Reports from the Economic Front

a blog by Marty Hart-Landsberg

Category Archives: Environment

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.

TTIP Dangers Revealed

The US government and and the European Commission are negotiating a major so-called free trade agreement, the Transatlantic Trade and Investment Partnership (T-TIP).

According to the US government:

T-TIP will help unlock opportunity for American families, workers, businesses, farmers and ranchers through increased access to European markets for Made-in-America goods and services. This will help to promote U.S. international competitiveness, jobs and growth.

However, it is hard to see great benefits from expected tariff reductions since both sides already have low average tariff rates.  For example, the average tariff rate for manufactured products in the European Union was 1.43 in 2013.  Its highest value over the past 25 years was 5.86 in 1990; its lowest value was 1.41 in 2012.

But of course much more is at stake than simply lowering already low tariffs.  The secret negotiations are really about removing regulatory barriers that get in the way of large corporations maximizing their profits, barriers like food safety law, environmental legislation, banking regulations and the sovereign powers of individual nations.

This may sound extreme, but judge for yourself thanks to Greenpeace Netherlands.  On May 1st,  it published 248 pages of leaked T-TIP negotiating texts.  According to Greenpeace, these “classified documents represent more than two-thirds of the overall TTIP text as of April, at the 13th round of TTIP negotiations in New York. They cover 13 chapters addressing issues ranging from telecommunications to regulatory cooperation, from pesticides, food and agriculture to trade barriers.”

Among other things they highlight the aggressive US attempt to dramatically weaken already low European Union safety and health regulations.

The following excerpts from a Guardian article provide some of the specifics:

Talks for a free trade deal between Europe and the US face a serious impasse with “irreconcilable” differences in some areas, according to leaked negotiating texts.

The two sides are also at odds over US demands that would require the EU to break promises it has made on environmental protection. . . .

“Discussions on cosmetics remain very difficult and the scope of common objectives fairly limited,” says one internal note by EU trade negotiators. Because of a European ban on animal testing, “the EU and US approaches remain irreconcilable and EU market access problems will therefore remain,” the note says.

Talks on engineering were also “characterised by continuous reluctance on the part of the US to engage in this sector,” the confidential briefing says.

These problems are not mentioned in a separate report on the state of the talks, also leaked, which the European commission has prepared for scrutiny by the European parliament.

These outline the positions exchanged between EU and US negotiators between the 12th and the 13th round of TTIP talks, which took place in New York last week.

The public document offers a robust defence of the EU’s right to regulate and create a court-like system for disputes, unlike the internal note, which does not mention them.

Jorgo Riss, the director of Greenpeace EU, said: “These leaked documents give us an unparalleled look at the scope of US demands to lower or circumvent EU protections for environment and public health as part of TTIP. The EU position is very bad, and the US position is terrible. The prospect of a TTIP compromising within that range is an awful one. The way is being cleared for a race to the bottom in environmental, consumer protection and public health standards.”

US proposals include an obligation on the EU to inform its industries of any planned regulations in advance, and to allow them the same input into EU regulatory processes as European firms.

American firms could influence the content of EU laws at several points along the regulatory line, including through a plethora of proposed technical working groups and committees.

“Before the EU could even pass a regulation, it would have to go through a gruelling impact assessment process in which the bloc would have to show interested US parties that no voluntary measures, or less exacting regulatory ones, were possible,” Riss said.

The US is also proposing new articles on “science and risk” to give firms greater regulatory say. Disputes over pesticides residues and food safety would be dealt with by the UN Food and Agriculture Organisation’s Codex Alimentarius system.

Environmentalists say the body has loose rules on corporate influence, allowing employees of companies such as BASF, Nestle and Coca Cola to sit on – and sometimes lead – national delegations. Some 44% of its decisions on pesticides residues have been less stringent than EU ones, with 40% of rough equivalence and 16% being more demanding, according to Greenpeace.

GM foods could also find a widening window into Europe, with the US pushing for a working group to adopt a “low level presence initiative”. This would allow the import of cargo containing traces of unauthorised GM strains. The EU currently blocks these because of food safety and cross-pollination concerns.

The EU has not yet accepted the US demands, but they are uncontested in the negotiators’ note, and no counter-proposals have been made in these areas.

In January, the EU trade commissioner Cecilia Malmström said the precautionary principle, obliging regulatory caution where there is scientific doubt, was a core and non-negotiable EU principle. She said: “We will defend the precautionary approach to regulation in Europe, in TTIP and in all our other agreements.” But the principle is not mentioned in the 248 pages of TTIP negotiating texts. . . .

The EU negotiators internal note says “the US expressed that it would have to consult with its chemical industry on how to position itself” on issues of market access for non-agricultural goods.

Where industry lobbying in regulatory processes is concerned, the US also “insisted” that the EU be “required” to involve US experts in its development of electrotechnical standards.

Of course, this might be a one-sided look.  No doubt European corporations are pushing hard to undermine US regulations that they find objectionable.   One can imagine a terrible compromise where the two sides split the difference, leaving majorities on both sides of the Atlantic less healthy and safe.

17ttip-glynthomas

Surprise: Corporations Write Our Trade Agreements

Opposition to the Transpacific Partnership continues to grow.  Public concern centers on potential job loss and the ways in which corporations are likely to use their enhanced mobility to lower worker wages and benefits, weaken unions, and escape taxation.  More knowledge of the agreement would produce outrage at the way its terms are also designed to block progress on climate change, raise the cost of health care, overturn efforts to regulate the financial industry . . . .  well you get the idea.

