Reports from the Economic Front

a blog by Marty Hart-Landsberg

China’s Downward Growth Trajectory

China remains one of the most dynamic and important growth centers in the world economy.  The country is the single largest contributor to world GDP growth, accounting for almost 40 percent of global growth in 2016.  As I argued in a previous post, China’s rise owes much to its post-1990 embrace of an export-led growth strategy and resulting restructuring as the premier assembly/production base for transnational capital’s East Asia-centered cross-border production networks.

China recorded an unprecedented average rate of growth of nearly 10 percent over the years 1978 to 2008.  However, the slowdown in international trade and continuing economic difficulties in the advanced capitalist countries some seven years after the end of the Great Recession signals a significant change in the global economic environment.  China’s rate of growth has been steadily falling.  But Chinese leaders claim that the country has significantly lessened its trade dependence and begun a successful transformation to a more domestically centered economy.  They speak confidently of achieving an average rate of growth of 6.5 percent over the next five years.  I am dubious that such a transformation is taking place and that the target growth rate can be achieved.  If Chinese rates of growth do continue to fall, as I expect, perhaps to the 2-4 percent range, internal class pressures will likely build for a radical change in China’s current social and economic policies.  And, given China’s key position in the international economy, its slowdown will likely also have important negative consequences for the growth and political stability of many countries, especially those in East Asia, Latin America, and Sub Saharan Africa.

China’s Growth Trajectory

The chart below shows China’s growth performance since 1961.  From 1991 until 2015, the country’s yearly rate of growth never fell below 7.3 percent.  In ten of those years, Chinese GDP grew by at least 10 percent.   With this record as backdrop, the recent downturn in China’s economy stands out.  Not only did the country’s rate of growth fall to 6.9 percent in 2015, a 25 year low, it fell again, to an estimated 6.6 percent in 2016.  And, as noted above, the Chinese government has lowered its target growth rate to an average 6.5 percent for the next five years.

gdp-growth

Moreover, as the chart below highlights, China’s growth over the last few years has consistently fallen short of consensus forecasts.

forecasts

Of course, a slowdown in growth would have been hard to avoid, given China’s reliance on international trade and the severity of the Great Recession and weak post-Recession recovery in the advanced capitalist world.  Still, at the time of the crisis, it appeared that the Chinese economy would just power through the recession.  For example, the economy recorded growth of 9.7 percent in 2008, 9.4 percent in 2009, and 10.6 percent in 2010.   (In fact, a significant minority of economists pointed to this performance to argue that China’s trade dependence had been vastly overstated—more on this below.)  It is now clear that this was a temporary, stimulus-driven, growth spurt and not sustainable. However, the Chinese government, as well as many analysts, are now claiming that the Chinese economy is finally undergoing a long-delayed rebalancing away from its past reliance on external demand.  New policies designed to boost domestic consumption will, they believe, produce a more stable and egalitarian Chinese economy.  And while these policies are unlikely to generate the extraordinary growth rates of the past, they will allow the Chinese government to meet its current growth target and the country to continue to anchor world growth.

I disagree with this consensus.  As far as I can tell, the Chinese government has not achieved (or even pursued, for that matter) a meaningful rebalancing of the Chinese economy.  Thus, I expect the country’s rate of growth to continue to fall well below the target 6.5 percent growth rate.  To understand why I disagree with the consensus requires that we first investigate the Chinese growth experience.

The Chinese Growth Experience

The Chinese economy has gone through several major transformations.

Here I focus on post-1990 developments because it is in this period that the Chinese economy gradually becomes enmeshed in transnational capital’s accumulation dynamics and, as a result, a major force in the global economy.  The Chinese government’s decision to marketize the country’s economy and then privatize state enterprises came at roughly the same time that transnational capital was aggressively looking to internationalize its operations through the establishment of cross border production networks.  The two developments intertwined, and the consequence was that China, with the support of the Chinese state, gradually became the central player in East Asia’s regionally structured production-export networks.

We can see, in the chart below, the steady increase in China’s merchandise exports.  The major acceleration took place after 2001, which is when China joined the WTO.  In 2015, Chinese exports declined.

exports

The following chart puts this export growth in perspective, by showing the rise in China’s exports relative to the growth of the country’s GDP.  The export ratio climbed from 14 percent in 1990, to 21.2 percent in 2000, before reaching its peak in 2006 at a whopping 37.2 percent.  By 2015, the ratio had fallen back to a still considerable 22.1 percent.

exports-to-gdp

The next chart shows the movement in China’s current account balance (which is dominated by movements in the trade balance) as a percent of the country’s GDP.    The current account ratio rose from a relatively insignificant 0.22 percent in 1995, to 1.7 percent in 2000, before dramatically climbing in the period following China’s 2001 membership in the WTO.  The current account ratio went from 2.4 percent in 2002, to 8.4 percent in 2006, before peaking at an extraordinary 9.9 percent in 2007.  The current account ratio rose from 2014 (2.6 percent) to 2015 (3 percent) despite the absolute decline in exports, because imports fell by more.

current-account

To state the obvious: it takes a lot of investment to produce these trade numbers.  Factories have to be built and machinery purchased.  Transportation networks–highways, ports, rail lines, airports–have to be built.  Urban infrastructure—communication, energy, water, and waste systems as well as worker housing—has to be constructed.  We can get some idea of the scale of the Chinese effort by looking the dramatic rise in the ratio of gross fixed capital formation to GDP.  As we can see in the chart below, it reached historic highs of 38.9 percent in 2007, before moving to an even higher 45 percent in 2010.  In 2015 the ratio stood at 44 percent.

gross-fixed-capital-formation

Finally, as we see below, in sharp contrast to the growth in exports and fixed investment, household consumption as a share of GDP steadily declined until the last few years, with the first half of the 1990s and the first half of the 2000s standing out for the steepest declines.  The consumption ratio stood at 56.2 percent in 1970, 46.2 percent in 2000, and a low of 36.4 percent in 2006.  In 2015 the ratio was 37 percent.

consumption

In broad brush, the Chinese state promoted the country’s growth though policies that prioritized the construction of a massive infrastructure for production; the transfer of hundreds of million peasants from farms into cities to serve as wage labor; and the creation of a welcoming environment for export-oriented transnational corporations.   The results, in addition to rapid and sustained rates of economic growth and elevation to one of the world’s largest exporters and destinations for foreign direct investment, include socially devastating environmental destruction, world-ranking inequality, and—key to our discussion here–an export-driven economy.

Now, as noted above, the statement that China’s growth has heavily depended on exports was challenged by some economists who pointed to the country’s high rates of growth over the years 2008 to 2010 in the face of the collapse in international economic activity and trade.  They defended their position using data designed to measure the contribution of different economic sectors to growth.  The table below, which comes from the Asian Development Bank, presents such data for China.

The table provides estimates of the percentage contributions made by consumption (government and private), investment, and net exports to China’s economic growth.  As we can see, net exports, except for the year 1990, make a relatively small contribution to Chinese growth.  In fact, in 2003 and 2004, when exports were rapidly growing, net exports actually subtracted from growth.  To clarify: a negative contribution by net exports during those years does not mean that exports fell, only that the trade surplus narrowed, thereby reducing trade’s contribution to growth.  Viewed from this perspective, Chinese growth is overwhelmingly explained by domestic demand—investment and consumption–even during the years 2005 to 2007, when net exports made its biggest recent contribution.

table-china-growth

However, focusing on net exports is not a useful way to understand the importance of export activity.  The fact is that Chinese imports could be used to support consumption, investment, or export production.  Thus, to test the importance of exports, one would have to adjust each of these three sectors by subtracting the value of imports used by that sector.  The table above is constructed on the assumption that imports are used only in the export sector, an assumption that cannot help but minimize the contribution of trade to Chinese growth.  In addition, given what we know about China’s economic transformation, it seems hard to deny that a significant share of investment, whether in plant and equipment or infrastructure, was also triggered by export activity.  Moreover, the country’s export activity, by generating income for a growing share of China’s workforce, had to have increased the country’s private consumption.  In short, calculating the contribution of exports to Chinese growth requires far more than a simple examination of the contribution of net exports.

A number of economists, using different methods, have concluded that external demand has played a very significant role in driving Chinese growth.  For example, consultants for the McKinsey company, using their own measure of domestic value-added exports, estimated that exports accounted for some 30 percent of Chinese growth over the period 2002 to 2006.

Two Asia Development Bank economists used a different measure to calculate the contribution of external demand to Chinese growth, one that included inflows of foreign direct investment as well as their own estimate of domestic value added exports.  Their measure of external demand “grew steadily and maintained a two-digit annual growth rate [from 2000] until the global financial crisis in 2008. The estimates suggest that the weight of [external demand] on the economy increased gradually during this period—in 2001 it accounted for 18.3 percent of GDP growth; by 2004, almost half of the 10.2 percent GDP growth could be attributed to [it]. During 2005–07, the share of external demand dropped slightly, but remained 38 percent–40 percent.”

