Vladimir Popov: EU – Nationalism and Inequalities

I am grateful to Vladimir Popov of TsEMI, the Central Economics and Mathematics Institute of the Russian Academy of Sciences, Moscow, for contributing this guest post to our Blog as an extended comment on my previous post on Seismic Faults in the European Union.

Vladimir Popov on: EU – Nationalism and Inequalities

             “Imagine there's no countries ... And the world will be one.

             It may happen, if the current rise in inequalities is reversed.

Mario Nuti predicts new difficulties for the EU and believes Lenin was right, when stated that United States of Europe are either impossible or reactionary (post of January 8, 2017).  He may well be right, as he has been so many times, but I wish he wasn’t.

In the EU for the first time in history member countries voluntarily decided to eliminate borders – a dream of many since ancient times. It was by the way also one of the staples of the communist ideology – nations eventually, after the full victory of communism, will merge, borders will disappear, a brotherhood of men will share the whole world.  As the best poet of Soviet era Vladimir Mayakovsky put it,

“For we want this world to be a common earth

Without Latvias and without Russias”.

Many of those born and raised in the USSR cherish this dream and admire the EU that seemed to have been able to achieve this goal without coercion and violence. It would be most regretful, if EU project will not succeed.

This is the moral argument in favor of the EU that does not prove, of course, that Mario is wrong. Many inevitable trends may be undesirable for large groups of people. Below, however, are some “hard core, material” arguments, why current centrifugal forces in the EU and the world may be only a temporary phenomenon.

Nationalism and inequalities

Conservative politicians all over the world have recently spoken against globalization. As former French Prime Minister Dominique De Villepin put it recently, ”globalization, on the one hand, promotes cooperation, on the other hand, brought new mutual exclusion, isolation and radicalization”. And Donald Trump wants “Americanism, not globalism”.

It would be wrong, however, to blame globalization for all the disasters and misfortunes, from non-growing real incomes to the rise of nationalism. History does not repeat itself, but it rhymes. Those who blame globalization today for economic and social misfortunes are similar to the luddites of the XIX century that believed that the use of machines leads to the rising unemployment and falling wages. 

There are cases when globalization works leading to rising incomes of the masses. Theoretically greater international flows of goods, ideas and technology, capital and labor should increase productivity, but in reality this happens only if these flows are carefully managed (Popov, 2014, Chapter 5)..

Why in some countries greater economic interaction with the world was accompanied in recent several decades by rising income and its relatively even distribution (China and other East Asian countries), whereas in other countries modest growth of income coupled with rising inequalities left large masses of  population worse off (many Western countries, including the US, Eastern Europe and former Soviet Union)? The answer is that policy matters a great deal and many good policies that allow gaining from globalization are often non-orthodox and counterintuitive (Polterovich, Popov, 2005). If globalization is accompanied by the increase in income and wealth inequalities within countries, so that gains from globalization are appropriated by the few better off, whereas the masses get nothing or very little, it is only too easy for the interested political forces to blame globalization for the negative developments.

The central argument of this post is that the reversal of the previous trend towards the decline in income inequalities in the last three decades in most countries created favorable grounds for the rise of nationalist and anti-globalization feelings (Popov, 2016). Lindert and Williamson (2016) claim that income inequalities breed populism and attribute the rise of inequalities to globalization (especially in the two periods of American history – Gilded Age of the late 1800 and recent three decades since the 1980s). My argument is that income inequalities indeed contribute to the rise of populism and nationalism, but that globalization does not necessarily lead to the rise in inequalities.

Trends in nationalism are explained, among other factors, by both between the countries and within the countries inequalities. If the gains from globalization are distributed evenly, the public is willing to embrace it, but if the gains are appropriated by few, it is easy for nationalist political forces to turn the public against globalization.

Hence, there are several globalization models, depending on the trend in inter and intra- country inequalities in recent three decades:

·        Great gains from globalization for the country as a whole and relatively small rise in within the country inequalities (Japan, China, SEA, Scandinavian countries, the Netherlands);

·       Small gains from globalization for the country as a whole, but decline in domestic inequalities (some LA countries, including Brazil);

·       Large gains from globalization for the country as a whole, but increase in domestic inequalities (Britain and some continental European countries);

·       Small gains from globalization for the country as a whole and increase in domestic inequalities (US, Russia in the 1990s).

The worst conditions for the rise of nationalism would be in the first group of countries, the best – in the last, fourth group, with the 2^nd and 3^rd group falling in between.

The rise of nationalism in recent decades in the EU and many other countries seems to be associated with the increase in within the country income inequalities. In some countries income inequalities did not increase and nationalist and anti-globalist feelings are more related to the slowdown of growth and other reasons, but in most countries there was an increase in income and wealth inequalities since the 1980s – a reversal of the trend of over 50 years that created a fertile ground for rise of nationalism (Popov, 2016).

Recent trends in income inequalities in EU

The fall of the Berlin Wall, collapse of the USSR and the conversion of Eastern Europe and former Soviet republics to capitalism, added additional push to the growing income inequalities trend due to both – the disappearance of “socialist counterbalance” for the Western capitalism and the rise in inequalities in the transition countries of Eastern Europe and former Soviet Union themselves (Jomo, Popov, 2016).

In most European countries income inequalities increased since the beginning of the 1980s – the reversal of the trend that predominated since early 20^th century (fig. 1). This increase in inequalities may be the single most important reason for the rise of nationalism. In Eastern Europe there was a transformational recession of the 1990s associated with the transition to the market economy – output fell by 20-50% in the course of 2-5 years (Popov, 2000), which certainly contributed to the rise of nationalism. But in Western Europe there was no major recession (except for Greece). Even though economic growth was not very strong, it was  rather stable, recessions of 1993 (per capita GDP fell by 0.4%), 2009 (-4,7%) and 2012-13 (-0.4%) were overcome and average incomes, unlike in the US,  by 2016 were way higher than in the 1980s. However, the progressing unevenness in income distribution undermined real incomes and social status of large groups of European population making them an easy target for the nationalist politicians.

Britain may be the case in point. The rise in nationalism is often explained by unfairness and humiliation experienced by the whole nation (for instance, Germany after the First World War or developing countries where costs of globalization are often higher than benefits).  In Britain, however, the recent rise of nationalism did coincide with the relatively successful economic development and with the improvement of its economic positions versus the major competitors. Britain was falling behind continental Western Europe in terms of its per capita income and this trend was reversed only a decade after Britain entered the EU (fig. 2).

However. only a minority of the population benefited from the acceleration of economic growth since the early 1980s – income inequalities increased (fig. 1) and so did wealth inequalities (fig. 3).

From the point of view of economic efficiency and future growth, Brexit is bad for the EU and especially bad for Britain. But the majority of British voters apparently blamed economic difficulties not on policies that allowed inequalities to increase, but on the European integration and globalization.

Future

There may be at least two scenarios for the EU and the world. First, if the rise of income inequalities would continue, social tensions in some countries will become unbearable and will produce a social turmoil and anti-globalisation, nationalist sentiments. And the rise of nationalism may lead to conflicts, if not wars, between countries, with the collapse of the international trade and capital flows, like in the 1930s. Then the world may once again get into the familiar 20^th century historical track and there may be a pause in or even the reversal of globalization, like during the Great Depression, when the outburst of protectionism led to the decline of the international trade and capital movements. This is the worst scenario: the world degrading into social and national conflicts.

Second, countries that carry out successful policies of limiting inequalities would become more competitive, driving other countries “out of anti-globalisation business”. Even small countries, if they are successful, may create a counterbalance through the demonstration effect to the tendency of unconstrained capitalism to cut welfare programs and increase inequalities. These countries may regulate the functioning of the market mechanisms through direct interventions and high progressive taxation to reduce bubbles and windfall profits. Besides, the crucial way of lowering inequalities is public and collective property, so it could be expected that state enterprises, non-profit institutions, labour managed enterprises and coops, operating not for profits, but for public good would become more common. Such a more optimistic scenario implies that social upheavals within countries and national conflicts between countries could be largely avoided. EU in this case would have a bright future.

References

Facundo Alvaredo, Anthony B Atkinson, and Salvatore Morelli (2016). Top wealth shares in the UK over more than a century, Working Papers Department of Economics Ca’ Foscari University of Venice No. 01 /WP/20.

Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez (2012). ‘The World Top Incomes Database’, http://www.wid.world/#Introduction

Jomo, K.S., V. Popov (2016). Income Inequalities in Perspective. Develoipment, No. 2, 2016.

Lindert, P. and Jeffrey Williamson (2016). Unequal Gains: American Growth and Inequality since 1700. Princeton University Press, 2016.

Maddison project (2013). http://www.ggdc.net/maddison/maddison-project/home.htm, 2013 version.