If it sounds like this so-called trade agreement was designed to serve corporate interests that is because it was largely written by those who represent those interests.

The Washington Post published some great infographics which highlight the corporate-heavy network of official trade advisers that helped shape the US negotiating position and final agreement.

As you can see in the first graphic below, private industry and trade groups (which represent private industry) make up 85 percent of all the official advisers.

advisers

This overall breakdown, while revealing, does not fully capture the actual influence of the corporate sector.  As we see in the next infographic, labor and ngo representatives are basically excluded from the key committees where the US Trade Representative’s positions on trade, investment, and finance policies are hammered out.  The one committee dominated by labor, the Trade Negotiations and Labor Policy, is largely irrelevant since there are no binding labor accords in the agreement.  The same is basically true of the Trade and Environment committee.

committees

World Poverty Rates Remain High

The World Bank has a new international poverty line and is celebrating the rapid decrease in the percentage of people living in poverty.  According to the World Bank, the world poverty rate will fall below 10% this year; we are on our way to ending world poverty. Unfortunately, this is a story based on misleading measurements, one that largely serves to buttress the status quo and blunt demands for real change in global economic processes.

The World Bank’s new international poverty line, announced in October 2015, is set at $1.90 per day in 2011 purchasing power parity dollars.  Before discussing the origins of that line, it is worth taking a moment to consider how low that level truly is.  As Jason Hickley explains:

How much is $1.90 per day, adjusted for purchasing power? Technically, it represents the international equivalent of what $1.90 could buy in the United States in 2011. But we know that this amount of money is inadequate to achieve even the most basic nutrition. The US Department of Agriculture calculates that in 2011 the very minimum necessary to buy sufficient food was $5.04 per day. And that’s not taking account of other requirements for survival, such as shelter and clothing.

If you multiply $1.90 times 365 you get the princely annual sum of $693.50.  Imagine living on that in the United States in 2011, and then imagine that according to the World Bank if you make more than that (or its equivalent in other countries) you are no longer to be classified as poor.

Calculating the global poverty line

Countries have their own poverty line calculated in their own respective currencies.  Having a global poverty line means (1) converting national poverty lines to a common standard and (2) finding a way to devise a single number that would have relevance for every country.

While it might be tempting to overcome the first challenge by converting every country’s national poverty line into a dollar value using the existing exchange rate between the country’s currency and the dollar, this would produce widely and rapidly fluctuating poverty lines.  Moreover many goods and services are not traded internationally and so their prices are not actually changed by exchange rate movements.

Therefore, the World Bank employs a different approach.  In broad brush, it constructs a so-called basket of consumer goods and services and determines its cost in the United States in a particular year.  Next, it attempts to determine the national costs of a similar basket in most third world countries.  Finally, it calculates a purchasing power parity exchange rate for the dollar and the currencies of these countries using these relative costs.  In theory, at least, one can then talk about a standardized purchasing power expressed in dollars.

The Bank sought to overcome the second challenge by first using purchasing power parity exchange rates to convert national poverty lines denominated in local currencies into dollars.  Bank researchers then selected, somewhat arbitrarily, the newly converted poverty lines of 15 of the lowest income countries, and determined a consensus poverty line.  It is this consensus poverty line that serves as the Bank’s international poverty line.  Finally, the Bank attempts to estimate the number of people in each country with earnings below that line.

Because the measurement process is expensive and time consuming, the Bank only makes periodic updates to its poverty line.  The 1993 purchasing power parity international poverty line was set at $1.08 a day.  The 2005 purchasing power parity international poverty line was set at $1.25 a day.  And the newly released 2011 purchasing power parity international poverty line was determined to be $1.90 a day.

The figure below, taken from a study by Rahul Lahoti and Sanjay Reddy, highlights the percentage of the world population living below the poverty line for a number of different poverty lines.  As one can see, the percentage of those living in poverty according to the Bank’s latest poverty line is rapidly falling.  In fact, the gains are even greater using the new poverty line than the previous one.

percent poverty


Problems with the Bank’s work

There are many problems with the Bank’s methodology, most importantly its framework is rather arbitrary.  Why should the Bank choose the poorest countries to set a poverty line?  As Hickley points out:

The World Bank picked the $1.90 line because it’s the average of the national poverty lines of the very poorest countries in the world, like Chad and Burundi. But it tells us very little about what poverty is like in most other countries. The bank itself admits that poverty in Latin America, for example, should be measured at about $6 a day. And yet for some reason it persists with the $1.90 line.

Perhaps even more telling there is little reason to have confidence that national poverty lines accurately capture poverty status or that the basket of goods and services used to construct the purchasing power parity exchange rates truly measure basic needs.

And then there are all the difficulties of the computations.  Many of the poorest countries do not have poverty that clearly differentiate between rural and urban poverty or national consumer price indicies, all of which require the Bank to make a number of estimates and/or use adhoc measures to make its calculations.

Moreover, it is tricky to use international poverty lines calculated in one year to measure poverty rates in past or future years.  The international poverty lines are based on prices in a base year which are shaped by the structure of the world economy in that year, while prices in different countries shift yearly in response to changing local and international conditions.  For a more complete discussion of these and other points see the above cited study by Lahoti and Reddy.

