Friday, July 23, 2021

Is Norway the new East India Company?

 In the eighteenth century, English-led East India Company gradually managed to gain control of most of India. Its rule was a disaster for India, but made many directors and stockholders of the company exceedingly rich. The wealth enabled many of them to play important roles in English political, intellectual and business life. As Adam Smith, an uncompromising critic of the Company, wrote: “The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever.” Faced with so many depredations, the British government finally took away the monopoly of Indian trade from the company in the midst of the Napoleonic wars.

This led the Company to redouble its efforts elsewhere: to trade with China. The problem with China was that nothing that company could sell to the Chinese was of interest to them. There was a lot that the company wanted to buy from China (porcelain, tea) but nothing to sell. Until it came to the idea of using opium produced in Bengal to sell to China. Despite the ban that the Chinese government had put on opium imports there was domestic demand for it. To overcome the ban, and in order to sell a widely addictive substance that for ethical reasons it could not sell anywhere else, the company decided to engage in a war to open Chinese ports. This was the origin of the infamous Opium War whose final outcome in 1842 was the opening of five Chinese “treaty ports”, cession of Hong Kong. and extraterritoriality for foreigners living in China. The “century of humiliations” had begun. And the company could finally sell to far-away foreigners something of whose consumption the Company members in their private lives disapproved.

Norwegian government is one of the most active governments in highlighting the threat of the climate change. It tries to replace almost entirely country’s use of gas-fueled cars by electric cars. It is proud of the decrease of the footprint of its consumption. It funds international activities that are supposed to limit and reverse deforestation in the world. Yet at the same time, for half century, Norway has been one of significant world producers, and even more so important  exporters, of oil and gas/ For gas, it is the third largest in the world, and some 50% of the value Norwegian goods exports consists of gas and oil. Moreover, the government has recently decided to expand exploration and production of gas and oil in one of the areas that the very same government acknowledges are most sensitive to climate change—the Arctic Circle.

Norway thus increases the production and sales of a commodity that herself deems noxious, and sells it, like the East India Company did with opium, to far-away foreigners while staying domestically clean. “Money has no smell”.

Norway’s behavior is not only surprising because it is hypocritical: the virtue-signaling stands in a manifest contrast with what the government does. It is even more striking when looked at in the context where many climate-change activists in their struggle to reduce emissions try to convince poorer and middle-income countries of benefits of lower production and consumption.

The question can then be asked: if they are so clearly unable to convince of the benefits of climate control the population and the government of the richest country in the world, what type of arguments do they plan to use to convince Mexico, Gabon, Nigeria, Russia to reduce production of gas and oil? These are countries whose incomes are a fraction of Norway’s: for example, the median-income person in Nigeria has one-twentieth (not a typo: 1/20) of the real income of the median-income person in Norway.

I could fully understand that Mexico or Nigeria refuse to reduce production of gas and oil because without it, there would be significant impoverishment of their population. But there will be no impoverishment of Norwegian population—by any reasonable metric. Norway, a country with a very high income (GDP per capita of 66,000 international dollars, 20% higher than that of the United States) and with this income fairly equally distributed amongst its citizens (Gini coefficient of 26), should be able to give up the production of its “opium-equivalent”. But there is apparently no political support for such a measure, as the current government in its new decision about a more extensive exploration and production seems fully assured of majority support.

There is here a very important lesson for all climate change activists. They need, as I have many times insisted, to think much more seriously about the trade off between economic growth and climate change control. While in their models, the advantages of controlling climate change are incontrovertible, when they come to policies that need to be implemented, from taxes on airplane fuel, to taxes on gas (which provoked the Gilets Jaunes movement in France), they face popular resistance. The popular resistance is due to the unwillingness of almost anyone in the world to accept lower income. Climate change activists might talk in their conferences about people “thriving” on lower incomes, but when offered that alternative, even the citizens of the richest country in the world decline it.