Polterovich, V., Popov, V. (2005). Appropriate Economic Policies at Different Stages of Development. NES, 2005 - http://www.nes.ru/english/research/pdf/2005/PopovPolterovich.pdf.

Popov, V. (2000). Shock Therapy versus Gradualism: The End of the Debate (Explaining the Magnitude of the Transformational Recession) – Comparative Economic Studies, Vol. 42, No. 1, Spring 2000, pp. 1-57 (http://www.nes.ru/%7Evpopov/documents/TR-REC-full.pdf);

Popov, V. (2014). Mixed Fortunes: An Economic History of China, Russia and the West. Oxford University Press, April 2014.

Popov, V. (2016). Is Globalisation Coming to an End Due to Increase of Income Inequalities? -  MPRA paper №73094 , August 2016.

World Wealth and Income Database. http://www.wid.world/#Database:

Mario Nuti’s reply:

I agree with Vladimir that a world without borders would be very attractive, as a realisation of both human freedom and economic efficiency. However it is no accident that it was part of communist utopia only after the expected universal diffusion of communism. For a world without borders involves - as I pointed out in my previous post - global communism in access to national social capital (however defined, whether as physical infrastructure, social cohesion and trust, or welfare state institutions and provisions). This is neither feasible nor desirable nor sustainable in a world where private ownership is globally prevailing and fully protected. I take it that Vladimir would not support unrestricted full communism – in the sense of abolition of both private and national social property – on a global scale or even in a single country or just in the European Union. I regard Vladimir’s unconditional endorsement of the Schengen Area abolition of internal borders (and neglect of external ones) not as a cogent argument in favour of a world without borders but merely as evidence of his generous nature.

I particularly like Vladimir’s characterisation of the relationship between globalisation and inequality, with his four country cases: (a) large gains, small rise of inequality; (b) small gains, inequality decline; (c) large gains, [significant] rise of inequality; (d) small gains, inequality increase. The first case would make people approve of globalisation; the last case would be associated with strongly nationalistic, anti-globalisation feelings and policies; while the two intermediate cases also would be somewhat nationalistic and anti-globalist but to a lesser extent. And at the global level, I would add even more positively and forcefully than Vladimir, globalisation has halved the incidence of poverty in the last twenty years – lifting hundreds of millions of Chinese from starvation to obesity – and achieved the reduction of inequality among the citizens of the world.  

However, globalisation, including migrations, does not lead to “gains … appropriated by the few better off, whereas the masses get nothing or very little benefit”, as Vladimir conjectures. It does yield net benefits, as I readily recognised, but it actually makes a non-negligible number of people worse off. In theory we can imagine a redistribution of gross gains to gross losers so as to make everybody better off - which is how Vladimir would be able to achieve a win-win situation. But such Paretian redistribution is not possible, because it would have to be international and/or regressive. International redistribution is presently impossible for lack of political globalisation, i.e. global governance by institutions capable of global taxation and expenditure. Regressive redistribution from gainers who tend to be poorer to losers who tend to be richer would be undesirable, as I trust Vladimir would agree.  

And even if everybody gained from globalisation, inequality in the distribution of gains would legitimise some opposition to unrestricted, raw globalisation. Vladimir’s comparison with the Luddites is very apt, but with opposite implications with respect to the one he draws: technical progress in the early 19^th century (and today’s automation) also yields net benefits but makes some people worse off, just like globalisation and migrations, therefore justifying – unless there was compensatory income redistribution from gainers to losers – resistance and even forceful opposition by the losers.

The dividing line between populism and democracy is very thin. It is no accident that today we talk of right wing and left wing populism. "The accusation of populism can easily become an instrument to maintain and extend the power of oligarchies, and their influence on public life and decisions, reducing any protest attempt from below to irrationality or intellectual or moral laziness.  Anti-populism therefore can become a weapon in the hands of the élite, a weapon that jeopardizes the essence of democratic coexistence. While populism, if properly articulated, may be useful to democracy" (my translation from Lorenzo Del Savio e Matteo Mameli, "Il populismo è democratico: Machiavelli e gli appetiti delle élite" 2014), whose conclusions are based on a recent debate on Machiavelli's theses in his Discorsi sopra la prima deca di Tito Livio. http://ilrasoiodioccam-micromega.blogautore.espresso.repubblica.it/files/2014/02/machiavelli-populismo.pdf.  Though growing support for populist parties is also due to non-economic factors, such as the feeling of marginalisation, of a falling standing in society, of having lost control over one’s condition, determined by the establishment élite; there are also cultural, ethnic and religious diversities coming into play. When these factors determine electoral choice there is no reason to dismiss the results as expression of populism instead of an integral part and parcel of a democratic system.

Vladimir offers two alternative visions of the future. A pessimistic scenario involves rising inequalities and anti-globalist policies, the rise of nationalisms with possible commercial or even hot conflicts, a pause or even reversal of globalisation. An optimistic vision, favoured by Vladimir, involves the containment of inequality, the restoration of the welfare state funded by progressive taxation, the build-up of public and collective enterprises (including self-managed non-profit cooperatives). “The EU in this case would have a bright future” – he writes. Unfortunately there are other fault lines in the EU today, which I tried to spell out in my post and are left unscathed by Vladimir’s reflections, which do not alter my fundamental pessimism.  

Dr Marchionne’s Vietnam War

[SEE POSTCRIPT/UPDATE, POSTED BELOW AS A COMMENT]

In 1968, at the height of the Tet offensive, I argued with US sociologist Edward Shils (1910-1995) at Cambridge about the uselessness, wickedness and immorality of the Vietnam war. Shils shut me up curtly by saying that the US were in Vietnam simply “because they can”, and there was nothing more to be said. And so they could, of course: the US had the troops, the military hardware, the financial resources to do it, and they could get away with it, wanting to get away with it (at the time). Which of course did not imply that the war was in the US' best interests, that it was justifiable, or that the US would win it in the end. Shils lived long enough to see the inglorious débacle of the US last exit by helicopter from the roof of the US Embassy in Saigon.

In 2010 FIAT's Sergio Marchionne adopted an antagonistic industrial relations strategy towards his employees, first at the Pomigliano d’Arco plant in Southern Italy and then at the Mirafiori plant in Turin. Either FIAT employees accepted greater internal flexibility, duration and intensity of work or FIAT would invest an alleged €20bn elsewhere, notably in Serbia and in Canada. At Pomigliano a workers' referendum endorsed the deal but the overwhelming majority of over 60% was judged insufficient by Marchionne. At the Turin Mirafiori plant on 29 December FIAT signed an agreementwith all unions (Fim, Uilm e Fimsic) except with the traditionally more militant FIOM metalworkers. Now a referendum has been called on 13-14 January, and FIOM has called a general strike for 28 January inviting not only metalworkers but all "social opposition forces" from students to movements opposing water privatisation.

Marchionne’s attitude is reminiscent of Shils’ views on the Vietnam War: FIAT is fighting the metalworkers’ Trade Union FIOM “because it can”. Globalisation has dramatically increased labour markets competition in the world: labour migrations and production de-localisation are the more spectacular forms of such intensified competition, but trade liberalisation is its most important quantitative manifestation. Even if existing factories stayed for ever where they are, new production would naturally follow the logic of global comparative advantage. This is what has reduced the average share of wages in GDP in advanced countries from 65% to 55% in 1980-2005 (IMF World Economic Outlook June 2007), a trend that has continued to date except for a small rise in wage shares in 2009 due to the temporary fall of profits in the recession. This is what allows FIAT to give such a blunt ultimatum to its workers: take it or leave it, don’t even think you can negotiate anything else.

The former communist leader Piero Fassino – now candidate as mayor of Turin, FIAT’s headquarters – has stated that were he a FIAT employee he would support the proposed deal and vote Yes in the coming referendum. Other Democratic Party politicians have dissented: Marchionne has already succeeded in splitting not only the Unions but also the main Opposition party. (See Antonio Lettieri, "La sinistra ai piedi di Marchionne", Il Manifesto, 8-01-2011).

One’s vote in such a referendum is not necessarily a reflection of one’s politics, but of family circumstances and wealth. Were I a FIAT employee, faced with the brutal alternative between unemployment and a worsening of my labour conditions I too might well vote Yes in the referendum. Which does not imply that the deal is in FIAT’s best interests, indeed that it is necessarily superior to other deals reachable after negotiation, or that its political/social implications are desirable, especially in the long run.

