The IMF’s Skewed Forecasts

The IMF, eager to defend the status quo, has consistently and incorrectly predicted recovery for the post-Great Recession world economy.

The figure below highlights the overly optimistic forecasting bias of recent IMF growth projections.  For example, the green line represents the September 2011 IMF forecast for future world GDP growth.  In each case illustrated, the IMF forecast is for a significant boost in future world GDP growth. And in each case not only did that boost not materialize, growth actually declined.

Sadly, it does not appear that this dismal forecasting record has led the IMF to engage in any meaningful reconsideration of their modeling assumptions.

The 1% Disproportionately Benefit From US Expansions

A new study of the distribution of income by the Economic Policy Institute (EPI) highlights the enormous sway the top one percent of families (defined as tax paying units, either single adult or married couple) has over the US economy.  The authors found:

Between 2009 and 2013, the top 1 percent captured 85.1 percent of total income growth in the United States. Over this period, the average income of the top 1 percent grew 17.4 percent, about 25 times as much as the average income of the bottom 99 percent, which grew 0.7 percent.

In 24 states the top 1 percent captured at least half of all income growth between 2009 and 2013.

In 15 of those states the top 1 percent captured all income growth between 2009 and 2013. Those states were Connecticut, Florida, Georgia, Louisiana, Maryland, Mississippi, Missouri, Nevada, New Jersey, New York, North Carolina, South Carolina, Virginia, Washington, and Wyoming.

In the other nine states, the top 1 percent captured between 50.0 and 94.4 percent of all income growth. Those states were Arizona, California, Illinois, Kansas, Massachusetts, Michigan, Oregon, Pennsylvania, and Texas.

This development, where the top 1 percent captures almost all of the income gains during a period of economic expansion, has now become business as usual.  As the figure below shows, the top 1 percent has increased its share of income, expansion by expansion, starting in the late 1970s.

Not a pretty picture—recessions bring losses to the great majority of working people and expansions bring gains only to those at the top.

Clearly, we need significant structural changes to achieve an economy that works for the majority.  Just as clearly, there is a powerful minority that has every reason to use its considerable power to block those changes.  Among other things, they actively use their wealth to influence candidate selection and elections and, by extension, our national and state economic policies.

And, perhaps even more importantly, they use their control over media to try and convince us that the existing system is a fair and just one.

Third World Countries Lose Ground

Globalization advocates celebrated the 2003-08 period, pointing to the rapid rate of growth of many third world countries as proof of capitalism’s superiority as an engine of development.  Overlooked in the celebration was that fact that growth and development are not the same thing, and in most countries the benefits of growth were only enjoyed by a small minority.  Also overlooked was the fact that this growth was achieved at the cost of ever increasing damage to the health of our planet.  Finally, these cheerleaders also minimized the unbalanced, unstable, and unsustainable nature of the growth process; some seven years after the end of the Great Recession most countries continue to struggle with stagnation, with working people disproportionately suffering the social consequences.

The following figures, taken from the World Bank’s latest annual Global Economic Prospects report, highlight the severity of the post-crisis growth slowdown.

Figures 1 and 2 illustrate the extent of the growth slowdown.   Emerging Market and Developing Economy (EMDE) commodity exporters have suffered the worst declines.  In terms of region, EMDEs in Europe and Central Asia and Latin America and the Caribbean recorded the lowest rates of growth.  Sub Saharan African countries experienced one of the sharpest declines in growth relative to the 2003-08 period.

Figure 1: Gowth By Group

 

Figure 2: Regional Growth EMDEs (weighted average)

This ratcheting down of EMDE growth rates means a significant setback in progress towards achieving advanced economy levels as shown in Figure 3 A and B.

Figure 3: Catch-Up of EMDE Income To Advanced Economies

The Financial Times discusses the significance of this development:

That downgrade [in world growth] came alongside a new analysis showing that for the first time since the turn of the century a majority of emerging and developing economies were no longer closing the income gap with the US and other rich countries.

Last year just 47 per cent of 114 developing economies tracked by the bank were catching up with US per capita gross domestic product, below 50 per cent for the first time since 2000 and down from 83 per cent of that same sample in 2007 as the global financial crisis took hold.