If we want to really confront –as opposed to just talking—climate change we should first, be rid of extreme hypocrisy (as this one), and second, design policies that would be acceptable to the population. And we should start with rich countries, not only because historically they have been the most important contributors to climate change (through historical accumulation of emissions) but because they should be able to bear costs more easily than the rest. 

Friday, July 9, 2021

On luxury

 Is luxury consumption  bad? Should it be limited? At the time of high inequality, and especially inequality driven by the very top of income distribution (1 percent and higher) these are legitimate questions. The answer however is not easy.

Keynes in his famous opening of The Economic Consequences of the Peace speaks  of a social compact (although he does not use the term) that, according to him, existed between the rich and the rest before World War I where the rich were “allowed” to amass huge wealth but on the understanding that they would use it for investments (and thus further growth), not for ostentatious consumption.

The same idea is present in Max Weber’s description of Protestantism: accumulation of wealth and austere living: “Wealth is …bad ethically only in so far as it is a temptation to idleness and sinful enjoyment of life, and its acquisition is bad only when it is with the purpose of later living merrily and  without care” (The protestant ethic and the spirit of capitalism).

Recently I listened to Pierre Rosenvallon proposing the reintroduction of sumptuary laws that would not allow certain types of consumption. (This is clearly impossible to implement today, but the idea that one needs to do something with excessive wealth underlines Rosenvallon’s concern).

In the last week’s Wall Street Journal, Barton Swaim, reviewing a new book on John Adams notes Adams’s concern with American elite’s accumulation of wealth and luxury consumption that might lead to the vices of indolence and decadence.

Display of wealth is, by all these authors, and probably thousands more, criticized for two separate reasons:  a social one, viz. that it provokes resentment and envy among those who cannot afford it, and a moral one, that it leads to personal decadence. The two critiques are different: the first is an instrumental critique: it is not a critique of the activity as such but of its social consequences.  It critiques a symptom of an economic system that allows for such behavior, but does not deal with the appropriateness or justice of the system itself. The second critique is concerned with the effects of wealth on the people themselves who enjoy it, and perhaps secondarily on a society where the upper class becomes increasingly decadent, and separate from the rest.

Both are, in some ways, superficial critiques. They are critiques of consumption, but they do not go deeper, into the origin of wealth, that is into the production process. They critique the use of wealth, not its origin. Consider the moral effect on the wealthy individuals first. The vice that concerns John Adams is very different from the vice “diagnosed” by Mandeville. The latter is the vice of greed; it is “in-built” in the acquisition of wealth, in activities that people engage in order to become rich. It has nothing to do with how money is spent. Mandeville’s is therefore a much more fundamental critique: the vice remains regardless of the use to which one’s wealth is put. One can live a very modest life, use all of his money to invest or make charitable contributions but the vice of acquisition remains.

A Marxist would also be indifferent to excessive wealth and its use by arguing that the problem does not lie in a person who has become rich, but in the system that has allowed for such wealth to be made through exploitation. Leszek Kolakowski in Main Currents of Marxism summarizes it very nicely: ‘Bourgeois consumption in the face of workers’ poverty is a moral issue, not an economic one; the distribution, once and for all, of rich men’s wealth among the poor world not solve anything or bring about any real change.” This is very different from Keynes’s view where apparent social equality is achieved through an act of concealment: becoming rich is acceptable, but not the use of riches for luxury.

For Marx (as for Mandeville—even if for different reason), the way wealth is used is irrelevant. It might even be thought that, from the purely political point of view, extravagant ostentatious consumption is desirable because it highlights the social divide and undermines the system that creates it. Marie Antoinette by her famous (if probably apocryphal) comment on how the poor should deal with their lack of bread has probably contributed to undermining the position of the monarchy. The estrangement of the elite from the majority of the people as shown in similar comments and outlandish spending patterns may be seen as desirable by those in favor of systemic change. “Spend, spend as much as possible and with as much visibility as possible, so that your reign can be as short as possible” may be the motto of partisans of change.

