Reports from the Economic Front

a blog by Marty Hart-Landsberg

Category Archives: China

False Promises: Trump And The Revitalization Of The US Economy

President Trump likes to talk up his success in promoting the reindustrialization of the United States and the return of good manufacturing jobs.  But there is little reason to take his talk seriously.

Microsoft closes shop

For example, as reported in a recent article in the Oregonian, Microsoft just decided to close its two year old Wilsonville factory, where it built its giant touch-screen computer, the Surface Hub.  As the article explains :

Just two years ago, Microsoft cast its Wilsonville factory as the harbinger of a new era in American technology manufacturing.

The tech giant stamped, “Manufactured in Portland, OR, USA” on each Surface Hub it made there. It invited The New York Times and Fast Company magazine to tour the plant in 2015, then hired more than 100 people to make the enormous, $22,000 touch-screen computer. . . .

“We looked at the economics of East Asia and electronics manufacturing,” Microsoft vice president Michael Angiulo told Fast Company in a fawning 2015 article that heaped praise on the Surface Hub and Microsoft’s Wilsonville factory.

“When you go through the math, (offshoring) doesn’t pencil out,” Angiulo said. “It favors things that are small and easy to ship, where the development processes and tools are a commodity. The machines that it takes to do that lamination? Those only exist in Wilsonville. There’s one set of them, and we designed them.” . . .

But last week Microsoft summoned its Wilsonville employees to an early-morning meeting and announced it will close the factory and lay off 124 employees – nearly everyone at the site – plus dozens of contract workers. . . .

Even as President Donald Trump heralds “Made in America” week, high-tech manufacturing remains an endangered species across the United States. Oregon has lost more than 14,000 electronics manufacturing jobs since 2001, according to state data, more than a quarter of the total job base.

Microsoft is moving production of its Surface Hub to China, which is where it makes all its other Surface products.  Apparently, the combination of China’s low-cost labor and extensive supplier networks is an unbeatable combination for most high-tech firms.  In fact, the Oregonian article goes on to quote a Yale economist as saying:

“Re-shoring” stories like the tale Microsoft peddled in 2015 are little more than public relations fakery,” [providing] “lip services or window-dressing to please politicians and the general public.”

Foxconn says it is investing

But now we have another bigger and bolder re-shoring story: The Taiwanese multinational Foxconn has announced it will spend $10 billion to build a new factory somewhere in Wisconsin (likely in Paul Ryan’s district), where it will produce flat-panel display screens for televisions and other consumer electronics.

As reported in the press, Foxconn is pledging to create 13,000 jobs in six years—but only 3000 at the start.  In return, the state of Wisconsin is offering the company $3 billion in subsidies.

According to the Trump administration, this is a sign that its efforts to bring back good manufacturing jobs is working.  The Guardian quotes a senior administration official “who said the announcement was ‘meaningful,’ because ‘it [represents] a milestone in bringing back advanced manufacturing, specifically in the electronics sector, to the United States.’”  President Trump followed with “If I didn’t get elected, [Foxconn] definitely would not be spending $10bn.”

However, there are warning signs.  For example, as an article in the Cap Times points out, Foxconn doesn’t always follow through on its promises:

  • Foxconn promised a $30 million factory employing 500 workers in Harrisburg, Pennsylvania, in 2013. The plant was never built, not a single job was created.
  • That same year, the company signed a letter of intent to invest up to $1 billion in Indonesia. Nothing came of it.
  • Foxconn announced it would invest $5 billion and create 50,000 jobs over five years in India as part of an ambitious expansion in 2014. The investment amounted to a small fraction of that, according to The Washington Post’s Todd Frankel.
  • Foxconn committed to a $5 billion investment in Vietnam in 2007, and $10 billion in Brazil in 2011. The company made its first major foray in Vietnam only last year. In Brazil, Foxconn has an iPhone factory, but its investment has fallen far short of promises.
  • Foxconn recently laid off 60,000 workers, more than 50 percent of its workforce at its IPhone 6 factory in Kushan, China, replacing them with robots that Foxconn produces.

In fact, even the Wisconsin Legislative Fiscal Bureau is worried that the state may be overselling the deal, promising billions for very little.  As a Verge article reported:

Wisconsin’s plan to treat Foxconn to $3 billion in tax breaks in exchange for a $10 billion factory is looking less and less like a good deal for the state. In a report issued this week, Wisconsin’s Legislative Fiscal Bureau said that the state wouldn’t break even on its investment until 2043 — and that’s in an absolute best-case scenario.

How many workers Foxconn actually hires, and where Foxconn hires them from, would have a significant impact on when the state’s investment pays off, the report says.

The current analysis assumes that “all of the construction-period and ongoing jobs associated with the project would be filled by Wisconsin residents.” But the report says it’s likely that some positions would go to Illinois residents, because the factory would be located so close to the border. That would lower tax revenue and delay when the state breaks even.

And that’s still assuming that Foxconn actually creates the 13,000 jobs it claimed it might create, at the average wage — just shy of $54,000 — it promised to create them at. In fact, the plant is only expected to start with 3,000 jobs; the 13,000 figure is the maximum potential positions it could eventually offer. If the factory offers closer to 3,000 positions, the report notes, “the break-even point would be well past 2044-45.”

The authors of the report even seem somewhat skeptical of the best-case scenario happening. Foxconn is already investing heavily in automation, and there’s no guarantee it won’t do the same thing in Wisconsin. Nor is there any guarantee that Foxconn will remain such a manufacturing powerhouse. (Its current success relies heavily on the success of the iPhone.)

It is because of concerns like these, that the Milwaukee Journal Sentinel reports that the state’s Senate Majority Leader has said he doesn’t yet have the votes to pass the tax package Governor Scott Walker has promised.

Forget the new trade deals

President Trump has also spoken often about his determination to revisit past trade deals and restructure them in order to strengthen the economy and boost manufacturing employment.  However, it is now clear that the agreement restructuring he has in mind is what he calls “modernization” and that translates into expanding the terms of existing agreements to cover new issues of interest to leading US multinational corporations.

As Inside US Trade explains:

Commerce Secretary Wilbur Ross on Wednesday said “the easiest issues” to be addressed in North American Free Trade Agreement modernization talks “should be” those that were not part of the existing agreement, which entered into force in 1994.

“The easiest ones will be the ones that weren’t contained in the original agreement because that’s new territory; that’s not anybody giving up anything,” Ross said at an event hosted by the Bipartisan Policy Institute on May 31. “And by and large, those should be the easiest issues to get done.”

Ross added that those new issues are important “because one of our objectives will be to try to incorporate in NAFTA kind of basic principles that we would like to have followed in subsequent free-trade agreements, rather than starting each one with a blank sheet of paper.”

Among those issues — which he called “big holes” in the old agreement — he listed the digital economy, services, and financial services. . . .