Some aspects of the proposed deal are very disquieting. The proposal has not been discussed beforehand, even within those Unions that have supported it. Such referendums, overriding union leadership, are unprecedented so that there are no set rules: at Pomigliano a yes vote of over 60% was regarded as insufficient for FIAT to go ahead with investment; at Mirafiori Marchionne demands only “over 51%”. An unintended consequence of existing Italian legislation involves FIOM members losing the right to union representation unless FIOM signs the deal. This could be rectified easily by either government decree or by an additional provision in the agreement with FIAT, before the referendum takes place, but neither Italy’s weak, absentee and corrupt government nor FIAT have taken the initiative, in spite of protestations by several unions and politicians and not just by FIOM. The threat of losing union representation poses additional and improper pressure on FIOM members. The deal marks the end of collective bargaining – which is, among other things, an integral part of the European Social Model – and marks the re-emergence of enterprise-level bargaining outside medium and small size firms. FIAT has had to leave the Confederation of Italian Industries in order to replace the standing collective contract, but metalworkers could also be moved to the new contract in other enterprises that followed FIAT’s example.

A major problem is that FIAT’s so-called “Fabbrica Italia” project does not really guarantee FIAT’s employees anything at all. The €20bn investment “envisaged” – with an unspecified time-horizon – exists only in the vaguest and most nebulous industrial plan not worth the paper on which it is not written. So far only €1,3bn have been “planned”, only another €700mn have been identified at the very outset.

The new contract would be signed with a New Company, a joint venture with Chrysler. As is always the case with multinational companies, including joint ventures, the distribution of profits between FIAT and Chrysler would depend on transfer prices of components between the two partners. The criteria for such distribution has not been remotely faced by the parties, or even raised by the Unions.

The greater flexibility, the acceleration and prolongation of worktime involved in the deal seem too minor to really impact FIAT’s global competitiveness but represents merely a net worsening of working conditions. They are 1) a shortening of 10 minutes per day in work pauses (three 10’ pauses instead of two 15’ and one 10’ pauses) compensated by €0.1877 per worked hour or roughly €45 per month; 2) the postponement of the 30 minutes meal break to the end of the shift; 3) loss of illness allowance for period of “anomalous absenteeism” to be assessed case by case by a joint committee; 4) up to 18 8-hour shifts over six working days; 5) up to 120 hours overtime work without having to negotiate with the Unions, plus another 80 hours with union agreement; 6) in case of strikes or other breaches of contract FIAT would not be liable to honour union permits and payments.

Would such greater internal flexibility, prolongation and intensification of work solve FIAT’s problems and miraculously restore competitiveness in a sector affected by world-wide supply over-capacity and demand recession? (see a letter endorsed by 146 Italian economists on the subject, on the Sbilanciamoci website. )

Fact 1. In 2009 FIAT produced 650 thousand cars in Italy, barely a third of those produced in 1990, compared to a planned 2mn and to the stability and growth of quantities produced in the major European countries. The stated intention of more than doubling output seems over-optimistic.

Fact 2. FIAT spends on productive investments, and on Research & Development, shares of turnover significantly lower than those of its main European competitors, and it is not active in the development of low environmental impact alternatives. European competitors of FIAT, like Volkswagen, have responded to crisis by reducing working hours while protecting wages and employment.

Fact 3. While in 2004-2008 FIAT recovered from a very serious crisis and developed a few models, in the last two years FIAT has not introduced any new models; its market share in Europe has fallen to 6.7%, the largest drop in car output shares in Europe in 2010.

Fact 4. In 2010 Fiat shares rose 90%, beating all competitors, also following the recent split of Fiat Industrial from the rest of the company involved in car production. In the third quarter of 2010 FIAT was first in the Italian stock exchange in terms of shareholder value, with a 33% return on capital.

Fact 5. In spite of the rhetoric of FIAT depicted as an enterprise “capable to walk in the market on its own legs”, from the end of the 1980s and the early 2000s FIAT has enjoyed public subsidies of the order of €500mn per year. Perhaps FIAT should have been given subsidies to deal with the crisis by the Italian government, or at least Marchionne should have asked.

Fact 6. Over the last ten years FIAT global employment in car production has fallen from 74 thousand to 54 thousand units, of which only 22,000 are in Italian factories. Employees have average skill levels lower than those of FIAT’s competitors, and among the lowest wages in the sector in Europe.

Fact 7. In 2004-2009 Dr Marchionne earned €36.6mn euro, including the accumulation of his golden handshake, i.e. €6.3mn a year. Plus 4million free shares, worth 69.8mn on 7 January 2011, which will have appreciated further already since then. This brings his yearly income to €38.8 mn a year (See Massimo Mucchetti, "Marchionne e lo stipendio del dipendente FIAT", Corriere della Sera, 9 January 2011), which corresponds to 1,037 times the average yearly cost of Italian metalworkers' labour over the same period. Not that this matters for the plausibility of FIAT’s industrial policy stance but certainly not an irrelevant consideration in providing a perspective for the average FIAT metalworker, whether or not she is a FIOM member.

[SEE POSTCRIPT/UPDATE POSTED BELOW AS A COMMENT]

Wonderful New Gadget from the World Bank

The World Bank has made available online - http://devdata.worldbank.org/DataVisualizer/ - the 2009 World Development indicators. This is a beautifully designed and presented form of data visualisation. The time pattern of any three out of 50 variables (from GDP to external debt, from trade to demography or military expenditure), for any number of 221 countries over the period 1960-2007, moves in colour smoothly and tellingly through your screen.

This is the luxury of a global research department at your fingertips. You ask the questions, you get the answers in real time. You can construct your own movie, with a happy ending (see the time trend of mortality of under-5 per thousand), an open ending (see the relentless generalised growth of globalisation measured by trade/GDP ratios – until 2007; you don’t see the de-globalisation of the last two years) or a worrying ending (the ballooning of debt). Thanks Mr Zoellick.

Enjoy!

We should be so lucky to have a double dip

The global crisis of 2008-2009 was abrupt, rooted in the financial markets of advanced countries where it went through synchronised stages that sometimes can be pinpointed to the day, then spreading to the real economy in different ways, timing and speeds in different countries. It is a seismic crisis as deep – so far – as that of 1929-32. In the end it may turn out to be shorter, and therefore less deep than that, thanks to the more appropriate, large scale and synchronised – also so far – policy responses by world governments and international financial institutions.

The suddenness, financial origins and stages of the crisis are best synthesised and illustrated by the evolution of Interbank Market Spreads, i.e. the difference between 12-month Euribor/Libor and Overnight Index Swap rates, in basis points (from “The ECB Enhanced Credit Support”, a keynote Address by the European Central Bank President, Jean-Claude Trichet, given on 13 July 2009 at the University of Munich; Figure 1 below).

Figure 1
All was well in the euro, sterling and US dollar markets until August 2007, the “Beginning of the Turmoil”, when the US crisis of subprime mortgages erupted. The Turmoil worsened gradually until September 2008 (on 15 September, Lehman Brothers went bankrupt) when it began to intensify reaching a peak in November 2008; the spreads have declined gradually since then but are still as high in July 2009 as they were around July 2008.

It is best to let Jean-Claude Trichet speak: “…we have to acknowledge that there was a dramatic shift in focus in large parts of the financial sector – away from facilitating trade and real investment towards unfettered speculation and financial gambling. Hans-Werner Sinn has called these deviations “ Kasino-Kapitalismus”. Of course, we all know that financial liberalisation and financial innovation have made important contributions to the overall productivity of our economies. The securitisation of loans, for example, had tremendous potential for the diversification and efficient management of economic risk. But securitisation was implemented in a precarious way. Banks and non-banks were able not only to sell loans, but also to place them fully off-balance sheet as soon as they had been granted. This resulted in weak underwriting standards and a lack of incentives for lenders to conduct prudent screening of loans. “ …

“The credit boom leading up to the crisis was exacerbated by three multipliers:


- first, incentives: ill-designed compensation schemes for loan managers and traders that reinforced the shortening of their time horizons;
- second, complexity: increasingly complicated and opaque financial instruments that made it difficult for holders of securities to assess the quality of the underlying investments; and
- third, global macroeconomic imbalances: a chronic shortage of savings in some industrialised economies was made possible by an excess of savings in other parts of the world."


"In mid-2007 the turmoil erupted. This was sudden, but not entirely unexpected. Indeed, as long ago as January 2007, I myself expressed the views of my fellow central bankers, when I indicated that markets would need to prepare for a general reassessment and repricing of risk, which was clearly underestimated at that time. [1] Some months later, this repricing occurred very suddenly, triggering turbulences in the interbank market. The consequences of this very sharp repricing threw the credit boom into reverse. The asset cycle turned, and many of the missing links in the financial chain were exposed.

The collapse in mid-September of last year of a major financial institution [Lehman Brothers] transformed the financial turmoil into a global financial crisis. Immediately, financial intermediaries restored liquidity buffers, scaled down their balance sheets and tightened lending conditions. They dramatically reduced exposure to the risks that they had imprudently accumulated during the period of financial euphoria. Collectively, they engaged in a large-scale “deleveraging” process. Banks’ intermediation was sharply reduced, and loans to companies were curtailed.

A long-term trend that had brought credit risk spreads on loans extended by international financial intermediaries to historical lows was suddenly reversed. A credit squeeze ensued which took a severe toll on the real economy.”