Yılmaz Akyüz, Special Economic Advisor to the South Center and former Director of UNCTAD’s Division on Globalization and Development Strategies, using detailed input-output tables, concluded that:

despite a high import content ranging between 40 and 50 percent, approximately one-third of Chinese growth before the global crisis was a result of exports, due to their phenomenal growth of some 25 percent per annum. This figure increases to 50 percent if spillovers to consumption and investment are allowed for. The main reason for excessive dependence on foreign markets is under consumption. This is due not so much to a high share of household savings in GDP as to a low share of household income and a high share of profits.

In short, it seems clear that exports and foreign direct investment have played a major role in China’s high speed growth.  Therefore, it is to be expected that a global recession and very weak post-crisis global recovery would cause a fall in China’s rate of growth.  But that raises these two important questions: by how much and for how long?  And not surprisingly, the answers to those questions depends, in part, on the response of the Chinese government.

The Misleading Rebalancing of the Chinese Economy

In a trivial sense, if exports fall, then domestic spending will become more important to growth.  However, a meaningful rebalancing must mean more than that.  The economy should be transformed in ways that allow for sustainable growth based on domestic demand that is underpinned by and contributes to a rising majority standard of living.  That is what I do not see.

The Chinese government’s immediate response to the global recession was a massive stimulus program supported by a highly expansionary monetary policy.  In November 2008 the government announced a stimulus package, heavily weighted toward infrastructure spending, equal to $586 billion or about 14 percent of the country’s gdp.   Thanks to the government’s control over key state industrial enterprises and the country’s banking system, the spending began one month later and continued throughout 2009.

Two Chinese economists describe the impact of this program on the country’s growth as follows:

Directly after the unveiling of the stimulus package, the year-over-year growth rate of fixed asset investment in China jumped 9 percentage points from 2008:Q4 to 2009:Q1 and accelerated further to 38 percent per year in 2009:Q2. So for the entire year of 2009 the yearly growth rate of fixed investment reached 30.9 percent, almost twice as high as its average pre-crisis growth rate. As a result, gross fixed capital formation contributed a phenomenal 8.06 percentage points to China’s 9.1 percent per year real GDP growth in 2009. In other words, investment alone was responsible for nearly 90% of the robust GDP growth in 2009 when Chinese exports collapsed and shrank by nearly 45 percent. . .

(T)he People’s Bank of China started to expand money supply by the end of 2008. The monetary injection immediately led to sharp increases in credit lending at nearly the same speed and magnitude. Despite positive inflation, the real growth rate of outstanding loan balances increased from 5 percent per year in mid-2008 to 12.49 percent per year in December 2008, and further up to 32.5 percent per year in June 2009, a historical peak during the entire reform era since 1978.

Accompanying this explosion of investment was a change in its composition.  Investment by private sector manufacturing firms fell, while investment by key state owned industries tied to the government’s infrastructure program–which targeted the construction of new roads, railway lines, ports, airports, and the like–grew.  Local governments pursued their own investment activity, supported by cheap and plentiful loans, promoting construction of new industrial parks, shopping centers, and apartment complexes.

All this investment powered the Chinese economy through the period of global collapse; China’s gdp grew by 9.4 percent in 2009 and 10.6 percent in 2010.  However, as to be expected, the effects of the stimulus program gradually weakened, leaving in its wake massive excess capacity in many state owned firms; under-used airports, highways, railways, and shopping centers; and enormous environmental damage.  Determined to keep growth up, the government maintained its expansionary monetary policy.  However, given the continued weakness in the global economy, little of the money was used for productive investment.  Instead businesses, local governments, and wealthy citizens tended to borrow to purchase assets, more specially stocks and housing, producing bubbles in each.  The stock market bubble was popped by policy in 2015.   The housing bubble is ongoing.  Construction of housing has helped offset the decline in state investment in infrastructure.  And the wealth effect from the stock and housing bubbles has boosted consumption (by high income families), as we can see in the chart below. But housing construction is too limited and personal consumption is too small a share of the economy to halt the steady slide in the country’s gdp growth rate.

household-consumption

Underpinning and now threatening the Chinese government’s growth strategy has been a rapid and extreme build up in debt.  Chinese debt levels soared from 150 percent of gdp in 2009 to approximately 280 percent of gdp in 2016.  And the debt build up is accelerating.  In other words ever more debt appears needed to produce a slowing gdp.  And the debt build-up appears to be running up against its own limits.  As the China specialist Michael Pettis wrote in his May 2016 monthly report on the Chinese economy:

in order to achieve current levels of GDP growth, China’s debt is growing at least two-and-a-half times as fast as debt-servicing capacity and is probably growing three or four times as fast. Clearly this isn’t sustainable. And it must become even less sustainable as long as the process continues. If China attempts to maintain GDP growth of 6.5% for the next five years, it won’t be enough for debt to continue growing at the same already-alarming rate relative to GDP growth. In the late stages of overinvestment growth cycles, credit must grow exponentially relative to GDP growth. . . .

If China manages the targeted 6.5% GDP growth over the next five years, in short, so that by the end of 2021 its GDP will be double the 2011 level, its GDP will be nearly 40% larger than it is today. If we assume that it takes 15-16% growth in credit, gradually rising to 20-22% growth in credit, to achieve this GDP growth target, China’s debt will have risen to become between 110% and 170% larger than it is today. This represents an enormously high growth rate on an already high level of debt.

And, as Pettit goes on to say, these projected debt levels “are simply too implausible to take seriously. In my opinion it is, in other words, extremely unlikely that China can follow the targeted GDP growth path because the target can only be met if debt is able to grow to what are effectively impossibly high levels.”

The Chinese government has tried several times over the last years to tighten credit, but each time, worried about the consequences, they have reversed course.  George Magnus, writing in the Financial Times, provides a useful summary of this experience:

Total Social Financing, a broad measure of monthly credit creation, is growing at nearly three times the rate of officially recorded money GDP growth, or more if you don’t believe the official GDP data. Curiously, many private companies face tight credit conditions and so rapid credit creation may be largely for the benefit of the cash-flows of already highly indebted real estate sector, local governments and state enterprise sectors.

Some financial policies have been introduced by way of countermeasures, but to little effect. For example, the government clamped down in 2013 on borrowing by local government financing vehicles, only to relax the curbs last year [2015]. It also introduced a local government bond debt swap scheme last year to allow expensive bank debt to be swapped for cheaper debt instruments. Banks duly bought more than Rmb3tn of bonds, but traditional lending growth continued regardless.

After encouraging the development of shadow banking between 2009 and 2013, lending restrictions were enforced in 2014, but a fall in financial institutions’ off-balance sheet assets simply showed up in an expansion in the main banking system’s assets. . . .

Instead, all we are likely to see is more credit easing, in the wake of the six initiatives since late 2014 to cut interest rates and banks’ reserve requirements, albeit to no economic effect. The credit binge, then, will continue until it can’t.

The decisive factors will be the already compromised debt servicing capacity of borrowers, and the behavior of banks under the weight of rising non-performing and bad loans and emerging funding difficulties as loan to deposit ratios increase further.

Thus, even while demonstrating a willingness to tolerate deepening imbalances, the Chinese government has been forced to accept ever lower rates of growth.  And, there are good reasons to believe that the trade-offs facing the Chinese government are worsening, leaving the government with little choice but to accept a lower growth target.  One reason is that China’s housing bubble will, like all bubbles, eventually come to an end.  C.P. Chandrasekhar and Jayati Ghosh provide the following overview of developments in China’s housing market:

What exactly is going on in the Chinese housing market? Over the past year, there has been a dramatic rise in prices of residential property in many cities, and especially in some of the large metros. This comes after a period just before, when everyone was talking about the “softening” of the Chinese real estate market as the authorities sought to clamp down on what they believed was speculative activity that was leading to excessively high prices and making housing unaffordable for many ordinary Chinese. But since then – and really from early 2015, as [the chart below shows] – prices seem to have gone completely berserk, increasing at unprecedented rates.

housing

The problem, as in most housing booms, is that house purchases are leveraged (albeit to a lesser extent in China than in other countries because of higher down payment requirements). The extent of debt flowing into housing has increased sharply in the current year. According to Bloomberg, outstanding housing mortgages in China increased by 31 percent just in the first half of 2016, three times more than the increase in overall lending. Loans to households increased to account for as much as 71 percent of total new lending in August 2016, compared to 24 percent in January. And this excludes the shadow banking activities that are also dominantly geared to real estate and construction lending. This means that there is bound to be a knock-on effect on banks and other lenders, once the bubble bursts and house prices start coming down. The Chinese authorities are trying to walk the tightrope to bring stability and greater affordability into the housing market without simultaneously destabilizing finance, but this is a difficult task. Indeed, the problem may be urgent, because in fact in many cities the downslide in house prices has already started – and indeed it is evident that in recent months the trend has got aggravated.

The housing market boom has encouraged new home construction and greater consumption, both of which have helped moderate the decline in Chinese growth rates.  Letting the air out of the bubble, even assuming that this can be done in a controlled way, will weaken an important force supporting economic growth.

