Too much industrial policy? The case of China

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China has reached a stage in its development where it needs to reform its growth model and rebalance its economy. But it is finding it hard to do so. Its policy framework remains too focused on expanding industrial capacity and insufficiently on rebalancing domestic demand away from excessive investment and towards consumption. In this sense China has ‘too much’ industrial policy. Sufficient incentives for progressive reform in China and other ‘imbalanced’ economies may ultimately require a new kind of global trade and financial system.

Many heterodox economists with an interest in development have made the case for industrial policy. Part of the reason for this is that all of today’s advanced economies have used it in various forms in order to accelerate growth and structural transformation. So-called late industrialisers, such as South Korea and Taiwan, have used it as part of their strategy to catch up with the richest countries. There have undoubtedly been industrial policy failures, with policies used to support fledgling industrial sectors becoming entrenched and firms failing to ‘grow up’ and become internationally competitive. However, these cases should not lead us to reject such policies wholesale. Rather we should learn from both the success stories and the failures in order to do the policies better and get state intervention right. Continue reading

Opening up Keynesianism – the implications for economic policy

keynesAt its simplest, Keynesian economics makes the case for the role of aggregate demand in determining output and employment in the economy as a whole. Government policies should therefore attempt to achieve low levels of unemployment through the management of aggregate demand, or the growth of expenditure. A crude form of this emphasises fiscal policy, the balance between tax revenues and public spending. A weak economy with rising unemployment may need an expansionary fiscal policy, with public spending increases or tax cuts to boost demand, while an overheating economy may need the opposite, to reduce demand and lower inflation.

This is a crude characterisation of a major school, or truthfully what has given rise to many schools, of economic thought. It is unfortunate since, in the wake of economic crises in recent decades, particularly that of 2008-09, commentators proclaimed the return of Keynesian ideas as governments across the world responded to recession with degrees of expansionary fiscal policy, as the use of monetary policy alone was deemed to be inadequate. But it didn’t last, and the turn to austerity and ‘tighter’ fiscal policy quickly followed. Alongside a return to reliance on monetary policy and the adoption of Quantitative Easing (QE), this played a role in the weakness of the recovery.

Following the global pandemic and the advent of war in Ukraine, many countries now face the prospect of stagflation, the combination of weak growth and rising unemployment alongside high inflation. Policymakers are now tightening monetary policy by raising interest rates, even as recent fiscal expansions come to an end. Crude Keynesianism appears to have little to offer, echoing its abandonment during the stagflation of the 1970s.

But genuine Keynesianism does have far more to offer public policy than expansionary fiscal policy during a deep recession. It may start with a focus on aggregate demand, but can be used to illustrate the importance of industrial policy, the reduction of inequality and the reform of the global monetary and trade system. This post intends to explain how. Continue reading

Marx, Keynes and the limits to wage increases

“Marx is very clear that labour is exploited and that a higher wage would make workers’ lives less miserable without removing the exploitation per se. But he doesn’t think, therefore, that a higher wage  will make the system operate better or indeed even make workers as a whole better off. In fact, in the discussions of this in “The Reserve Army of Labour” he argues something quite striking given his political view: namely, that if workers get into a better situation to the point that the reserve army of unemployed labour shrinks and the wage begins to rise relative to productivity, then the wage share rises and the profit rate falls. If the profit rate falls, accumulation slows down, mechanisation speeds up, the import of labour becomes more feasible, and the system re-creates the reserve army of labour. So, now you have a situation where the success of labour leads to the undermining of that success – from the internal logic of the system. Many people, many of my friends who are Post Keynesians, argue this is not true, because if workers’ wages are higher, consumption demand will be higher, then demand will be higher, and capitalists will hire more people. I think that’s not true as a general proposition because of the limits I described. I would like it to be true, but for me you cannot, you should not, persuade yourself that something is true because you would like it.”

