural disasters such as the eruption of the Cotopaxi volcano and the El Nino phenomenon and, most substantially, the severe earthquake, which killed at least 676 people with over 16,600 injured and which by itself had a negative impact of 0.7% on GDP. This led to the necessity in the short term to devote more of the economy to consumption, in order to maintain the population’s living standards, but there was no confusion on the fundamental strategy of increasing the level of investment in the economy. This simply tactical shift was politically successful in ensuring the election of the candidate of the Alianza País in the 2017 Presidential election.
Economic inability to deal with the effects of the decline in commodity prices creates political setback – Brazil and Argentina.
· Lula was elected president of Brazil in October 2002. He was succeeded in 2011 by Dilma Rousseff who won re-election in 2014 until being removed from office by a fraudulent ‘constitutional coup d’etat’ in August 2016 – with Temer becoming president, whose current approval rating is 4%.
· Néstor Kirchner became Argentina’s president in May 2003. He was succeeded by Cristina Fernández de Kirchner who remained in office until the right winger Macri was elected president in December 2015.
The economic dynamics in Brazil and Argentina are shown in Figure 3
· In Brazil, under the left government, the economy grew steadily until 2013. Per capita GDP in 2002-2013 rose by 33%, an annual average 2.6%. However, from 2014-2016 Brazil’s per capita GDP fell sharply by 9%.
· In Argentina per capita GDP grew by 58% from 2002-2011 – an annual average 5.2%. However, after 2011 GDP growth stalled and by 2015 per capita GDP had fallen by 3% compared to 2011.
Turning to the explanation of the difference between the left wing governments which achieved both economic and political success and Brazil and Argentina, this can be clearly seen by comparing Figure 4 below with Figure 2 above.
· In Brazil the percentage of fixed investment in in GDP did rise significantly from 2003 to 2013 – from 16.6% of GDP in 2003 to 20.9% of GDP in 2013. However, from 2014 onwards it was allowed to fall, dropping to 16.4% of GDP by 2016.
· In Argentina the increase in fixed investment was shorter lived than in Brazil– from 15.1% of GDP in 2002 to 19.5% of GDP in 2007, before falling to 15.8% of GDP in 2015.
A special case Venezuela – the left in political power but problems in the economy
These victories were followed by rapid economic expansion in Venezuela. Between 2003 and 2008 per capita GDP rose by 52% – an annual average 8.7%. Despite a moderate economic setback in 2008-2010, due to the impact of the international financial crisis, recovery then took place and in 2013 Venezuela’s per capita GDP was still 50% above its 2003 level – an annual average increase over that period of 4.1%. Chavez died in March 2013 and was succeeded by Nicolas Maduro who has remained President until the present.
The results of the very high oil price during most of the period prior to 2014 was to create a very high level of total savings in Venezuela – total savings are equal to savings by companies, savings by individuals, and saving by the government. This very high oil price created very high company savings – total savings in the Venezuelan economy reached 42% of GDP in 2007.
As investment is financed by savings such a high level of savings would have permitted a very large increase in fixed investment in Venezuela, of the type seen in Bolivia, Nicaragua, or Ecuador – or of the type seen in China as analysed below. But although fixed investment in Venezuela recovered from their extremely low level of 2003 they never reached even the level of 1998. That is, Venezuela was not transforming its savings into fixed investment – as were, in contrast, Bolivia, Nicaragua, Ecuador or China. These trends are shown in Figure 7 – data in an internationally comparable form is only available up to 2013.
Without a high level of investment Venezuela’s economic growth could not be sustained in the face of the downturn in international commodity prices after 2014, and, even more directly damaging, without a high level of investment the rate of production of oil could not be maintained.
In the almost 40 years since the beginning of China’s economic reform China’s economy has grown every year without exception. Its annual per capita GDP has increased on average by 8.4% a year over the 39-year period from 1978-2017. China experienced no serious economic crisis following the international financial crisis beginning in 2008.