Barry Eichengreen of Berkeley and Kevin O’Rourke of Dublin have tracked down the course of the current crisis against that of the 1929-32 global crisis, in terms of industrial output, Stock Exchange values and international trade volume (Vox.eu 6 April, updated 4 June 2009). They have taken as the respective starting points of the two crisis the earlier peaks in world industrial production, which occurred respectively in June 1929 and April 2008. Month after month, our current recession replicates the trends of 1929-32 or is worse. Signs of improvement appeared in the 9 June update, but do not alter the basic picture: the latest levels to which our recession has plunged in 2008-2009 are still below the corresponding levels reached at the equivalent time in 1929-30. “Today's crisis is at least as bad as the Great Depression” (cit). See Figures 2-4.


Figure 2. World Industrial Output, Now vs Then (update in green)

Source: Eichengreen and O’Rourke (2009) and IMF.

Figure 3. World Stock Markets, Now vs Then (update in green)


Source: Global Financial Database. From: Eichengreen and O’Rourke (2009)

Figure 4. The Volume of World Trade, Now vs Then (update in green)

Source: League of Nations Monthly Bulletin of Statistics. From : Eichengreen and O’Rourke (2009).

This “trade destruction” appears to have been much worse than in the corresponding months of 1929-32; it is one of the most worrying aspect of our recession. As recently as May 2008 the IMF External Relations Department could still issue a paper “Globalization: A Brief Overview”(“By IMF Staff”), saying that “Globalisation is irreversible: In the long run, globalization is likely to be an unrelenting phenomenon” (italics in the original). Six month later an important episode of de-globalisation was already under way.

“To sum up, – Eichengreen and O’Rourke conclude – globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event. That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline.”

The hope is that the massive macroeconomic intervention jointly set in motion in particular by the G-20 of April 2009 but also before and after, eventually will reverse the course of our recession. Monetary policy has responded faster and more strongly in the present crisis: in 7 major countries interest rates have been cut more rapidly, from a lower level, down to unprecedented low levels. In 19 major countries money supplies in the run up to the beginning of the current crisis had been growing faster than before 1929, but the expansion has continued faster in the current crisis, moreover without any prospect of the money supply contraction of 1929-32. Government budgets have been running consistently higher deficits than in 1929-32, on a world basis, especially in the advanced countries, but also in emerging countries.

At the latest count the overall global stimuli – fiscal and monetary, national and international – appear to have reached a previously unimaginable scale of the order of $15 trillion. We have grown indifferent to inconceivably large sums, and the arithmetic of government finance has fundamentally altered (“Is Trillion the New Billion?”, asked Robert Hahn and Peter Fassel, Economist Voice, http://www.bepress.com/ev, January 2009. Italian readers are easier to stun if they think of a trillion dollars as 1.4 million billions of old Italian liras). But most of those trillions are only on paper or are not yet getting spent. It is arguable whether the small improvements noted by Eichengreen and O’Rourke amount to “green shoots of recovery” (they deny it). Yet there have been premature calls for an exit strategy (for instance by the German Chancellor Angela Merkel and the ECB President Jean-Claude Trichet). Worse, a collective exit strategy was considered – though rejected for the time being – by the latest G-8. We should be so lucky to have a double dip, a W-shaped pattern of GNP instead of an L-shaped one or worse.

The Vatican Road Is Paved With Good Intentions

"Jesus was the first socialist, the first to seek a better life for mankind" – Mikhail Sergievich Gorbachev is reported to have said. He was neither the first nor the last to claim this: in 2007 Venezuelan President Hugo Chàvez said that Jesus was “the greatest socialist in history”. It is true that some passages in the Gospel are suggestive: “The first shall be last ... ”, “the meek shall inherit the earth ... ”, the Good Samaritan and “love thy neighbour”, Lazarus and the rich man, chasing off the merchants from the Temple, “You cannot serve God and money”, the camel through the eye of the needle … But these are calls for greater equality, reciprocity, social justice, to be achieved through individual honesty and generosity, not through political or collective action, let alone a revolution (contradicted by “Give onto Caesar…”).

Benedict XVI’s long-anticipated social encyclical, “Caritas in Veritate” [Love in Truth], released on Tuesday 7 July 2009 on the eve of the G8 meeting at L’Aquila, is supposed to be the Catholic Church’s enlightened response to the current challenges of globalization and the financial crisis, of widespread poverty and rising unemployment, and the growth of inequality. It has been greeted as a radical, progressive manifesto (for instance by the Governor of the Bank of Italy Mario Draghi, in “Senza etica non c’è sviluppo”, L’Osservatore Romano, 9 July 2009). Admittedly Love in Truth, compared with the G8 wishy-washy “President’s Summary”, does sound quite radical. But in truth and charity Benedict XVI’s text is a remarkably bland, vague and ineffectual treatment of the issues it is supposed to address, just like all the previous acclaimed papal encyclicals from 1891 to date. Indeed in some respects – for instance on intellectual property protection, on immigration, on its neglect of monopoly – in spite of new noises about full employment, non-profit organisations and the economics of gift, it represents a marked regress with respect to earlier statements of the Catholic Church’s “social doctrine”, especially those of John Paul II.

Leo XIII: Rerum Novarum (1891)

Leo XIII discusses the implications of an economic system based on “a new property form”, capital, and a new form of labour, “wage labour”, echoing Marx in defining labour as a commodity freely exchanged in the market, insecurely and without reference to any vital minimum, involving a society "divided into two classes, separated by a deep chasm” (n.132). The system had been developing for some time but towards the end of the XIX century was reaching a critical point: “… society …was torn by a conflict all the more harsh and inhumane because it knew no rule or regulation. It was the conflict between capital and labour, or — as the Encyclical puts it — the worker question” (as John Paul II commented in his celebratory Centesimus Annus in 1991).

Leo XIII condemned class war, but was aware that class peace could be built only on justice (n. 130); he stressed the dignity of work and of the worker. Among the rights worthy of protection, next to ownership he listed the right to associate in Trades Unions, to limit working hours, protect the working conditions of children (he did not seem to mind at all that children should actually be working instead of going to school) and women, and the right to a “fair wage”, understood as the right to the necessary means of subsistence. A fair wage is a woolly concept, like that of a fair price. “A fair price – I was taught in the 1960s by a scathing Nicky Kaldor – is that which gives a fair rate of return on labour costs reckoned at a fair wage”: the indeterminacy of two out of these three variables and their possible/likely inconsistency given the state of technology clearly did not occur to Leo XIII and his economic advisors. But apart from that Leo XIII was adamant, though he may have not understood fully how far-fetched, radical and probably impossible his proposition was : “A workman's wages should be sufficient to enable him to support himself, his wife and his children. If through necessity or fear of a worse evil the workman accepts harder conditions because an employer or contractor will afford no better, he is made the victim of force and injustice"(n.131). He did not stop to consider whether unemployment was fairer or less fair than an unfair wage, which he should have.

Leo XIII was equally critical of liberalism and socialism. "To remedy these wrongs [the unjust distribution of wealth and the poverty of the workers], the Socialists encourage the poor man's envy of the rich and strive to do away with private property, contending that individual possessions should become the common property of all...; but their contentions are so clearly powerless to end the controversy that, were they carried into effect, the working man himself would be among the first to suffer. They are moreover emphatically unjust, for they would rob the lawful possessor, distort the functions of the State, and create utter confusion in the community" (n.99). Leo XIII deserves full credit for this prophetic criticism of what came to be known as “realised socialism” (Rudolph Bahro’s expression); John Paul II paid him such credit in his Centesimus Annus.

From Pius XI to Paul VI

The “social doctrine” of the Catholic Church was further developed by Pius XI in Quadragesimo Anno (1931). Not surprisingly Pius XII left no mark whatever on such doctrine. John XXIII in Mater et Magistra (1961) and in Pacem in Terris (1963) stated unambiguously that the social question had become world-wide.

Paul VI, in Populorum Progressio (1967, which Benedict XVI rightly or wrongly considers “the Rerum Novarum of the present age”), tersely denounced “the scandal of glaring inequalities not merely in the enjoyment of possessions but even more in the exercise of power” (n.9), called for integral development, “the good of every man and of the whole man” (n.14), and stigmatized “a system … which considers profit as the key motive for economic progress, competition as the supreme law of economics, and private ownership of the means of production as an absolute right that has no limits and carries no corresponding social obligation. This unchecked liberalism leads to dictatorship rightly denounced by Pius XI as producing “the international imperialism of money””.

It is interesting to note that Paul VI recognized the possibly adverse impact of population growth on development. “It is true that too frequently an accelerated demographic increase adds its own difficulties to the problems of development: the size of the population increases more rapidly than available resources, and things are found to have reached apparently an impasse. From that moment the temptation is great to check the demographic increase by means of radical measures” – though of course he rejected such measures in the name of the freedom of married couples, the moral law, the right to procreation and the law of God.