What should today’s position with respect to luxury consumption be? Confiscatory taxation of excessive wealth is one possibility. Some people have argued for the wealth tax of 100% on all wealth above a billion of US dollars. It is technically quite easy to do, but political feasibility of such a proposal is close to zero.

Another possibility is the moral suasion, or ideological pressure that Keynes had in mind: the rich would feel uncomfortable, and would be looked at unfavorably by the other rich, if they spent too lavishly. That seems the most unlikely way to limit luxury consumption today, at the time when the media (and the public that reads such media) crave to read reports on extravagance. There are no moral or religious constraints that are likely to work. 

Finally, should consumption taxes on extra luxury goods be increased? That seems to me a very attractive option. The pattern of consumption of the very rich is quite well known. If private jets used by Epstein, or enormous brownstone purchased by him in New York, were taxed at exorbitant rates, even Jeffrey Epstein or similar billionaires would at some point be able to purchase fewer of them. The approach is consistent with differentiation of retail taxes (VAT tax rates) according to the type commodity: food is often not taxed at all, hotel or restaurant consumption is taxed high. Cars, for example, at the time when they were considered much more of a luxury item than today, used to be taxed quite heavily. Exorbitant taxes on luxury items will not bring much money to the Treasury. But their objective is not that they should—their objective is either to soak up as many resources from the super wealthy as possible, or to make them refrain from luxury consumption. That, I think, they can achieve.

Unless of course you wish is for the whole system to come crashing down, in which case you should cheer up Bezos and Musk and Kardashians to spend even more extravagantly. And document it on the social media for all to see.

 

 

 

Sunday, July 4, 2021

Towards global progressiveness

 Is it possible to define a series of approaches to global problems for the group of people who may be called “global progressives” (GPs)? Before I try to answer this question, I need to define the terms. “Progressive”  is meant to include all those who identify with broad left-wing movements, from Marxists to social democrats and even to the fringes of liberals (in the American sense of the term). “Global” is supposed to cover issues that can, at least in principle, be either acted upon or actively pursued on a global, as opposed to national, level. “Approach” is supposed to mean activities that are between policies (since global policies are extremely rare, and most policy-making is made at the national or local level), and the rather vague “values” or “opinions.”  “Approach” therefore stands between “policies” and “values” and has an activist component attached to it, which moves individuals and groups beyond mere expressions of what they believe or hold dear. But it is less than policy simply because the world has currently very few such tools at the global level.

What are the areas were such global approaches can be defined? The seven areas listed here move from the final objective which is higher income (and the attendant greater “happiness”) to the means to realize it, which concern capital, labor, technology, and taxes.

Economic growth. It is true by definition that economic growth is an indispensable condition for the reduction of global poverty. Reduction and ultimately elimination of global poverty (at whatever modest poverty line one can envisage today), is probably the most important task in the 21st century. Nobody in the world should live in misery. In order for this to become reality, GPs must be in favor of economic growth, and especially so in poor and middle-income countries. Higher economic growth in poor and middle-income countries would also reduce global inequality which may be considered as the global goal No. 2 for this century. Reduction of material inequality between individuals in the world is a requirement for the existence of a global (however weak) community of interests and values because such community cannot be based on vastly different levels of material welfare.

Climate change. The focus on global poverty elimination and global inequality reduction must be considered within the framework where climate change is an important challenge to many people. While some trade-off between global growth and the means to combat climate change may be allowed that trade-off must acknowledge that economic growth is the most important global objective. Global growth and control of climate change are not lexicographically ordered (with growth coming first) because that would exclude any trade-off between the two. But the trade-off must be such as to prioritize growth-compatible methods of control of climate change: “green growth” brought about by suitable (and subsidized) technological progress, and change in consumption patterns brought about by subsidies and taxes. All of these tools however are national, and GPs cannot affect them much at the global level. However, since the issue of climate change has acquired worldwide importance and is subject of international cooperation at the level of nation-states, a unified approach by GPs may make a difference.