As a result of that growth China has changed itself from a situation where in 1980 every country in Latin America had a higher per capita GDP than China to one in which by 2017 China had a higher per capita GDP than every country in Latin America except Panama, Chile, Uruguay, Argentina, Mexico and Costa Rica – China overtook Brazil in 2016. By 2023, on IMF projections, China’s per capita GDP will also overtake Mexico and Costa Rica.
Translating that into terms of the percentage of the population of Latin America, as Figure 8 shows:
· In 1980 100% of the population of Latin America lived in countries with a higher per capita GDP than China.
· By 2017 only 23% of the population of Latin America lived in countries with a higher per capita GDP than China and 77% lived in countries with a lower per capita GDP than China.
To understand the scale of this transformation, however, it must be understood that China is far larger than Latin America – China’s population of China, at 1.4 billion, is more than two times that of the continent of Latin America.
Figure 9 therefore looks at the combined population of China and Latin America and notes the percentage of that combined population with per capita GDPs above and below China’s – that is, in a sense, it treats China as though it were a Latin American country for purposes of comparison. This shows that as recently as 1997 every country in Latin America, and therefore 100% of the population of Latin America, lived in countries with a higher per capita GDP than China. But, as already noted, by 2017 only 23% of the population of Latin America lived in countries with a higher per capita GDP than China and 77% lived in countries with a lower per capita GDP, while by 2023, on IMF projections, only 7% of the population of Latin America will live in countries with a higher per capita GDP than China and 93% will live in countries with a lower per capita GDP. As a result of this development China achieved the fastest increase in living standards of any major country.
It is also a complete myth, spread by the right, that the right wing has swept all before it. On the contrary the continuing success in a number of Latin American governments, the new left victory in Mexico, continuing struggles in Brazil and Argentina and elsewhere show that the left, as well as the right, has deep social roots in Latin America. The fact that the right in Latin America has to resort to ‘lawfare’ is precisely because it believes that if a democratic process were allowed to unfold the left would win.
At the same time, to confront the new round of struggles, it is necessary to draw lessons, both positive and negative, of the previous wave of struggles in Latin America. A key part of that is to draw the economic lessons. Study both of the successful examples in Latin America and of the socialist economy of China is crucial for this.
The above article was originally published here on the Brazilian website Opera Magazine
Misplaced optimism from the Bank of England GovernorBy Tom O’Leary
The Bank of England Governor has declared that the UK economic outlook is improving. He may be right in a limited sense. The recorded growth rate of the 1st quarter of just 0.2% may not be as dismal in subsequent quarters. But there is little room in the medium-term outlook for misplaced optimism.
Carney said, “A number of indicators of household spending and sentiment have bounced back strongly from what increasingly appears to have been erratic weakness in Q1. The UK labour market has remained strong, and there is widespread evidence that slack is largely used up. Pay and domestic cost growth have continued to firm broadly as expected. Headline inflation is still expected to rise in the short term because of higher energy prices.”
But this only highlights the misconceptions about the drivers of economic growth and its consequences. The first indicators Carney relies on are Consumption data. But Consumption growth cannot drive economic growth, and is destined to fall back unless production and living standards are rising.
Consumption is a consequence of output, not a contributor to it. The growth in Consumption therefore requires the growth in output. Chart 1 below shows the real GDP growth rate (in blue, on the right-hand scale) alongside the proportion of GDP in real Final Consumption Expenditure (orange, on the left-hand scale).
Over time, in common with most Western economies, in the UK the proportion of GDP directed towards Consumption has grown. The corollary is that the proportion of GDP devoted to Investment has fallen. At the same time, the growth rate of the economy has slowed as the proportion of GDP directed to Consumption has risen and the proportion directed to Investment has fallen.
This apparent correlation between the falling proportion of GDP directed towards Investment is that it is associated with a decline in the growth rate of GDP. Peaks in Consumption are associated with troughs in GDP growth. If we take prolonged periods, such as the build-up to the Great Recession in 2008, this included a rise in the proportion of Consumption in GDP from 81% at the end of the 1990s to a peak of 87.8% in the depth of the recession in 2009.