A second reason for pessimission about Chinese growth is the increasing problem of capital flight.  In brief, rich Chinese and foreign investors are now moving money out of China.  As the New York Times reports:  “In Beijing, confidence has given way to a case of nerves. Local residents often sense trouble coming before foreign investors and are the first to flee before a crisis. Chinese moved a record $675 billion out of the country in 2015, some of it for purchases of foreign real estate.”

money-flows

And, as Bloomberg News points out, this problem will not be easily managed:

China’s balancing act isn’t getting any easier.

Policy makers are grappling with how to attack excessive borrowing and rein in soaring property prices while maintaining rapid growth. They’re also battling yuan depreciation and capital outflow pressures as U.S. interest rates rise, while on the horizon looms the risk of confrontation with America’s President-elect Donald Trump on trade and Taiwan. . . .

Outflows will exceed $200 billion in the fourth quarter [2016] and rise further in the first quarter, said Pauline Loong, managing director at research firm Asia-Analytica in Hong Kong.

Capital is leaving for more fundamental reasons than rising U.S. rates and a stronger dollar, she said. Drivers include rising expectations of yuan weakness, fears of an abrupt policy U-turn trapping funds in the country, and a lack of profitable investment opportunities at home amid rising costs and slowing growth.

“The real nightmare for Beijing – and for markets – is a vicious cycle of capital outflows triggering bigger devaluations of the yuan that in turn drive bigger and faster outflows,” Loong said. “We expect capital outflows to increase in the coming months as Chinese money seeks to maximize exit quotas in case of more stringent restrictions later on.”

The most effective way to halt a capital outflow is to reduce credit and raise interest rates.  However, doing so would likely topple the housing market and threaten the financial health of bank and non-bank lenders and high income borrowers, and push down growth rates.  On the other hand, to do nothing means a continuing rundown in reserves and a self-reinforcing currency decline.

A third reason is the enormous excess capacity of key Chinese industries and continuing slow growth in the world economy.  The consequences of these interrelated problems are well described by two analysts:

As officials from China and the US meet this week [June 2016], they’re scheduled to talk about everything from the US Federal Reserve’s decision-making process to the disputed South China Sea. But China’s “excess capacity” problem is top of the agenda.

US treasury secretary Jack Lew called the problem “distorting” and “damaging” in remarks in Beijing on Monday (June 6) and said it was critical to global markets that China cut its production.

That’s because some of China’s factories have been pumping out more steel, solar panels, and other goods than the world wants or needs—in order to keep China’s GDP growing and citizens employed.

Widespread labor strikes and a slowing domestic economy have put pressure on local Chinese officials to keep factories going, even as leaders in Beijing have pledged to cut capacity and said they could lay off millions. Most of these factories are state-owned, meaning they’re subsidized by the government, rather than making market-driven decisions.

That means Chinese manufacturers can lower prices of what they make to keep factories busy more easily than private companies. China’s producer price index, which measures wholesale prices they command for their goods, has fallen for 50 months in a row.

The net effect for some industries outside of China has been devastating, marked by mass layoffs and closing factories, as lower-priced Chinese goods flood the market—and that has been no where more apparent than the steel industry.

producer-prices

This is not a sustainable situation.  The combination of growing debt with falling producer prices is a deadly one for business stability.

And it is worth mentioning a fourth: the changing labor situation in China.  Workers are increasingly fighting and winning wage increases despite Chinese government efforts to the contrary.   As a result, as the New York Times explains:

Labor costs in China are now significantly higher than in many other emerging economies. Factory workers in Vietnam earn less than half the salary of a Chinese worker, while those in Bangladesh get paid under a quarter as much.

Rising costs are driving many companies in a variety of sectors to relocate business to a wide range of other countries. In the most recent survey from the American Chamber of Commerce in China, a quarter of respondents said they had either already moved or were planning to move operations out of China, citing rising costs as the top reason. Of those, almost half are moving into other developing countries in Asia, while nearly 40 percent are shifting to the United States, Canada and Mexico.

Many of the factories moving away make the products often found on the shelves of American retailers.

Stella International, a footwear manufacturer headquartered in Hong Kong that makes shoes for Michael Kors, Rockport and other major brands, closed one of its factories in China in February and shifted some of that production to plants in Vietnam and Indonesia. TAL, another Hong Kong-based manufacturer that makes clothing for American brands including Dockers and Brooks Brothers, plans to close one of its Chinese factories this year and move that work to new facilities in Vietnam and Ethiopia.

Other companies with an extensive presence in China may not be closing factories, but are targeting new investments elsewhere.

Taiwan’s Foxconn, best known for making Apple iPhones in Chinese factories, is planning to build as many as 12 new assembly plants in India, creating around one million new jobs there. A pilot operation in the western Indian state of Maharashtra will start churning out mobile phones later this year.

To this point, labor activism largely remains limited to shop-floor struggles aimed at forcing corporations to meet wage, benefit, and safety standards mandated by law.  However, capitalist mobility gives the Chinese state little room to maneuver.  For now, state repression has kept the insurgency from become a movement.    But, a sustained slowdown could trigger more militant activism, and on a wider scale, which would negatively impact foreign investment and production.

What Lies Ahead For The Chinese Economy?

The Chinese government faces enormous challenges.  Its strategy of building a powerful export sector is now threatened by stagnation in the advanced capitalist countries.  It sought to compensate by directing a massive, wasteful, and environmentally destructive infrastructure program that has largely run its course.  It now confronts a growing debt spiral, a housing bubble, and capital flight, as well as industrial over capacity and a growing worker insurgency.  There is no simple set of policies that can solve any one of these problems without making another worse.  For example, government spending to sustain production will only add to capacity and debt problems as well as increase capital flight.  Tightening credit markets will help reduce over capacity and capital flight, but likely collapse the housing market and significantly dampen economic growth.

In making this case for difficult times ahead, I do not mean to suggest that the Chinese economy is on the verge of collapse.  Rather I mean to argue that the country’s growth can be expected to slow considerably, perhaps to the 2 to 4 percent range.  And for China that likely means an intensification of internal pressures for structural change, especially from workers who have enjoyed few of the gains they helped produce during the country’s many years of high-speed growth.

And, since most of the third world has become ever more export-dependent, and China has been the prime export market for the parts and components produced by Asian countries and the primary commodities sold by many Latin American and Sub Saharan African countries, China’s slowdown can be expected to have a significant negative effect on growth rates in most of the third world.   At the same time, unless the slowdown in China’s growth rate triggers a major restructuring of the Chinese economy that disrupts/reorients existing cross border production networks, something that has yet to happen, the effects on US and European economies should be far less.  The consequences might be greater for Japan, given its tighter integration with East Asian economies.

In sum, those expecting China, or East Asia more generally, to anchor a resurgent global economy, will be disappointed.  Transnational corporations have gone far in creating a world to their liking, but the resulting contradictions and tensions are multiplying rapidly, even in those countries and areas where accumulation dynamics have been the most robust.  The need is great for meaningful change in how economies are structured and interconnected.

Asia’s Economic Future

There is strong reason to expect a further weakening of global economic activity over the next several years, putting greater pressure on majority living and working conditions.

In brief, Asia’s economic dynamism is ebbing.  Given the region’s centrality in the international economy, this trend is both an indicator of current global economic problems and a predictor of a worsening global situation.

Asia’s central role in the global economy

Asia’s central role in the world economy is easily documented.  For example, as the Asian Development Bank points out, “Global headwinds notwithstanding, developing Asia will continue to contribute 60% of world growth.”

Asia’s key position is anchored by China.  China is the single largest contributor to world GDP growth, likely accounting for almost 40 percent of global growth in 2016.  Stephen Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, estimates that China’s contribution to global growth was 50 percent larger than the combined contributions of all the advanced capitalist economies.

The rise of Asia, and in particular China, owes much to the actions of transnational corporations and their strategy of creating Asian-centered cross-border production networks or global value chains (GVC).  In the words of the Asian Development Bank, these networks or chains involve “dividing the production of goods and services into linked stages of production scattered across international borders.  While such exchange of inputs is as old as trade itself, rapid growth in the extent and complexity of GVCs since the late 1980s is unprecedented.”

The strategy was initiated by Japanese transnational corporations who began shifting segments of their respective production processes to developing Asian countries in the late 1980s; US and European firms soon followed.  The process kicked into high gear in the mid to late 1990s once China opened up to foreign investment and decided to pursue an export-led growth strategy.

Asia, as a consequence, became transformed into a highly efficient, integrated, regional export machine, with China serving as the region’s final assembly platform.  Developing Asian economies became increasingly organized around the production of manufactures for export; their share of total world manufacturing exports rose from 18.4 percent to 32.5 percent over the period 1992-3 to 2011-12.   And, following the logic of cross border production, a growing share of these exports were parts and components, which were often traded multiple times within the region before arriving in China for final assembly.   Parts and components accounted for more than half of all developing Asian intra-regional manufacturing trade in 2006-7.

China, befitting its regional role, became the first or second largest export market for almost every developing Asian country, with the majority of those exports the parts and components needed for the assembly of advanced electronics.  Between 1995 and 2014, the electronics share of manufacturing exports to China from Korea grew from 8.5 percent to 32.2 percent.  Over the same period, the electronics share from Taiwan exploded from 9.1 percent to 63.7 percent, for Singapore the share grew from 17.5 percent to 36.8 percent, and for the Philippines it rose from 3.4 percent to 78.3 percent.  China’s exports to the region, and especially outside the region, were mostly final goods, with the most technologically advanced assembled/produced under the direction of foreign transnational corporations.  In line with this development, China became the premier location for foreign investment by transnational corporations from Japan, Korea, and Taiwan, as well as leading non-Asian corporations.

