Please note i’ve stopped updating this site, hopefully temporarily, as i’ve started a new job. More soon — with luck (or not, depending on how you see these things).
The trade policy framework myself and a colleague have been working on has been endorsed by the Solomon Islands government.
“The vision of the Trade Policy Framework is to: ‘Build the productive capacity of the Solomon Islands economy via sustainable trade and investment. The resulting creation of wealth and employment opportunities is aimed at promoting human development, reducing poverty and improving living standards for Solomon Islanders.'”
Just a couple of quick thoughts on radicalism in the aftermath of the Greek elections. Paul Krugman rightly points out that Syriza’s policies aren’t radical. Syriza is proposing sensible things: rejigging its unfair debt obligations, investing and reflating the economy, just like in Germany after the second world war. These policies are what any sensible policymaker would do in response to years of failed austerity. It’s the eurocrats who are radical, proposing fiscal rectitude in a full-on depression.
The situation reminds me of Scotland’s Radical Independence Conference last year after the referendum. Several speakers pointed out that what the so-called radicals wanted was pretty mainstream. Calls for tax to go up a bit aren’t exactly Trotskyite. The top rate of income tax under Margaret Thatcher was 60%, higher than any Scottish party or campaign group is currently proposing. It isn’t ‘extreme’ to rid the country of weapons of mass destruction or to ask for a society which looks after the worst off.
One reading of this situation is that conservatives have succeeded in dragging the debate so far to the right that today’s firebrands are reduced to saying things that would have seemed middle-of-the-road two decades ago. Maybe that’s partly true.
But it’s also important to remember that radical doesn’t mean extreme or fanatical. It’s from the Latin radix, meaning root. There’s a sense in which radicalism is to do with stripping away the superficial and delving to the bottom of a problem. Today’s radicals are, like their forebears, addressing the roots of economic and social concerns. They’re not posturing, wild-eyed fanatics. In a sense, it’s a source of optimism that many people have reached the end of their patience and are being forced to see things as they really are, coalescing around the doable and showing up right-wingers and austerians as the fantasists.
“If we had a debt crisis very clearly risk would have increased and so interest rates would have risen. But they haven’t. Interest rates have fallen, significantly, and not just to reflect inflation.
So first of all we have no gilt crisis.
Second, we have no affordability crisis.
And third, we have a lost opportunity to invest at rates lower than we have almost ever known, which lost opportunity is why we have an economic crisis.”
I thought i’d post a graph of benchmark gilt yields going back to 1984. It shows quite clearly that borrowing costs are at some of their lowest levels ever. There was no spike in yields during the crisis. Investors do not remotely think the government might default, nor do they think spending plans might be unsustainably high. More likely they expect years of stagnation or low growth.
It’s just ludicrous to suggest, as Cameron and Miliband do, that anything other than buttock-clenching austerity will be the “path to ruin”. Any future interest rate payments on debt issued now are profoundly not the main problem. If it wanted, the government would have plenty of wiggle-room within which to reinflate the economy.
The data is from the Bank of England’s series “annual average yield from British government securities, 10-year nominal par yield”.
David Cameron today again repeated the nonsense claim that anything other than swingeing cuts will cause “economic chaos”. In an indication of just how impoverished mainstream British political debate has become, he lambasted Labour’s plans to balance the budget but keep spending on infrastructure as if it were Zimbabwe-esque profligacy.
Yet far from lowering the deficit, the cuts are one reason why the economy has suffered its worst period of growth since the Great Depression in the 1930s. Balancing the budget is exactly the wrong medicine in a crisis. The coalition has sucked so much money out of the economy that demand and investment have collapsed, raising welfare payments and reducing tax revenues.
The mainstream media’s fixation with the last five-minute’s news means that they tend to focus on headline economic growth, which recently hit a quarterly rate of 0.7%. But the economy shrank so much after the crisis hit in 2008 that it was likely to rebound sooner or later. Because of population growth, it’s still smaller per head than before the crisis.
Here’s a graph Cameron doesn’t want you to see:
Data source: Office for National Statistics
Taking inflation into account economic output is now 7.3% smaller per head than at the start of the crisis in the first quarter of 2008. We’ve only now climbed back to the levels of about 2005. Of course averages don’t tell the whole story, and a small minority have become much wealthier whilst most people have suffered much more, but of the G7 group of rich countries Britain’s economy has performed second-worst, ahead of only Italy.
Alongside slowing global growth part of the reason for this economic catastrophe – the worst for 80 years – is that the government has extracted tens of billions of pounds from the economy. These sort of cuts are economically counterproductive during a recession.
The recent fall in unemployment to a still-unacceptable 6% has been the result of an increase in part-time, badly-paid and insecure work. People aren’t being paid enough to contribute to government coffers.