That, the bank’s economists warned, would have a meaningful impact on the future people in those countries could expect.

“Whereas, pre-crisis, the average [emerging market] could expect to reach advanced country income levels within a generation, the low growth of recent years has extended this catch-up period by several decades,” they wrote.

Leading International Monetary Fund officials have warned in recent months that the so-called process of “economic convergence” had slowed to two-thirds of its pre-crisis rate. But the warning from the bank paints an even starker picture.

In the five years before the 2008 financial crisis, emerging markets could expect to take an average of 42.3 years to catch up with US per capita GDP, according to the bank’s analysis.

But over the past three years, as major emerging economies such as Brazil, Russia and South Africa have slowed or fallen into recession, the slower average growth means the number of years it would take to catch up with the US has grown to 67.7 years.

For frontier markets, those more fragile economies further down the development scale, such as Nigeria, the catch-up period more than doubled from 43.1 years to 109.7 years.

And, it is important to add, even these projections are likely optimistic.  The IMF and World Bank have repeatedly overestimated future rates of growth and tend to downplay the possibilities of yet another global crisis.

Corporations On The Move

While the fate of the Transpacific Partnership agreement remains uncertain, one thing is clear: Vietnam’s embrace of the agreement has singled transnational corporations that the country is open for business.  And with labor militancy growing in the Asian region, especially in China, South Korea, Indonesia, and Thailand, transnational corporations appear eager to shift operations to that country.

An article in the South Korean newspaper, the Hankyoreh, highlighted the findings of a recent report by the Korea Trade-Investment Promotion Agency (KOTRA) titled: “Changes in the International Trade Environment and Global Production Bases.”

The report looked at 31 cases involving 27 major transnational corporations that had either invested in China, Vietnam, Indonesia, Thailand, Malaysia, or Mexico in the preceding two years or had announced plans to do so.  According to the Hankyoreh, the report found that:

15 of the companies – accounting for nearly half of the cases – had either relocated their production bases to Vietnam or were planning to. With just one company planning to exit Vietnam, the data mean a net influx of 14 companies.

Meanwhile, signs pointed to a production base exodus from the “world’s factory” in China, with a negative net influx of eight companies (three entries, eleven departures).

The most commonly cited reason for relocating was to take advantage of trade agreements, which was mentioned in 23 cases. Changes in the business environment were cited in 12 cases.  Among business environment changes, the most frequently mentioned was “to cut personnel costs,” which was cited in nine cases.

Such moves put new pressures on Asian governments to intensify their respective efforts to slash wages, weaken labor protections, and cut taxes.  Whether they can succeed is another matter.

For example, working conditions are already terrible in many Chinese export factories—see here for a recent report on living and working conditions at a factory outside Shanghai where workers assembled Apple products.

Moreover, strikes and workplace actions are on the rise as Chinese workers grow increasingly militant in the face of worsening economic conditions.  In fact, the China Labor Bulletin reported a doubling of strikes in 2015 compared to the previous year.

As the Wall Street Journal explained in an article titled “China’s Workers Are Fighting Back as Economic Dream Fades“:

Factory employment in China has fallen for 25 months, according to a business-sentiment index released by Caixin, a Chinese magazine. China’s labor ministry says it expects employment to remain stable near term but says the impact of China’s slowdown and restructuring can’t be ignored. . . .

Chinese researchers and business executives say chances are rising that the Communist government may face the kind of social unrest that it has long feared. Chinese authorities recently detained and interrogated over a dozen labor activists, mainly in Guangdong.

“They definitely see protests as threatening social security, and are concerned,” says Anita Chan, a visiting fellow with the Political and Social Change Department of Australian National University.

The KOTRA report demonstrates that transnational corporations remain committed to their strategy of using mobility (or the threat of it) to force down production costs despite the fact that this strategy will only intensify global stagnation tendencies.  Hopefully, the pressures generated by capitalist globalization will strengthen worker organizing and encourage the building of cross-border solidarity and demands for greater control over corporate investment and production decisions.