This history allows us to appreciate the forces that powered Asia’s growth.  Growing demand for manufactures by consumers and retailers in the US and the Eurozone became increasingly satisfied by exports from Asia.  The production of these exports triggered the production of and trade in parts and components by developing East Asian countries and their final assembly in China, as well as massive investment in new factories and supportive infrastructure, especially in China.  East Asian export production also required significant imports of primary commodities, which were largely purchased from countries in Latin America and Sub Saharan Africa, who experienced their own growth spurt as a result.

As we now well know, this growth was heavily dependent on the borrowing capacity of working people in the advanced capitalist world, especially in the US, whose incomes had been falling in large part because of the shift of production to Asia.  The collapse of the debt-driven US housing bubble in 2008 triggered a major financial crisis and global recession, which also greatly depressed international trade.   A weak international recovery has followed; international trade and growth remain far below pre-crisis levels, raising questions about Asia’s future economic prospects.  To appreciate why I am pessimistic about Asia’s economic future requires us to delve more deeply into the ways in which Asian economies have been restructured by transnational capital’s accumulation dynamics.

The Dynamics of Asia’s Economic Transformation

The three charts below, which come from an article authored by the Monetary Authority of Singapore in collaboration with Associate Professor Davin Chor of the National University of Singapore, provide a useful visualization of the Asian economic transformation described above, in particular, changes in the trading relationships of the countries, with each other and with the rest of the world.  The authors use what they call a measure of “upstreamness” to highlight “where a country fits in the operation of cross border production networks, more particularly whether it specialized in producing raw input, intermediate inputs or finished goods.”  The more a country specializes in producing raw inputs, the greater is the value of its upstreamness index; the more it specializes in producing final goods, the smaller is its upstreamness index.

More precisely: the upstreamness index for an industry takes on values equal to or larger than 1.  A value of 1 means that the industry’s output “is just one stage removed from final demand.” A greater value means that the industry’s output enters the relevant production process as an input that is a number of stages removed from final demand.  Here are some examples of upstreamness values for select US industries:

index-values

For the charts below, the upstreamness measure for each country is calculated by weighting the upsteamness of its export industries by the share of each industry in the country’s total exports for the year in question.

As the authors explain:

Charts 2 to 4 depict the changing networks of trade flows between the Asian economies, and in relation to the US, UK, Eurozone (EZ), Australia, as well as the rest of the world (ROW). In these charts, the arrows indicate the direction of the net trade balance between each pair of economies, while the width of each arrow is proportional to the magnitude of this balance.

The arrows are color-coded to reflect the upstreamness of the export flows that move in the same direction as the net trade balance between each pair of nodes. For simplicity, export upstreamness values lying between 1 and 2 are labelled as “downstream” (green), those between 2 and 2.5 as “midstream” (yellow), and those above 2.5 as “upstream” (red).

As we can see in Chart 2, in 1995, a time when cross boarder production networks were still limited, Japan dominated the Asian region.  It was a significant downstream (green) exporter to the US, the Eurozone, the UK, and China.  And it was a significant supplier of key midstream machinery to Korea, Taiwan, Hong Kong, Singapore, Thailand and Malaysia.  It generally purchased its upstream inputs from the ROW.   As we can also see, China was well on its way to becoming a major exporter of final goods to the US, the world’s dominant consumer of both downstream and midstream goods.

chart-2

chart-3

By 2005, as illustrated in Chart 3, Japan’s role in the region had dramatically diminished.  China was now the region’s hub, and as such, the dominant exporter of finished goods to the US, the Eurozone, Hong Kong, and the ROW.  The economies of Korea and Taiwan had also been transformed, increasingly oriented to supplying upstream parts and components to China-based exporters.

chart-4

Chart 4, which captures conditions in 2014, shows a deepening of the trade patterns of the previous period.  China’s export dominance is greater yet, as illustrated by the increase in the width of its green trade arrows pointing to the US, ROW, EZ, and Hong Kong.  The Korean and Taiwanese economies are even more dependent on sales of parts and components to China.  Because of their relatively small trade activity, it is difficult to appreciate the transformations experienced by other Asian countries.  Many ASEAN countries, as noted above, had become suppliers of key electronic components to China.  Vietnam, due in large part to the expansion of South Korean production networks, has become an important assembly and export location for some consumer electronics such as smart phones.

What is also not visible from these charts is the effect that transnational corporate-driven regionalization dynamics have had on the structures and stability of individual countries, and of course on the working and living conditions of Asian workers.  One consequence of the rise of China as the region’s key final assembly and production platform is that leading firms from other Asian countries significantly reduced their domestic investment activity as they located operations in China. This deliberate deindustrialization was a natural outcome of the establishment of cross border production networks which involve, as stated above, the dividing of production activities into segments and the location of one or more of these segments in other countries.

The chart below highlights the dramatic decline in Japanese investment as Japanese firms shifted segments of production overseas.   This ongoing decline in investment is one of the most important reasons for the country’s ongoing economic stagnation.

japan

The following chart shows a similar sustained decline in investment, although beginning at a later date than for Japan, for the grouping “Rest of emerging Asia,” which includes Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea and Thailand.   China, on the other hand, has experienced a dramatic and sustained rise in its investment ratio. Chinese state activity, rather than foreign direct investment, accounts for the great majority of this investment, although in many cases it was undertaken to attract and support foreign production.

asian-investment

As leading Asian transnational corporations expanded their production networks, their actions tended to restructure their respective home economies in ways that left these economies more unbalanced and crisis prone.  For example, almost all Asian economies became increasingly export dependent at the same time that their exports narrowed to a limited range of parts and components.   And with transnational corporations increasingly able to shift production from one national location to another, China’s pull became ever stronger.  One consequence was that governments throughout Asia were forced to match China’s relatively low labor costs and corporate friendly business environment.  In many cases, they did so by transforming their own labor markets though the introduction of new laws and actions designed to weaken labor rights.  This, in turn, tended to suppress regional purchasing power, thereby reinforcing the region’s export dependence.  Not surprisingly then, the decline in exports that has followed the post 2008 Great Recession poses a serious challenge to Asia’s growth strategy.

According to the Asian Development Bank:

Developing Asia’s exports grew rapidly in real terms at an annual rate of 11.2 percent in 2000–2010 (Figure 1.2.1). Excepting a brief rebound in 2010, the region’s export volume growth has slowed since the crisis, recording annual growth of 4.7 percent in 2011–2015. A major concern is that developing Asia’s exports actually declined by 0.8 percent in 2015, which was a particularly bad year for world trade. Regional trends follow the lead of export growth in the PRC, which contributes about 40 percent of developing Asia’s export value.  PRC export growth slowed from an annual average of 18.3 percent in 2001–2010 to 6.4 percent in 2011–2015, falling into a 2.1 percent decline in 2015. The slowdown in developing Asia excluding the PRC was less pronounced as growth halved from 8.0 percent in 2001–2010 to 4.1 percent in 2011–2015, still growing marginally in 2015 at 0.8 percent. . . .

The slowdown has meant that developing Asia’s export growth in 2011–2015 was, at 4.1%, similar to the 4.3% averaged by other developing economies and not much higher than the 3.6% of the advanced economies—two groups that developing Asia has historically outperformed in export growth.

trade-trends

And as the region’s export growth rate declined, so did overall rates of GDP growth, as we see in the table below.

rates-of-growth

Still, these growth rates remain impressive, especially in light of the steep decline in regional exports.  Perhaps not surprisingly, developing Asia’s buoyancy owes much to China’s ability to maintain its relatively high rates of economic growth.  However, as I will discuss in a following post, contradictions and pressures are mounting in China that will intensify its economic slowdown and significantly depress growth in the rest of Asia, with negative consequences for the rest of the world.

The Devastating Transformation Of Work In The US

Two of the best-known labor economists in the US,  Lawrence F. Katz and Alan B. Krueger, recently published a study of the rise of so-called alternative work arrangements.

Here is what they found:

The percentage of workers engaged in alternative work arrangements – defined as temporary help agency workers, on-call workers, contract workers, and independent contractors or freelancers – rose from 10.1 percent [of all employed workers] in February 2005 to 15.8 percent in late 2015.

That is a huge jump, especially since the percentage of workers with alternative work arrangements barely budged over the period February 1995 to February 2005; it was only 9.3 in 1995.

But their most startling finding is the following:

A striking implication of these estimates is that all of the net employment growth in the U.S. economy from 2005 to 2015 appears to have occurred in alternative work arrangements. Total employment according to the CPS increased by 9.1 million (6.5 percent) over the decade, from 140.4 million in February 2005 to 149.4 in November 2015. The increase in the share of workers in alternative work arrangements from 10.1 percent in 2005 to 15.8 percent in 2015 implies that the number of workers employed in alternative arrangement increased by 9.4 million (66.5 percent), from 14.2 million in February 2005 to 23.6 million in November 2015. Thus, these figures imply that employment in traditional jobs (standard employment arrangements) slightly declined by 0.4 million (0.3 percent) from 126.2 million in February 2005 to 125.8 million in November 2015.