“Rich nations must give to developing countries”. “… the superfluous [sic] wealth of rich countries should be placed at the service of poor nations” – not a radical proposal: Paul VI does not explain why only superfluous wealth should be given . “At Bombay [4 December 1964] we called for the establishment of a great World Fund, to be made up of part of the money spent on arms, to relieve the most destitute of this world”. He was aware that developing countries relying on primary products’ exports were at a disadvantage in trade with highly industrialized nations; on that ground he questioned liberalism but as a remedy he only called on the goodwill of industrialized countries. “The world is sick. Its illness consists less in the unproductive monopolization of resources by a small number of men than in the lack of brotherhood among individual and people”. “Excessive economic, social and cultural inequalities among peoples arouse tensions and conflicts, and are a danger to peace”. “We appeal to all Our sons… Changes are necessary, basic reform are indispensable: the laymen should strive resolutely to permeate them with the spirit of the Gospel”.

Looking back, it is surprising that this collection of bland and trite platitudes, without any real initiative to promote any change for the better, should ever have been regarded by anybody – believer or not – as something worthy of attention and comment. And how could John Paul II suggest that “The Encyclical [Rerum Novarum] and the related social teaching of the Church had far-reaching influence in the years bridging the nineteenth and twentieth centuries. This influence is evident in the numerous reforms which were introduced in the areas of social security, pensions, health insurance and compensation in the case of accidents, within the framework of greater respect for the rights of workers”. As if such reforms had nothing to do with Trades Union militancy, War and Post-War developments, the response to the Great Crisis, emulation of the social policies of “realized socialism”. But John Paul’s pontificate really did make a difference.

John Paul II

John Paul II made several important pronouncements on the Church’s “social doctrine”. His Centesimus Annus endorsed fully Leo XIII’s Rerum Novarum and developed it to discuss the 1989 fall of the socialist system of central-eastern Europe and its transition to capitalism; to criticize liberalism and western consumerism, to introduce environmental questions, to raise much more forcefully than ever before (in Church doctrine) issues of poverty and inequality. Two other encyclicals of his had prepared the ground: Laborem Exercens on human work (14 September 1981) and Sollicitudo Rei Socialis on the current development problems of individuals and peoples (30 December 1987).

But a much lesser known “Post-Synodal Apostolic Exhortation” Ecclesia in America, delivered in Mexico City on 22 January 1999, expounds and develops his approach to globalization. And two official documents produced during his pontificate and submitted respectively to the United Nations and the World Trade Organisation, on the excessive protection of intellectual property rights, moved the Vatican from general moral exhortations to concrete, progressive policy proposals, from an audience of the faithful to the appropriate global institutions.

Centesimus Annus (1991)

John Paul II attributed the 1989 collapse of communism in central eastern Europe to “the violation of the right of work” [presumably meaning the human rights of workers], the inefficiency of the economic system, and the spiritual vacuum provoked by atheism. He claimed that an important, decisive contribution had been ”the Church’s commitment to the defence and promotion of human rights”, and the meeting of the Church and the workers’ movement. But in a memorable piece in The Guardian (8 April 2005) Jonathan Steele convincingly argued that “It was Gorbachev, not the Pope, who brought the system down”. And that “The impetus for Gorbachev’s reforms was not external pressure from the west, dissent in eastern Europe or the Pope’s calls to respect human rights, but economic stagnation in the Soviet Union and internal discontent within the Soviet elite”.

John Paul II states that “private property also has a social function which is based on the law of the common purpose of goods". “God gave the earth to the whole human race for the sustenance of all its members, without excluding or favouring anyone. This is the foundation of the universal destination of the earth's goods.” This is a meaningless proposition, for there is no sense in which the earth’s goods have a common purpose or destination, in our world where the Gini coefficient for global income distribution is 65%, and is much higher for wealth distribution (see my earlier post on To Have and Have Not). And the idea that individual labour is the origin of individual property is fatuous, because it ignores primitive accumulation. Where John Paul takes an enlightened stance, however, is on the importance of knowledge and the excessive protection of intellectual property right (see below, on Vatican submissions to the World Intellectual Property Organisation and the WTO on the subject).

National and global markets “seem” (in John Paul’s words) to be efficient in the allocation of resources and the satisfaction of needs, but the defeat of so-called “real socialism” should not “leave capitalism as the only model of economic organisation”. “It is necessary to break down the barriers and monopolies which leave so many countries on the margins of development, and to provide all individuals and nations with the basic conditions which will enable them to share in development.” “There are collective and qualitative needs that cannot be satisfied by market mechanisms”. Consumerism is chastised in all its forms, including drugs and pornography. Enterprises should not be directed to profit only but to (unspecified) “other human and social factors”, and should be treated as “communities of men”. The service of high foreign debt should not lead entire populations to hunger and despair.

Ecclesia in America (Mexico City, 1999)

Chapter 2 of this large document, under the unlikely heading “Encountering Jesus Christ today in America”, contains a full discussion of globalization and its ethical implications. Globalization “brings some positive consequences, such as efficiency and increased production and … with the development of economic links between the different countries, can help to bring greater unity among peoples and make possible a better service to the human family. However, if globalization is ruled merely by the laws of the market applied to suit the powerful, the consequences cannot but be negative. There are, for example, the absolutizing [sic] of the economy, unemployment, the reduction and deterioration of public services, the destruction of the environment and natural resources, the growing distance between rich and poor, unfair competition which puts the poor nations in a situation of ever increasing inferiority. While acknowledging the positive values which come with globalization, the Church considers with concern the negative aspects which follow in its wake” (n.20).

Chapter 5 of Ecclesia in America, on “The path to solidarity”, develops these themes further. There is a call for “the globalization of solidarity”; a sharp criticism of “neoliberalism”; “based on a purely economic conception of man, this system considers profit and the law of the market as its only parameters, to the detriment of the dignity of and the respect due to individuals and peoples. At times this system has become the ideological justification for certain attitudes and behavior in the social and political spheres leading to the neglect of the weaker members of society. Indeed, the poor are becoming ever more numerous, victims of specific policies and structures which are often unjust” (n.56). Reduction and cancellation of foreign debt, environmental protection and reclamation, corruption, drug trade, the arms race, immigration, receive specific attention.

On immigration, “the Church in America must be a vigilant advocate, defending against any unjust restriction the natural right of individual persons to move freely within their own nation and from one nation to another. Attention must be called to the rights of migrants and their families and to respect for their human dignity, even in the case of non-legal immigration” (n. 65).

Yet John Paul opposed liberation theology – “because he saw priests defy their bishops and challenge the church’s hierarchical structure” (Jonathan Steele, cited).

The Holy See Submissions to the WIPO and the WTO (2001)

On 16 April 2001 the Permanent Observer Mission of the Holy See in Geneva submitted to the United Nations WIPO a document entitled “Intellectual property and genetic resources, traditional knowledge and folklore”. It firmly opposed the patenting of “genetic material existing in nature, provided that it is possible to replicate it using a biochemical process – a sort of reverse engineering of the complex results of natural evolution”. It defended the rights of use and usufruct of such materials by “native communities that have some knowledge and make use of some of the biological properties covered by the patent”. Present legislation tends to abandon “the social function of intellectual property”, and “patents constitute a brake on free competition”. The Holy See advocates: the informed, free agreement of persons, peoples and states involved as a prerequisite of patenting biological resources; equitable economic participation of native populations in the benefits from commercial exploitation of biological resources: the extension of such protection to human genetic resources; “assurance that patents for biological discoveries do not constitute an undue obstacle to subsequent research and scientific teaching.” Chapeau.

On 20 June 2001 His Excellency Mons. Diarmuid Martin submitted “Intellectual property and access to basic medicines” to the WTO Plenary Council on trade-related aspects of intellectual property rights, on behalf of the Holy See. “Within an open free trade system, intellectual property rights constitute an exceptional monopoly regime”. The submission calls for price discrimination on drugs in favour of poor countries, and a regime of compulsory licensing “to be used as remedies in situations of national emergency or other circumstances of extreme urgency”. “A broad-based commitment of solidarity is the best way to prevent poor countries from falling into the temptation of weakening the Intellectual Property rights framework” (italics in the original text).

Not only that, but: “The Holy See, consistent with the traditions of Catholic social thought, underlines that there is a "social mortgage" on all private property, namely, that the reason for the very existence of the institution of private property is to ensure that the basic needs of every man and woman are met and sustained. This "social mortgage" on private property must also be applied today to "intellectual property" and to "knowledge" (John Paul II, Message to the "Jubilee 2000 Debt Campaign" Group, September 23, 1999). The law of profit alone cannot be applied to that which is essential for the fight against hunger, disease and poverty. Hence, whenever there is a conflict between property rights, on the one hand, and fundamental human rights and concerns of the common good, on the other, property rights should be moderated by an appropriate authority, in order to achieve a just balance of rights.” This is a most powerful, pointed, specific and effective proposal. This kind of “social doctrine” – obviously developed by John Paul II, is a truly revolutionary change. “Santo subito”, as his followers decreed after his death.