The fall in pay is a remarkable feature of the crisis. Again, accounting for inflation, the wages of a British worker have suffered their longest sustained fall since records began in 1862. The International Labour Organisation says that British pay has plunged more than even in Italy. In the five best performing countries shown in the following graph, wages have gone up.
Average real wage index for developed G20 countries, 2007-13
Because we’ve got less pay in our pockets, less money is spent than it otherwise might be, which in turn suppresses growth. Consumer expenditure collapsed during the crisis and is only just recovering. Business investment has shrunk to unprecedented levels as too few people can afford to buy companies’ products and services, and companies remain uncertain about the future. Productivity remains abysmal. I suspect that a fragile recovery based on the services sector and badly-paid jobs will peter out as the underlying economic conditions remain so bleak.
Instead of the debt falling due to government spending cuts, it’s forecast to keep going up until next year because the economy is doing worse than it otherwise would. In fact public debt isn’t particularly high by historical standards and it’s not the main problem, especially when borrowing costs are at such historic lows.
What the Tories fail to mention is that it was private debt which caused the crisis, not government debt. Private debt, mostly financial sector and corporate, grew to four-and-a-half times GDP, compared with public debt which is now 80.4% of GDP.
The deficit has ‘only’ halved as a proportion of GDP since the coalition took power, to £91.3 billion, despite Osborne’s promise to eliminate it by now. This failure is because of the cuts.
There’s more madness to come. Osborne said in his autumn statement that over the next five years he wants to shrink public spending to levels not seen since before the second world war. £60 billion will come from public service cuts. That’s nearly twice the defence budget or the equivalent of dualling Scotland’s A9 road from Perth to Inverness 143 times. Schools, health and foreign aid are ring-fenced, so some departments will be ransacked. This amounts to a full-scale attack on the state.
What we should be doing – and what Scotland could do given full economic powers – is reinflating the economy. Building infrastructure would encourage businesses to invest. Tackling the housing shortage would stimulate demand. We could develop a modern, strategic industrial policy which built a new, environmentally-sustainable economy based on Scotland’s advantages in sustainable energy. This investment would eventually pay for itself, particularly when borrowing is as cheap as it’s ever been.
Osborne and Cameron have taken us so far down the rabbit hole that we’ve confused up with down, good with bad. We should be rebuilding the economy rather than trashing it; looking after each other instead of accepting the cuts. All that rhetoric about hairshirts and tightening our belts is nonsense. We’re being punished when punishment isn’t the answer.
Here’s an article I published this month with the Commonwealth on the importance of trade and productive capabilities in the sustainable development goals to be adopted next year. In addition to social and climate-related goals, the least developed countries must be helped to build their domestic economies.
This issue of Commonwealth Trade Hot Topics examines how the sustainable development goals (SDGs) that will be adopted in 2015 can better reflect the trade and development-related needs of least developed countries (LDCs) and small island states such as the Pacific island countries (PICs). It draws lessons from four Pacific Diagnostic Trade Integration Studies (DTISs) – a series of comprehensive trade analyses aimed at improving countries’ ability to access global markets and to benefit from trade. The paper argues that, in addition to market access, focus should be placed on behind-the-border measures including infrastructure, rules of origin, negotiating capacity, standards and targeting aid for trade.
Click here (pdf) to read the article.
Rural wages are surging in Asia as fewer people enter the rural workforce and manufacturing growth draws people into cities, according to an important study by the Overseas Development Institute’s Steve Wiggins and Sharada Keats.
It’s a huge story. Wiggins says it’s “almost certainly the end of mass poverty in Asia” although he points out that pockets of chronic poverty will persist.
One of the most interesting impacts is on manufacturing wages: “manufacturers can’t get dirt-cheap labour off the land anymore, and they have to start putting up their salaries.” Industry will have to locate to inland China and low-income Asian countries like Cambodia, Bangladesh and Burma.
Fascinatingly, Wiggins also reckons factories will be forced to move to Africa, the last big pool of cheap labour. Until recently Chinese direct investment in Africa has mostly been resource-seeking, a hunt for oil and minerals. But cost-saving investment is also underway. Millions of jobs may move across the Indian ocean as factory owners try to cut the wage bill:
The World Bank reports Ethiopian factory wages for unskilled labour as being one-quarter those of Chinese wages. Logistics costs are higher, but overall costs are lower. Outside Addis Ababa, the first pioneer wave of relocated Chinese plants can be seen. Now these have broken the ice, how many more will follow? [Former World Bank chief economist Justin] Lin… speculated that 85 million factory jobs could leave China in the coming years. If half of those came to Africa, it would transform a continent where there is a surge in youth entering the labour market.