It is obvious from the above that GPs should not be in favor of degrowth because it would negatively affect elimination of global poverty and reduction of global inequality.  

International aid. GPs should be in favor of rich countries finally achieving their pledge (made more than half-century ago) of transferring 0.7% of their GDPs in the form of aid to poor countries. This objective, however modest, has recently receded in importance and public concern because of sluggish growth in rich countries and the rise of Asian middle-income countries. But the objective is still crucial given vast inequalities that exist between countries and peoples.

Global aid should not be confused with purely commercial transaction (like foreign direct investments) and loans by national or international development agencies that are only in part aid (to the extent that the interest rate charged on loans is below the market rate).  

Migration. GPs must be in favor of free movement of people. This derives from the first principles of equal opportunity which, for those who think globally, must be equal opportunity at any point in the world, and not solely within one’s own country. It derives also from the support of globalization which includes free movement of capital, goods, services and technology. There is no reason why labor should be  treated differently. But that principle must be, within each individual country, moderated (and in some cases modified) to be compatible with what is politically feasible. While various compromises and temporary solutions are possible, one should not forget that it must be done with the principle of free movement of people always in the background and not being forgotten.  

Technology. GPs must in favor of facilitating transfer of technology from rich to poor countries. It is one of the principal ways in which growth of poor countries can be accelerated.  Recent exaggerated concerns about the protection of intellectual property rights are not only antithetical to the achievement of global poverty eradication but are at variance with rich countries’ own stated objectives, repeated over many years, of being in favor of easing transfer of technology to poorer countries.

Taxation. International taxation (such as tax on financial transactions,  or more ambitiously, global tax on the most polluting activities) should lead to the creation of a global tax authority. It is unrealistic that such global tax authority will, within foreseeable future, come close to national tax authorities’ power, but any move in that direction is welcome. The global tax authority with its own source of funds, derived from global taxes, could be used for green energy subsidies across countries, help to migrants, and financial support under extraordinary conditions such as pandemics.

Equality between countries. This is an important principle that, like in federal countries’ constitutions, must be balanced with the approach mentioned above regarding global poverty elimination which treats all persons in the world (not countries) as equal. But treatment of all countries equally implies non-interference in their internal affairs so long as they do not have implications beyond their borders, and preference for the organizations like the United Nations that are, at least in principle, built on the assumption of equality of nations. It also means that international institutions like the World Bank and the International Monetary Fund which are built on the principle of richer countries having greater rights should be forced to move toward greater country-equality. (The same applies to the World Trade Organization which is in fact biased in favor of rich countries.)  

What cannot be dealt with globally? The issues that can be addressed only at the national level are those that belong to inequalities of opportunity and outcome. It is already mentioned that global equality of opportunity can be helped by being pro-growth, pro-migration, pro-technology transfer, and pro-aid. But most of inequality of opportunity is nationally-based and can only be dealt with at that level. This includes inequalities linked to one’s background (wealth of parents), gender, race, caste, or sexual orientation. Inequalities of outcome (in income and wealth) can also be remedied mostly nationally through higher taxation of inheritance, more accessible education, higher income taxes for the rich, deconcentration of financial wealth (through worker shareholding) etc. But these objectives, however laudable, cannot be currently addressed at the global level.

While the just discussed group of objectives cannot be dealt globally because the means to do so are national, another group of objectives cannot be included because a global consensus on them, even among the global progressives, is impossible to reach. They are philosophical and political issues such as alienation of labor, hyper-commodification of life, and political systems of different countries. Thus they have to be left aside.   

