Vladimir Popov replies on China

[A Guest Post by Vladimir Popov, New Economic School, Moscow, vpopov@NES.RU, http://www.nes.ru/~vpopov]

I am very grateful to everyone who commented on my post of 24 May on the Uniqueness of Chinese Capitalism. Here are some brief replies that I hope might promote further debate.

Mario stresses the prohibition of trades unions and strikes in today’s China. Well, trade unions formally exist, but the right to strike is really not guaranteed by Deng’s constitution, although it was guaranteed by Mao’s constitution. (By the way, the relative popularity of Mao and Deng in China today could be measured by observing the numbers at the memorial site where people can go and put virtual flowers to personalities they like: http://jidian.china.com Since 2009 and until July 8, 2010, Mao got over 2 million bouquets of flowers, Deng – only 33,000, less than Zhou Enlai (nearly 200,000) and Norman Bethume, a Canadian doctor helping Republicans in Spain in 1936-39 and Communists in China during the Anti-Japanese and Civil Wars (over 37,000)).

Mario questions my statement that all developed countries had authoritarian regimes in the past. “Including England, Sweden, Denmark, Switzerland, the United States? If you said "many developed countries had before" nobody could argue, but all? You might say more about this presumably universal authoritarianism”. Well, I would stick to what I said – there was life before democracy, which emerged at a very late stage of human history. In ancient Greece neither women nor slaves had voting rights. In France in 1815-30 voters amounted to only 0.25-0.3 per cent of the population, and about 0.6 per cent in 1830-48. In England suffrage was extended by the Reform Act of 1832. Nevertheless, voting rights were received by 14-18 per cent of men only. Universal male suffrage was introduced only in 1928. In Germany, Italy, Belgium women were not given voting rights until after the Second World War. Rich countries were generally late in introduction of universal suffrage: it was granted in 1965 in the USA, in 1970 - in Canada, in 1971 - in Switzerland. (Polterovich, Popov, 2007).

Mario writes: “Mao's contribution to filling state coffers is fine, but did he really contribute to building state institutions? I thought Maoism had been fairly destructive rather than constructive in this respect?”

I referred to the fact that Mao created the “vertical of power” that not only Putin, but Qin Shihuangdi (the first emperor that unified China in 3rd century B.C.) could not have dreamt of. I gave the data on shadow economy and murders. I said that party cells were created in every village, so for the first time in China’s history the central government in Beijing could enforce decisions taken in the capital all across the country. And I explained that government for the first time in Chinese history started to collect reasonable revenues (always a problem in developing countries).

A couple of examples can be enlightening. In Mao’s days policemen used to be unarmed like most British Bobbies. Bank officials collected cash from retail shops at the end of the business day and carried it back to the bank on a bike or via public transport (and unarmed, of course). Today, the same procedure is different – armoured vehicles, bullet proof jackets, helmets, machine guns…

Another good indicator of the ability to maintain social order and the magnitude of non-compliance with existing regulations is the incarceration rate – the number of inmates per capita. It is 120 per 100,000 against 751 people in prison or jail for every 100,000 population in the US and 151 in the UK. Which is the “land of freedom” and which is the “prison state”?

Anonymous comments that the lower Chinese murder rate does not account for “capital punishment and the silent massacre of female babies along with the number of suicides directly or indirectly induced by Chinese state repression and rule of force”. It does account for capital punishment; Amnesty International estimates that “Legal murders” – executions (1000-2000 a year) account for about 5% of total murders.

“The silent massacre of female babies” is probably a reference to Berlusconi statement that “under Mao's China they didn't eat babies, but they boiled them to fertilise the fields” (Berlusconi, 2006). There is a debate, whether China has sex-selective abortions (although it is illegal for doctors in China to reveal the gender of the foetus) because China has one of the highest gender imbalances for the newborns. But “silent massacre of female babies” is as probable as “boiling them to fertilize the fields”.

And on “suicides directly or indirectly induced by Chinese state repression and rule of force”: the total number of suicides in China is 21 per 100,000, quite high by international standards, but less than in Japan and Finland, and way less than in Estonia and Hungary.

Alberto’s comment that “authoritarian types of mixed capitalist economy with an important steering role for the state have thrived in South-East Asia, from Japan to Singapore, to South Korea and Taiwan, without any communist connotations, leading those countries to development and prosperity” is missing the point. All the countries mentioned were supported by the US during the Cold War as counterweights to global communism, some even call this “development by invitation”. Not only did they receive Western assistance, but also, and most important, got access to US markets. In addition in Japan and Korea the agricultural reform was carried by the US occupation authorities and in Taiwan it took place under pressure from the US.

In a sense, Alberto writes, “over the long haul Chiang Kai-shek has triumphed over Mao. (An analogous consideration could be made with respect to Vietnam, where after a long bloody civil war the vanquished appear to have triumphed over the victors.)”. I would dispute that. Chiang Kai-shek, as the puppet South Vietnamese government, had the time to carry reforms and produce an economic miracle but failed to do so. There was no growth and no peace in China in 1928-48, when Chiang Kai-shek was the leader. When Chiang Kai-shek fled to Taiwan (even after the so called “golden decade of the 1930s”), he left China with GDP per capita of $500 (Maddison, 2008), same as in 1500, and a life expectancy of 35 years.