Ross reiterated the administration’s stance that the “guiding principle is do no harm” in redoing NAFTA, while the second “rule of thumb” is to view concessions made by Mexico and Canada in the Trans-Pacific Partnership negotiations “as sort of a starting point” for NAFTA talks.

Asked whether the administration has set itself up for “unrealistic aspirations” on NAFTA — promising to return to the U.S. jobs that the president has often claimed were lost due to the agreement with Mexico and Canada — Ross cautioned against viewing a retooled deal as a “silver bullet.”

In short, it is foolish and costly to believe the promises made to working people by leading corporations and the Trump administration.  Hopefully, growing numbers of people are getting wise to the game being played, making it easier for us to more effectively organize and advance our own interests.

The Need For A New US Foreign Policy Towards North Korea

US-North Korean relations remain very tense, although the threat of a new Korean War has thankfully receded.  Still the US government remains determined to tighten economic sanctions on North Korea and continues to plan for a military strike aimed at destroying the country’s nuclear infrastructure.  And the North for its part has made it clear that it would respond to any attack with its own strikes against US bases in the region and even the US itself.

This is not good, but it is important to realize that what is happening is not new.  The US began conducting war games with South Korean forces in 1976 and it was not long before those included simulated nuclear attacks against the North, and that was before North Korea had nuclear weapons.  In 1994, President Bill Clinton was close to launching a military attack on North Korea with the aim of destroying its nuclear facilities.  In 2002, President Bush talked about seizing North Korean ships as part of a blockade of the country, which is an act of war.  In 2013, the US conducted war games which involved planning for preemptive attacks on North Korean military targets and “decapitation” of the North Korean leadership and even a first strike nuclear attack.

I don’t think we are on the verge of a new Korean war, but the cycle of belligerency and threat making on both sides is intensifying.  And it is always possible that a miscalculation could in fact trigger a new war, with devastating consequences. The threat of war, perhaps a nuclear war, is nothing to play around with.  But – and this is important — even if a new war is averted, the ongoing embargo against North Korea and continual threats of war are themselves costly: they promote/legitimatize greater military spending and militarization more generally, at the expense of needed social programs, in Japan, China, the US, and the two Koreas.  They also create a situation that compromises democratic possibilities in both South and North Korea and worsen already difficult economic conditions in North Korea.

There is a choice for peace

We doesn’t have to go down this road—we have another option—but it is one that the US government is unwilling to consider, much less discuss.  That option is for the US to accept North Korean offers of direct negotiations between the two countries, with all issues on the table.

The US government and media dismiss this option as out of hand—we are told that (1) the North is a hermit kingdom and seeks only isolation, (2) the country is ruled by crazy people hell bent on war, and (3) the North Korean leadership cannot be trusted to follow through on its promises.  But none of this is true.

First: if being a hermit kingdom means never wanting to negotiate, then North Korea is not a hermit kingdom.  North Korea has been asking for direct talks with the United States since the early 1990s.  The reason is simple: this is when the USSR ended and Russia and the former Soviet bloc countries in central Europe moved to adopt capitalism.  The North was dependent on trade with these countries and their reorientation left the North Korean economy isolated and in crisis.

The North Korean leadership decided that they had to break out of this isolation and connect the North Korean economy to the global economy, and this required normalization of relations with the United States.  Since then, they have repeatedly asked for unconditional direct talks with the US in hopes of securing an end to the Korean War and a peace treaty as a first step towards their desired normalization of relations, but have been repeatedly rebuffed.  The US has always put preconditions on those talks, preconditions that always change whenever the North has taken steps to meet them.

The North has also tried to join the IMF and WB, but the US and Japan have blocked their membership.

The North has also tried to set up free trade zones to attract foreign investment, but the US and Japan have worked to block that investment.

So, it is not the North that is refusing to talk or broaden its engagement with the global economy; it is the US that seeks to keep North Korea isolated.

Second: the media portray North Korea as pursuing an out of control militarism that is the main cause of the current dangerous situation.  But it is important to recognize that South Korea has outspent North Korea on military spending every year since 1976.  International agencies currently estimate that North Korean annual military spending is $4 billion while South Korean annual military spending is $40 billion.  And then we have to add the US military build-up.

North Korea does spend a high percentage of its budget on the military, but that is because it has no reliable military ally and a weak economy.  However, it has largely responded to South Korean and US militarism and threats, not driven them.  As for the development of a nuclear weapons program: it was the US that brought nuclear weapons to the Korean peninsula.  It did so in 1958 in violation of the Korean War armistice and threatened North Korea with nuclear attack years before the North even sought to develop nuclear weapons.

Third: North Korea has been a more reliable negotiating partner than the US. Here we have to take up the nuclear issue more directly.  The North has tested a nuclear weapon 5 times: 2006, 2009, 2013, and twice in 2016.

Critically, North Korean tests have largely been conducted in an effort to pull the US into negotiations or fulfill past promises.  And the country has made numerous offers to halt its testing and even freeze its nuclear weapons program if only the US would agree to talks.

North Korea was first accused of developing nuclear weapons in early 1990s.  Its leadership refused to confirm or deny that the country had succeeded in manufacturing nuclear weapons but said that it would open up its facilities for inspection if the US would enter talks to normalize relations.  As noted above, the North was desperate, in the wake of the collapse of the USSR, to draw the US into negotiations.  In other words, it was ready to end the hostilities between the two countries.

The US government refused talks and began to mobilize for a strike on North Korean nuclear facilities.  A war was averted only because Jimmy Carter, against the wishes of the Clinton administration, went to the North, met Kim Il Sung, and negotiated an agreement that froze the North Korean nuclear program.

The North Korean government agreed to end their country’s nuclear weapons program in exchange for aid and normalization.  And from 1994 to 2002 the North froze its plutonium program and had all nuclear fuel observed by international inspectors to assure the US that it was not engaged in making any nuclear weapons.   Unfortunately, the US did not live up to its side of the bargain; it did not deliver the aid it promised or take meaningful steps towards normalization.

In 2001 President Bush declared North Korea to be part of the axis of evil and the following year unilaterally canceled the agreement.  In response, the North restarted its nuclear program.

In 2003, the Chinese government, worried about growing tensions between the US and North Korea, convened multiparty talks to bring the two countries back to negotiations.  Finally, in 2005, under Chinese pressure, the US agreed to a new agreement, in which each North Korean step towards ending its weapons program would be matched by a new US step towards ending the embargo and normalizing relations.  But exactly one day after signing the agreement, the US asserted, without evidence, that North Korea was engaged in a program of counterfeiting US dollars and tightened its sanctions policy against North Korea.

The North Korean response was to test its first nuclear bomb in 2006.  And shortly afterwards, the US agreed to drop its counterfeiting charge and comply with the agreement it had previously signed.