Saturday, July 3, 2021

NEP after Deng

 In the first chapter of Volume 3 of Main Currents of Marxism Leszek Kolakowski discusses practical and theoretical disagreements regarding the development of the USSR after the October Revolution and the Civil War. Although Kolakowski’s main focus is, as implied by the title of his work, on ideology, economics –at least in that period—played an important role. Kolakowski goes over the well-trodden ground of War Communism (1918-21), NEP (1921-28), and collectivization and planning (1928--…).  There is not much new in his discussion of the conflict between Preobrazhensky and Trotsky on the one side (arguing for collectivization of land and fast industrialization) and, on the other side, Stalin (for a while) and Bukharin and Rykov, favoring  continuation of NEP. What is original is, in my opinion, Kolakowski’s excessive determinism: he thinks that the differences between the two camps, however seemingly great, eventually had to converge to the same point (totalitarian party control) and that fact made collectivization and integral planning the only realistic option: “even the famous debate on industrialization…does not deserve to be presented as a clash between two opposite principles” (Kolakowski, p. 25).

Kolakowski’s somewhat overly deterministic view that the battle was bound to end with the victory of the “collectivizers”  is based on the assumption that NEP can never be seriously pursued by a communist party as it would thereby cede some of its economic, and possibly political, power to peasants. NEP was, according to Kolakowski, against both Marxist and Bolshevik principles because it meant the restoration of capitalism in the countryside, replacement of a proletarian government by the one supportive of peasantry, which was in the purest Marxist tradition always regarded (especially when possessing some land) with a fair dose of skepticism if not sheer hostility. “How the ‘proletariat’, i.e. the Bolshevik party, could maintain its dominant position if the state economy was at the mercy of the peasants; as the market developed, their position would become stronger, and they might in the end threaten the ‘proletarian dictatorship’” (Kolakowski, p.30). Or "the winding-up of NEP and the enforcement of collectivization were....dictated by the system and the interests of its only active element [the bureaucracy]" (ibid, p. 149).

There were, Kolakowski acknowledges, some –few-- political elements  favoring NEP: Lenin’s view of the need for a “worker-peasant government” and his insistence on keeping firmly in the camp of the revolution poor and middle-income peasants. The argument of the pro-NEP fraction was that industrialization could be achieved, not as Preobrazhensky and Trotsky believed, by “internal colonization” of peasants, but by expanding food production, releasing, thanks to higher agricultural productivity, rural labor, and then by the use that labor in industry (while having the wherewithal to pay for it thanks to cheaper and more abundant food).  The NEP model is Ricardian in its simplicity: reduction in the cost of food reduces the labor share in the industrial sector (in Ricardo, it was the labor share in capitalist production), increases the surplus, and that surplus can be used by the state to invest and accelerate development (in Ricardo,  the surplus is used by capitalists to do the same thing).

NEP need not necessarily produce lower growth rates and slower industrialization (at least over the medium-term) than collectivization and forced requisition of grain from peasants. The latter, as indeed happened, may rather reduce food production (this is why millions perished of famine) and thus make maintenance of large number of industrial workers more difficult than under the NEP.

            As I mentioned, this type of argument is basically dismissed by Kolakowski because of his view that ideologically and in terms of political power, Stalinist industrialization was the only course of action compatible with what Bolsheviks stood for. Kolakowski’s view though is less compelling now than it was in 1975-76 when he wrote Main currents…. The reasons is that we lacked then an example of a NEP in practice: the Soviet NEP was short-lived and one could only speculate what might have happened had it been prosecuted for several decades. (It is true that Kolakowski could have also used the example of his native Poland to observe that privately-owned agriculture did not spell the doom of communism—but perhaps he thought that the maintenance of Polish communism depended on foreign forces, namely the Soviet Union, and that this example therefore could not be carried over to the USSR.)