This impression is confirmed by examining the data statistically. Chart 2 below shows the correlation between GDP growth and the proportion of Final Consumption in GDP. As the chart clearly shows, the correlation is a negative one, with a downward slope. As Final Consumption rises as a proportion of GDP, GDP growth itself slows.
Correlation is not causality. But the data completely belies the notion that economic growth, and the rise in living standards that growth allows, can be driven by rising Consumption over the medium-term.
Instead, the relationship is better understood as the relationship between Consumption and Investment, which both follow output. If output is not consumed, but saved and invested, it lays the basis for further output. However, if all output is consumed, then there is no possibility of increased output, and it will decline over time as capital (the means of production) are themselves consumed in the production process (through wear and tear, dilapidation, and so on). It is the increase in Investment which leads to the development of the means of production, which sustains an increase in production.
On this fundamental point, Carney’s assessment is wrong, even if better quarters ahead are possible in terms of GDP compared to the 1st quarter of 2018. Improving household spending and consumer sentiment cannot sustain increased growth over the medium-term.
The decisive factor is Investment. And here, the outlook is very far ‘bouncing back strongly’. Chart 3 below shows the rate of growth in Investment (Gross Fixed Capital Formation).
Investment (GFCF) fell in the 1st quarter of this year compared to the 4th quarter of 2017. Measured on the less erratic basis on yearly comparisons, it has been on a declining trend since the 1st quarter of 2014 and is now just 1.5%.
This Investment weakness and lack of growth in productive capacity is the source of Mark Carney’s other concern of rising price pressures. It is the dearth of Investment which is causing capacity constraints, from which he sees rising inflationary pressures. But even that standard interpretation may be misplaced.
His view that the strength of the labour market is leading to pay pressures is belied by the fact that real earnings growth remains close to zero. The focus on the falling unemployment rate may be misleading, along with the rise in the employment rate, both of which are at levels not seen in a generation or more.
This is because the number of hours worked per week in the economy is stagnating. Chart 4 below shows the total number of hours worked, in millions. The low-point following the recession was 914.4 million hours worked in the 1st quarter of 2010. But it peaked at 1,034.2 million hours in the 2nd quarter of 2017 and has since stagnated.
Although there are more people in work (and fewer unemployed workers) they are working shorter hours. Therefore total hours worked are not increasing. The growth of part-time working, zero hours contracts and perhaps even shorter time for full-time workers do not reinforce the idea of a labour market that is going to produce much higher wages.
The lack of Investment means that the significant creation of jobs over the last period is dominated by lower productivity, lower-paid jobs. It is also at the same time leading to genuine capacity constraints. The Bank of England Governor’s optimism is misplaced. Consumer spending cannot sustain stronger growth over the medium-term. So, the weakness of Investment means that a strong recovery from here is highly unlikely.
Tories’ Brexit and Trump will only damage the economyBy Tom O’Leary
US President Trump seems to be stumbling towards a trade war. At the same time a large section of the current UK government seems intent of crashing out of the EU without a deal.
In both cases, there will be economic damage inflicted on other countries (in Trumps’ case, consciously so). But the main damage will be inflicted on their own economies.
The damage is easy to identify. In the UK, a string of large manufacturers have highlighted the risks to their business arising from the prospect of a Tory ‘Hard Brexit’ or even no deal leading to the adoption of World Trade Organisation (WTO) rules. Airbus issued a statement (pdf) which was very clear. In summary, it said that a no deal outcome would inevitably mean that they would leave this country, and that until there was a deal which allowed product pre-approval (vital for the safety-conscious aerospace industry), and the free movement across borders of its goods and its people, they would be making no investment in the UK.