Benedict XVI: Caritas in Veritate (2009)

Against this background of major contributions to the Church’s “social doctrine” – and in particular the pronouncements of John Paul II who can be considered its true founder – what is the value added of Benedict XVI latest encyclical?

Before getting to substantive points, the non-believer is put off by more cryptic and mysterious statements than usually are found in encyclicals: about Love in Truth and its apparently equivalent inverse, Truth in Love; the asserted but unexplained importance of the Gospel for development, as well as several references to the mystery of the Trinity. Nothing the matter with that, from a pope of course, but it does not help communications with the world at large.

The necessity of the full development of individuals and peoples is borrowed from Paul VI and John Paul II. The limitations of the profit motive are not new in the Church’s social doctrine. The narrative of the current global financial crisis is obviously broader, richer and more accurate than anything anticipated in previously encyclicals, but that is simply the benefit of hindsight and up to date information, not of particularly profound insights.

Here are a few instances of awareness of recent changes. The limits placed by globalization on the feasible policies that national governments can undertake are stressed. The “…downsizing of social security systems [is] the price to be paid for seeking greater competitive advantage in the global market, with consequent grave danger for the rights of workers, for fundamental human rights and for the solidarity associated with the traditional forms of the social State.” “Governments, for reasons of economic utility, often limit the freedom or the negotiating capacity of labour unions. Hence traditional networks of solidarity have more and more obstacles to overcome.” “…uncertainty over working conditions caused by mobility and deregulation, when it becomes endemic, tends to create new forms of psychological instability, giving rise to difficulty in forging coherent life-plans, including that of marriage”. “What is missing … is a network of economic institutions capable of guaranteeing regular access to sufficient food and water for nutritional needs”. “…the human consequences of current tendencies towards a short-term economy — sometimes very short-term — need to be carefully evaluated.” The encyclical acknowledges “the damage that can be caused to one's home country by the transfer abroad of capital purely for personal advantage”. It condemns the “speculative use of financial resources that yields to the temptation of seeking only short-term profit, without regard for the long-term sustainability of the enterprise”, though often it may be difficult for a speculative use to be distinguished from other uses. “Both the regulation of the financial sector, so as to safeguard weaker parties and discourage scandalous speculation, and experimentation with new forms of finance, designed to support development projects, are positive experiences that should be further explored and encouraged, highlighting the responsibility of the investor.”

Otherwise, the characterization of globalization, its benefits, costs and excesses, the principle of subsidiarity in its governance; the concern about poverty, inequality and environmental issues, do not add much to the picture already drawn by John Paul II in his encyclicals. Added emphasis on the need of “equivalent value” in international trade (echoing unfashionable, outdated post-Marxian trade theory based on irrelevant labour values, as Arghiri Emmanuel’s Echange Inégal, 1962, 1969) is just as empty as Leo XIII’s reliance on the “just wage”.

There are a few minor novelties in Love in Truth. One is the reliance on non-profit organizations as a form of enterprise that can operate in the market and provide social services efficiently, mobilizing additional entrepreneurial energies in society. This is a hopeful possibility, known to be a pet concern of one of Benedict XVI’s economic advisors, Stefano Zamagni, yet untried in its full potential and of doubtful viability in a deep crisis.

A stronger novelty is the advocacy of “principle of gratuitousness”, the economics of gift, for the pleasure of giving rather than for the benefit of remission of sins. Reciprocal gift is well known (since Marcel Mauss, Le Don, 1922) as the foundation of some of the social texture of any society, but it is a limited foundation whose limits are confirmed by Benedict XVI: “Gift by its nature goes beyond merit, its rule is that of superabundance” – ultimately the same thing as Paul VI advocating the gift of “superfluous” wealth.

The commitment to “prioritize the goal of access to steady employment for everyone” is another strong novelty. It might have been wiser to talk of government policies aiming at high and stable employment, rather than full employment for all, as of right. The right to employment is also enshrined in article 4 of the Italian Constitution, and equally wishfully futile. Nobody can have a right to anything without somebody else having a corresponding obligation, and short of there being an Employer of Last Resort (a possible, though remotely likely institution, missing from both the Italian Constitution and Love in Truth) the promise of a right to employment is a straight con. Not so much Stalin's enquiry when warned by an adviser against coming into conflict with the Catholic Church, “How many divisions does the pope have?”. Rather, when Benedict XVI calls for access to steady employment for everyone, the operative question is “How many trillion dollars does the pope have?”. Not enough to make a dent on world unemployment.

These well-meaning but merely wishful additions to the Church’s social doctrine come at a price. For instance, the dilution of the Church’s position on immigration previously reached by John Paul II. The contributions that migrants make to both their country of origin via remittances, and to the host country, are acknowledged, and so are their “inalienable rights that must be respected by everyone and in every circumstance”. But Benedict XVI is awed by “the sheer numbers of people involved, the social, economic, political, cultural and religious problems [immigration] raises, and the dramatic challenges it poses to nations and the international community.” The phenomenon “requires bold, forward-looking policies of international cooperation if it is to be handled effectively. Such policies should start from close collaboration between the migrants' countries of origin and their countries of destination; [such collaboration] should be accompanied by adequate international norms able to coordinate different legislative systems with a view to safeguarding the needs and rights of individual migrants and their families, and at the same time, those of the host countries. No country can be expected to address today's problems of migration by itself. We are all witnesses of the burden of suffering, the dislocation and the aspirations that accompany the flow of migrants.” Maybe this is a change in the right direction, but a far cry from John Paul II’s “natural right of individual persons to move freely within their own nation and from one nation to another… the rights of migrants and their families …even in case of non-legal immigration”.

On excessive protection of intellectual property, the powerful proposals submitted by the Holy See to the WIPO and the WTO in 2001 are totally forgotten, replaced by a feeble single sentence “On the part of rich countries there is excessive zeal for protecting knowledge through an unduly rigid assertion of the right to intellectual property, especially in the field of health care.” The likely negative impact of demographic growth on sustainable development, which had been recognized by Paul VI (see above), is denied by Benedict XVI: “To consider population increase as the primary cause of underdevelopment is mistaken, even from an economic point of view”. There is a total neglect of monopoly and its adverse impact on unemployment and distribution (neither “monopoly” nor “competition” figure in Love in Truth). Altogether, not a small price by any means for the few novelties reported above.

Finally, there is no progress with respect to the view that has always characterized Vatican thinking, that economic problems can be solved if only individuals behaved ethically, a precondition no different from the socialist reliance on the development of “socialist man”, and equally pretentious, hopeless and futile. Benedict XVI has a peculiar notion of “the common good”: “It is the good of “all of us”, made up of individuals, families and intermediate groups who together constitute society” – thus implicitly rejecting the possibility of bettering the position of some individuals families and groups at the cost of worsening that of others. Mario Draghi writes that “Without ethics there is no development” (the title of his article quoted above). Not so. What is needed is not ethics but rules, legal rules embodying those ethical principles but relying on a clear system of penalties and rewards in this life rather than the next.

Caritas begins at home

Suppose that Benedict XVI (and his predecessors who have developed the Catholic Church’s “social doctrine”) had really wanted to impact the full, sustainable development of individuals and peoples, reduce poverty, improve equality, avoid exploitation and unemployment. They have powerful instruments at their disposal, not just moral exhortations but a complex system of permissions and prohibitions, backed by powerful penalties and rewards. There are a few things popes could have done, and could still do, at a stroke. Encourage contraception, to reduce both population growth and the resulting unsustainable pressure on non reproducible resources (that Paul VI well understood, and Benedict XVI denies) and at the same time reduce the number of abortions. Encourage or at least condone the use of condoms in particular, to avoid the spread of HIV and other sexually transmitted diseases. Let people die in peace if and when they want to. Make false reporting, insider trading and tax evasion a mortal sin explicitly, and excommunicate pyramid bankers. Promulgate a schedule of hundreds, thousands, millions, trillions days of indulgence to reduce sinners’ permanence in Purgatory for each economic good deed, and grant plenary indulgence for remission of debt or the hiring of the unemployed. All these measures would affect only Roman Catholics, but there are enough believers and practicing sinners among them to make a significant difference.

As it is, the Vatican Road is paved with good intentions. It does not lead to Hell, but leads nowhere - other than the status quo.