But with China’s “household responsibility system”, we have a strong empirical counterfactual. China’s “responsibility system” involved breaking up communal land ownership and transferring it to individual families in an egalitarian fashion. This was also the starting point of NEP: the land ownership in the Soviet Union after spontaneous peasant occupations, flight of landlords, and formal nationalization in 1918 was widespread. While the land was not as equally distributed as in China in 1978-80, the percentage of large land-owners was small. Even according to Stalin, middle and poor peasants produced ¾ of marketable grain surplus. It is true that the share of their production that was for sale was less than among state farms, and among the kulaks (which was one of Stalin’s justifications for the collectivization), but surely that share was not cast in stone and would have increased with better incentives and modernized agriculture. * And this indeed happened in China.

Agricultural production in China increased, on average, by 6% in the first decade after the responsibility system was introduced. Between 1981 and 1996, mean rural per capita income increased from 683 (inflation-adjusted) yuans to 2101, that is, it grew by an average annual rate of almost 8 percent. The increases, as the graph below shows, continued afterwards. Chinese rural growth released between 50 and 100 million workers who found jobs in TVEs (Township and Village Enterprises) that mushroomed in the 1980 and 1990s, and led to the increase in industrial production. Finally, the increased output and savings enabled, as is now too well  known, a spectacular increase in Chinese industrial production.

 

Real per capita income in rural areas: China 1981-2012


            All of these positive effects continued in China for more than four decades. But if we limit our attention to just the first fifteen years (given that, this was –as we know now—the period which USSR had to create an industrial base  before being attacked by the Nazis), Chinese results are no less spectacular. There is no reason to think they would not have been replicated in the USSR, where indeed the short NEP period revived agriculture, commerce  and light industry. According to Maddison’s most recent data, real Soviet GDP per capita increased from $838 in 1921 to $2184 in 1928. While it would be wrong to ascribe all that growth to NEP (since a lot of it had simply to do with the end of the Civil War and reintroduction of some peacetime normalcy) there is little doubt that the effects of NEP were significant.

The Chinese experience shows not only that the economic effects of agricultural liberalization combined with a more restricted role of the state elsewhere would have been positive: after all, this was clear even from the limited experience of NEP in the USSR. They question one of the key assumptions made by Kolakowski, namely that NEP was incompatible with the continued one-party rule by the Communist party. The conclusions made by Kolakowski in 1976 regarding the fundamental incompatibility between NEP and one-party rule, and consequently, regarding an almost preordained abandonment of NEP in favor of a fully planned system and socialized agriculture, need to be revised. 

“Seek truth from facts”.

 

Note: * Stalin believed in a form of technological determinism: increasing returns to scale in agriculture principally because of ability to apply better technology.  

 

Tuesday, June 1, 2021

How China escaped, and Eastern Europe was felled by, the Volcker shock

 In an excellent book “How China Escaped Shock Therapy” at whose launch I was one of the discussants (together with Jamie Galbraith and Bin Wong) Isabella Weber discusses, among other things, how China escaped shock therapy and the Big Bang, and created, or stumbled upon, its own way to economic growth.

Weber mentions only in passing that China also escaped another possible calamity: the debt trap. That threat loomed around 1978 when Hua Guofeng wanted to relaunch the economy by using the East European approach to economic growth. Weber writes about the Chinese economic delegations that went to Hungary and Yugoslavia in 1988 to discuss the experience of reforms in these two countries; they came back with a fairly negative assessment, based on anemic growth performance and high inflation in these countries. But, I surmise, they might have also come back with a cautionary tale of not falling into the debt trap.

Thus it is worth surveying more closely how Yugoslavia, Romania, Poland, and Hungary, all independently engaged in the 1970s, after the oil shock and when the petro-dollars were plentiful, into large-scale borrowing from both public and private sources in the West. The borrowing responded to the desire to accelerate growth, the process that also motivated economic reforms in Yugoslavia in 1965, Hungary in 1968, and change of government in Poland in 1970 after the Gdansk riots. The idea the reformers had in mind was to borrow from the West, use the funds to build either import-substitution industries (as was indeed done in most of the world those days), or hard-currency-earning export-oriented production. In either case, they hoped, borrowings would pay  for itself. Countries would either save money they were spending on hard-currency imports by producing the “stuff” at home, or they would became exporters to the West. (Poland had its program under Gierek most clearly defined.)