In 2007 North Korea shut down its nuclear program and even began dismantling its nuclear facilities—but the US again didn’t follow through on the terms of the agreement, falling behind on its promised aid and sanction reductions.  In fact, the US kept escalating its demands on North Korea, calling for an end to North Korea’s missile program and improvement in human rights in addition to the agreed upon steps to end North Korea’s nuclear weapons program.  And so, frustrated, North Korea tested another nuclear weapon in 2009.

And the US responded by tightening sanctions.

In 2012 the North launched two satellites.  The first failed, the second succeeded.  Before each launch the US threatened to go to the UN and secure new sanctions on North Korea.  But the North asserted its right to launch satellites and went ahead.  After the December 2012 launch, the UN agreed to further sanctions and the North responded with its third nuclear test in 2013.

This period marks a major change in North Korean policy. The North now changed its public stance: it declared itself a nuclear state—and announced that it was no longer willing to give up its nuclear weapons.  However, the North Korean government made clear that it would freeze its nuclear weapons program if the US would cancel its future war games.  The US refused and its March 2013 war games included practice runs of nuclear equipped bombers and planning for occupying North Korea.  The North has therefore continued to test and develop its nuclear weapons capability.

Here is the point: whenever the US shows willingness to negotiate, the North responds.  And when agreements are signed, it is the US that has abandoned them.  The North has pushed forward with its nuclear weapons program largely in an attempt to force the US to seriously engage with the North because it believes that this program is its only bargaining chip.  And it is desperate to end the US embargo on its economy.

We lost the opportunity to negotiate with a non-nuclear North Korea when we cut off negotiations in 2001, before the country had a nuclear arsenal. Things have changed.  Now, the most we can reasonably expect is an agreement that freezes that arsenal.  However, if relations between the two countries truly improve it may well be possible to achieve a non-nuclear Korean Peninsula, an outcome both countries profess to seek.

New possibilities and our responsibilities

So, why does US refuse direct negotiations and risk war?  The most logical reason is that there are powerful forces opposing them.  Sadly, the tension is useful to the US military industrial complex, which needs enemies to support the ongoing build-up of the military budget.  The tension also allows the US military to maintain troops on the Asian mainland and forces in Japan.  It also helps to isolate China and boost right-wing political tendencies in Japan and South Korea.  And now, after decades of demonizing North Korea, it is difficult for the US political establishment to change course.

However, the outcome of the recent presidential election in South Korea might open possibilities to force a change in US policy. Moon Jae-in, the winner, has repudiated the hard-line policies of his impeached predecessor Park Guen-Hye, and declared his commitment to re-engage with the North.  The US government was not happy about his victory, but it cannot easily ignore Moon’s call for a change in South Korean policy towards North Korea, especially since US actions against the North are usually presented as necessary to protect South Korea. Thus, if Moon follows through on his promises, the US may well be forced to moderate its own policy towards the North.

What is clear is that we in the US have a responsibility to become better educated about US policy towards both Koreas, to support popular movements in South Korea that seek peaceful relations with North Korea and progress towards reunification, and to work for a US policy that promotes the demilitarization and normalization of US-North Korean relations.

I discuss this history of US-North Korean relations and current developments in South Korea in a May 8 interview on KBOO radio; you can hear the interview here: http://kboo.fm/media/57730-how-us-has-provoked-north-korea

To keep up on developments I encourage you to visit the following two websites:

Korea Policy Institute: kpolicy.org

ZoominKorea: zoominkorea.org

US Corporations Continue Their Global Dominance

“Make America Great Again,” Donald Trump’s campaign slogan, was cleverly designed to suggest that the nation as a whole has been in decline.  And Trump repeatedly blamed past administrations for this situation, attacking them for pursuing policies that he said left US corporations unable to compete with their foreign rivals to the detriment of US workers.

US workers have indeed experienced a steady deterioration in their working and living conditions.  But Trump’s focus on national decline and call for national revitalization obscures what a class analysis plainly shows: leading US corporations have greatly benefited from past policies and continue to dominate global markets and profit handsomely.  In other words, US workers and US corporations do not share a common interest.  Moreover, Trump administration policies designed to strengthen US corporate competitiveness can be expected to further depress worker well-being.

Globalization Changes Things

We live in a world where economic processes and outcomes are heavily shaped by corporate globalization strategies.  This means that national statistics and measures of economic performance can be misleading.  Sean Starrs, in an essay titled “China’s Rise is Designed in America, Assembled in China,” makes this point by using a global lens to evaluate the relative economic strength of China and the United States.

In the pre-globalization era, a country’s production tended to be nationally rooted.  Thus, for example, Japan’s post World War II rise as a major producer and exporter of cars and consumer electronics meant that Japan’s “rising world share of national accounts [could be considered] synonymous [with] rising national economic power.”  But transnational corporate globalization strategies have dramatically changed things.

Thanks to the expansion of transnational corporate controlled cross-border production networks, the production of many goods and services has been divided into multiple segments, with each segmented located in a different country.  As a result, national economic activity tends to be truncated and less revealing of national value-added than in the past.

These networks are most fully developed in East Asia, and their expansion helped transform China into “the workshop of the world.” China is now the leading producer and exporter, largely to the United States, of such key products as cell phones and laptop computers.  However, in sharp contrast to the Japanese experience, most of the value-added in the production of these high-technology goods is captured by non-Chinese firms.  Thus, Chinese national accounts, especially its trade account, greatly overstate Chinese economic power.  At the same time, US national accounts, including its trade account, greatly overstate the loss of US economic power.

The table below, from Starrs’s article, shows China’s top five exports of manufactures, as well as export values and market share for each product.  It also shows US export values and market shares for the same products.  Finally, it also includes the relative share of global profits from sale of these products earned by Chinese and US corporations.  Starrs used the Forbes Global 2000 list, which ranks the top 2000 corporations in the world using a composite of four indices–assets, market value, profit and sales–and groups them by their appropriate sector of activity, to calculate the profit shares.

As we can see, China was responsible for 38 percent of world exports of telecommunications equipment in 2013, compared with a 7.4 percent share for the United States.  Yet, US firms captured 59 percent of the profit generated by sales of these products; the Chinese share was only 6 percent.  Perhaps even more striking:

There is not a single profitable Chinese firm in textiles that is large enough to make the Forbes Global 2000, despite China’s exports making up 39 percent of the world’s. Exports of clothing from production in the United States is miniscule compared to the rest of the world, at 1.3 percent, yet American firms reap 46 percent of the profit-share — even when the top two firms in the world, Inditex (owner of Zara) and H&M, are both European (Spanish and Swedish, respectively).

The reason for this is simple: Chinese production of the products listed in the table takes place within cross-border production networks largely dominated by US corporations.  US firms are able to monopolize the profits generated by the production and sale of these products thanks to their control over the relevant technologies, product branding, and marketing.

The point then is that in the age of globalization, national accounts are no longer a reliable indicator of national economic strength.