Alternative measures and poverty trends

While Lahoti and Reddy call for the construction of an alternative measure of poverty, one that relies not on income but a concrete measure of the goods and services required to live a non-poverty life, they do offer, using U.S. Department of Agricultural data, an alternative estimate of international poverty to illustrate the problematic nature of the World Bank’s work.

As they explain:

The Thrifty Food Plan produced by the US Dept. of Agriculture Center of Nutrition Policy and Promotion established, with great care, the minimum cost of achieving “Recommended Dietary Allowances” in the United States. It does so for a model family of a specified size and composition by collecting “scanner” price data from markets around the US and calculating the mathematical least cost of achieving the allowances at these prices (using linear programming techniques) and by subsequently modestly adjusting the amount to make some allowance for prevailing tastes. It then verifies that the amount suffices for cooking model recipes in a test kitchen. The allowance is based entirely on the supposition of home cooking and makes no reference to the costs of the kitchen or the cooking pots. By definition, the Thrifty Food Plan allowance does not suffice for any non-food requirement (e.g. for shelter, clothing, transportation etc.). It can therefore be taken as a lower bound on real requirements in the US. However, to take note of the possible criticism that the Thrifty Food Plan allowances are overly generous, we consider expenditure levels corresponding both to those allowances (based on per person per day costs in a family of four with two children of intermediate ages) and to half their value. In 2011, these amounts were respectively $5.04 and $2.52. These can be thought of as food poverty lines to which non-food requirements must be added, but have not been. Further, we apply both general consumption PPPs (as does the Bank) and food PPPs more appropriate to food requirements in particular. Combining these possibilities leads to four alternative poverty lines and resulting poverty estimates.

Looking at poverty trends using the $5.04 2011 Food PPP and 2011 PPP we see in the figure above that declines in poverty are quite recent, dating to 2000.  These gains no doubt reflect the high country growth rates powered by soaring commodity prices.  Those prices are now in sharp decline as are growth rates.  Regardless, the percentage of the world population below the poverty line remains extremely high, well over 50%.

The figure below shows numbers of poor rather than percentages.  These two alternative measures show increases, not decreases, in the number of poor people relative to 1980 and 1990.

number poor

Hickley offers two other poverty estimates, both of which also show levels of world poverty far higher than that claimed by the World Bank:

One option is to count poverty country-by-country using each nation’s own poverty line, with $1.90 as an absolute floor. If we did that, we would see that about 1.7 billion people remain in poverty today, which is more than 70% higher than the World Bank would have us believe.

If we want to stick with a single international line, we might use the “ethical poverty line” devised by Peter Edward of Newcastle University. He calculates that in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line. In the past, that was $5 a day. Using the bank’s new calculations, it’s about $7.40 a day. As it happens, this number is close to the average of national poverty lines in the global south.

Challenges ahead

The UN and the World Bank are strongly committed to the World Bank’s results because it allows both organizations to declare the success of their efforts.  The UN, for example, recently declared its Millennium Development Goals successfully met, thanks in large part to World Bank poverty estimates.  Now, it has launched its Sustainable Development Goals, which includes the eradication of world poverty.

The bankruptcy, perhaps better said danger, in this concerted effort to legitimate business as usual is clearly expressed in the following public letter to the UN by Noam Chomsky and other leading scholar/activists:

As the UN and the world’s governments ratify the Sustainable Development Goals (SDGs) today (September 25), we must be clear that they do not represent the best interests of the world’s majority — those that are currently exploited and oppressed within the current economic and political order.

The SDGs claim they can eradicate poverty in all its forms by 2030. But they rely primarily on global economic growth to achieve this tremendous task. If such growth resembles that seen in recent decades, it will take 100 years for poverty to disappear, not the15 years the SDGs promise. And even if this were possible in a shorter timescale, we would need to increase the size of the global economy by a factor of 12, which, in addition to making our planet uninhabitable, will obliterate any gains against poverty.

Rather than paper over such obvious madness with false hopes, we must address two critical issues head on: income inequality and endless material growth.

If poverty is to be truly overcome by 2030, then much of the improvement in the position of the impoverished must come through reduction in the enormous inequality that has accumulated in the last 200 plus years. The richest 1 percent of humanity will very soon own over half of the world’s private wealth. It would take only modest reductions in inequality to deliver large increases in the socio-economic position of the poorer half of humanity.

The SDGs do talk about reducing inequality. However, their prescription is technocratic, obscure and wholly incommensurate to the task at hand. For example, Target 10.1 states that by 2030 they will “progressively achieve and sustain income growth of the bottom 40 per cent of the population at a rate higher than the national average.” It is hard to imagine a less robust or ambitious goal. This commitment allows inequality to grow without limit until 2029, so long as it then begins to be reduced. The SDGs thus fail to endorse the only means that can achieve their stated goal of ending poverty: substantial inequality reduction, starting now. In effect, they perpetuate severe poverty and leave this fundamental problem to future generations.

The other essential task is for the world’s nations to adopt a saner measure of human progress; one that gears us not towards endless GDP growth based on extraction and consumption, but towards the wellbeing of humanity and our planet as a whole. There are plenty of options to choose from, all of which have been ignored in the SDGs. Instead, Target 17.19 says only that they will, “by 2030, build on existing initiatives to develop measurements of progress on sustainable development that complement GDP”. Another urgent challenge passed down to the next generation.