To put it differently, to produce an economic miracle in Taiwan Chang Kai-shek had to be defeated and learn from his defeat and from the communists (and to carry out agrarian reform on the island that he never carried out in China) and to get a support from the US (access to the US market).

“…Maoism left the Chinese economy and society in such a bad shape that simply the demolition of Maoism produced the economic miracle”, says Alberto. This is wrong again. The catch-up development of China since 1949 was extremely impressive: not only were growth rates in China higher than elsewhere after the reforms (1979 onward), but even before the reforms (1949-79), despite temporary declines during the Great Leap Forward and the Cultural Revolution, Chinese development was quite successful. According to Maddison (2008), Chinese per-capita GDP was about 70 percent of India’s in 1950, rose to about 100 percent by 1958-59, fell during the Great Leap Forward, rose again to 100 percent of the Indian level by 1966, fell during the first years of the Cultural Revolution, and rose again to 100 percent by 1978. By 2006, it was more than twice the Indian per capita GDP. World Bank estimates, however, suggest that since 1960, Chinese growth rates (five-year moving averages) were always higher than Indian growth rates. Life expectancy in China in 1950 was only 35 years but by the end of the 1970s rose to 65 years—thirteen years higher than in India. Today, it is seventy-three years—seven years higher than in Russia and India. Some charts below (from Popov, 2009).

Berlusconi (2006). Communists boiled babies: Berlusconi. “Herald Sun”, 27 March 2006
http://www.freerepublic.com/focus/f-news/1603618/posts

Maddison, A. (2008). Statistics on World Population, GDP and Per Capita GDP, 1-2006 AD (http://www.ggdc.net/maddison/Historical_Statistics/horizontal-file_09-2008.xls)

Polterovich, V. Popov, V (2007). Democratization, Quality of Institutions and Economic Growth.
-TIGER Working paper No. 102, Warsaw, July 2007.

Popov, V. (2009). Why the West Became Rich before China and Why China Has Been Catching Up with the West since 1949: Another Explanation of the “Great Divergence” and “Great Convergence” Stories. -NES/CEFIR Working paper # 132, October 2009.

Is The Chinese Variety of Capitalism Really Unique?

A Guest Post by Vladimir Popov [1]

Because the Chinese economy did much better in the recent recession of 2008-09, there is no shortage of articles suggesting that the Chinese model is more viable and that the West should learn from China.

“We in the West have a choice - writes Anatole Kaletsky in The Times -. Either we concede the argument that China, in the 5,000 years of recorded human history, has been a much more successful and durable culture than America or Western Europe and is now reclaiming its natural position of global leadership. Or we stop denying the rivalry between the Chinese and Western models and start thinking seriously about how Western capitalism can be reformed to have a better chance of winning” [2].

“East is East, and West is West, and never the twain shall meet”? Rudyard Kipling's oft quoted words prompt a more modest question: does the Chinese economic model today differ radically from the Western model; does it really have magic properties that allow growth amidst the world-wide recession or has growth been just a stroke of luck?

Certainly the Chinese economy is no longer either centrally planned or state-owned. On the similarities with the West side we have the:

- Dominant role of the private sector - 75% of GDP is produced by non-state enterprises, including joint stock companies and individual private businesses, which are not that different from their Western counterparts;

- Relatively small share of government spending in GDP (about 20%) – lower than in all Western countries and often lower than in developing countries with similar per capita GDP;

- No longer free education and health care, and relatively high income and wealth inequalities (Gini coefficient of 45% and 64 billionaires on the mainland alone, according to the March 2010 “Forbes’ account, second in the world after the US with 403, but ahead of Russia's 62).

Differences with the Western economic model also do not seem to be all that significant:

- China has a strong, export-oriented industrial policy – mostly caused by undervaluation of the yuan leading to the accumulation of vast foreign exchange reserves. This is not without a precedent, however, since this practice was used by Hong Kong, Japan, Korea, Taiwan and Singapore at earlier stages of development);

- Land is still not private property in China and is not traded, but private, long-term transferable private leases are widespread; besides, public ownership of land is not uncommon in other countries, albeit in smaller proportions;

- China exercises controls over its capital account but, again, this practice is used by many developing countries now and was still being used by European countries just half a century ago, until well after the end of the Second World War;

- China has an authoritarian regime (which, of course, all developed countries had in the past; some of them, like Spain, Portugal, Taiwan, South Korea, as recently as three-four decades ago).

A real difference is the institutional capacity of the state.

Many formal comparisons of the similarities and differences of Chinese and Western economic models misses the most important point. The uniqueness of China is that while it looks very much like a developed country today in terms of the institutional capacity of the state, it is a developing country according to GDP per capita. Instead China should be compared with developing countries today or developed countries a hundred years ago, when their GDP was at the current Chinese level; this comparison is very much in China favour.