Continued US Global Dominance

A simple look at national accounts does paint a picture of declining US economic power.  For example, the US share of global GDP has slowly but steadily declined.  It was 37 percent in the mid-1960s, 33 percent in the mid-1980s, 27 percent in the mid-2000s, and most recently approximately 22 percent.  The US share of world merchandise exports has also declined.  It averaged approximately 12 percent throughout the 1980s and 1990s and then began rapidly falling.  It was down to 8.5 percent by 2010.

However, Starrs finds that once one takes globalization dynamics into account, US corporations continue to dominate international economic activity.

The table below, again from Starrs’s article, looks at 16 leading sectors and the national profit share for the top 2000 publicly traded global corporations within each sector, for the years 2006, 2010, and 2014.   As we can see, in 2014, the US was the only country with corporations that finished in one of the top three places in all 16 sectors.  US corporations had the largest profit shares in 10 of the 16 sectors, including those at the technological frontier.  They are:

  • Aerospace and defense
  • Chemicals
  • Computer hardware and software
  • Conglomerates
  • Electronics
  • Financial Services
  • Heavy Machinery
  • Oil and Gas
  • Pharmaceuticals and Personal Care
  • Retail

If we define market control as either a 40 percent share of global profits or a profit share more than twice that of the second-place nation, US corporations dominated in 8 of these sectors:

  • Aerospace and defense
  • Chemicals
  • Computer Hardware and Software
  • Conglomerates
  • Financial Services
  • Heavy Machinery
  • Pharmaceuticals and Personal Care
  • Retail

Here are the 6 sectors which were led by a country other than the United States:

  • Auto Trucks and Parts: Japan is first and the US third
  • Banking: China is first and the US second.
  • Construction: China is first and the US tied for second.
  • Forestry, Metals, and Mining: Australia is first and the US third.
  • Real estate: Hong Kong is first and the US third.
  • Telecommunications: the UK is first and the US second.

China is the only country other than the United States that finished first in more than one sector.  But as Starrs points out:

Almost all of these top Chinese firms are state-owned enterprises with heavily protected domestic [markets] with very few operations abroad (with the partial exception of Chinese firms in natural resource extraction). None of these behemoth state-owned enterprises can be characterized as globally competing head-to-head with the world’s top corporations to advance the technological frontier, yet these firms constitute the bulk of the non-foreign ownership of profit from production and investment conducted in China.

And the US is second to China in both sectors.

In short, US corporations remain dominant and highly profitable.  And, US dominance is even greater then these results suggest.  That is because US capital “disproportionately owns not only the economic activity occurring within the territory of the United States, but also around the world.”  Thus, while the US “accounts for only 22 percent of global GDP . . . the proportion of American millionaires and total household wealth is 42 percent and 41 percent respectively [of world totals].”

In sum, it is clear that the US state has done well by leading US firms and their owners.  The problem for us is that the policies that helped produce this outcome—deregulation, liberalization, privatization, and globalization, to list a few—have not benefited US workers, and in most cases workers in other countries as well.  Moreover, sustained US corporate dominance does not guarantee the vitality, or even the stability of the global economy.  Core economies continue to stagnate and there is no reason to think that renewal is on the horizon.  In fact, quite the opposite is true; there are growing signs that the US expansion is near end and that Chinese growth will continue to weaken.

Trump, with his call to “Make American Great Again,” aims to use nationalism to win support for his own efforts to advance US corporate interests. While it remains unclear to what extent his policies will differ from those of past administrations, it is already certain that they will not serve majority interests.  This destructive use of nationalism must be challenged.  The best way is to promote a strategy of resistance that flows from and helps to popularize a grounded class analysis of the workings of our economy.

Trump’s Economic Policies Are No Answer To Our Problems

President Trump has singled out unfair international trading relationships as a major cause of US worker hardship.  And he has promised to take decisive action to change those relationships by pressuring foreign governments to rework their trade agreements with the US and change their economic policies.

While international economic dynamics have indeed worked to the disadvantage of many US workers, Trump’s framing of the problem is highly misleading and his promised responses are unlikely to do much, if anything, to improve majority working and living conditions.

President Trump and his main advisers have aimed their strongest words at Mexico and China, pointing out that the US runs large trade deficits with each, leading to job losses in the US.  For example, Bloomberg News reports that Peter Navarro, the head of President Trump’s newly formed White House National Trade Council “has blamed Nafta and China’s 2001 entry into the World Trade Organization for much, if not all, of a 15-year economic slowdown in the U.S.” In other words, poor negotiating skills on the part of past US administrations has allowed Mexico and China, and their workers, to gain at the expense of the US economy and its workers.

However, this nation-state framing of the origins of contemporary US economic problems is seriously flawed. It also serves to direct attention away from the root cause of those problems: the profit-maximizing strategies of large, especially US, multinational corporations.  It is the power of these corporations that must be confronted if current trends are to be reversed.

Capitalist Globalization Dynamics

Beginning in the late 1980s large multinational corporations, including those headquartered in the US, began a concerted effort to reverse declining profits by establishing cross border production networks (or global value chains).  This process knitted together highly segmented economic processes across national borders in ways that allowed these corporations to lower their labor costs as well as reduce their tax and regulatory obligations.   Their globalization strategy succeeded; corporate profits soared.  It is also no longer helpful to think about international trade in simple nation-state terms.

As the United Nations Conference on Trade and Development explains:

Global trade and foreign direct investment have grown exponentially over the last decade as firms expanded international production networks, trading inputs and outputs between affiliates and partners in GVCs [Global Value Chains].

About 60 per cent of global trade, which today amounts to more than $20 trillion, consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption. The fragmentation of production processes and the international dispersion of tasks and activities within them have led to the emergence of borderless production systems – which may be sequential chains or complex networks and which may be global, regional or span only two countries.

UNCTAD estimates (see the figure below) that some 80 percent of world trade “is linked to the international production networks of TNCs [transnational corporations], either as intra-firm trade, through NEMs [non-equity mechanisms of control] (which include, among others, contract manufacturing, licensing, and franchising), or through arm’s-length transactions involving at least one TNC.”

tnc-involvement

In other words, multinational corporations have connected and reshaped national economies along lines that best maximize their profit.  And that includes the US economy.  As we see in the figure below, taken from an article by Adam Hersh and Ethan Gurwitz, the share of all US merchandise imports that are intra-firm, meaning are sold by one unit of a multinational corporation to another unit of the same multinational, has slowly but steadily increased, reaching 50 percent in 2013.  The percentage is considerably higher for imports of manufactures, including in key sectors like electrical, machinery, transportation, and chemicals.

onea

The percentage is lower, but still significant for US exports.  As we see in the following figure, approximately one-third of all merchandise exports from the US are sold by one unit of a multinational corporation to another unit of the same company.

oneb

The percentage of intra-firm trade is far higher for services, as illustrated in the next figure.

services

As Hersh and Gurwitz comment,

The trend is clear: As offshoring practices increase, companies need to provide more wraparound services—the things needed to run a businesses besides direct production—to their offshore production and research and development activities. Rather than indicating the competitive strength of U.S. services businesses to expand abroad, the growth in services exports follows the pervasive offshoring of manufacturing and commercial research activities.