Take a moment to let that sink in—and think about what that tells us about the operation of the US economy and the future for working people.  Employment in so-called traditional jobs is actually shrinking. The only types of jobs that have been growing in net terms are ones in which workers have little or no security and minimal social benefits.

Figure 2 from their study shows the percentage of workers in different industries that have alternative employment arrangements.  The share has grown substantially over the last ten years in almost all of them.  In Construction, Professional and Business Services, and Other Services (excluding Public Services) approximately one quarter of all workers are employed using alternative work arrangements.

distribution

The study

Because the Bureau of Labor Statistics has not updated its Contingent Work Survey (CWS), the authors contracted with the RAND institute to do their own study.  Thus, Rand expanded its own American Life Panel (ALP) surveys in October and November 2015 to include questions similar to those asked in the CWS.   They surveys only collected information about the surveyed individual’s main job.  And, to maintain compatibility with the CWS surveys, day laborers were not included in the results.  Finally, the authors only included information from individuals who had worked in the survey reference week.

People were said to be employed under alternative work arrangements if they were “independent contractors,” “on-call workers,” “temporary help agency workers,” or “workers provided by contract firms.  The authors defined these terms as follows:

“Independent Contractors” are individuals who report they obtain customers on their own to provide a product or service as an independent contractor, independent consultant, or freelance worker. “On-Call Workers” report having certain days or hours in which they are not at work but are on standby until called to work. “Temporary Help Agency Workers” are paid by a temporary help agency. “Workers Provided by Contract Firms” are individuals who worked for a company that contracted out their services during the reference week.

The results in more detail

All four categories of nonstandard work recorded increases:

Independent contractors continue to be the largest group (8.9 percent in 2015), but the share of workers in the three other categories more than doubled from 3.2 percent in 2005 to 7.3 percent in 2015. The fastest growing category of nonstandard work involves contracted workers. The percentage of workers who report that they worked for a company that contracted out their services in the preceding week rose from 0.6 percent in 2005 to 3.1 percent in 2015.

Table 4 shows the percentage of workers in different categories that are employed for their main job in one of the four nonstandard work arrangements.  The relevant comparisons over time are with the two CPS studies and the Alternative Weighted results from the Rand study.

4b

Here are some of the main findings:

There is a clear age gradient that has grown stronger, with older workers more likely to have nonstandard employment than younger workers.  In 2015, 6.4 percent of those aged 16 to 24 were employed in an alternative work arrangement, while 14.3 percent of those aged 25-54 and 23.9 percent of those aged 55-74 had nonstandard work arrangements.

The percentage of women with nonstandard work arrangements grew dramatically from 2005 to 2015, from 8.3 percent to 17 percent.  Women are now more likely to be employed under these conditions than men.

Workers in all educational levels experienced a jump in nonstandard work, with the increase greatest for those with a bachelor’s degree or higher.  “Occupational groups experiencing particularly large increases in the nonstandard work from 2005 to 2015 include computer and mathematical, community and social services, education, health care, legal, protective services, personal care, and transportation jobs.”

The authors also tested to determine “whether alternative work is growing in higher or lower wage sectors of the labor market.”  They found that “workers with attributes and jobs that are associated with higher wages are more likely to have their services contracted out than are those with attributes and jobs that are associated with lower wages. Indeed, the lowest predicted quintile-wage group did not experience a rise in contract work.”

The take-away

The take-away is pretty clear.  Corporate profits and income inequality have grown in large part because US firms have successfully taken advantage of the weak state of unions and labor organizing more generally, to transform work relations.  Increasingly workers, regardless of their educational level, find themselves forced to take jobs with few if any benefits and no long-term or ongoing relationship with their employer.  Only a rejuvenated labor movement, one able to build strong democratic unions and press for radically new economic policies will be able to reverse existing trends.

Capitalism and Inequality

Defenders of capitalism in the United States often choose not to use that term when naming our system, preferring instead the phrase “market system.”  Market system sounds so much better, evoking notions of fair and mutually beneficial trades, equality, and so on.  The use of that term draws attention away from the actual workings of our system.

In brief, capitalism is a system structured by the private ownership of productive assets and driven by the actions of those who seek to maximize the private profits of the owners.  Such an understanding immediately raises questions about how some people and not others come to own productive wealth and the broader social consequences of their pursuit of profit.

Those are important questions because it is increasingly apparent that while capitalism continues to produce substantial benefits for the largest asset owners, those benefits have increasingly been secured through the promotion of policies – globalization, financialization, privatization of state services, tax cuts, attacks on social programs and unions–that have both lowered overall growth and left large numbers of people barely holding the line, if not actually worse off.

The following two figures come from a Washington Post article by Jared Bernstein, in which he summarizes the work of Thomas Piketty, Emmanuel Saez and Gabriel Zucman. The first figure shows the significant decline in US pre-tax income growth.  In the first period (1946-1980), pre-tax income grew by 95 percent.  In the second (1980-2014), it grew by only 61 percent.

income-trends

This figure also shows that this slower pre-tax income growth has not been a problem for those at the top of the income distribution.  Those at the top more than compensated for the decline by capturing a far greater share of income growth than in the past.  In fact, those in the bottom 50 percent of the population gained almost nothing over the period 1980 to 2014.

The next figure helps us see that the growth in inequality has been far more damaging to the well-being of the bottom half than the slowdown in overall income growth.  As Bernstein explains:

The bottom [blue] line in the next figure shows actual pretax income for adults in the bottom half of the income scale. The top [red] line asks how these folks would have done if their income had grown at the average rate from the earlier, faster-growth period. The middle [green] line asks how they would have done if they experienced the slower, average growth of the post-1980 period.

The difference between the top two lines is the price these bottom-half adults paid because of slower growth. The larger gap between the middle and bottom line shows the price they paid from doing much worse than average, i.e., inequality (aging demographics are also in play, but the researchers show that they do not explain the extent of the slowdown in income growth). That explains about two-thirds of the difference in endpoints. Slower growth hurt these families’ income gains, but inequality hurt them more.

inequality-versus-growth

A New York Times analysis of pre-tax income distribution over the period 1974 to 2014 reinforces this conclusion about the importance of inequality.  As we can see in the figure below, the top 1 percent and bottom 50 percent have basically changed places in terms of their relative shares of national income.

changing-places

The steady ratcheting down in majority well-being is perhaps best captured by studies designed to estimate the probability of children making more money than their parents, an outcome that was the expectation for many decades and that underpinned the notion of “the American dream.”

Such research is quite challenging, as David Leonhardt explains in a New York Times article, “because it requires tracking individual families over time rather than (as most economic statistics do) taking one-time snapshots of the country.”  However, thanks to newly accessible tax records that go back decades, economists have been able to estimate this probability and how it has changed over time.

Leonhardt summarizes the work of one of the most important recent studies, that done by economists associated with the Equality of Opportunity Project.   In summary terms, those economists found that a child born into the average American household in 1940 had a 92 percent chance of making more than their parents.  This falls to 79 percent for a child born in 1950, 62 percent for a child born in 1960, 61 percent for a child born in 1970, and only 50 percent for a child born in 1980.

The figure below provides a more detailed look at the declining fortunes of most Americans.   The horizontal access shows the income percentile a child is born into and the vertical access shows the probability of that child earning more than their parents.   The drop-off for children born in 1960 and 1970 compared to the earlier decade is significant and is likely the result of the beginning effects of the changes in capitalist economic dynamics that started gathering force in the late 1970s, for example globalization, privatization, tax cuts, union busting, etc.  The further drop-off for children born in 1980 speaks to the strengthening and consolidation of those dynamics.

american-dream

The income trends highlighted in the figures above are clear and significant, and they point to the conclusion that unless we radically transform our capitalist system, which will require building a movement capable of challenging and overcoming the power of those who own and direct our economic processes, working people in the United States face the likelihood of an ever-worsening future.

Confronting Capitalist Globalization

Trade agreements were a major issue in the US presidential election.  Bernie Sanders and Donald Trump both made opposition to the Transpacific Partnership a central part of their respective campaigns, and the popularity of this position eventually forced Hillary Clinton to also oppose it.  A number of mainstream economists even began to acknowledge that many working people actually had reason to be critical of globalization dynamics.  These economists still held that globalization brought positive benefits to the country.  The problem, in their opinion, was that the gains had not been equally distributed, with many workers, especially in manufacturing, suffering wage and employment losses.  Of course, few offered meaningful suggestions for correcting the problem.

Now that Trump has been elected, economists again appear to be downplaying the negative consequences of globalization, arguing that it is technology, rather than globalization, that best explains the growth in inequality and worker insecurity.  No doubt this stems from their concern that popular dissatisfaction with current economic conditions might grow from opposition to trade agreements into an actual challenge to contemporary globalization dynamics, which means capitalism itself.