It is possible to overcome poverty in a way that respects the Earth and helps tackle climate change. The planet is abundant in wealth and its people infinitely resourceful. In order to do so, however, we must be prepared to challenge the logic of endless growth, greed and destruction enshrined in neoliberal capitalism.

It is time to envision a new operating system, based on social justice and symbiosis with the natural world. As currently formulated, the SDGs merely distract us from addressing the challenges we face.

Signed by:

Noam Chomsky, MIT
Thomas Pogge, Yale University
Naomi Klein, Author and activist
Eve Ensler, Playwright and activist
Chris Hedges, Pullitzer-prize winning journalist and author
Helena Norberg-Hodge, International Society for Ecology and Culture
Anuradha Mittal, Oakland Institute
Tom Goldtooth, Indigenous Environmental Network
Maude Barlow, Author and human rights activist
David Graeber, London School of Economics
Medha Patkar, National Alliance of People’s Movments, India
Alnoor Ladha, The Rules

 

Environmental Slight Of Hand

If you believe press reports, governments are preparing for “serious” climate negotiations at the upcoming December UN climate conference in Paris.  I put quotes around serious because there is good reason to believe that most governments, at least the most powerful, care little about the outcome.  One indicator is their commitment to protecting the environment in two so-called free trade agreements.

For example, the Guardian newspaper recently leaked the EU proposal for the Sustainable Development Chapter of the Transatlantic Trade and Investment Partnership. Here is what the Guardian had to say:

In January, the bloc promised to safeguard green laws, defend international standards and protect the EU’s right to set high levels of environmental protection, in a haggle with the US over terms for a free trade deal.

But a confidential text seen by the Guardian and filed in the sustainable development chapter of negotiations earlier this week contains only vaguely phrased and non-binding commitments to environmental safeguards.

No obligations to ratify international environmental conventions are proposed, and ways of enforcing goals on biodiversity, chemicals and the illegal wildlife trade are similarly absent.

The document does recognize a “right of each party to determine its sustainable development policies and priorities”. But lawyers say this will have far weaker standing than provisions allowing investors to sue states that pass laws breaching legitimate expectations of profit.

“The safeguards provided to sustainable development are virtually non-existent compared to those provided to investors and the difference is rather stark,” said Tim Grabiel, a Paris-based environmental attorney. “The sustainable development chapter comprises a series of aspirational statements and loosely worded commitments with an unclear dispute settlement mechanism. It has little if any legal force.” . . .

Last year, more than a million people across Europe signed a petition calling for the Transatlantic Trade and Investment Partnership (TTIP) talks to be scrapped. Their concern was that multinationals could use the treaty’s investor-state dispute settlement (ISDS) provisions to sue authorities in private tribunals, not bound by legal precedent.

In one famous case, Lone Pine launched an unresolved $250m suit against the state of Quebec after it introduced a fracking moratorium, using ISDS provisions in the North American Free Trade Agreement (Nafta). . . .

Natacha Cingotti, a trade campaigner for [Friends of the Earth Europe], said that only a carve-out of environmental protections from the tribunal process could prevent such cases mushrooming after a TTIP deal.

“This new leak illustrates that the European commission is not serious about protecting essential safeguards for citizens and the environment in the context of the TTIP talks,” she told the Guardian. “Powerful corporate polluters are likely to get VIP treatment under it, while the only chapter that could bring strong language to protect essential regulations to build a sustainable future is weak and unenforceable.” . . .

An EU promise that TTIP would “support our climate targets, for example by promoting trade and investment in green goods and services” has already been thrown into doubt by the leak of a draft energy chapter last May. In it, Europe’s negotiators pushed for “a legally binding commitment in the TTIP guaranteeing the free export of crude oil and gas resources”.

So, in sum, the one chapter that might point to a serious stance on climate change will likely include no requirements to ratify international environmental conventions.  More importantly, the agreement would include an investor-state dispute resolution system that allows corporations to sue governments if they believe implemented environmental policies will cause them to lose expected profits.

And European governments are not alone in seeking to create a structure of regulations that will make it difficult to protect the environment and reverse climate change.  Here is what governments have to say about the environmental chapter of the US-driven Transpacific Partnership Agreement; of course this is the most hopeful perspective since it is drawn from official statements–the actual terms of the chapter remains secret.

According to a UK information service, it appears that:

the environment chapter will contain obligations related to three of the seven multilateral environmental agreements (MEAs) set forth by congressional Democrats as a minimum standard for inclusion in the final deal, but that only one of these agreements will be fully enforceable under TPP’s dispute settlement mechanism.

Specifically, [government statements] make clear that the TPP environment chapter will include an obligation for all parties to uphold their commitments under the Convention on Illegal Trade in Endangered Species of Wild Flora and Fauna (CITES), which generally requires countries to ban trade in specific endangered species.

They also suggest that the environment chapter will include obligations similar to those contained in the Montreal Protocol on protection of the ozone layer, and the Convention on the Prevention of Pollution from Ships (MARPOL) — without specifically subjecting these MEAs to the TPP dispute settlement mechanism.

Finally, the TPP environment chapter will contain a general obligation for countries to reaffirm their commitments to implementing other MEAs to which they are parties, without specifically making these enforceable under the TPP, countries have signaled.

This architecture would mean TPP falls short of the standard established in the May 10, 2007 agreement between House Democrats and the George W. Bush administration, which was that future free trade agreements would contain a commitment for countries to adopt, maintain, and implement laws and regulations that fulfill their obligations under any of seven specific MEAs to which they are a party. The May 10 language also subjected this commitment to the regular dispute settlement mechanism of the FTA.

