Convergence and divergence – emerging markets, global value chains and industrial policy

Containers are loaded onto a container ship at a shipping terminal in the harbour in Hamburg

According to a recent piece in The Economist, economic convergence with the US among so-called emerging markets has slowed in the ten years since the great recession. The difference in the growth rate of GDP per capita has slipped since the 2000s from an average of over six percent in emerging Asia to about four percent. Emerging Europe has slowed less, but from a lower rate, while Latin America, North Africa, Sub-Saharan Africa and the Middle East are now beginning to fall behind again, at least on average.

This is disappointing for champions of economic theories of convergence resting on the globalisation of the world economy. It is also bad news for those still living in poverty in the countries slipping back. Of course, slowing convergence need not mean that absolute poverty is no longer falling. But it does mean that the prospects for reducing inequality between rich and poor nations and more widely-shared prosperity are for now receding. Given that the US has not grown particularly fast since it emerged from recession, it means that only emerging Asia continues to be a truly dynamic region in economic terms. And even this mantle may be under threat as growth slows in China, affecting supply chains throughout Asia. Continue reading

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Heiner Flassbeck on the global economy: the problem of Europe

In the video below from the Real News Network, former economist at UNCTAD, Heiner Flassbeck, discusses some of the problems besetting today’s global economy and claims that they have deep historical roots. Germany may be heading for a recession due to shrinking exports linked to the ongoing US-China trade war and weak demand in Europe.

Flassbeck argues that the cause of sluggish global demand lies in the weakness of corporate investment compared to corporate saving alongside stagnant wages and the insufficient response of governments in Europe to counter this with more expansionary fiscal policy.

This has been brewing since the 1970s. The US under Reagan, Bush junior and most recently Trump has on a number of occasions responded to sluggish growth with higher fiscal deficits. The exception came under Clinton, when a booming economy and fiscal tightening produced several years of budget surpluses, which ultimately proved unsustainable.

In contrast, many European economies have remained wedded to tighter fiscal policies and austerity in the run-up to the creation of the euro. Since 2000 Germany has relied on foreign demand to drive growth, and now runs, in absolute terms, the largest current account surplus in the world.

Corporate surpluses are also excessively large in Japan, but the government continues to run a moderately large budget deficit which absorbs some of these savings and sustains aggregate demand to a degree. The German government is now running a budget surplus, which withdraws demand from the economy, leaving net exports as the driver of growth.

Ideally, corporations would use more of their retained earnings for investment, rather than running up surpluses as they are doing at the moment, particularly in Germany. This would increase spending on the demand side, and the capital stock on the supply side, boosting growth in output and some combination of employment and productivity.

In the absence of strong corporate investment growth, sufficient demand to support economic growth has to come from household consumption, net exports, or from the government. With insufficient household income growth, Germany has relied excessively on growth in exports enabled by sluggish wage increases for twenty years. In a weakening global economy, it is now suffering again and could be on the brink of recession.

A more sustainable return to healthy economic growth and fuller employment with rising living standards would see household incomes rising for the majority through significant wage increases, stimulating consumption and providing greater incentives for companies to increase investment in new capacity and employment. Also needed is some degree of fiscal expansion which includes public investment in necessary infrastructure and support for those on the lowest incomes.

The corporate sector surplus (the excess of savings over investment) in a number of large economies needs to shrink as wages and household incomes rise alongside corporate investment. This would lessen the need to rely on large and persistent fiscal deficits, which have supported demand in Japan on and off for well over two decades but have not by themselves created the conditions for a return to more balanced economic growth over the longer term. It would also lessen the need for consumption to be excessively dependent on rising debt, as in the UK and US.

More balanced global growth and reduced inequality within countries which have seen the latter soar since the end of the 1970s can be achieved together.

Flassbeck does not really discuss the reasons behind excessive corporate savings relative to investment, aside from a brief reference to neoliberalism, and he ignores the problem of private debt in China, but the interview is interesting and worth a watch.

Michael Hudson: Trump’s new tariffs on China help pay for his corporate tax cut

A video interview below with the always original Michael Hudson on the Real News Network (transcript here). He discusses the impact of Trump’s tariffs, the failure to bring back manufacturing production to the US, and how the President is managing to isolate America and unite much of the rest of the world.

Asia’s ‘other communist dynamo’ – Vietnam and economic transformation

Moneyweek magazine recently ran a piece extolling the virtues of the Vietnamese economy and pinpointing it as an emerging market worth investing in. Perhaps as an unintended consequence of Trump’s trade war, Vietnam may benefit from US-China tensions as production and exports shift away from China to some extent. However this outcome remains highly uncertain, since Vietnam itself may also become a victim of US tariffs.

The story of Vietnam since it began its own version of China’s ‘opening up’ and path of development as a ‘socialist-oriented market economy’, called Doi Moi, literally meaning ‘renovation’, has to date been pretty successful. This began in 1986, and since 1990 the country “has notched up the world’s second fastest growth rate per person after China”. This has led to dramatic falls in poverty as wages have kept up with or exceeded productivity, which has itself grown fairly rapidly. Continue reading

Hirschman’s Linkages: Passé in the Age of Global Production Sharing? — Developing Economics

How does economic development happen? After World War II, many development economists rose to prominence, such as Paul Rosenstein-Rodan (the big push), Arthur Lewis (the dual-sector model), Walter Rostow (the linear stages of growth) and Albert Hirschman (unbalanced growth and linkages). Given the continued importance of industrial policy, it is particularly worthwhile to revisit the […]

via Hirschman’s Linkages: Passé in the Age of Global Production Sharing? — Developing Economics

Jason Hickel on global poverty and neoliberalism

Jason Hickel is an anthropologist who has written extensively on global poverty and inequality, as well as political economy. Here is a recent post of his, discussing the nature and measurement of, and trends in, global poverty, as a response to a critique by Steven Pinker.

Hickel strongly disputes the idea that falling poverty, where it has occurred, has been due to neoliberal globalisation. Rather, the successful industrialisation and economic development that are necessary for sustained poverty reduction have been achieved with state intervention, industrial policies, and strategic integration with the global economy in countries such as South Korea, Taiwan, Singapore and China.

There is a huge literature on this, but Ha-Joon Chang is perhaps one of the best known academics to have written popular books on how particular forms of state intervention have promoted capitalist development. 23 Things They Don’t Tell You About Capitalism is the easiest read and I have posted a number of excerpts from it over the last few years. Bad Samaritans is also good value. For a more academic discussion see Kicking Away the Ladder.

Thanks to the excellent blog The Case For Concerted Action for posting on this first and drawing my attention to Hickel’s work.