Thus, there is no simple way to change US trade patterns, and by extension domestic economic processes, without directly challenging the profit maximizing strategies of leading multinational corporations.  To demonstrate why this understanding is a direct challenge to President Trump’s claims that political pressure on major trading partners, especially Mexico and China, can succeed in boosting the fortunes of US workers, we look next at the forces shaping US trade relationships with these two countries.

The US-Mexican Trade Relationship

US corporations, taking advantage of NAFTA and the Mexican peso crisis that followed in 1994-95, poured billions of dollars into the country (see the figure below).  Their investment helped to dramatically expand a foreign-dominated export sector aimed at the US market that functions as part of a North American region-wide production system and operates independent of the stagnating domestic Mexican economy.

fdi-mexico

Some 80 percent of Mexico’s exports are sold to the US and the country runs a significant merchandise trade surplus with the US, as shown in the figure below.

trade-mexico

Leading Mexican exports to the US include motor vehicles, motor vehicle parts, computer equipment, audio and video equipment, communications equipment, and oil and gas.  However, with the exception of oil and gas, these are far from truly “Mexican” exports.  As a report from the US Congressional Research Service describes:

A significant portion of merchandise trade between the United States and Mexico occurs in the context of production sharing as manufacturers in each country work together to create goods. Trade expansion has resulted in the creation of vertical supply relationships, especially along the U.S.-Mexico border. The flow of intermediate inputs produced in the United States and exported to Mexico and the return flow of finished products greatly increased the importance of the U.S.- Mexico border region as a production site. U.S. manufacturing industries, including automotive, electronics, appliances, and machinery, all rely on the assistance of Mexican [based] manufacturers. One report estimates that 40% of the content of U.S. imports of goods from Mexico consists of U.S. value added content.

Because foreign multinationals, many of which are US owned, produce most of Mexico’s exports of “advanced” manufactures using imported components, the country’s post-Nafta export expansion has done little for the overall health of the Mexican economy or the well-being of Mexican workers. As Mark Weisbrot points out:

If we look at the most basic measure of economic progress, the growth of gross domestic product, or income per person, Mexico, which signed on to NAFTA in 1994, has performed the 15th-best out of 20 Latin American countries.

Other measures show an even sadder picture. The poverty rate in 2014 was 55.1 percent, an increase from the 52.4 percent measurement in 1994.

Wages tell a similar story: There’s been almost no growth in real inflation-adjusted wages since 1994 — just about 4.1 percent over 21 years.

Representative Sander Levin and Harley Shaiken make clear that the gains have been nonexistent even for workers in the Mexican auto industry, the country’s leading export center:

Consider the auto industry, the flagship manufacturing industry across North America. The Mexican auto industry exports 80 percent of its output of which 86 percent is destined for the U.S. and Canada. If high productivity translated into higher wages in Mexico, the result would be a virtuous cycle of more purchasing power, stronger economic growth, and more imports from the U.S.

In contrast, depressed pay has become the “comparative advantage”. Mexican autoworker compensation is 14 percent of their unionized U.S. counterparts and auto parts workers earn even less–$2.40 an hour. Automation is not the driving force; its depressed wages and working conditions.

In other words, US workers aren’t the only workers to suffer from the globalization strategies of multinational corporations.  Mexican workers are also suffering, and resisting.

In sum, it is hard to square this reality with Trump’s claim that because of the way NAFTA was negotiated Mexico “has made us look foolish.” The truth is that NAFTA, as designed, helped further a corporate driven globalization process that has greatly benefited US corporations, as well as Mexican political and business elites, at the expense of workers on both sides of the border.  Blaming Mexico serves only to distract US workers from the real story.

The US-Chinese Trade Relationship

The Chinese economy also went through a major transformation in the mid-1990s which paved the way for a massive inflow of export-oriented foreign investment targeting the United States.  The process and outcome was different from what happened in Mexico, largely because of the legacy of Mao era policies.  The Chinese Communist Party’s post-1978 state-directed reform program greatly benefited from an absence of foreign debt; the existence of a broad, largely self-sufficient state-owned industrial base; little or no foreign investment or trade; and a relatively well-educated and healthy working class.  This starting point allowed the Chinese state to retain considerable control over the country’s economic transformation even as it took steps to marketize economic activity in the 1980s and privatize state production in the 1990s.

However, faced with growing popular resistance to privatization and balance of payments problems, the Chinese state decided, in the mid-1990s, to embrace a growing role for export-oriented foreign investment.  This interest in attracting foreign capital dovetailed with the desire of multinational corporations to globalize their production.  Over the decade of the 1990s and 2000s, multinational corporations built and expanded cross border production networks throughout Asia, and once China joined the WTO, the country became the region’s primary final assembly and export center.

As a result of this development, foreign produced exports became one of the most important drivers, if not the most important, of Chinese growth.  For example, according to Yılmaz Akyüz, former Director of UNCTAD’s Division on Globalization and Development Strategies:

despite a high import content ranging between 40 and 50 percent, approximately one-third of Chinese growth before the global crisis [of 2008] 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

The figure below illustrates the phenomenal growth in Chinese exports.

china-exports

The US soon became the primary target of China’s exports (see the trade figures below).   The US now imports more goods from China than from any other country, approximately $480 billion in 2015, followed by Canada and Mexico (roughly $300 billion each).  The US also runs its largest merchandise trade deficit with China, $367 billion in 2015, equal to 48 percent of the overall US merchandise trade deficit.  In second place was Germany, at only $75 billion.

china-trade-us

Adding to China’s high profile is the fact that it is the primary supplier of many high technology consumer goods, like cell phones and laptops. More specifically:

(F)or 825 products, out of a total of about 5,000, adding up to nearly $300 billion, China supplies more than all our other trade partners combined. Of these products, the most important is cell phones, where $40 billion in imports from China account for more than three-quarters of the total value imported.

There are also 83 products where 90 percent or more of US imports come from China; together these accounted for a total of $56 billion in 2015. The most important individual product in this category is laptop computers, which alone have an import value of $37 billion from China, making up 93 percent of the total imported.

Of course, China is also a major supplier of many low-technology, low-cost goods as well, including clothing, toys, and furniture.

Not surprisingly, exports from China have had a significant effect on US labor market conditions. Economists David Autor, David Dorn and Gordon Hanson “conservatively estimate that Chinese import competition explains 16 percent of the U.S. manufacturing employment decline between 1990 and 2000, 26 percent of the decline between 2000 and 2007, and 21 percent of the decline over the full period.”  They also find that Chinese import competition “significantly reduces earnings in sectors outside manufacturing.”