The missing MEAs in TPP are the Ramsar Convention on Wetlands and Waterfowl; the Convention on the Conservation of Antarctic Marine Living Resources; the International Convention for the Regulation of Whaling; and the Inter-American Tropical Tuna Convention. . . .

The U.S. fact sheet says the environment chapter requires TPP countries to “[p]romote cooperative efforts to address issues such as energy efficiency; development of cost-effective, low-emissions technologies and alternative, clean and renewable energy sources; deforestation and forest degradation; and resilient development.” The joint summary says parties will cooperate to “transition to low-emissions and resilient economies.”

So, again, lots of fine words but, as revealed by the reach of the investor-state dispute resolution mechanism, it is profits before all.

 

US Policy Fails To Protect Our Climate

Governments were charged by the UN to develop national plans for combating climate change in advance of the upcoming 2015 United Nations Climate Change Conference, which will be held in Paris from November 30 to December 11.  These “Intended Nationally Determined Contributions” are to be used by the climate treaty secretariat to create a draft agreement for discussion and approval at the Paris conference.

The US government submitted its Intended National Determined Contribution in May.  In it, the government stated that the US intends to reduce its economy-wide greenhouse gas (GHG) emissions 26-28 percent below 2005 levels by 2025.  It calls this target “fair and ambitious.”

However, as the just released report–Captain America, US climate goals: a reckoningauthored by the New Delhi Center for Science and the Environment, makes clear, this commitment is anything but fair and ambitious.

As the report points out, the 2005 baseline is key to US claims of climate change progress.  Most importantly, US greenhouse gas emissions hit a post-1990 peak in 2005 and trended down over the following years.  Setting its target against this base year rather than the 1990 base year that was widely endorsed in past UN meetings greatly eases the ability of the US to meet its own self-declared target.  This recent decrease in emissions has also allowed the US to falsely present itself as part of the climate change solution not problem.

As we can see in the graph below, despite the reduction in recent years, US emissions were still greater in 2013 than they were in 1990.  Thus, the US has not actually begun reducing its emissions relative to 1990.

picture 1

Moreover, as we see in the next graph, US emissions fluctuate yearly and the post-2005 reduction is likely more the result of the recent major recession and weak economic expansion, not a restructured and more environmentally stable economy.  In fact, emissions have begun to grow again.

picture 2

As the Center for Science and the Environment explains:

Whereas 1990 is the baseline fixed in the global climate convention for nations to reduce GHG emissions, the US’ choice is 2005. It is the first mask the US wears to veil its climate-inaction. The US has cleverly used 2005 as its base year because, 1990-2005, the US allowed its emissions to grow, whereas it should have actually been reducing its emissions. The masking effect of 2005 as a base to reduce emissions translates to millions of tons of CO2 emissions the US has cloaked — that, for some reason, the world has failed to notice.

If we calculate the US emissions target using a 1990 baseline, its pledge translates into a far more modest reduction of 13-15 percent by 2025. This is even lower than what it had pledged at the 2010 Cancun UN climate meetings.  In percentage as well as absolute terms, the US INDC trails that of many countries, including that of the EU-28.

The year 2005 was important to the US for yet another reason.  It was the last year that the US was the world’s largest yearly emitter of greenhouse gasses.  China now holds the title.  This development has helped the US shift public attention from its own historical responsibilities for our global climate change crisis to the rising emissions of emerging economies like China and India.

However, the US still remains one of the world’s top greenhouse gas emitters on a percapita basis, as we can see in the following graph.

picture 3

And, the US is still the biggest historical emitter of greenhouse gases.  As the Center for Science and the Environment explains:

So far, we have looked at the ‘flow’ of US emissions. But what of the stock: 411 billion tons CO2, emitted 1850-2011?  The US has borrowed from the global commons a share of other countries’ carbon space to become the economic powerhouse it is today. This is its natural debt. And, as with a financial debt, the natural debt needs to be paid. Try as it might, the US cannot erase its historical emissions from its climate action record. CO2 is a gas with a past, present and future. Once emitted, it stays in the atmosphere. So, the US’s past emissions are a legacy that must be accounted for in any future emissions reduction plan or move. 1850-2011, the US was responsible for 21 per cent of CO2 emissions in the atmosphere.20 emissions have caused the warming we see today, whose impacts are now devastating the lives of the poorest. It has the capacity. But it also has the responsibility to reduce emissions. Not by tinkering year-to-year, or creating a perceptual veneer of reduction, but rather through drastic reductions that make space for the rest of the world to grow.

picture 4

The report, which examines US energy production, consumption, and policies in great detail, makes clear that the US has yet to take meaningful steps to create a more ecologically responsible economy.  In fact, as we see next, the US has become the world’s biggest producer of oil and natural gas and its fossil fuel consumption continues to grow.

picture 5

Tragically, US determination to continue with business as usual will likely mean that the upcoming UN conference will once again be long on speeches and short on meaningful action. Unfortunately, there is no fooling the climate or avoiding the consequences of inaction.

Uruguay Withdraws From The Trade In Services Agreement

You probably don’t know that 52 countries are engaged in secret negotiations over a proposed Trade in Services Agreement (TISA), or that the Government of Uruguay, responding to massive domestic opposition to the agreement, has withdrawn from the negotiations.  And that is too bad because it’s all a big deal.