Contemporary globalization dynamics are an expression of capitalism’s logic.  Faced with profit pressures, leading firms in core countries began to internationalize their operations in the mid-1980s by shifting production to the third world.  This internationalization process was shaped by the creation of cross border production networks or value chains.  Firms would divide the production of their goods into multiple segments and then locate the individual segments in different third world countries.

Sometimes, these leading firms built and operated their own overseas production facilities, directly controlling the entire production process.  More often, especially in electronics and telecommunications, pharmaceuticals, textiles and clothing, and automobiles, leading firms relied on “independent” partner firms to organize production under terms which still allowed them to direct operations and capture the majority of profits from sale of the final goods.

In broad brush, Japanese transnational corporations centered their product chains in China and several East Asian countries.  US transnational corporations centered theirs in China, Mexico and several Caribbean countries.  German transnational corporations centered theirs in China and several Central and Eastern European countries.   China’s role in the global economy grew explosively because it was a favorite location for production and final assembly for transnational corporations from all three core countries.

One consequence of this development was that both the US trade deficit, especially with China, and the Chinese trade surplus, especially with the US, grew large.  The chart below highlights this development, showing changes in size of the US and Chinese current account balances relative to their respective GDP.

us-and-china

The following chart looks just at the US trade balance and shows its dramatic decline beginning in the late 1990s.

us_trade_balance_1980_2014-svg

US manufacturers were not alone in benefiting from the shift in production to lower cost third world countries.  US retailers also gained as the lower costs allowed them to boost sales and profits.  And the US financial industry also gained.  The large deficits meant large dollar flows abroad which were returned for investment in financial instruments such as stocks and bonds.  Moreover, as conditions worsened for growing numbers of working people in the US (more on that below), many were forced to borrow to maintain their life style which further expanded financial activity and profits.  In addition, globalization has enabled many transnational corporations to shift profits to those countries with the lowest tax requirements, thereby further boosting their profitability and that of the financial sector.

Not surprisingly, the expansion of international production by US and other transnational corporations took its toll on US manufacturing workers.  As Dean Baker explains:

As can be seen (in the chart below), manufacturing employment stayed close to 17.5 million from the early 1970s to 2000. We had plenty of productivity growth over these three decades, but little net change in manufacturing employment, in spite of cyclical ups and downs. It was declining as a share of total employment, which almost doubled over this period. Then, as the trade deficit explodes, we see manufacturing employment plummet. Note that most of the drop is before the Great Recession in 2008.

jobs

In other words, while it is true that manufacturing employment as a share of total US employment had been falling for some time, the dramatic decline in the number of workers employed in manufacturing dates to the period of rapid expansion of third world-centered international production networks.

Jared Bernstein and Dean Baker summarize the results of two studies that examine some of the costs paid by US workers for this global restructuring:

Trade deficits, even in times of strong growth, have negative, concentrated impacts on the quantity and quality of jobs in parts of the country where manufacturing employment diminishes. . . . There is, for example, a lot of research confirming that deindustrialization in the Rust Belt is partly a result of the fact that America meets its domestic demand for manufactured goods by importing more than it exports. One oft-cited academic study found that imbalanced trade with China led to the loss of more than 2 million U.S. jobs between 1991 and 2011, about half of which were in manufacturing (which worked out to 17 percent of manufacturing jobs overall during that time).  Further, the economist Josh Bivens found that in 2011 the cost of imbalanced trade with low-wage countries cost workers without college degrees 5.5 percent of their annual earnings (about $1,800). Far from a small, isolated group, these workers represent two-thirds of the American workforce.

Unfortunately, many US workers have viewed globalization from a nation-state perspective, believing that third world workers, especially those in China and Mexico, are stealing their jobs.  In reality, few workers employed in these product chains have enjoyed meaningful gains.  For example, the number of manufacturing workers in China has also been falling.  And growing numbers of them are forced to work long hours, in unsafe conditions, for extremely low wages.  Firms operating in China as subcontractors for foreign multinational corporations are squeezed by these corporations to lower costs.  They in turn employ a variety of tricks to lower worker wages and intensify the work process.  And they do this with the approval of local government officials who want to maintain the production in their jurisdiction.

One common trick is to use employment agencies to provide them with students under so-called internship programs.  As students, they are not considered workers under Chinese labor law and thus are not covered by such things as minimum wage laws, overtime benefit laws, and pensions.  A recent study by China Labor Watch provides one example:

University students who worked summer jobs at one of China’s leading small-appliance factories were forced to live in cramped, ill-equipped dorm rooms, made to sweat through 12-hour days in a hot factory and then were stiffed on pay, according to a report by China Labor Watch and confirmed via interviews with students and the agents who hired them.

The 8,000-employee Cuori factory in Ningbo, south of Shanghai on China’s east coast, manufactures kitchen appliances, irons, heaters and vacuum cleaners under its own name and for such multinational firms as Cuisinart, Hamilton Beach and George Foreman. Stores in the U.S. carrying items made there include Walmart and Home Depot.

More often, the students are from technical schools and forced to accept jobs as part of their curriculum.  This is just one way that firms operating within international production networks seek to push down wages to maximize their own profits and satisfy the demands of transnational corporations for low cost production.

Seen from this perspective the problem facing US workers, and those in Japan and Germany who face similar competitive pressures and downward movement in their living and working conditions, is not job theft by workers in the third world, but the working of contemporary capitalism.   And this is the perspective needed to judge the likely policies of newly elected US president Donald Trump.

We already have two indicators that the Trump administration will do little to threaten contemporary globalization dynamics.  During the campaign, Trump made big news when he told Carrier, an air-conditioning and furnace manufacturer, that the company would “pay a damn tax” if it carried out its plan to lay off some 1400 workers and close one of its factories in Indianapolis and move its production to Mexico.  Later he said that if Carrier moved its Indianapolis production to Mexico he would, if President, levy a steep 35 percent tariff on any of its products coming back to the US from off-shore factories.

Well, on December 1, 2016, Trump announced the terms of the deal he worked out with Carrier.  Carrier would “keep” 800 workers in its Indianapolis factory.  But approximately 600 workers would still be laid off as the factory’s fan coil assembly line would still be moved to Mexico.  And in exchange, the state of Indiana would provide Carrier with a $7 million subsidy including tax breaks and training grants.  This is no attack on capitalist globalization.  And when the president of the union at the factory voiced his disapproval of the agreement, Trump tweeted out that the union needed to “Spend more time working-less time talking. Reduce dues.”

As for Trump’s claim that we will look carefully at NAFTA to see if it should be rewritten, the US Chamber of Commerce has already gone on record in defense of NAFTA but welcoming its revision to incorporate issues like e-commerce that were not included at the time of its approval. In line with the Chamber’s confidence, a former Chamber lobbyist who has publicly defended NAFTA and outsourcing more generally has just been appointed to Trump’s transition team dealing with trade policy.

In short, if we are going to build a strong economy that works for the great majority of US workers we need to build a movement that is critical not just of the Transpacific Partnership but the entire process of capitalist globalization.  Moreover, that movement needs to be built in ways that strengthen relations of solidarity with workers in and from other countries.  And, it is critical to start the needed educational process now, before the new administration has a chance to trumpet new misleading initiatives and confuse people about the real threat to our well-being.

Exile From A Future Time

Although this is not my typical post, I hope readers will find this poem, The Bellbuoy by Sol Funaroff, useful.  I read it periodically and it strengthens my resolve.

The most moving part for me follows:

I am that exile

from a future time,

from shores of freedom

I may never know,

who hears, sounding in the surf,

tidings from the lips of waves

that meet and kiss

in submarine gardens

of a new Atlantis

where gold colored fishes

paint the green gloom.

 

Here is the complete poem:

The Bellbuoy by Sol Funaroff

 

At the ebb and flow of the sea

near the shore’s edge

I stand and watch the low grey clouds

whistling in the winds weather,

and hear the bellbuoy,

rocked with the sea swell,

give sound and meaning

to the unknown currents, seawhispers,

subdued voices, the undersea of living.

 

New world navigator

I sound uncharted depths.

For the longings of sailors

I sing a voyage of discovery;

lands where bleached river beds

like mammoth bones lie dry;

and ancient cities,

built by slaves,

doomed by the slaver’s whip,

Crumble in their wreckages.

 

In a city of hulks,

battered tenements,

with creatures swarming

in slime and weeds,

stars lit by electric fish

flash in the marine night

and the moon sinks down,

a foundering ship.

 

In this human deep

the derelict’s dreams are drowned

in absinthe solitudes,

and hopes are drowned

with the dreams of drowning.

There are dark gulfs,

hollowed by the tears of oceans,

where the weeping of waters

is like the weeping of women

in a nation at war

and the sea is salt and bitter

with the blood of the slain.

 

There in subterranean caverns

the long rains,

in travels underground

seeping through the graves of paupers,

drip an age of sorrows

frozen in stalagmite;

and from the abyss,

deep as the tones of organs,

echos swell in reply,

a surge of voices

the rebel exile often hears

in the far, hidden tides

of his native land.

 

I am that exile

from a future time,

from shores of freedom

I may never know,

who hears, sounding in the surf,

tidings from the lips of waves

that meet and kiss

in submarine gardens

of a new Atlantis

where gold colored fishes

paint the green gloom.