The institutional capacity of the state, narrowly defined, is the ability of a government to enforce laws and regulations. While there are a lot of subjective indices (corruption, rule of law, government effectiveness, etc.) that supposedly measure state institutional capacity, many researchers do not think they help to explain economic performance and consider them biased[3]. The natural objective measures of state institutional capacity are the murder rate – non-compliance with the state’s monopoly on violence[4], and the shadow economy – non compliance with the economic regulations. China is unique in having some of the lowest scores for both indicators in the developing world, comparable to those of developed countries (see chart 1).

Chart 1. Murder rate per 100,000 inhabitants and government effectiveness index (ranges from -2.5 to +2.5) in 2002


















Upper chart - countries with a high (15-75) murder rate; Lower chart – countries with a low rate (0-3). Source: WHO, World Bank.

With less than 3 murders in 2002 per 100,000 inhabitants against 1-2 in Europe and Japan and over 5 in the US) China looks like a developed country. Only a few developing countries, mostly in the Middle East and North Africa (MENA), have such low murder rates, normally they are considerably higher, as in Latin America, Sub Saharan Africa, and many Former Soviet states. By way of comparison, it took Western Europe 300 years to move from a murder rate of over 40 per 100, 000 inhabitants in the sixteenth century to current levels of 1-2 murders per 100, 000 inhabitants in the nineteenth century beyond [5].

The same is true of the shadow economy: it is less than 17% of the Chinese GDP, lower than in Belgium, Portugal, Spain, whereas in developing countries it is typically around 40%, sometimes even over 60%. Only few developing countries have such low share of shadow economy, in particular, Vietnam and some MENA countries (Iran, Jordan, Saudi Arabia, Syria).

Chart 2. Share of the shadow economy in GDP in 2005, %, and government effectiveness index in 2002 .
















Source: World Bank. Data on shadow economy are from: Friedrich Schneider. Shadow Economies and Corruption All Over the World: New Estimates for 145 Countries. – Economics. Open Access, Open Assessment E-Journal, No. 2007-9 July 24, 2007 (measures of the shadow economy are derived from divergence between output dynamics and electricity consumption, demand for real cash balances, etc.).

Where does the strength of the Chinese institutions come from?

The pre-conditions for the Chinese success of the last thirty years were created mostly in the preceding period 1949-76. It would be no exaggeration at all to claim that without the policies implemented by Mao’s regime, the market-type reforms of 1979 and beyond would never have produced the impressive results that they did. In this sense, economic liberalization in 1979 and beyond was only the icing on the cake. The other ingredients, most importantly strong institutions and human capital, had already been provided by the previous regime. Without these other ingredients, liberalization alone in different periods and in different countries was never successful and sometimes was counterproductive, as in sub-Saharan Africa in the 1980s.

Market-type reforms in China in 1979 and beyond brought about such an acceleration in economic growth because China already had an efficient government, created by the Chinese Communist Party after the Liberation, which the country had not had in centuries - not least because of its deliberate destruction by various colonial, European aggressors. Through the party cells in every village, the communist government in Beijing was able to enforce its rules and regulations throughout the country more efficiently than Qing Shi Huang Di or any subsequent emperor, not to mention the Kuomintang regime (1912-49). While, in the late nineteenth century, the central government had revenues equivalent to only 3 percent of GDP (against 12 percent in Japan right after the Meiji Restoration) and, under the Kuomintang government, they increased to only 5 percent of GDP, Mao’s government left the state coffers to Deng’s reform team with revenues equivalent to 20 percent of GDP [6].

The Chinese crime rate in the 1970s was among the lowest in the world, A Chinese shadow economy was virtually non-existent, and corruption was estimated by Transparency International even in 1985 to be the lowest in the developing world (China, together with the USSR, was in the middle of the list of 54 countries – below Western countries, but ahead of most developing countries and even ahead of South Korea, Greece, Italy, and Portugal [7]). In the same period, during “clearly the greatest experiment in the mass education in the history of the world”, literacy rates in China increased from 28 percent in 1949 to 65 percent by the end of the 1970s (41 percent in India, for comparison)[8].

By the end of the 1970s, China had virtually everything needed for growth except some liberalization of markets — a much easier ingredient to introduce than human capital or institutional capacity. The foundations for the truly exceptional success of the post-reform period had been laid purposefully in 1949-76. [9]

But even this seemingly simple task of economic liberalization required careful management. The USSR was in a similar position in the late 1980s. True, the Soviet system lost its economic and social dynamism, growth rates in the 1960s-80s were falling, life expectancy was not rising, and crime rates were slowly growing, but institutions were generally strong and human capital was large, which provided good starting conditions for reform. Nevertheless, economic liberalization in China (since 1979) and in the USSR and later in Russia (since 1989) produced markedly different outcomes.[10]

[Russia was assaulted for decades by the West and suffered massive human and material losses in the Second WW. China may have been having objectively hard and troubled times but it was not under attack in the same way, and having itself constantly diverted from its course of action by the Americans].