TISA negotiations have been on-going for two years and according to the agreement’s provisional text, the document is supposed to remain secret for at least five years after it is has been signed.  The only reason we know about the negotiations is because of WikiLeaks, which called the TISA the “largest component of the United States’ strategic trade ‘treaty’ triumvirate.  The other two treaties are the Transpacific Partnership (TPP) and the TransAtlantic Trade and Investment Pact (TTIP).

As Don Quijones explains: 

TiSA involves more countries than TTIP and TPP combined: The United States and all 28 members of the European Union, Australia, Canada, Chile, Colombia, Costa Rica, Hong Kong, Iceland, Israel, Japan, Liechtenstein, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, South Korea, Switzerland, Taiwan and Turkey.

Together, these 52 nations form the charmingly named “Really Good Friends of Services” group, which represents almost 70% of all trade in services worldwide. Until its government’s recent u-turn Uruguay was supposed to be the 53rd Good Friend of Services. . . .

Here’s a brief outline of what is known to date (for more specifics click herehere and here):

1.TiSA would “lock in” the privatization of services – even in cases where private service delivery has failed – meaning governments can never return water, energy, health, education or other services to public hands.

2.TiSA would restrict signatory governments’ right to regulate stronger standards in the public’s interest. For example, it will affect environmental regulations, licensing of health facilities and laboratories, waste disposal centers, power plants, school and university accreditation and broadcast licenses.

 3.TiSA would limit the ability of governments to regulate the financial services industry, at a time when the global economy is still struggling to recover from a crisis caused primarily by financial deregulation. More specifically, if signed the trade agreement would:

  • Restrict the ability of governments to place limits on the trading of derivative contracts — the largely unregulated weapons of mass financial destruction that helped trigger the 2007-08 Global Financial Crisis.
  • Bar new financial regulations that do not conform to deregulatory rules. Signatory governments will essentially agree not to apply new financial policy measures which in any way contradict the agreement’s emphasis on deregulatory measures.
  • Prohibit national governments from using capital controls to prevent or mitigate financial crises. The leaked texts prohibit restrictions on financial inflows – used to prevent rapid currency appreciation, asset bubbles and other macroeconomic problems – and financial outflows, used to prevent sudden capital flight in times of crisis.
  • Require acceptance of financial products not yet invented. Despite the pivotal role that new, complex financial products played in the Financial Crisis, TISA would require governments to allow all new financial products and services, including ones not yet invented, to be sold within their territories.

4. TiSA would ban any restrictions on cross-border information flows and localization requirements for ICT service providersA provision proposed by US negotiators would rule out any conditions for the transfer of personal data to third countries that are currently in place in EU data protection law. In other words, multinational corporations will have carte blanche to pry into just about every facet of the working and personal lives of the inhabitants of roughly a quarter of the world’s 200-or-so nations.

Uruguay’s withdrawal is unlikely to do much to slow down the negotiations, especially since the story has largely been ignored by the media in other countries, including the United States.  However, the government’s decision does demonstrate the power of education and organizing.  The Uruguayan government took action only because of massive popular political pressure.  As Viviana Barreto and Sam Cossar-Gilbert describe:

After months of intense pressure led by unions and other social movements—including a general strike on the issue—the Uruguayan President listened to public opinion and left the US-led trade agreement. The overwhelming majority of members of the ruling Frente Amplio party believe that the deal would undermine the government’s national development strategy and therefore considered it “unadvisable to continue participating in the TISA negotiations”. . . .

By leaving the TISA negotiations, Uruguay has created a blueprint of how to beat these corporate-driven agreements. A strong coalition of trade unions, environmentalists and farmers working together on an effective public campaign were able to take on the interests of the world’s biggest companies and win.

Information and clear communication was key to the campaign. The negotiation texts released by WikiLeaks and assessments by international experts helped to break the secrecy surrounding the negotiations. Then when Uruguay entered the TISA negotiations in February [2015] social movements were able to launch a public awareness campaign that gave rise to ongoing public debate in the media.

The Stop TISA campaign was able to successfully lobby and engage the government on the issue. It exposed the negative effects that Uruguay’s participation in the trade deal would have on key government policies in health and education, as well as the role of the State to address inequality.

For example, TISA attempts to transform healthcare into a tradable commodity would “raise health care costs in developing countries and lower quality in developed countries,”  according to Dr. Odile Frank of Public Services International.

Building a strong coalition of social movements and non-profits  against TISA enabled a popular opposition to the agreement to grow rapidly across diverse sections of society, from doctors to train drivers. The Workers’ Trade Union Federation of Uruguay (PIT-CNT) played a crucial role in organizing mass mobilization. Thousands marching in the streets and a general strike against TISA increased pressure on the government and led it to walk away from the deal.

Stopping TISA in its tracks is a huge victory for the Uruguayan people and their fight for a more just and sustainable future. It is time for all other countries involved in the negotiation to do the same and end this bad trade deal.

Capitalism At Work: Profits Over People

Corporations have been making money just fine—but economic growth has been slow, productivity stagnant, and job creation limited.  What gives?