In the spirit of recent posts, the above is another extract from an interview with Anwar Shaikh in the book What is Heterodox Economics? Conversations with Leading Economists. Shaikh is clearly being intellectually honest here, admitting that he would like capitalism to enable wage increases for ordinary workers across the economy that drive faster growth and falling unemployment in a win-win sustainable process, but that his own theoretical understanding suggests that this is unlikely to be sustainable. For Shaikh, falling unemployment will tend to strengthen the bargaining power of labour, such that at some point wages for the economy as a whole will start to rise faster than productivity growth, leading to a rising wage share and a falling profit share. The latter will blunt the stimulus to investment and growth will then slow down, leading to rising unemployment once again, and ‘re-creating the reserve army of labour’. Continue reading

A maverick economist on Japan: overcoming thirty years of stagnation

SmithersRoadtoRecoveryThis is the second in my series exploring some of the ideas covered in the work of economist Andrew Smithers, particularly his wide-ranging book The Road to Recovery. In this post I want to consider his explanation for Japan’s relatively poor economic performance in recent decades, and his suggested solutions. His ideas overlap with those of other economists I have covered in this blog, such as Michael Pettis and Richard Koo, but much of the detail remains distinct, so they are worth writing about in a new post.

Japan’s economy has not had a good thirty years. After its post-war economic ‘miracle’, which saw it emerge from devastation to catch up rapidly with the world’s richest economies, its growth rate has largely stagnated since the 1990s. Successive governments have responded by periodically employing fiscal and monetary expansion (intended to boost demand), as well as reforms to business (intended to boost supply), seemingly without any great benefit. Of course, things might have been even worse without these reforms. It is also important to factor in the country’s ageing population, a population that has been shrinking overall since the mid-2000s. When this is taken into account, growth in GDP per head in recent years has actually been comparable to other rich economies, though this is nothing to shout about, as the US and Europe have not exactly distinguished themselves lately either. Continue reading

Looking back, looking forward: blogging in 2022

img_0372I have resisted posting my top ten most viewed posts over the last twelve months; nevertheless this post takes a longer view back in time to assess the content and direction of this blog, and looks forward to the year ahead in the worlds of economics and political economy. The Political Economy of Development is perhaps a bit of a mouthful and not very catchy as a blog title, but it was in fact the name of my masters degree course at SOAS in London which, although my studies there finished 20 years ago, continues to inspire my thinking and writing. This blog is an outlet for both. The economics department at SOAS is well known for its focus on development, and on political economy and heterodox or non-mainstream approaches to it in particular.

Despite the blog’s title, I do not focus exclusively or even mostly on development, developing countries or emerging markets. As something of a get-out, I take the view that the process of economic and social development is ongoing and does not stop if or when countries ‘graduate’ to ‘advanced’ status and relatively high levels of income and wealth. Successful development is also more than a simple rise in GDP or national income. It is a process of socioeconomic transformation, encompassing technological progress, rising productivity and living standards, creative destruction a la Schumpeter (as old industries decline and new ones expand), and social and political change. If such processes are to be successful, we now realise that they need to be sustainable, economically, socially and environmentally, or they will undermine the very basis of human progress. Continue reading

Michael Pettis on Evergrande and China’s debt problem

Another video of an interesting discussion with Peking University Finance Professor Michael Pettis where he explores the issue of China’s property sector and its current dynamics, but also the bigger picture of the Chinese economy’s debt problem. He outlines five possible options for the future evolution of the economy and foresees a significant slowdown in growth akin to Japan in the 1990s, which ushered in many years of stagnation amid its economic rebalancing. This rebalancing is essential for China but also the rest of the world, and will ultimately be good for the latter, albeit with the costs and benefits unevenly distributed between different countries and sectors.

Michael Pettis on China’s latest economic prospects and the difficulty of reform

For some years now I have found Professor Michael Pettis’ analysis of the Chinese economy and its relationship to the rest of the world to be original and compelling. Here is a short interview with him on China’s growth prospects for this year, and the difficulty for policymakers in rebalancing the economy away from investment and towards household consumption. He has long argued that a substantial redistribution of income and wealth from businesses and the state towards ordinary households is vital to this end, for the good of China and the world. He also argues that this still remains largely undone.