President Trump has accused China of engaging in an undeclared trade war against the United States.   However, while Trump’s charges conjure up visions of a massive state-run export machine out to crush the United States economy for the benefit of Chinese workers, the reality is quite different.

First, although the Chinese state retains important levers of control over economic activity, especially the state-owned banking system, the great majority of industrial production and export activity is carried out by private firms.  In 2012, state-owned enterprises accounted for only 24 percent of Chinese industrial output and 18 percent of urban employment.  As for exports, by 2013 the share of state-owned enterprises was down to 11 percent.  Foreign-owned multinationals were responsible for 47 percent of all Chinese exports.  And, most importantly in terms of their effect on the US economy, multinational corporations produce approximately 82 percent of China’s high-technology exports.

Second, although these high-tech exports come from China, for the most part they are not really “Chinese” exports.  As noted above, China now functions as the primary assembly point for the region’s cross border production networks.  Thus, the majority of the parts and components used in Chinese-based production of high-technology goods come from firms operating in other Asian countries.  In many cases China’s only contribution is its low-paid labor.

A Washington Post article uses the Apple iPhone 4, a product that shows up in trade data as a Chinese export, to illustrate the country’s limited participation in the production of its high technology exports:

In a widely cited study, researchers found that Apple created most of the product’s value through its product design, software development and marketing operations, most of which happen in the United States. Apple ended up keeping about 58 percent of the iPhone 4’s sales price. The gross profits of Korean companies LG and Samsung, which provided the phone’s display and memory chips, captured another 5 percent of the sales price. Less than 2 percent of the sales price went to pay for Chinese labor.

“We estimate that only $10 or less in direct labor wages that go into an iPhone or iPad is paid to China workers. So while each unit sold in the U.S. adds from $229 to $275 to the U.S.-China trade deficit (the estimated factory costs of an iPhone or iPad), the portion retained in China’s economy is a tiny fraction of that amount,” the researchers wrote.

The same situation exists with laptop computers, which are assembled by Chinese workers under the direction of Taiwanese companies using imported components and then exported as Chinese exports.  Economists have estimated that the US-Chinese trade balance would be reduced by some 40 percent if the value of these imported components were subtracted from Chinese exports.  Thus, it is not Chinese state enterprises, or even Chinese private enterprises, that are driving China’s exports to the US.  Rather it is foreign multinationals, many of which are headquartered in the US, including Apple, Dell, and Walmart.

And much like in Mexico, Chinese workers enjoy few if any benefits from their work producing their country’s exports.  The figure below highlights the steady fall in labor compensation as a share of China’s GDP.

china-labor

Approximately 80 percent of Chinese manufacturing workers are internal migrants with a rural household registration.  This means they are not entitled to access the free or subsidized public health care, education, or other social services available in the urban areas where they now work; the same is true for their children even if they are born in urban areas.  Moreover, most migrants receive little protection from Chinese labor laws.

For example, as the China Labor Bulletin reports:

In 2015, seven years after the implementation of the Labor Contract Law, only 36 percent of migrant workers had signed a formal employment contract with their employer, as required by law. In fact the percentage of migrant workers with formal contracts actually declined last year by 1.8 percent from 38 percent. For short-distance migrants, the proportion was even lower, standing at just 32 percent, suggesting that the enforcement of labor laws is even less rigid in China’s inland provinces and smaller cities.

According to the [2014] migrant worker survey . . . the proportion of migrant workers with a pension or any form of social security remained at a very low level, around half the national average. In 2014, only 16.4 percent of long-distance migrants had a pension and 18.2 percent had medical insurance.

Despite worker struggles, which did succeed in pushing up wages over the last 7 years, most migrant workers continue to struggle to make ends meet.   Moreover, with Chinese growth rates now slipping, and the government eager to restart the export growth machine, many local governments have decided, with central government approval, to freeze minimum wages for the next two to four years.

In short, it is not China, or its workers, that threaten US jobs and well-being.  It is the logic of capitalist globalization.  Thus, Trump’s call-to-arms against China obfuscates the real cause of current US economic problems and encourages working people to pursue a strategy of nationalism that can only prove counterproductive.

The Political Challenge Facing US Workers

The globalization process highlighted above was strongly supported by all major governments, especially by successive US administrations.  In contrast to Trump claims of a weak US governmental effort in support of US economic interests, US administrations used their considerable global power to secure the creation of the WTO and approval of a host of other multilateral and bilateral trade agreements, all of which provided an important infrastructure for capital mobility, thereby supporting the globalizing efforts of leading US multinational corporations.

President Trump has posed as a critic of existing international arrangements, claiming that they have allowed other countries, such as Mexico and China, to prosper at US expense.  He has stated that he will pursue new bilateral agreements rather than multilateral ones because they will better serve US interests and he has demanded that US multinational corporations shift their investment and production back to the US.

Such statements have led some to believe that the Trump administration is serious about challenging globalization dynamics in order to rebuild the US economy in ways that will benefit working people.  But there are strong reasons to doubt this.  Most importantly, he seems content to threaten other governments rather than challenge the profit-maximizing logic of dominant US companies, which as we have seen is what needs to happen.

One indicator: an administration serious about challenging the dynamics of globalization would have halted US participation in all ongoing negotiations for new multilateral agreements, such as the Trade in Services Agreement which is designed to encourage the privatization and deregulation of services for the benefit of multinational corporations.  This has not happened.

Such an administration would also renounce support for existing and future bilateral agreements that contain chapters that strengthen the ability of multinational corporations to dominate key sectors of foreign economies and sue their governments in supranational secret courts.  This has not happened.

Another indicator: an administration serious about creating a healthy, sustainable, and equitable domestic economy would strengthen and expand key public services and programs; rework our tax system to make it more progressive; tighten and increase enforcement of health and safety and environmental regulations; strengthen labor laws that protect the rights of workers, including to unionize; and boost the national minimum wage.  The Trump administration appears determined to do the opposite.

Such an administration would also begin to develop the state capacities necessary to redirect existing production and investment activity along lines necessary to rebuild our cities and infrastructure, modernize our public transportation system, and reduce our greenhouse gas emissions.  The Trump administration appears committed to the exact opposite.

In short, if we take Trump’s statements seriously, that he actually wants to shift trading relationships, then it appears that his primary strategy is to make domestic conditions so profitable for big business, that some of the most globally organized corporations will shift some of their production back to the United States.  However, even if he succeeds, it is very unlikely that this will contribute to an improvement in majority living and working conditions.

The main reason is that US corporations, having battered organized labor with the assistance of successive administrations, have largely stopped creating jobs that provide the basis for economic security and well-being.  Economists Lawrence F. Katz and Alan B. Krueger examined the growth  from 2005 to 2015 in “alternative work arrangements,” which they defined as temporary help agency workers, on-call workers, contract workers, and independent contractors or freelancers.