The following figure, which comes from a Brookings report on the negative consequences of the financialization of the U.S. economy, provides one explanation.  It shows that corporations increasingly prefer to fund dividends and stock purchases (the green line, left scale) rather than productive investment (red line, right scale).

priorities

In fact,  according to a Bloomberg Businessweek article, corporate spending on stock repurchases is heading for a record:

Corporations report profits as earnings per share (EPS). By reducing the number of shares outstanding, buybacks help increase a company’s EPS. . . . Companies in the S&P 500 bought more than $550 billion of their own stock last year, boosting EPS growth by 2.3 percentage points, according to data compiled by Bloomberg.

The last time buybacks contributed as much to profits was in 2007, when companies spent the most ever on their own stock and enhanced that year’s increase in EPS by 3.1 percentage points.

Buyback announcements so far in 2015 have already topped full-year totals for 2008, 2009, 2010, and 2012, and they’re on pace to reach an annual record of $993 billion, according to Birinyi Associates. . . .

Since 2009 companies have spent $2.4 trillion on buybacks, drawing criticism from politicians who say the companies should use the money to hire workers, pay them more, build plants, and fund research.

The figure below illustrates this trend.

stock repurchase trend

In a telling comment, the Bloomberg Businessweek article actually quotes analysts who share the view that corporations are being forced into this behavior by the lack of “attractive” alternative uses for their funds:

Over the previous 12 months [U.S. companies have] generated $1.1 trillion in profits—a sum that “cannot possibly be reinvested back” as capital spending or research and development, says Dubravko Lakos-Bujas, an equity strategist at JPMorgan Chase. “Cash flow generation for U.S. companies has been very robust, balance sheets have remained pretty healthy, and interest rates are still low,” he says. “With growth fairly anemic, it’s extra reason for buybacks.” Or as BTIG’s Greenhaus puts it, “Companies have to do something with their cash.”

An interesting perspective, one apparently shared by most corporations—investing money in productive, job-creating, environment-supporting activities is a distraction from the real work of making profits.

Oppose Fast Track And The TPP

It is looking increasing likely that the U.S. Congress is going to approve a Fast Track mechanism which will be used to pass the Transpacific Partnership (TPP) agreement.  This is not good.   What follows is the text of a talk I gave at an April 2015 Oregon AFL-CIO sponsored event on the TPP.

I don’t have much time so I am going to try and make my points as quickly but as clearly as I can.

First, globalization is a process that is shaped by power and current globalization dynamics reflect corporate interests.  Sadly, these dynamics have produced a globalization process that is harmful to workers in all the countries involved.

Many U.S. companies have globalized their production because it enables them to lower labor and environmental costs and greatly increase their profits.  Since they no longer need to engage in production in this country they have not used their profits to fund investment or job creation in this country.  Rather they have channeled them into dividends or stock by-backs, both of which enrich their owners and managers.  The consequence for working people is quite different.  The resulting low growth and intensified competition between workers for jobs has left us with weak job creation and employment conditions that are increasingly precarious.

Second, the essence of these globalization dynamics is perhaps best revealed through an examination of our various free trade agreements.  These agreements, and the Transpacific Partnership agreement (TPP) is no different, are called free trade agreements because the government believes that we all think free trade is good and so by calling them free trade agreements it hopes we will uncritically support them.

The fact is that these agreements are about far more than trade.  For example, they normally have some 20 chapters, most having nothing to do with trade as we understand it.  The US-Korea agreement had 24 chapters, for example.    The TPP apparently has 29 chapters.  Now, we don’t know precisely what the TPP or the Trans-Atlantic Trade and Investment Partnership, another agreement being pushed by the current government, will include because they are being negotiated primarily in secret.  But we have seen enough agreements signed that we know the US trade negotiator’s play book and there have been enough leaks about the TPP that we can be confident of what many of the chapters will include.

Let me highlight two of its chapters:

We know the TPP has an investment chapter because of a recent leak.  Ostensibly this chapter is supposed to protect foreign investors, defined broadly, from nationalization or expropriation, but it does much more.  For example, the chapter blocks governments from putting performance requirements on foreign investment.  More problematic, it also grants foreign corporations protection from direct or – and here is the kicker – indirect expropriation or nationalization.

So, what is an indirect expropriation or nationalization you might ask?  According to the leaked chapter, one of the factors that might signal an indirect expropriation is “the extent to which the government action interferes with distinct, reasonable investment-backed expectations.”  Another is “the character of the government action.”  This last factor becomes clearer from a reading of the terms of the Investment Chapter in the U.S.-Korea Free Trade Agreement.  There it is stated that one of the factors to be considered in determining whether a foreign investor has suffered an indirect expropriation is “whether the government action imposes a special sacrifice on the particular investor or investment that exceeds what the investor or investment should be expected to endure for the public interest.”

Moreover, the chapter also allows an investor that feels like it has been wronged to sue the offending level of government in a special tribunal, whose judges are primarily corporate lawyers who will earn millions of dollars regardless of who wins.  In fact many of these lawyers actively encourage corporations to sue in one period, making millions representing them, and then sit on a tribunal judging a government in another time period and again making millions.

The number of corporations suing governments under investment chapters, which are in most FTAs, is rising sharply.  Here are a few cases:

  • Philip Morris is suing Uruguay and Australia, because these countries want tobacco products sold in plain packaging with large health warnings. The company is suing Uruguay for $2 billion.
  • Vatterfall, a Swiss company, is suing Germany because the country has decided to decommission nuclear power plants.
  • Lone Star, a U.S. based company, is suing Canada because the province of Quebec has decided to ban fracking.
  • Veolia, a French company, is suing Egypt because the government mandated increase in the minimum wage has reduced the profitability of its waste management operation.