 

And where the cracked heart of the world

sobs through great fissures

whose boiling hells

raise volcanic fires

and tears of stone,

in huge convulsions,

waterspouts and steam,

eternity gives birth,

and from its watery womb

emerges a continent

from the slime of oceans.

 

Then tossed by seas rebellious and proud

with stormy syllables in mass cascades

my songs are sung.

The Trump Victory

The election of Donald Trump as president of the United States is the latest example of the rise in support for right-wing racist and jingoistic political forces in advanced capitalist countries.  Strikingly this rise has come after a sustained period of corporate driven globalization and profitability.

As highlighted in the McKinsey Global Institute report titled Playing to Win: The New Global Competition For Corporate Profits:

The past three decades have been uncertain times but also the best of times for global corporations–and especially so for large Western multinationals. Vast markets have opened up around the world even as corporate tax rates, borrowing costs, and the price of labor, equipment, and technology have fallen. Our analysis shows that corporate earnings before interest and taxes more than tripled from 1980 to 2013, rising from 7.6 percent of world GDP to almost 10 percent.  Corporate net incomes after taxes and interest payments rose even more sharply over this period, increasing as a share of global GDP by some 70 percent.

global-profit-pool

As we see below, it has been corporations headquartered in the advanced capitalist countries that have been the biggest beneficiaries of the globalization process, capturing more than two-thirds of 2013 global profits.

advanced-economies-dominate

More specifically:

On average, publicly listed North American corporations . . . increased their profit margins from 5.6 percent of sales in 1980 to 9 percent in 2013. In fact, the after-tax profits of US firms are at their highest level as a share of national income since 1929. European firms have been on a similar trajectory since the 1980s, though their performance has been dampened since 2008. Companies from China, India, and Southeast Asia have also experienced a remarkable rise in fortunes, though with a greater focus on growing revenue than on profit margins.

And, consistent with globalizing tendencies, it has been the largest corporations that have captured most of the profit generated.  As the McKinsey report explains:

The world’s largest companies (those topping $1 billion in annual sales) have been the biggest beneficiaries of the profit boom. They account for roughly 60 percent of revenue, 65 percent of market capitalization, and 75 percent of profits. And the share of the profit pool captured by the largest firms has continued to grow. Among North American public companies, for instance, firms with $10 billion or more in annual sales (adjusted for inflation) accounted for 55 percent of profits in 1990 and 70 percent in 2013. Moreover, relatively few firms drive the majority of value creation. Among the world’s publicly listed companies, just 10 percent of firms account for 80 percent of corporate profits, and the top quintile earns 90 percent.

bigger-the-better

Significantly, most large corporations have chosen not to use their profits for productive investments in new plant and equipment.  Rather, they built up their cash balances.  For example, “Since 1980 corporate cash holdings have ballooned to 10 percent of GDP in the United States, 22 percent in Western Europe, 34 percent in South Korea, and 47 percent in Japan.”  Corporations have often used these funds to drive up share prices by stock repurchase, boost dividends, or strengthen their market power through mergers and acquisitions.

In short, it has been a good time for the owners of capital, especially in core countries.  However, the same is not true for most core country workers.  That is because the rise in corporate profits has been largely underpinned by a globalization process that has shifted industrial production to lower wage third world countries, especially China; undermined wages and working conditions by pitting workers from different communities and countries against each other; and pressured core country governments to dramatically lower corporate taxes, reduce business regulations, privatize public assets and services, and slash public spending on social programs.

The decline in labor’s share of national income, illustrated below, is just one indicator of the downward pressure this process has exerted on majority living and working conditions in advanced capitalist countries.labor-share

Tragically, thanks to corporate, state, and media obfuscation of the destructive logic of contemporary capitalist accumulation dynamics, worker anger in the United States has been slow to build and largely unfocused.  Things changed this election season.  For example, Bernie Sanders gained strong support for his challenge to mainstream policies, especially those that promoted globalization, and his call for social transformation.  Unfortunately, his presidential candidacy was eventually sidelined by the Democratic Party establishment that continues, with few exceptions, to embrace the status-quo.

However, another “politics” was also gaining strength, one fueled by a racist, xenophobic, misogynistic right-wing movement that enjoyed the financial backing of the most reactionary wing of the capitalist class.  That movement, speaking directly to white (and especially male) workers, offered a simplistic and in its own way anti-establishment explanation for worker suffering: although corporate excesses were highlighted, the core message was that white majority decline was caused by the growing demands of “others”—immigrants, workers in third world countries, people of color, women, the LGBTQ community, Muslims, and Jews—which in aggregate worked to drive down wages, slow growth, and misuse and bankrupt governments at all levels.  Donald Trump was its political representative, and Donald Trump is now the president of the United States.

His administration will no doubt launch new attacks on unions, laws protecting human and civil rights, and social programs, leaving working people worse off.  Political tensions are bound to grow, and because capitalism is itself now facing its own challenges of profitability, the new government will find it has little room for compromise.

According to McKinsey,

After weighing various scenarios affecting future profitability, we project that while global revenue could reach $185 trillion by 2025, the after-tax profit pool could amount to $8.6 trillion. Corporate profits, currently almost 10 percent of world GDP, could shrink to less than 8 percent–undoing in a single decade nearly all the corporate gains achieved relative to world GDP over the past three decades. Real growth in corporate net income could fall from 5 percent to 1 percent per year. Profit growth could decelerate even more sharply if China experiences a more pronounced slowdown that reverberates through capital-intensive sectors.

future

History has shown that we cannot simply count on “hard times” to build a powerful working class movement committed to serious structural change.  Much depends on the degree of working class organization, solidarity with all struggles against exploitation and oppression, and clarity about the actual workings of contemporary capitalism.  Therefore we need to redouble our efforts to organize, build bridges, and educate. Our starting point must be resistance to the Trump agenda, but it has to be a resistance that builds unity and is not bounded in terms of vision by the limits of a simple anti-Trump alliance.   We face great challenges in the United States.

The Importance Of Solidarity

As we begin to take stock of the political moment in the United States and strategize ways to build a movement strong enough to resist the policies of the Trump administration and confident enough to project a new social vision, it is important to learn from the efforts of people in other countries facing similar challenges.  South Korea for example.

Park Geun-hye, the current president of South Korea, took office in February 2013.  The daughter of Park Chung-Hee, the brutal military dictator who ruled the country from 1961 until his assassination in 1979, Park Geun-hye presented herself as a “soft” conservative during the presidential campaign.  But once elected she moved quickly and decisively, with the support of the country’s security forces, to expand the neoliberal and anti-democratic policies of her conservative predecessor and crush any opposition.

The consequences of her rule have been devastating for the great majority of Koreans.  Some highlights: her deregulation of health and safety standards led directly to the sinking of a ferry carrying over 400 students; more than 300 of whom drowned.  Her labor initiatives include laws to increase the precariousness of work and difficulty of unionization, and lower the wages of regular workers.  Her education policies require that public school teachers use only state written history books.  Her militarist policies include the construction of a new naval base for US warships on Jeju island, over the objections of the residents; an intensification of war games directed against North Korea; the closure of the Kaesong industrial zone; and the welcoming of a US THAAD anti-missile battery aimed at China and Russia on South Korean soil.  And she has advanced her policies by outlawing demonstrations, arresting hundreds of union leaders, and dissolving a political party.

Korean social movements, led by the Korean Confederation of Trade Unions, have responded to this rightward movement with ever larger demonstrations, despite the jailing of many labor leaders.  Now, the balance of forces appears to be decisively shifting against the government.  The reason: new revelations point to the fact that many of Park’s policies were made either in consultation with or in response to the dictates of an unelected confidant, the daughter of a now deceased cult leader.

As the website Zoom in Korea explains:

Since late October, when news broke of the government corruption scandal involving South Korean president Park Geun-hye, South Korean citizens have demanded the removal of Park and her administration from office. Last week on November 5, close to 200,000 people took to the streets of Seoul to demand her resignation. A diverse range of people from different social enclaves of South Korean society joined together to send a common message to their government – “Park Geun-hye, step down.”

Throughout the streets of Seoul, one could see recently politicized high school students marching side by side with elderly folks who had experienced past revolutionary moments in South Korean history.

Here is a short clip which shows what it looks like when 200,000 people crowd the streets of Seoul to demand change.

For more on the growing movement in South Korea, its demands and its challenges, read the rest of the Zoom in Korea article here.

 

We are not alone in facing powerful dictatorial rightwing political forces.  As we develop our own response here in the United States we need to keep solidarity in mind, which means both supporting and learning from struggles elsewhere.

 

November 12 update

Zoom in Korea reports:

1 Million in Historic Protest to Oust Park Geun-hye
As of 8:30 pm (Seoul time) on Saturday, November 12, 2016

South Korean media report 1 million gathered at Gwanghwamun Plaza to demand Park Geun-hye’s resignation. This is the largest protest South Korea has seen since the democratic uprising of June 1987. People from across the country, including conservative strongholds Busan and Daegu have traveled to Seoul to join the protest. Youth in school uniforms and mothers with children are among the protest.