Fast economic growth can materialize only if several necessary conditions are met simultaneously. Specifically rapid growth requires: infrastructure, human capital, in agrarian countries even land re-distribution, strong state institutions, and economic stimuli, among other things. Rodrik, Hausmann, and Velasco talk about “binding constraints” that hold back economic growth; finding these constraints is a task in “growth diagnostics”[11]

Why did economic liberalization work in central Europe but not in sub-Saharan Africa and Latin America? The answer, according to the outlined approach, would be that in central Europe the missing ingredient was economic liberalization, whereas in Sub-Saharan Africa and Latin America there was a lack of state capacity, not a lack of market liberalization. Why did liberalization work in China and central Europe but did not work in the Commonwealth of Independent States? It is because in the CIS it was carried out in such a way as to undermine state capacity — the one useful heritage of the socialist past ― whereas in central Europe and even more so in China , state capacity did not decline substantially during transition?

Unlike Russia after 1991, so far it seems that China in 1979-2009 managed to preserve its strong state institutions better — the murder rate, a reliable measure of state capacity as noted above, in China is still below 3 per 100,000 inhabitants compared to about 30 in Russia in 2002 and about 20 in 2009. In the 1970s, under the Maoist regime, the murder rate in Shandong Province was even less than 1 [12], and in 1987 it was estimated to be 1.5 for the whole of China [13]. The threefold increase in the murder rate during the market reforms is comparable with the Russian increase, but Chinese levels are nowhere near the Russian levels.

If the Chinese model exists, is it replicable and sustainable, or even desirable?

The litmus test is a question on which economists sharply disagree: where will the next economic miracles occur, if at all.

Today, conventional wisdom suggests democratic countries that encourage individual freedoms and entrepreneurship, as Mexico and Brazil, Turkey and India, for future growth miracles, whereas rapidly-growing, currently authoritarian regimes, like China and Vietnam or Iran and Egypt, are thought to be doomed to experience a growth slowdown, if not a recession, in the near future. According to Jack Goldstone [14], “a country encouraging science and entrepreneurship will thrive regardless of inequality: hence India and Brazil, and perhaps Mexico, should become world leaders. But I say countries that retain hierarchical patronage systems and hostility to individualism and science-based entrepreneurship, will fall behind, such as Egypt and Iran ”. Many believe that rapid growth could be achieved under authoritarian regimes only at the catch-up stage, not at the innovative stage: once a country approaches the technological frontier and it becomes impossible to grow just by copying innovations of the others, it can continue to advance only with free entrepreneurship, guaranteed individual freedoms and a democratic political regime [15].

We still do not have enough evidence for innovation-based growth. For one thing, on all measures of patent activity, Japan , South Korea and China are already ahead or rapidly catching up with the US. The patent office of the United States of America, which had consistently issued the highest number of patents since 1998, was overtaken in 2007 by the patent office of Japan . The patent office of China replaced the European Patent Office as the fourth largest office in terms of issuing grants (the five largest patent offices - those of Japan, the USA, the Republic of Korea, China and the EPO accounted for 74.4% of total patent grants). The number of resident patent filings per $1 of GDP and $1 of R&D spending is already higher, sometimes considerably higher, in Japan, Korea and China than in the US [16].

And the evidence for catch-up growth is controversial to say the least. Imagine, for instance, that the debate about future economic miracles were happening in 1960: some would be betting on more free, democratic and entrepreneurial India and Latin America, whereas others would predict the success of authoritarian (even sometimes communist), centralized and heavy handed government interventionist East Asia. What is unknown, however, is whether the gradual weakening in the reform period capacity of the Chinese state will continue to weaken further, which will convert China into a “normal” developing country. In this case Chinese rapid growth would come to an end and there wouldn’t be any more a question of what is so special about the Chinese economic model.

POSTSCRIPT by DMN: The 27 May issue of the Russian magazine "Russkiy Reporter" lists Vladimir Popov among the "10 best [Russian] economists and sociologists in 2000-2010". Vladimir is sketched on the right-hand top corner of the magazine's cover.
Warmest congratulations, Vladimir!























[1] New Economic School, Moscow. vpopov@NES.RU, http://www.nes.ru/~vpopov.

[2] Anatole Kaletsky. “We need a new capitalism to take on China . If the West isn’t to slide into irrelevance, governments must be much more active in taking control of the economy”. “The Times”. February 4, 2010, http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article7014090.ece.

[3] Mushtaq H. Khan. Governance, Economic Growth and Development since the 1960s. DESA Working Paper No. 54, August 2007.
http://www.un.org/esa/desa/papers/2007/wp54_2007.pdf

[4] Crimes are registered differently in different countries—higher crime rates in developed countries seem to be the result of a better registration of crimes. But serious crimes, like murders, appear to be registered quite accurately even in developing countries, so an international comparison of murder rates is well warranted.

[5] Eisner, Manuel. Long-Term Historical Trends in Violent Crime. – Crime and Justice, Vol. 30 (2003), pp 83-142.