Another leaked chapter, this one designed to protect the intellectual property rights of our large companies, seeks, among other things, to extend the length of patents enjoyed by big drug makers. It does that in several ways.   For example, it protects “evergreening” in which drug companies can obtain patent extensions by making minor changes to their patented formula or by promoting a secondary use for the drug.  It also limits the criteria a product must fulfill in order to be eligible for a patent, thereby making it easier for companies to patent new products.  An earlier version of the chapter—it is not sure where things currently stand—even tried to secure patents for particular methods of performing surgery.

I could go on but you get the idea—these and other chapters are designed to promote corporate power and profits by limiting public policies that might regulate their investment or production decisions.  This freedom would come at our expense and, I would add, the overall health of our economy.

Third, what about the trade part.  We hear over and over again from economists how wonderful free trade is for all countries involved.  However, realize that this conclusion is largely based on Ricardo’s theory of comparative advantage, a theory which rested on a few key assumptions.  The most important were: full employment, balanced trade, and a lack of capital mobility.  Now you might think that this theory and its assumptions is just another example of the fantasy world that economists live in, and no one, especially policy-makers, would take its conclusions seriously.  Well, every time you read or hear an economist or government official tell you how much such and such free trade agreement is going to raise GDP or boost trade you can be sure that they got that number from something called a Computable General Equilibrium Model.  And those models, believe it or not, use the very same assumptions.  They have to make those assumptions if their models are to produce numerical estimates.  But think of what that means.  We worry about unemployment, trade deficits, and capital flight.  Economists, the ones that our government relies on, assume those worries away, by assumption.

Even granting them their assumptions, their predictions for gains are still incredibly small.  The most common estimates, using the method noted above, find that the TPP will boost U.S. GDP by 0.38 percent in 2025.  That is a predicted gain of approximately $80 billion, really a rounding error in a $18 trillion economy.  And then remember all the chapters that we know will do us harm.  For example, the extra cost for medical care from extending and promoting patients will clearly swamp predicted benefits from trade.

Nevertheless U.S. officials have been endlessly quoting that the agreement will boost jobs—most often they cite a gain of 650,000 jobs.  However, it is unclear where this number comes from.  The studies themselves do no actual job forecasting.  All they do is predict, subject to the assumptions noted, growth in GDP and exports and imports.

So, where does the administration get its estimate?  No one knows for certain, but here is a good guess:  The model predicts that the TPP will increase exports by $124 billion by 2025.  The Commerce Department estimates that about 5,500 jobs are supported by every $1 billion in exports, so, if you do the math you get an increase of approximately 650,000 jobs.  There is one big problem with this calculation—it leaves out imports.  The model actually predicts an increase of approximately the same dollar value of imports—so there goes the increase in jobs.

In short, we are being lied to—about the nature of this and other agreements.

The fact is that the government doesn’t have the slightest idea of what this agreement will do for our GDP or employment.  What it knows is that it will greatly increase corporate profits and power and that is what it cares most about.  The rest is all salesmanship.

So, the takeaway: these agreements have been harmful—we have the history of past agreements to show us that.  We need to oppose them.  The government knows that the more people know about these agreements the less they will like them so they want to fast track them.  They want a procedure that will allow a simple and quick up or down vote.  Unfortunately many of our politicians depend on corporate funds and so they also want fast track because it allows them to do what they want without drawing too much public heat.  We cannot let that happen.  We need to educate others about what these agreements are really about and we need to pressure Congress not to approve a fast track procedure for approving them.

Things are bad enough in this economy we certainly don’t need to implement agreements that will only worsen them.

Hipster Economics

We have the money and the know how to tackle most of our social problems.  Certainly unemployment, houselessness, and poverty.  So, why don’t we?

In large part it is because our socially created wealth remains outside social control.  Critical economic decisions are driven by private interests not the public good.  One result is hipster economics.

If you are not familiar with hipster economics, I recommend Sarah Kendzior’s The Perils of Hipster Economics. Here is the first part:

The Perils of Hipster Economics

On May 16, an artist, a railway service and a government agency spent $291,978 to block poverty from the public eye.

Called psychylustro, German artist Katharina Grosse’s project is a large-scale work designed to distract Amtrak train riders from the dilapidated buildings and fallen factories of north Philadelphia. The city has a 28 percent poverty rate – the highest of any major US city – with much of it concentrated in the north. In some north Philadelphia elementary schools, nearly every child is living below the poverty line.

Grosse partnered with the National Endowment of the Arts and Amtrak to mask North Philadelphia’s hardship with a delightful view. The Wall Street Journal calls this “Fighting Urban Blight With Art”. Liz Thomas, the curator of the project, calls it “an experience that asks people to think about this space that they hurtle through every day”.

The project is not actually fighting blight, of course – only the ability of Amtrak customers to see it.

2013-086_psychylustro_Warehouse_004

“I need the brilliance of colour to get close to people, to stir up a sense of life experience and heighten their sense of presence,” Grosse proclaims.

“People”, in Grosse and Thomas’s formulation, are not those who actually live in north Philadelphia and bear the brunt of its burdens. “People” are those who can afford to view poverty through the lens of aesthetics as they pass it by.

Urban decay becomes a set piece to be remodeled or romanticised. This is hipster economics.

The rest of the article is here.