Protesters on the way to the Blue House are blocked by a barricade of police buses near Gyeongbok Palace. The police have also blocked off entrances to subway stations between the police barricade and the presidential residence. Protesters are intent on reaching the Blue House but so far remain peaceful.

Seoul Mayor Park Won-soon refused to supply water from the city’s fire hydrants to the police, which had threatened to use water cannons to block protesters.  Referring to the death of farmer Baek Nam-gi, hit by a high-pressure water cannon at a mass demonstration in November 2015, Mayor Park said in a radio interview, “No more.” He added, “Water from fire hydrants is intended for putting out fires, not peaceful protests.”  A reporter outside the Blue House says protesters can be heard from the Blue House, which has been in a state of emergency since Saturday morning but has not issued an official response to the calls for the president’s resignation.

The Korean Confederation of Trade Unions has vowed a general strike if Park Geun-hye refuses to resign.

The Importance of Oregon’s Measure 97

Approval of Measure 97 is critical for the well-being of most Oregonians; its passage could also encourage efforts in other states to reverse the slashing of public capacities in the name of tax relief for profit-rich large corporations.

The national picture is well illustrated in a New York Times article.   As David Leonhardt explains:

Consider corporate taxes, which ultimately tend to be paid by the well-off, because they own the most stock. The official corporate rate is 35 percent, infamously higher than in any other advanced economy. Yet there are so many loopholes that companies often pay relatively little in tax.

The following chart highlights just how well corporations have done at avoiding taxes—and remember this shows the tax rate for all taxes paid (federal, state, local, and foreign) by corporations.

national-tax-mess

Here in Oregon, corporations have also done well.  In fact, according to the Anderson Economic Group, which does a yearly state-by-state study of the overall tax burden faced by businesses relative to their profits, Oregon has the lightest business tax burden in the country, and has secured that dead last position three years running.  The table below comes from its 2016 edition.

anderson-tax-burden

No wonder Oregon is short of funds and unable to deliver high quality early childhood and K-12 education, affordable health care, and critical senior services.

Measure 97 is designed to change this situation.  Although the Oregon initiative process limits the kinds of changes people can make to state law, the authors of this measure have crafted a well-designed change to the tax code.   The proposed measure makes one simple, but critical change to the state’s existing minimum tax code.

Here a bit of history is useful.  Oregon introduced a $25 minimum corporate tax in 1929.  The tax was lowered to $10 in 1931 and the rate remained unchanged until 2010.  By 2009, some two-thirds of C-corporations were paying just this $10 minimum.  As we can see below in the figure taken from an Oregon Center for Public Policy study, corporations currently pay only 6.7 percent of Oregon income taxes; thirty years ago it was 18.5 percent.

shrinking-oregon-corporate-taxes

The Great Recession, which caused the state deficit to explode, finally forced the legislature to act on tax reform.  It proposed, after consultation with the business community, a ballot measure which called for a new flat tax for all businesses and a new minimum tax schedule based on sales only for C-corporations. This measure, Measure 67, was approved by the voters.  The change, although helpful, was a modest one.  Most importantly, the new minimums remained set in unchanging dollar terms; were quite low; and were regressive in that the implicit minimum tax rate went down as sales went up.

Measure 97 seeks to remedy these shortcomings by changing only the minimum tax schedule, and only for the largest corporations.   Corporations with less than $25 million in in-state sales will see no change in their taxes.  Corporations with more than $25 million in in-state sales will now have to pay a new higher minimum tax equal to 2.5% of the amount of their sales above $25 million.

According to the Oregon Legislative Revenue Office, this new minimum will raise taxes on only 1051 corporations, less than one percent of all businesses operating in Oregon and less than 4 percent of all corporations operating in Oregon.  It will however raise a significant amount of money, some $3 billion a year; that amount will produce a 30 percent increase in the state’s general fund.  Moreover, as structured, the tax will fall heavily on the largest firms; more than half of the new revenue will come from the top 50 firms.  Finally, because the tax is based on sales, corporations will have little choice but to pay it.  They cannot fudge their sales figures like they can their profits, and it doesn’t matter where they produce as long as they sell in Oregon.  No wonder these large corporations don’t like the measure.

More money has been spent on the fight over Measure 97 than on any any other ballot measure in Oregon’s history.   According to the Oregonian:

With more than two weeks to go before the state’s Nov. 8 general election, groups against the corporate tax measure have contributed more than $22.5 million toward its defeat.

That surpasses the previous record of $21.2 million contributed in 2014 toward the defeat of Measure 92, the proposed GMO labeling measure. . . .

The group supporting the measure, Yes on 97, has raised more than $10.5. That puts the combined figure for spending on the measure at more than $33 million, which also eclipses the previous record of $29.6 million in total spending on a ballot measure. The prior record was also set during the contentious run-up to the GMO labeling measure election, in which it lost by fewer than 1,000 votes.

Among the biggest contributors to the No on 97 are retail corporations like Costco, Safeway, and Kroger, each of which has given almost $2 million.  More than 80 percent of the new revenue is predicted to come from large, multi-state corporations headquartered outside Oregon and not surprisingly it is these firms that are pouring in the most money to defeat the measure.

Their strategy is to scare working people, by claiming that the tax will be passed on to consumers through higher prices.  Little is said, of course, about the fact that the measure directs that the new money is to be spent on improving early childhood and K-12 education, expanding health care options, and funding senior services—all programs with high payoff for working people.  However, this fact aside, corporate threats of higher prices are merely that, empty threats.

There are three simple reasons why these large corporations will have little choice but to absorb the tax, and accept lower profits.  First, as mentioned above, very few firms will have their taxes raised by the measure.  Thus, these firms will be facing many firms that will not be subject to higher taxes. This is well illustrated by the following figure taken from an Oregon Center for Public Policy study.  If the firms affected by the new tax try to raise their prices, they risk losing market share.  In short, competitive pressures will make it difficult for them to raise their prices.

affected-firms-by-industry

Second, research shows that most large, out of state corporations employ national pricing strategies.  This means that they charge the same price for the same product in every state in which they sell.  In other words, there is no relationship between their pricing strategies and the various tax regimes they face in the different states in which they operate.  For example, the Oregon Consumer League examined prices charged by a number of major retailers.  What they found in the case of Target was typical:

Target is one of the biggest retailers in America, making $3.4 billion in net profits from $73.8 billion in sales in 2015. Target stores can be found in every state except Vermont. We selected one Target store in each state and looked up prices online for a sample of five items: a digital camera, laundry detergent, sunscreen, a box of Cheerios, and a spiral notebook. No matter which store was chosen, the prices did not change. . . . [P]rices remain consistent despite Target paying higher taxes in some states and much lower taxes in others.

Finally, there is the internet.  Most large firms offer on-line shopping.  Oregonians could easily check to see whether firms were raising local prices and if they found that to be true, simply order the same product on-line for the national price.  And, there is always Amazon, which is ready to sell anything to anyone.

In short, Measure 97 will raise much needed money that will be used to boost the quality of the state’s schools, health care, and senior services.  And it will do so by targeting the biggest and richest corporations, making them finally pay the taxes they have so far avoided.

For more on the importance of this measure and why I strongly support it you can read my article, Measure 97 corporate tax would put state on right track, which was recently published in the excellent local newspaper Street Roots.

 

 

 

 

Join Koreans In Opposing THAAD Deployment

The US government, with the approval of the South Korean government, wants to locate a Terminal High Altitude Area Defense (THAAD) anti-missile system in South Korea.  Growing numbers of South Koreans oppose this.  They fear that the anti-missile system, which is largely aimed at China and Russia, will only increase military tensions and fuel a new arms race in the region as well as worsen relations with North Korea.  Those living close to the proposed location for the THAAD battery worry about the long term health effects of the associated high-intensity radar system.  Their fears and worries are well founded.

no-war

While the anti- THAAD struggle is big news in Korea, little is known about it in the United States.  This is unfortunate because the U.S. effort to expand its military presence in the Asia-Pacific region also has real consequences for people in this country.  For example, the resulting militarization will lead to ever higher levels of U.S. military spending, draining resources away from needed social programs.  And, of course, it increases the risk of a new war.  In short, it is in the interest of people living in the United States to join with people in South Korea to oppose the THAAD deployment in South Korea.

Therefore, several U.S. based organizations have joined in coalition under the banner of “Stop THAAD in Korea and Militarism in Asia and the Pacific.”  Its demands are simple:

  • We urge the U.S. government to rescind its decision on THAAD deployment in South Korea.
  • We urge the U.S. government to pursue all possible avenues for reducing tensions on the Korean peninsula by re-engaging in diplomacy with North Korea.
  • We urge the U.S. government to resolve conflicts in the Asia-Pacific region peacefully, through diplomacy and dialogue.

The coalition’s website, http://stopthaad.org/, includes a longer statement of purpose and links to articles that analyze both the political aims and consequences of the proposed THAAD deployment and the growth of the resistance movement in South Korea.  As you will see, close to 100 organizations have already endorsed the coalition’s demands.

As a first action, the coalition is organizing candlelight vigils in select U.S. cities in solidarity with candlelight vigils taking place in South Korean cities; information about them can also be found on the website.