The UK CEO of Siemens said that, “If the Brexit we end up having provides significant friction, provides significant cost then of course that will be an argument against making investments here in the UK,” and argued for continued membership of the Customs Union until an equivalent friction-less system for goods is put in place.
BMW, which make Minis and Rolls-Royces said it had no plans to cut jobs and close plants, but “We always said we can do our best and prepare everything, but if, at the end of the day the supply chain will have a stop at the border, then we cannot produce our products in the UK.”.
In addition, the Society of Motor manufacturers and Traders (SMMT) (pdf) revealed that industry investment had halved in the last year and that sales and exporters were expected to fall. The SMMT’s chief executive said, “There is no credible ‘plan B’ for frictionless customs arrangements, nor is it realistic to expect that new trade deals can be agreed with the rest of the world that will replicate the immense value of trade with the EU. Government must rethink its position on the customs union. There is no Brexit dividend for our industry, particularly in what is an increasingly hostile and protectionist global trading environment.”
In the US, the Trump administration has already imposed tariffs on imports from a number of countries, primarily in an effort to corral them into a concerted anti-China trade policy. He threatens further trade tariffs, on a wider array of goods.
US farmers are worried that they will bear the brunt of Trump’s trade tariffs. US agriculture is enormously productive and US agricultural exports amount to around $140 billion per year. China offered to buy additional foodstuffs as a way of reducing its bilateral trade surplus with the US. But Trump refused to remove tariffs and now China and other countries will respond to Trump’s tariffs with their own, which will hit US farmers.
It is also clear that Harley-Davidson’s decision to shift production overseas will hurt US manufacturing jobs. The shift is necessary because of retaliation by the EU against tariffs imposed by Trump on European steel and aluminium production. But it is not only the retaliation which is destroying US jobs, but Trump’s initial actions themselves.
This is important, and key to understanding how both Trump’s protectionism and the Tory Brexit will damage the US and the British economies respectively. There is the obvious point that tariffs on steel will raise the input price of imported steel for all production where it is used. Either more costly or inferior steel will be used (if possible), which will hit jobs and living standards in the US.
But there is a more important and more fundamental reason behind the self-inflicted damage from protectionism. Production globally is integrated. There are single, global prices for nearly all commodities and for many semi-finished goods. Raising the price (through tariffs or other mechanisms) nationally tends to raise them internationally.
In addition, production is integrated through international, sometimes global supply chains. In the US, EU-owned car producers will be hit by tariffs on parts and other inputs from Europe and elsewhere. This is already happening. It will deter new investment in US-based investment for car production by overseas producers, and it will raise costs and act as a deterrent to expansion for existing producers.
The same logic applies to UK-based manufacturers and Brexit. If the UK link of multinational supply chains is broken, the chain will be reassembled without the UK. This is irrespective of the companies’ ultimate ownership, British, European, or third country. It is not a question of nationalism, but of markets, production, profit and jobs.
Airbus is obviously a transnational corporation. It relies on parts and inputs crossing national boundaries, sometimes several times as each plant adds new value to the production process.
Airbus cannot realistically have an integrated multinational supply-chain where one country imposes tariff barriers, operates separate rules (impacting safety standards) and where it cannot move key personnel around Europe to facilitate the integrated production process. If one locale unilaterally imposes tariff barriers, separate safety standards and monitoring or prevents free movement of skilled workers, it endangers production in that locale entirely.
UK-based car producers, like BMW, operate under the same strictures and require the same effective free trade regime to make their existing supply chains work. It is the threat of disrupting those supply chains, or even severing them altogether, which is the cause of the plunge in UK car industry investment in the last year.
Trump’s tariffs and the Brexit being pursued by the Tory government have the effect of severing these supply chains. It is the US and the UK respectively that will be the broken link, with the consequent loss of investment, productivity and jobs.
‘Making America Great Again’ and a ‘Global Britain’ are crass sound-bites when economic policy has the effect of reducing each country’s participation in the global division of labour. There is a fundamental economic underpinning to the damage Trump and the Tory Brexit will cause.