They found that the percentage of workers employed in such arrangements rose from 10.1 percent of all employed workers in February 2005 to 15.8 percent in late 2015.  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.

A further increase in employment in such “alternative work arrangements,” which means jobs with no benefits or security, during a period of Trump administration-directed attacks on our social services, labor laws, and health and safety and environmental standards is no answer to our problems. Despite what President Trump says, our problems are not caused by other governments or workers in other countries.  Instead, they are the result of the logic of capitalism. The Trump administration, really no US administration, is going to willingly challenge that. That is up to us.

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.

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.

Capitalist Globalization: Running Out Of Steam?

The 2016 edition of the Trade and Development Report (TDR 2016), an annual publication of the United Nations Conference on Trade and Development, is an important study of the changing nature of capitalist globalization and its failure to promote third world development.

The post-1980 period was marked by an explosion of transnational corporate activity, with investment increasingly taking place in the third world, especially Asia.  The resulting investment created a system of cross border production networks in which workers in third world countries produced and assembled parts and components of increasingly advanced manufactures under transnational capital direction for sale in developed country markets.

Mainstream economists supported this process, arguing that it would promote rapid industrialization and upgrading of third world economies and the eventual convergence of third world and advanced capitalist living standards.  However, the TDR 2016 makes the case that the globalization process appears to have run its course and that mainstream predictions were not realized.

Capitalist globalization under pressure

The TDR 2016 shows that the post-2008 slowdown in developed capitalist country growth has led to a significant downturn in third world exports and economic activity.  The following charts show that while international trade has long grown faster than global output, the ratio grew dramatically bigger over the first decade of the 2000s.  This was in large part the result of the expansion of cross border production networks.  This explosion of trade also brought ever expanding trade imbalances.

trade-trends

But, as the above charts also show, globalization dynamics appear to have lost momentum.  According to the TDR 2016:

International trade slowed down further in 2015. This poor performance was primarily due to the lackluster development of merchandise trade, which increased by only around 1.5 per cent in real terms. After the roller-coaster episode of 2009–2011, in the aftermath of the global financial and economic crisis, the growth of international merchandise trade was more or less in line with global output growth for about three years. In 2015, merchandise trade grew at a rate below that of global output, a situation that may worsen in 2016, as the first quarter of the year showed a further deceleration vis-à-vis 2015.

This loss of momentum has hit the third world, which has become ever more export-dependent, especially hard. As the following table shows, the growth rate of third world exports has dramatically slowed, and is now below that of the developed capitalist countries.  East Asian export growth actually turned negative in 2015.

table-1

This slowdown in trade has been accompanied by growing capital outflows from the third world, again especially Asia, as shown in the following chart.

capital-flows

The combination of developed country stagnation and dramatically slowing international trade has begun to stress the logistical infrastructure that has underpinned capitalist globalization dynamics.  This is well illustrated by Sergio Bologna’s description of the consequences of Hanjin’s bankruptcy:

The world’s seventh largest shipping company, the Korean company Hanjin, went bankrupt. Overburdened by $4.5-billion in debt, it has not been able to convince the banks to continue their support.

As a matter of fact, it did not convince the government of South Korea, because the main financier of Hanjin is the Korean Development Bank, a public institution, which is also struggling with the critical situation of the other major shipping company, Hyundai Merchant Marine (HMM), and the two Korean shipyards, STX Offshore & Shipbuilding and Daewoo. It may sound like a mundane administrative issue, but imagine what it means to have a fleet of about 90 ships, loaded with freight containers valued at $14-billion, roaming the seas because if they touch a port their loads are likely to be seized at the request of creditors.

In fact, the Daily Edition of the Lloyd’s List dated September 13th . . . reported that 13 vessels had been detained. Other ships are being held in different ports, waiting for judiciary sentences. Others are at anchor and maybe had to refuel. Not to mention the 1,200-1,300 crew members who are not able to find suppliers willing to sell them a can of tuna or a bottle of water. In a Canadian port, the crew had to be assisted by the mission Stella Maris.

The intertwining of the ramifications of this problem is impressive. Hanjin must face legal proceedings at courts in 43 countries. For starters: Most of the ships are not owned by Hanjin, and those it owns, to a large extent, are not worth much. Sixty per cent of the fleet is leased, and Hanjin has not been paying the leases for a long time. This threatens to bankrupt old-name companies like Hamburg’s Peter Dohle, the Greek Danaos, and the Canadian Seaspan; there are about 15 companies who leased their ships to Hanjin, but in terms of loading capacity, the first four add up to more than 50 per cent.

Then there are the ports and other infrastructure service providers. The ports are owed fees for services (towing, mooring); the terminals, for load/unload operations to Hanjin ships on credit; the Suez Canal has not been paid the passage tolls and today won’t let the Hanjin ships through; in addition, the onboard suppliers, recruiting agencies of the crews, the ship management firms. The list does not end here, it has just begun. Because the bulk of creditors are thousands of companies, freight forwarders and logistics operators who have entrusted their merchandise to Hanjin, around 400,000 containers (the total capacity of the Hanjin fleet is estimated at 600,000 TEUs), goods that are stuck on board.

Why did this happen? Why did it have to happen? . . .

Because for years, the shipping companies have been transporting goods at a loss. They have put too many ships into service and they continued to order increasingly larger ships at shipyards. The ships competed fiercely for the orders and built the ships at bargain prices, although they are technological jewels. With the increase in freight capacity, freight rates plummeted, volumes grew but the income per unit of freight transported decreased. Then, China slowed exports, creating the perfect storm. . . .

And now? How many of the 10 to 15 most important companies still active on the market are zombie carriers?

The false promise of capitalist globalization

Critically, the globalization process has been aided by labor repression.  The transnational corporate drive for market share encouraged state policies designed to hold down labor costs.  And the resulting decline in wage demand reinforced the pursuit of exports as the “natural” engine of growth.  As TDR 2016 explains:

those countries that did exhibit increases in their global share of manufacturing exports did not show similar increases in wage shares of national income relative to the global average. . . . This suggests that increased access to global markets has typically been associated with a relative deterioration of national wage income compared with the world level.

The following chart illustrates the global ramifications of the globalization process for worker earnings.wage-share

As for convergence, the TDR 2016 compared the performance of third world economies relative to that of the United States using several different criteria.  The chart below looks at the ratio of per capita GDP of select countries and country groups relative to that of the United States.  We see that Latin America and the Caribbean and Sub-Saharan Africa have actually lost ground since the 1980s.  This is especially striking since the US growth rate also slowed over the same period.  Only in Asia do we see some catch-up, and outside the so-called first-tier NIEs and China the gains have been small.

comparisons-with-us

In fact, as the TDR 2016 explains: “The chances of moving from lower to middle and from middle- to higher income groups during the recent period of globalization show no signs of improving and have, if anything, weakened.”