To Have And Have Not

The forthcoming International Review of Applied Economics (Vol. 23, n. 3, May 2009, Routledge) is a special issue on Mechanisms of Inequality, reporting on a research project undertaken at the Universities of Rome “La Sapienza”, Ancona and Urbino (Guest Editors Maurizio Franzini and Mario Pianta). The issue is still in proofs, but its contents were discussed two days ago at a Round Table at the Faculty of Economics of “La Sapienza”. The benefit of Round Tables, like that of Blogs, is that of helping – indeed forcing – one to formulate decisively one’s own convictions about the subject under consideration. This is what I propose to do here with regard to Income Inequality, while referring interested readers to that excellent special issue of the IRAE.

1. Market-determined income distribution. In a market economy personal income distribution is determined by 1) the distribution of the many productive factors and of financial claims; 2) the state and progress of technology; 3) the price of goods and services and therefore the derived prices for productive factors and financial claims, determined in their markets and therefore depending on the degree of competition in those markets ; 4) institutions and policies, in particular re-distribution policies.

2. Efficiency, equality, re-distribution. Under a number of highly restrictive conditions – that are frequently neglected and deserve a separate post of their own – market allocation will deliver economic efficiency [in a Paretian sense: no more output of anything can be produced without either less of some other output(s) and/or more of some other input(s); nobody can be made better off without having to make someone else worse off]. But nobody in his right mind has ever argued (or should ever have argued) that market-determined income distribution is necessarily desirable, and cannot be improved.

A democratically elected government can and does re-distribute a certain amount of income through taxation and budget transfers, usually in an égalitarian direction – though the recent global crisis, financial and real, has induced governments to make large transfers to cover the losses of unsecured creditors, shareholders and other unsuccessful investors, all largely belonging to richer income groups.

Governments are perfectly legitimate in their re-distributive measures, within the bounds of democratic consensus, even at the cost of resulting inefficiency in the allocation of resources, i.e. at the cost of a loss of output.

3. Efficiency and equality gains? There may be a range of possible re-distribution policies over which no such conflict arises between efficiency and equality. The market allocation may be inefficient to start with (some of the necessary conditions for efficiency not being satisfied); lower inequality may enhance cohesion and reduce losses from conflict; re-distribution from the rich to the poor may result in a higher level of activity. But re-distribution is bound to generate opportunistic behaviour (or “moral hazard”), which will reduce the net benefits of re-distribution even over the otherwise safe range. Sooner or later moral hazard will re-instate the conflict between efficiency and equality even if no other causes for such a conflict were present.

4. Countries and the world: income and wealth inequality. The most popular index of Inequality in the distribution of anything is the Gini coefficient, a measure of statistical dispersion taking the value zero for absolute equality between the members of the investigated population, and the value of one for a single member taking all. Inequality in the distribution of income in individual countries is relatively high and rising (see the UN-WIDER http://www.wider.unu.edu/research/Database/en_GB/database/). The current picture in the European Community is given in the Figure below http://www.poverty.org.uk/l14/index.shtm (click on it to enlarge):



Other sources give different coefficients, usually slightly higher. Throughout the world, Gini coefficients of income inequality in different countries range from around 0.25 in Northern Europe and Japan, to over 0.50 in Latin America, to peaks of over 0.60 in some African countries, where however measurements are less reliable and more volatile (up to 73.9 in Namibia in 1993, the last reported value of its coefficient).

Income Inequality world-wide, treating the world as a single country, naturally is much higher, with a Gini Coefficient of 65% (See Milanovic. 2005) [1]

Cornia and Court (2001)[2] consider the positive and negative impact of income inequality within a country. Extreme egalitarianism tends to reduce incentives, encourage free riding behaviour, involves high costs and corruption in the distributive system. Extreme inequality erodes social cohesion, raises social tension and conflicts, causing uncertainty in property rights. Both reduce the capacity to growth. The authors suggest a desirable range of Gini coefficients between 0.25 (typical of North European countries) and 0.40, lower than the Ginis of Russia, China and the USA, not to speak of Latin America and Africa. All the EU-27 countries fall within this range (Turkey being the only European country above 0.40, at 0.436). Cornia and Court (2001) call this the efficient inequality range, though there is considerable arbitrariness in the determination of the upper and lower bounds of the range.

Time trends of Gini coefficients are complex to identify in different periods, countries, country groups: data differ for sources and methods and are not directly comparable over time. The IMF World Economic Outlook of October 2007 confirm that “Inequality has risen in all but the low-income country aggregates over the past two decades, although there are significant regional and country differences... While inequality has risen in developing Asia, emerging Europe, Latin America, the NIEs, and the advanced economies over the past two decades, it has declined in sub-Saharan Africa and the Commonwealth of Independent States (CIS)...Among the largest advanced economies, inequality appears to have declined only in France” (p. 140). The next figure (http://en.wikipedia.org/wiki/File:Gini_since_WWII.gif) also suggests that by and large, with a few exceptions especially in initially very unequal countries such as Mexico, in the last 20-30 years there has been a visible increase in income inequality as measured by Gini coefficients (click on the Figure to enlarge).

A first estimate of the world distribution of household wealth has been provided by Davies et al. (2008) [3]. They find that “… the distribution [of wealth] is highly concentrated—in fact much more concentrated than the world distribution of income, or the distribution of wealth within all but a few of the world’s countries. While the share of the top 10 per cent of wealth-holders within a country is typically about 50 per cent, and the median Gini value around 0.7, our figures for the year 2000 using official exchange rates suggest that for the world as a whole the share of the top 10 per cent was 85 per cent and the Gini equalled 0.892. By comparison, Milanovic (2005) estimates that the world income Gini was 0.795 in 1998… Roughly thirty percent of world wealth is found in each of North America, Europe, and the rich Asian-Pacific countries. These areas account for virtually all of the world’s top 1 per cent of wealth holders”[4]

5. Technology and Macroeconomics. Some explanations of income distribution are rooted in the nature of technology and of technical progress; another explanation is rooted on macroeconomic, allegedly Keynesian foundations. Both refer primarily to the income shares of wages and profits, but in general we can expect a lower share of wages to be associated with a more unequal distribution, given that capital is much more unequally distributed than labour (except that employment trends may offset this factor, as observed by my colleague Francesco Farina at the Rome Round Table). Both explanations seem to be very unsatisfactory.

In its extreme formulation, the impact of technology is formalised under the guise of a production function, whereby national income depends on the amount of aggregate capital and labour in existence. Under a few assumptions about the mathematical properties of that function, and factor prices corresponding to the marginal productivities of factors and exhausting the product, the relative income shares correspond to the elasticities of national income with respect to the two factors. “Income distribution – Joan Robinson used to say of this approach – depends on god and the engineers”.

There is no denying that technology has an influence on distribution; for instance it is plausible to conjecture that recently an increasing skill-intensive bias in technical progress may have raised the degree of inequality. But there are too many problems in attempting to isolate the impact of technology on distribution: the aggregation of capital, the divergence between capital measurements at historical cost, at current prices and at replacement cost; the varying degree of capacity utilisation; the separation of increasing returns to scale from technical progress; and many others. Such problems arise even in less aggregate formulations of this approach.

The impact of macroeconomic accounting, also in its extreme formulation, establishes a link between profit share and investment share in income, given the respective propensities to save of profit earners and wage earners. Suppose wage earners do not save; if they do, they get the same profit rate on their investments, and the respective saving propensities differ according to income category not class. In that case the share of profit will be equal to the share of investment divided by the saving propensity of profit earners (presumed to be constant and equal to the marginal propensity). The alleged Keynesian connection is in the driving force of investment. But relationships based on average propensities hold always necessarily ex-post, while average propensities are not necessarily behavioural parameters, constant and therefore equal to marginal propensities. The approach has little explanatory let alone predictive value. [5]

The highly unequal distribution of wealth, documented above, by itself generates unequal distribution of income, and thereby unequal distribution of savings out of income and investments that unequally raise total wealth, preserving and probably augmenting the inequality in the distribution of wealth. It is conceivable but unlikely that the distribution of new investments might be less unequal than the distribution of the wealth from which they originate, for this would involve the wealthy saving proportionally less than the less-wealthy-but-still-fairly-wealthy. The preservation of wealth inequality preserves income inequality which in turn preserves or enhances wealth inequality.

This applies not only to financial capital but also to human capital. One of the more disturbing results reported in the May 2009 issue of the IRAE is the high correlation between one’s income class and educational achievements and those of one’s parents, even in countries usually characterised as socially mobile like the US [6].

The persistent combination of 1) a high inequality of income and 2) a much higher inequality of wealth has a devastating corollary, namely the persistence of social classes. The gradual abolition of classes – which many predict or even regard as a fait accompli, would require workers to command increasing, though still below average, shares of capital. In that case, over time both income distribution and wealth distribution would become more equal, and the gap between wealth inequality and income inequality would narrow. This is the opposite of what we observe: classes are still with us and are here to stay.