[6] Lu, Aiguo. China and the Global Economy since 1840. New York , St. Martins Press, 1999.

[7] Internet Center for Corruption Research, Historical comparisons. Http://www.icgg.org/corruption.cpi_olderindices_historical.html

[8] Peterson Glen. State Literacy Ideologies and the Transformation of Rural China. The Australian Journal of Chinese Affairs, No. 32 (Jul., 1994.

[9] To a lesser extent, this is true for India : market-type reforms in the 1990s produced good results because they were based on the previous achievements of the import substitution period. Fast Indian growth is sometimes attributed to the deregulation reforms of the 1990s, but it was shown that fast growth actually started in the early 1980s, well before the deregulation reforms were launched (Ghosh, Jayati. Macroeconomic and Growth Policies. Background Note. UN DESA, 2007). Like Chinese growth, Indian growth was based on the achievements of the 1950s-70s period of ISI and mobilization of domestic savings: the savings rate (as a percentage of GDP) doubled in the last fifty years, going up from 12-15% in the 1960s, to 16-20% in the 1970s, 15-23% in the 1980s, 23-25% in the 1990s, and to 24-35% in 2000-08.

[10] Popov, V. Shock Therapy versus Gradualism Reconsidered: Lessons from Transition Economies after 15 Years of Reforms. – Comparative Economic Studies, Vol. 49, Issue 1, March 2007, pp. 1-31
(http://www.nes.ru/~vpopov/documents/Shock%20vs%20grad%20reconsidered%20-15%20years%20after%20-article.pdf); Popov, V. Why the West Became Rich before China and Why China Has Been Catching Up with the West since 1949: Another Explanation of the “Great Divergence” and “Great Convergence” Stories. -NES/CEFIR Working paper # 132, October 2009.

[11] Rodrik, Dani, R. Hausmann, A. Velasco. Growth Diagnostics. 2005. Http://ksghome.harvard.edu/~drodrik/barcelonafinalmarch2005.pdf

[12] Shandong Province database [ Shandong sheng shengqing ziliaoku].
http://www.infobase.gov.cn/bin/mse.exe?seachword=&K=a&A=16&rec=42&run=13.%20%20Chinese%20PPP%20GDP%20per%20capita%20in%20the%201970s%20was%20about%201000Chinese PPP GDP per capita in the 1970s was about $1000 – at the same level as in Western Europe in the seventeenth century, when the murder rate was about 10 per 100, 000 inhabitants (Eisner, op.cit; Maddison, Angus. Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD (http://www.ggdc.net/maddison/).

[13] WHO Health for All Database, 2004.

[14] Goldstone, J. Unpublished comments on Popov, V. Why the West Became Rich before China and Why China Has Been Catching Up with the West since 1949: Another Explanation of the “Great Divergence” and “Great Convergence” Stories. -NES/CEFIR Working paper # 132, October 2009.

[15] Ronald Inglehart and Christian Welzel. Modernization, Cultural Change, and Democracy: The Human Development Sequence. Cambridge University Press, 2005.

[16] World Intellectual Property Indicators. WIPO, Geneva , 2009.

How to turn a minor crisis into a Greek tragedy

In the last four months the Greek economy has escalated from a minor national crisis to a near-catastrophe spreading to the whole of Europe, due to a combination of:

genuinely worrying Greek macroeconomic trends - in terms of government deficit, public and private debt and its maturity structure, trade competitiveness, current account imbalances - made worse by a recent and past record of national accounts falsification and cosmetic manipulations (both the responsibility of past right wing governments);

plus European chauvinism in wanting to keep the IMF out of it in spite of the fact that only the IMF Board can mobilise substantial resources more cheaply and quickly (in half an hour or so) and smoothly than anybody else, and Greece is actually entitled to those funds. The very proposal of setting up a European Monetary Fund was unnecessary (why have a regional agency when there is a global one, should we also have a European Trade Organisation, a European Health Organisation, a Bank for European Settlements?). It was also a waste of time or, worse, a costly dilatory tactic;

plus German populism in delaying and opposing EMU assistance against the interests of the German governent and public (German banks have at least €32bn exposure to a Greek default, higher than the current German cost of a rescue package over three years, of €22.2bn), just to please the North-Rhine Westphalia electors voting today; Angela Merkel deserves to be duly punished for that;

plus the EU'S unbelievable vagueness about the scale, form and terms of a bail-out: "the EU will provide as much as it will be needed if and when it will be needed" does not tell investors what they want to know: how much, whether they will be guarantees or loans, by the Union or bilaterally by member states, EU or EMU. And there is still uncertainty about the very legality of a bail-out, with the German constitutional court examining various appeals against the rescue package. Jean-Claude Trichet and Angela Merkel insisted on "no subsidy" on interest to be charged to Greece, thus effectively casting serious doubts about the effectiveness and success of their own package. The compromise 5% interest eventually charged on EU states' bilateral loans is higher than both the interest charged by the IMF (just over 3%) and the cost of borrowing by the German government;

plus the adverse effects of silly pronouncements by a number of EU high officials and economic commentators, i.e. talks of possible expulsion of Greece from the eurozone (for which there is no legal instrument), or voluntary withdrawal by Greece returning to the drachma (this would require its withdrawal from the EU, which is not in anybody's interest, and just imagine the level to which drachma interest rates would rise) or the introduction of a currency parallel with the euro; or German withdrawal from the Eurozone for the reverse of those reasons, or a two-euro zone, one Southern and weak and the other strong and Nordic ...