This conclusion is buttressed by the following table which shows “estimate chances of catching up over the periods 1950–1980 and 1981–2010.”  The United States is the target economy in both periods with countries “divided into three relative income groups: low (between 0 and 15 per cent of the hegemon’s income), middle (between 15 and 50 per cent) and high (above 50). The table reports transition probabilities for the two sub-periods and the three income levels.”

catch-up

The TDR 2016 drew two main conclusions from these calculations:

First, convergence from the low- and the middle-income groups has become less likely over the last 30 years (1981–2010) relative to the previous period (1950–1980). As reported in the table, the probability of moving from middle- to the high-income status decreased from 18 per cent recorded between 1950 and 1980 to 8 per cent for the following 30 years. Analogously, the probability of catching up from the low- to the middle-income group was reduced approximately by the same factor, from 15 per cent to 7 per cent.

Second, and perhaps more strikingly, the probability of falling behind has significantly increased during the last 30 years. Between 1950 and 1980 the chances of falling into a relatively lower income group amounted to 12 per cent for middle-income economies and only 6 per cent for high-income countries.  These numbers climbed to 21 per cent and 19 per cent respectively in the subsequent period.

Uncertain times lie ahead

In short, globalization dynamics have restructured national economies in ways that have enriched an ever smaller group of transnational corporations.  At the same time, they have set back national development efforts with few exceptions and generated serious contradictions that are largely responsible for the stagnation and downward pressures on working and living conditions experienced by the majority of workers in both advanced capitalist countries and the third world.

While globalization dynamics have lost momentum the economic restructuring it achieved remains in place.  And to this point, dominant political forces appear to believe that they can manage whatever economic challenges may appear and thus remain committed to existing international institutions and patterns of economic activity.  Whether they are correct in their belief remains to be seen.  As does the response of working people, especially in core countries, to their ever more precarious conditions of employment and living.

Opposing US Militarism In South Korea

The militaristic nature of the Obama administration pivot to Asia is fully on display in South Korea.  While rarely discussed in the United States media, the South Korean government recently agreed to let the US military station a Terminal High Altitude Area Defense (THAAD) battery in the South Korean city of Seongju.  The decision has been strongly criticized by the governments of China and Russia, and fiercely resisted by the people of Seongju.

The US and South Korean governments claim that the battery is needed to help defend South Korea from a possible North Korean missile attack.  However, it is far more likely that this decision is part of a broader US effort to strengthen its regional missile defense system and first-strike capacity against China and Russia.

As the Korea analyst Gregory Elich explains, this system is not designed to counter any likely North Korean threat:

The missiles in a THAAD battery are designed to counter incoming ballistic missiles at an altitude ranging from 40 to 150 kilometers. Given North Korea’s proximity, few, if any, missiles fired by the North would attain such a height, given that the point of a high altitude ballistic missile is to maximize distance. Even so, were the North to fire a high altitude ballistic missile from its farthest point, aimed at the concentration of U.S. forces in Pyeongtaek, it would require nearly three and a half minutes for THAAD to detect and counter-launch. In that period, the incoming missile would have already fallen below an altitude of 40 kilometers, rendering THAAD useless. In a conflict with the South, though, North Korea would rely on its long-range artillery, cruise missiles, and short-range ballistic missiles, flying at an altitude well below THAAD’s range.

It is also far from certain that the system even works reliably despite Department of Defense approved test results.  As Elich points out, “the tests failed to replicate real-world scenarios, so claims made about THAAD’s effectiveness are unproven.”

So, what is the gain for the US in securing South Korean government willingness to host the system?  The THAAD battery also comes with a powerful radar system that has two different modes of operation.  The first, the terminal mode, is designed to detect incoming missiles and direct counter-missiles.  The second, the forward-based mode, is designed to cover a much wider area and is connected to the US-based missile defense system.  “[I]n forward-mode a radar at Seongju would be capable of covering much of eastern China, as well as missiles fired from further afield as they fly within its detection range.”  In other words, used in forward-mode, the THAAD radar system would greatly enhance the US military’s ability to track and destroy Chinese and Russian missiles, an ability that would significantly contribute to US first-strike capabilities by compromising Chinese or Russian capacities to launch a counter-strike.

Thus, the effort to establish a THAAD battery in South Korea is best understood as a part of the broader US effort to ring China and Russia with missiles and radar systems.  The Global Network Against Weapons and Nuclear Power in Space has declared October 1-8 “Keep Space for Peace Week.”  In concert with that effort they published the following poster which highlights the aggressive nature of US policy.

ksfpw16

The Obama administration is well aware that South Koreans do not want to be dragged into a US confrontation with China or Russia and so it appears likely that the US and South Korean governments conspired to win popular support for the battery by encouraging South Koreans to believe that its sole purpose was to reduce the likelihood of a North Korea missile attack.  However, things haven’t worked out as the two governments hoped.

Growing numbers of South Koreans are actively organizing in opposition to the battery.  The resistance in Seongju grew so strong that the government was forced to announce that it would consider an alternative location.  But the residents of Seongju, joined by a wider social movement, are demanding that the government renounce its willingness to host the battery.

Seongjuprotests

The resistance has been spirited and creative as highlighted in this report from the blog Zoom in Korea:

The online “We the People” petition against THAAD deployment surpassed its goal of 100,000 signatures on August 10. The Seongju residents gathered for their 29th nightly candlelight vigil that evening were beaming with joy. The emcee shouted, “What day is today?” and the residents shouted back in unison, “The day we reached 100,000!” According to the White House petition website, any petition that garners 100,000 signatures in 30 days triggers an official response from the White House within 60 days of the date that the goal is reached.

To be sure, waging an online petition campaign in Seongju was no easy task. Most residents don’t have computers nor read English. The petition requires an email verification step, but most didn’t have email accounts. College students set up booths at the nightly candlelight vigils and patiently helped older residents through the process, starting with opening an email account.

The residents made clear that they are not appealing for sympathy from the White House. The petition campaign was a process of organizing the entire country beyond Seongju to demand that the United States rescind its THAAD decision and exert pressure on the White House.

“Until when do we hold the rain ceremony?” asked Lee Jae-dong, the chair of the Seongju branch of the Korean Peasants League and the emcee of the nightly candlelight vigils.  “Until it rains!” replied the crowd. “Until when do we fight THAAD deployment?” he asked. “Until it’s rescinded!” replied Seongju residents in unison.

In August, a Veterans for Peace delegation traveled to South Korea to meet with Koreans resisting the deployment and to learn more about how best to build solidarity.  Two members of the delegation were denied entry into the country by South Korean authorities.

We need to do our part in this struggle and not just out of sympathy for Koreans.  The THAAD deployment, if successful, can only heighten tensions in the Asia-Pacific region and strengthen those forces in the US that seek to further militarize our own foreign and domestic policies.

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

Growth by group

 

Figure 2: Regional Growth EMDEs (weighted average)

regional growth weighted

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

catch up

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.