7. Primitive accumulation. Some of the largest fortunes, like that of Bill Gates, are built from zero with the foundation and growth of a successful company. But among the rich there are also many beneficiaries of what Karl Marx called primitive or original accumulation (ursprungliche Akkumulation, Das Kapital, Vol. I, ch. 26), i.e. conquest, robbery and theft rather than thrift. Primitive accumulation, from which further accumulation originates from profit reinvestment, is not only an inheritance from the past, but a continuous occurrence in today’s economies. It takes the form of fiscal evasion, corruption, crime, international trade of arms and drugs, monopoly profits of all kinds, reciprocal salary and bonus fixing by the managerial class, the conquest of Iraqi oil, the procurement contracts of Halliburton, fraudulent Ponzi schemes like the large scale swindle by Bernie Magdoff, the looting of government resources by subjects undertaking risky ventures on the expectation of public rescue in case of failure, the appropriation of national wealth by the beneficiaries of privatisation in states divesting of social assets, like the UK and the post-socialist countries, particularly the appropriation of Russian natural resources by “oligarchs”. The adverse impact of post-socialist transition on income distribution, without any justification on efficiency grounds, through privatisation but mostly through price liberalisation (and globalisation, see below), is well documented in one of the essays in the IRAE May 2009 issue.[7]

The notion that wealth is simply the result of frugality has no more credibility today than it did in Marx’s time. If there are objections to the re-distribution of income and wealth on grounds of presumed efficiency a lot more needs to be done to prevent immoral and illegal enrichment and entitlement.

8. What is the impact of globalisation on income distribution? There are two contrasting views, both originating in IMF publications. The first is put forward in the World Economic Outlook, on Globalisation and Inequality, October 2007. “The analysis finds that increasing trade and financial globalization have had separately identifiable and opposite effects on income distribution. Trade liberalization and export growth… are found to be associated with lower income inequality, whereas increased financial openness is associated with higher inequality. However, their combined contribution to rising inequalityhas been much lower than that of technological change, especially in developing countries” (p.136). In sum, financial globalisation and FDI raise demand and therefore wages for skilled labour relatively to the unskilled.

The second view put forward in the World Economic Outlook, on Spillovers and Cycles in the Global Economy, April 2007, notes the rising globalisation of labour: in 1985-2005 global labour supply has increased by only about 60%, but the “effective” labour force – i.e. labour weighed by a country’s exports to GDP ratio – has increased by about 360%. Labour globalisation by means other than foreign trade, that is immigration and off-shoring, by comparison is almost negligible (respectively about 5% on average and at most 2% of the labour force). This stunning rise in labour competition has been accompanied by a significant fall in the wage share in GDP in advanced countries. Over the period 1980-2005 in which the labour share has fallen: “The decline in the labor share since 1980 has been much more pronounced in Europe and Japan (about 10 percentage points) than in Anglo-Saxon countries, including the United States (about 3–4 percentage points)…Within Europe, the strongest decline is observed in Austria, Ireland, and the Netherlands. Further, most of the decline in the labor share can be attributed to the fall in unskilled sectors, which was more pronounced in Europe and Japan than in the Anglo-Saxon countries. This decline reflects a combination of the reduction in the within-sector labor share and the shift of output from unskilled toward skilled sectors” (p. 166). In Europe, the United States, other Anglo-Saxon countries, Japan, the labour share has fallen from a range of 65%-73% in 1980 to a range of 58%-66% in 2005.

Clearly - as already noted above - there is no necessary one to one correspondence between growing inequality in personal distribution and falling wage shares, but over the long run it is reasonable to presume a connection between the two. In any case, globalisation has winners and losers – lowering tariffs in one sector damages domestic producers to the advantage of foreign exporters – and even if there were net advantages to be reaped the problem would remain of actually (over)-compensating the losers, for we know that potential over-compensation is not sufficient to establish an unambiguous gain from globalisation. Moreover, another essay from the IJAE May issue, by Serranito, establishes that “the positive effect of a decrease in tariffs on growth depends on the level of development; for the majority of the developing countries included in our sample a decrease in tariffs will have no effect on growth”. [8]

9. Other aspects of inequality. All the propositions listed above only scrape the surface of the issue of inequality. Gini coefficients are often ambiguous in ranking degrees of inequality (unless their respective Lorenz curves do not cross). Inequality within country groups (Europe, the world) is much greater than in individual countries. There are many alternative indicators, which may give different results; the choice among them is largely arbitrary. Countries differ not only by indicator but also by the selected dimension of inequality. Both persistence and turning points in inequality time patterns are difficult to explain. Besides household average income we should consider intra-household income distribution, in order to take into account the specific position of children, women and the aged. Access to medical care and education, and indications of life expectancy should be specifically considered, together with the inter-generational distribution of income and wealth. There are not only profits and wages but also rents, central to the classical tradition and largely neglected today. Beside distribution, i.e. relative poverty, there is the issue of absolute poverty – which we have chosen not to discuss at all in this post.

There is the question on what makes high degrees of inequality acceptable: whether ideological propaganda, or the willingness to risk destitution for a small chance of riches, or reliance on unconditional solidarity in case of failure. And what makes inequality intolerable, either to the masses, or to the ruling élite out of concern for sustainability (after all, the Bismark-style welfare state is not a revolutionary conquest but a concession induced by such a concern, as argued by my colleague Anna Simonazzi at the Rome Round Table).

One question that has began to be considered only recently is the relativity of both inequality and poverty with respect to relative prices. An apparently rising income inequality may be – partly, or totally, or more than – counterbalanced by a change in relative prices adverse to the richer income groups; the reverse may also happen, inequality falls counterbalanced by, say, the rise in the price of foodstuffs like those taking place in 2007 and 2008. Moreover, even for the same categories of goods, the rich do not necessarily pay the same price as the poor. The poor buy worse quality food, in smaller quantities and therefore more expensively, and receive lower quality public services – enough to induce the World Bank in 2008 to revise upwards the poverty line and recognise the existence of 400 million more poor than previously believed, a rise of 40% at a stroke.

10. What is the impact of the global crisis – financial and real – on income and wealth inequality? There can be no doubt that the crisis will raise the numbers of the poor, no matter how defined. The order of magnitude of stock exchange falls of one half or more in 2008 is bound to have reduced the inequality of wealth distribution both within countries and worldwide. It is possible – though we will not know for sure until some time after the end of the crisis – that the rich will also suffer a proportionately greater fall in income – though not as much in consumption – than the poor; except that many of the poor might suffer a total loss of income, thus tipping the balance towards greater income inequality. But even if a more equal wealth and income distribution resulted after the crisis, most people would regard the corresponding increase in poverty an intolerably high price to pay for more equality.

This does not mean that the converse is true, i.e. that an increasing inequality is necessarily an acceptable price for poverty reduction. It is not just a question of the actual trade-off on offer between inequality and poverty. Many, perhaps most of us, may simply not be prepared to entertain a trade-off between the two, and regard achieved levels of poverty and inequality as ceilings, beyond which there can be no sustainable welfare improvement.

[1] Branko Milanovic. Worlds Apart, Measuring International and Global Inequality, Princeton University Press, 2005.
[2] Andrea Cornia and Julius Court, Inequality, Growth and Poverty in the Era of Liberalization and Globalization, WIDER Policy Brief No. 4, Helsinki, 2001.
[3] James B. Davies,1 Susanna Sandström, Anthony Shorrocks, and Edward N. Wolff, The World Distribution of Household Wealth, UNU-WIDER Discussion Paper No. 2008/03, February 2008, http://www.wider.unu.edu/publications/working-papers/discussion-papers/2008/en_GB/dp2008-03/.
[4] Davies et al, 2008, who also discuss the appropriateness of using actual instead of PPP exchange rates. They add that “About 34 per cent of the world’s wealth was held in the US and Canada in the year 2000, 30 per cent was held in Europe, and 24 per cent was in the rich Asia-Pacific group of countries. Africa, Central and South America, China, India and other Asia-Pacific countries shared the remaining 12 per cent. The location of top wealth-holders is even more concentrated, with North America hosting 39 per cent of the top global 1 per cent of wealth-holders, and Europe and rich Asia-Pacific having 26 per cent and 32 per cent respectively. The high share of top wealth-holders in North America is particularly disproportionate, as this region contains just 6 per cent of the world population”.
[5] On both approaches see Geoff Harcourt, Some Cambridge Controversies in the Theory of Capital, CUP, Cambridge, 1972 (critical of the first approach, supportive of the second); Luigi L. Pasinetti, Keynes and the Cambridge Keynesians, CUP, Cambridge, 2008.
[6] Maurizio Franzini and Michele Raitano, Persistence of inequality in Europe: the role of family economic conditions, IRAE May 2009.
[7] David Barlow, Gianluca Grimaldi and Elena Meschi, Globalisation versus internal reforms as factors of inequality in transition economies, IRAE May 2009.
[8] Francisco Serranito, Trade, catching up and divergence, IRAE May 2009.