Duncan Green features the report on his blog under the title: “A wage revolution could end extreme poverty in Asia, with massive knock-on effects in Africa.”
Some of the commenters beneath Green’s blog express scepticism , saying that increased mechanisation will limit the benefits for Africa. Chinese iPhone contractor Foxconn is already replacing workers with robots, points out one commenter. Another cites an Oxford Martin School study showing that nearly half of US jobs could be at risk of computerisation.
Ryan Avent argues in the Economist that:
More manufacturing work can be automated, and skilled design work accounts for a larger share of the value of trade, leading to what economists call “premature deindustrialisation” in developing countries. No longer can governments count on a growing industrial sector to absorb unskilled labour from rural areas. …new work for those with modest skill levels is scarce compared with the bonanza created by earlier technological revolutions.
The rise of the machines, in other words, will rob workers of potential factory jobs.
I don’t buy this story, at least in poor countries. For a start it overestimates the kind of pay and work we’re talking about. Sierra Leone’s minimum wage, the lowest in the world, is 3 cents an hour. No machine can compete with that. The electricity costs of running a robot are higher, not to mention set-up and maintenance costs. According to Wikipedia the minimum wage in Uganda is US$ 29 a year. Tanzanians are lucky in comparison, earning a minimum of US$ 303 a year. (Whether or not many people actually earn the minimum wage and how much it will buy at local prices are different questions.)
The Oxford study might well be true but it’s less relevant in impoverished nations. Plenty of bottom-end jobs will continue to be performed by low-paid workers in the developing world. It just doesn’t make sense to fully automate garment manufacture when people will make t-shirts for a few cents an hour. Unfortunately not much computerisation goes on in clothing factories: it’s just rows of (usually) women sitting at sewing machines.
Premature deindustrialisation is mostly due not to automation but to neoliberal economic policies: sudden trade liberalisation killed off a lot of manufacturers. Inflation-paranoia and overvalued exchange rates added to the pain.
Some commenters worry about Africa’s low productivity and infrastructure. But these fears, too, are misplaced. Fifteen years ago people doubted whether China itself possessed the infrastructure for rapid development. Now much of the country is criss-crossed with highways and high-speed trains. Given the right incentives, foreign (and local) investors will build the infrastructure. Chinese roads and buildings are already springing up across the continent. The promise of profits can achieve miraculous things.
The productivity argument is similarly misplaced: productivity is, by definition, the ratio of output per worker, which is mostly influenced by the capital-intensiveness of production. A shoemaker can produce far more if she works on a production line than if she has to do the job on her own, from scratch. Africans are only less productive because they generally don’t currently work in factories featuring cutting-edge machines and production processes.
Economic development is by nature a process of increased investment. Almost without fail the fastest-growing countries are the ones with higher rates of capital formation. Ha-Joon points out that in China the ratio of investment to GDP was as high as 45% in the last few years. For the world as a whole it’s 20-22%, and in some African countries it’s only 10%. “No economy has achieved ‘miracle’ rates of growth (that is, over 6 per cent per year in per capita terms) over a period of time without investing at least 25 per cent of GDP,” says Chang. Worries about the existing state of productivity in African are really just worries about the lack of investment rather than legitimate fears about future prospects. Productivity is weak because investment is low; low productivity isn’t a deterrent to investment or an obstacle to growth.
The whole debate reminds me of 19th Luddite worries about machines replacing human labour. Whilst the industrial revolution cause a lot of pain, and governments must act to mitigate the impact on the worst-off, eventually new sorts of work emerged in response to the new economy. Workers in rich countries might legitimately fear that robots and computers will take their jobs, and the Economist report cited above points out that it’s mostly middle-level jobs which are at risk. But in much of the poor world the situation is completely different. Poor quality, low-paid work is here for a long while yet (i’m still not convinced that Africa will undergo Asian-style industrialisation, and in many countries the services sector might play a bigger role, but that’s another story).
People have also historically misunderstood the reasons and prospects for the outward expansion of capitalism. Capitalists didn’t just look overseas to get resources or establish new foreign markets; they went abroad to access cheaper (and sometimes slave) labour. Companies will keep hunting for cheap workers.
Little about this story is particularly pleasant — who really wants to flog away on an assembly line for a few dollars a day? — but for unemployed Africans or those living a subsistence lifestyle and facing the horrors of extreme poverty, it’s a bleak source of optimism. Some work is better than no work, and eventually it should enable many countries on the continent to start moving toward higher value-addition and better pay and conditions, not to mention the myriad other benefits of development. Unfortunately there’s only one thing worse than exploitation: not being exploited.
Image courtesy of jiggoja at FreeDigitalPhotos.net