plus Greek failure to apply in good time for even the little finance they had secured in April (€45bn), allegedly not to signal distress, yet thus precipitating a much greater distress.

plus delays and quarrels leading to interest spreads over Bundes and to CDS prices rising to the point that Greece could no longer afford to access international financial markets, for at such high market rates Greek debt would have been unsustainable and demonstrably ended in default in the near future.

At that point the scale of the package required rose to €110bn (€80bn from EMU member states, €30 from the IMF) but, by the time this was granted, "markets" wanted even more.

And the burden of adjustment will fall on Greek public sector employees and on pensioners. Some of them benefited from large public deficits, for instance through the hiring by the previous rightwing government of thousands of their supporters, and through an earlier retirement age than most (including Germans). But they were not the main beneficiaries of rising public debt, or of rising inequality at large. When Romano Prodi squeezed Italians hard in order to meet the Maastricht conditions to join the euro, at least he made some symbolic gestures of taxing interest revenues and putting some extra tax on real estate. The people on whom the burden of Greek adjustment unfairly falls today have every reason to show their dissent on the streets of Athens - especially since the party now in opposition, responsible for the debacle, will not face up to their responsibilities. Popular protest, of course, objectively strengthens the expectation and the likelihood of default. In 1988 Ceaucescu implemented a brutal deflation in order to pay off all of Romania's foreign debt at a stroke, but fortunately Greece 2010 is not Romania 1988: creditors, bailers-out and the Greek government should recognise that there are limits to the political feasibility even of otherwise sound economic policies.

The coup de grace to Greece and perhaps to the euro was given by rating agencies unreasonably downgrading government bonds in the Eurozone even after the large scale rescue package had been approved. The "three sisters" should have been utterly discredited by their past failures in predicting performance, from Enron to Lehman Brothers, and by their past record of frequent conflicts of interest, yet they still mould and guide expectations, and are taken seriously even by the ECB (until Trichet fortunately decided to keep accepting Greek bonds as collateral regardless of their credit rating, and initiated a long-required re-assessment of the rating agencies' status. Nevertheless, talk of setting up a European (public?) "independent" rating agency is laughable, for nobody would take seriously its ratings of European bonds.

The attack on the euro must have been - at least partly - encouraged by the Americans and the British in order to deflect public attention away from their own economic and political troubles. Not necessarily through a conspiracy, as it has been suggested by some commentators, more by following a natural and self-serving inclination. In the end - during the night of Friday 7 May - Europe delivered, but delivered so much later than they should have that the tragedy is not over by any stretch of the imagination. And the deal made even the usually clownesque Berlusconi - compared to Trichet and Merkel and Sarkozy - look like a born statesman.

I'll Not Vote Brown's Labour

Remember Christopher Logue's poem "I shall vote Labour" (1966)? I remember reading his verses in The New Statesman at the time:

I shall vote Labour because
God votes Labour.
I shall vote Labour to protect
the sacred institution of The Family.
I shall vote Labour because
I am a dog.
I shall vote Labour because
upper-class hoorays annoy me in expensive restaurants.
I shall vote Labour because
I am on a diet.
I shall vote Labour because if I don't
somebody else will:
AND
I shall vote Labour because if one person
does it
everybody will be wanting to do it.
I shall vote Labour because if I do not vote Labour
my balls will drop off.
I shall vote Labour because
there are too few cars on the road.
I shall vote Labour because I am
a hopeless drug addict.
I shall vote Labour because
I failed to be a dollar millionaire aged three.
I shall vote Labour because Labour will build
more maximum security prisons.
I shall vote Labour because I want to shop
in an all-weather precinct stretching from Yeovil to Glasgow.
I shall vote Labour because
the Queen's stamp collection is the best
in the world.
I shall vote Labour because
deep in my heart
I am a Conservative.

[ 'I Shall Vote Labour' from Selected Poems by Christopher Logue published by Faber & Faber.]

Contrast and compare with the following excerpt from Tony Wood's Editorial in the latest issue of The New Left Review, "Good riddance to New Labour":

"... is there any reason to find Labour preferable? Arguments for them as the lesser evil rest on a number of false assumptions.

First, the notion that there is any principled social or political basis for loyalty to Labour: whatever such attachments used to mean, the party’s own self-transformation in pursuit of power has emptied them of any real content, turning them into little more than sub-political badges of identity. There is no reason why voters should be any more sentimental about the Labour Party than it has been about them.

Second, the idea that rejection of New Labour necessarily means voting for the Tories: abstention, a spoilt ballot, or a vote for one of the minority parties denied representation by the British parliamentary system are perfectly honourable options. Within the present morass of British parliamentarism, any consistent left should not restrict itself to one enemy, but should rather engage in combating the entire putrid edifice, the better to carve out an exit from it.