In his economic writings, Marx was primarily concerned with the analysis of the capitalist mode of production and its replacement by socialism. Socialism too is firstly a mode of production, one which allows the development of society and of the people within it; the producers collectively determining production to meet human needs, without value being extracted by capitalists. But as a materialist, Marx demonstrated that the basis of the new socialist society was the new mode of production itself.
The term ‘socialism’ derives from this socialised production. That is, the integrated production of all the necessary goods and services to satisfy human wants using the highest possible development of all the productive forces in society. These include labour and capital, as well as their integration into the production process through what Marx terms the socialisation of production.
The socialisation of production long precedes the development of capitalism. When we lived in forests and caves, some of us honed sharp instruments, others created weapons and others prepared the meat that had been hunted. Each successive society, based on successive modes of production raised the socialisation of production to a new, higher level, allowing it to be the dominant mode of production and the dominant form of society.
Capitalism raised this level of socialised production to a new, far greater height, as Adam Smith demonstrated in ‘The Wealth of Nations’, (which Marx drew on heavily, transforming Smith’s division of labour into ‘socialised production’.)
Volume 1 of Capital is shot through with reference to both ‘social production’ and ‘social division of labour’. The former appears 23 times in Volume 1 alone and the latter 16 times. And Smith’s own term, the ‘division of labour’ appears 164 times. They were staging posts on the way to Marx’s unified conception of socialised production. In addition, Marx’s Chapter 13 ‘Co-operation’, examines the increase in productivity arising even from the simplest forms of the division of labour.
Socialisation of production.
This socialised production of labour is ultimately the material basis for socialism. Socialism is necessary to replace capitalism precisely because, in Marx’s terms, “at a certain point the social relations of production come in conflict with the development of the productive forces”. That is to say, capitalist ownership of the means of production (from which they are solely concerned to derive profits) prevents the development of the productive capacity of the economy, and is the cause of if its deep, recurring crises. Only socialism can realise the full rational, socialisation of production to meet human needs.
It is incorrect to suggest, baldly that Marx was only in the first instance concerned with production. Volume 1 of Capital begins with commodities and money, not production, as the unique and specific feature of capitalism is that commodity production becomes generalised, and money becomes the universal substitute for all commodities. This is what is specific to capital.
Instead, the socialisation of production is a general phenomenon. It is a given throughout all modes of production. Capitalism raises this up to a new higher level, and Marx examines how this takes place within the capitalist system.
Socialised production is necessarily international. In Smith’s famous example, it was as easy to ship coal from Newcastle to European ports as it was to London. In the modern era, as we have seen, just-in-time manufacturing and complex supply chains mean that inputs for final products cross borders on multiple occasions.
Marx argued that capitalism really begins when individual capitalists employ larger numbers of workers, and the level of production becomes extensive and large amounts of commodities are produced. And the scope for the development of the productive capacity of the economy, the employment of large numbers of workers and of the degree of socialised production are all limited by the size of the market itself.
So, there is little incentive to build a smelting works if the ultimate sales of the commodities produced are very small. The development of the productive capacity and the scope for the increase in socialised production are in part determined by the size of the market.
Therefore the response of one Tory MP to the Airbus statement, to the effect that this country should establish its own aerospace industry instead, highlights the grave misunderstanding of fundamental economic forces.
The two main antagonists in global aerospace competition, Airbus and Boeing have a market value or around $100 billion and $200 billion respectively. This is the scale of investment that would be needed simply to establish a UK competitor. But, even with that investment, where is the market for this new production?
It could only come from a head-on struggle with the two market leaders who dominate the world market, And this while the UK imposes tariffs on parts, operates its own rules on product safety and bars highly-skilled overseas workers who would bring the expertise necessary to make that production feasible. It is more fantasy.
Like Trump’s protectionism, the Tory Brexit project will break global supply chains, reduce access to markets and interrupt the socialisation of production, the most important factor in economic growth.