Third, those who advocate yet another term for New Labour ignore the fact that, in a system where actual political differences are minimal, no government should be allowed to continue in power indefinitely, lest its corruption go unchecked. The notion that a spell in opposition might actually do a ruling party some good, though widespread in previous decades, is rarely voiced today—itself an indication of the system’s degeneration.

But surely the clinching argument against New Labour is one of simple democratic principle. Any government with a record as appalling as this one’s deserves to be punished at the polls, if accountability to the voting public is to have any meaning. The specifics of New Labour’s record—one murderous war after another; slavish devotion to finance; promotion of rampant inequality; repeated assaults on civil liberties; fragmentation and privatization of public services; outrageous corruption—make plain that they have fully merited being turfed out of office. Good riddance; this execrable government deserves to go."


I'll not vote Brown's Labour
because my balls would drop off
if I did and, above all, because
deep in my heart
I am a Socialist.


P.S. In fairness, I will vote Labour in my local elections, where clever and competent candidates committed to improving the life of their community innocently stand, unfairly handicapped by Gordo. They might have called for his demise before the elections, but nobody should be put in a position of having to be a hero.

Inflation: Up or Down?

On 12 February the IMF published a paper by Olivier Blanchard (the IMF Chief Economist from MIT), Giovanni Dell’Ariccia and Paolo Mauro, on “Rethinking Macroeconomic Policy.” The paper re-examines the traditional macroeconomic and financial policy framework in the wake of the recent devastating crisis. It reviews the main elements of the pre-crisis consensus about macroeconomic policy, evaluates what was wrong and what still holds of that consensus and makes a first attempt at re-drawing the contours of a new macroeconomic policy framework. It makes compulsory and compelling reading. Among other points the authors note how, traditionally, central banks have adopted low inflation rates of around 2 percent (like the ECB, just to name names); they argue that such a target should be raised. Interviewed by the IMF Survey Online, on this point Olivier Blanchard explains:

“The crisis has shown that interest rates can actually hit the zero level, and when this happens it is a severe constraint on monetary policy that ties your hands during times of trouble.

As a matter of logic, higher average inflation and thus higher average nominal interest rates before the crisis would have given more room for monetary policy to be eased during the crisis and would have resulted in less deterioration of fiscal positions. What we need to think about now is whether this could justify setting a higher inflation target in the future.”

Such an enlightened argument is not universally accepted. Frankfurt Rundschau reported that a Bundesbank internal paper, on the strength of this policy recommendation by Blanchard et al., launched a devastating attack on the IMF and referred to it as the Inflation Maximising Fund (Eurointelligence.com of 9 April).

The Wall Street Journal of 9 April reports:

Trichet: Some Euro Zone Countries May Need to Accept Deflation (by Brian Blackstone)

“European Central Bank President Jean-Claude Trichet says some countries in the euro zone might have to accept a period of deflation to restore long-term economic growth prospects.

“Some countries, to regain competitiveness, will have to keep inflation below the EU average,” Mr. Trichet told the Italian paper Il Sole 24 in an interview published Friday.

Asked by the paper whether this means “even accepting a period of deflation, with all the possible social consequences this might have?” Mr. Trichet replied: “Yes.”

“It is normal that some regions, after growing above the EMU average for some time, and after having accumulated high national inflation, experience a correction and therefore a period of negative inflation, as it is currently happening in Ireland,” Mr. Trichet said.

The ECB contends that it has avoided deflation for the euro zone as a whole, which is supported by recent data showing annual inflation in the region at about 1.5% in March, though that was probably pushed higher by energy and food prices.”

Let us rejoice that Monsieur Jean-Claude Trichet has not demanded that all the Euro-zone countries should have a rate of inflation lower than the average …

Wage Indexation

Twentyfive years ago Ezio Tarantelli – a professor of Labour Economics in the University of Rome La Sapienza – was assassinated by the Red Brigades shortly after giving a lecture. A distinguished economist, he was a follower of Franco Modigliani with whom he had studied and taught at MIT, and an economic advisor to CISL (the Italian Confederation of Trade Unions). He was a strong supporter of an incomes policy negotiated within a Social Pact, not just for Italy but throughout Europe as a pre-condition of the single currency, which he also strongly supported long before it materialised. But his main interest was the advocacy of curtailing Italian wage indexation (the scala mobile) which he regarded as responsible for perpetuating and accelerating the wage-price spiral that follows any inflationary shock. He successfully advocated the adoption of a pre-determined inflation target, to be agreed among social partners and the government, in place of actual recorded inflation.

Ezio Tarantelli’s proposal for cooling inflation by indexing wages to a negotiated target instead of actual inflation faced two difficulties:

First, the alternative is never whether a given nominal wage level should or should not be indexed. For a given relative negotiating strength of Trades Unions and Employers' Unions, if wages are indexed there is less need to take into account subsequent expected inflation in wage-fixing. Indeed if indexation is full (i.e. of 100% of the nominal wage with unit elasticity of the wage with respect to prices and with a short enough lag) there is no need and no case for taking into account subsequent expected inflation at all. In times of rapid inflation, especially of accelerating inflation, wage indexation defuses inflationary expectations and allows the negotiation of a lower nominal wage than would have to be fixed if there was no protection from future inflation. This is precisely why, when wage indexation was first introduced in Italy in 1947, the President of Confindustria (the Confederation of Italian Industrialists) shipowner Angelo Costa actually greeted it as a major anti-inflationary measure. Wage indexation thus has an ambivalent impact: it prolongs an inflationary process but starting from a lower wage and price level than is achievable without indexation.

Second, nominal wages are not fixed forever but are normally re-negotiated periodically. Inflation-proofing through indexation, if triggered by a shock after negotiation, will exhaust its effects completely at the next wage settlement. The new nominal wage will be determined by the relative negotiating strength of employees and employers and other fundamentals prevailing at that later time, regardless of how much the nominal wage might have risen in the intervening period thanks to wage indexation. On average, with rounds of nominal wage negotiations taking place, say, at two-year intervals, the impact of wage indexation will last for only one year, for the new nominal wage will be fixed starting from scratch, from a tabula rasa. To be more precise, it will last for one year (half the period between negotiations) minus the lag between price and wage rises (say at least three months), since the last indexed wage rise during that year will coincide with and will be taken into account at the next round of wage re-negotiation.

In conclusion, wage indexation is neither a shield against inflation nor an inflation engine, it has a positive and a negative impact on inflation, respectively defusing inflationary expectations and prolonging the impact of a shock; but both effects - partially reduced though not eliminated by Tarantelli's proposal - are operational only for a very, very short time. In all, we are talking at best of nine months partial wage protection, though on balance the impact of wage indexation on inflation may actually be beneficial. (A paper of mine in Italian developing these points, Indicizzazione e scala mobile (1994), is available on my website).

Reforms, Progress and Modernisation

The Brownshirt Hanns Johst remarked: 'Wenn ich Kultur höre … entsichere ich meinen Browning.' Personally, I actually rejoice at the word “culture”, but there are three words that make me reach for my Kalashnikov: the words “reforms”, especially in “structural reforms”; and the related words “progress” and “modernization”. They are not only under-defined, hold-all, ambiguous, weasel words; they are invariably used to mislead, con and manipulate. [Another such word is “priorities”].

"Reform" is used to represent a change for the better, a re-shaping or re-structuring of something (respectively its outside shape or its inner structure) to eliminate at least some if not all of its defects and drawbacks. But it means nothing and lends itself to mislead until the defects and drawbacks are specified, together with the direction and the extent of the changes that are being contemplated, their speed and the costs associated with those changes. And as long as there is a general recognition and acceptance of the defects and drawbacks as such, and of the desirability of those changes and their extent, pace and cost. This is most rarely the case. When in Italy a convicted criminal in government, who has gone unpunished thanks to laws ad personam legislated by and for himself and his accomplices, a corruptor of judges, of witnesses and minors, calls for justice reforms unspecified but designed to extend his impunity, not unnaturally hair stands on end. And, invariably, structural reforms are by definition changes that involve the transfer of large chunks of power and cash from the public purse or the general public or in particular from the weak, the old, and the deserving poor, to small groups of undeserving monopolists, speculators, rentiers and other unsavoury characters. As in frequent recent radical reforms – worldwide – of the taxation system, of pensions, and of any form of state regulation.

“Progress” is simply a change – whether due to a reform or to exogenous factors, like technical change – which is positively judged by whoever refers to it. Except that progress, like any other change, may have a cost, or side effects, whose total evaluation may be positive for some people but not for others. The invention and diffusion of motorcars was undoubtedly progress in many ways, at first, but it also has had adverse effects. Progress by definition enhances performance in some direction, but unless a change (for instance a technical change) is absolutely superior to the previous situation in all respects, true progress happens only when the change is “optimal” in the sense of reaching a higher level of “utility”/”satisfaction”/”welfare” as measured with reference to the “welfare function” of the population should there be one such function and we knew it, or to the “objective function” of a democratic government, if they have one and will tell us it if and when we ask.

“Modernisation” is the implementation of the latest manifestations of apparent progress, but here, again, the latest technology or institution are not, ipso facto, necessarily absolutely superior and therefore desirable unconditionally. What is most appropriate to one country, or situation, may be inappropriate or even counterproductive in another country or situation. The depletion, or gradual exhaustion of readily accessible natural resources may well make old-fashioned and apparently obsolete products and techniques optimal at some point in the near future, in preference to more “modern” products and techniques. Modernity is often absolutely superior, of course, but not necessarily always.

Confronted with reforms, progress and modernization, you don’t have to praise Marx and pass the ammunition, but you should read the fine print before signing on the dotted line or placing your cross on the ballot paper.

To paraphrase: 'When I hear the word "reforms", I reach for my culture'.