In addition, borrowing was politically preferable to trying to lure foreign (Western) investors. When you borrow, you obviously retain full control over the use of such money; one can choose to fulfill other objectives like to help development of poorer regions, to garner political support, or even to use the funds for consumption. With foreign investors, one is limited to accept what they like.

That logic led, as is well known, all socialist countries into impasse. Their investments were inefficient, new companies became a burden. (There is a very nice book on the most wasteful Yugoslav investments of the period, published in 1990, that I read then and still keep on my shelf. It is called, in English translation, “Among the ruins of wasted investments” by Ratko Bošković). Thus, the rate of return on the money borrowed was lower than the rate of interest countries were paying on their Western loans. It is not impossible, I think, that the rate of return might have even been negative. In any case, it means that all socialist countries that went on a borrowing spree in the seventies, suddenly had, when the US and world interest rates increased following the Volcker shock, to transfer significant percentage of their GDP abroad.

(Volcker, it could be argued, thus ended socialism in these countries. Of course, this is a somewhat facetious comment—because what ended socialism was, among other things, that investments were inefficient. The Volcker shock just made that plain.)

The inability to service debt manifested itself in different, but related ways. In Yugoslavia, it led to massive borrowing from the IMF. The IMF loan to Yugoslavia in 1981 was the largest loan that the IMF had even given by that point in time. This, to a country of 20 million people! But Yugoslavia was strategically important for the West. (One needs to remember that the loan came at the height of the Cold War tensions, about a year after the invasion of Afghanistan which made the strategic importance of Yugoslavia even greater. The West always thought that the Soviets are praying on Yugoslavia to bring it back into the fold.) Although the West was not willing to forgive the previous commercial loans, it was willing to help (or “help”) by opening the IMF spigots.Yugoslavia never succeeded to get out of the “debt trap”, and by mid-1980s, hyperinflation and high youth unemployment, together with the unsolvable Kosovo issue, moved the attention of the political elites toward nationalism. But there is, I think, little doubt that the economic catastrophe of the 1980s paved the way to it.

In Poland, the balance-of-payment crisis led to the attempts to impose austerity, which under conditions of perennially restless working class, created “Solidarity”, and brought in yet another change in government. (Gierek fell on the same test that brought him to power in 1970.) Poland imposed martial law in December 1981 and defaulted to the Paris Club. Although Poland was by 1986 member of the IMF and the World Bank it received no support from either of them. Technically, absence of lending was explained by its default status—but of course the true reason was political. The US was not going to bail out a communist regime that had just imposed a state of emergency, and banned a ten-million strong anti-communist union. In 1988, Poland tried another austerity program (“The price and income operation”) which was not very different from the Balcerowicz program a year later. But it foundered on the workers’ unwillingness to accept wage cuts. The Round Table talks were supposed to solve the impasse, and they did  by (rather unexpectedly) replacing communist party in the government, opening the way to the rescheduling of the Polish debt, and to the implementation of the Balcerowicz program.  

  In Romania, the debt crisis led to Ceausescu deciding to go on a crash course of foreign debt repayment—in order to forever be rid of foreign economic meddling. He imposed incredibly austere measures, including draconian cuts in electricity, reduction in the availability of food etc. In 1989, Ceausescu cut a lonely figure in Europe and was overthrown in a coup.  

Hungary limped along with low growth and permanent balance of payment issues, without ever being in default, or even rescheduling its debt. (Some Hungarians used to complain that, after 1989, Poland got some 65% of its debt forgiven, while Hungary had to pay back everything). The change of regime ensued in Hungary as well.

China, however, avoided all of this, perhaps by sheer luck of being a late reformer and seeing where borrowing without a change in the structure of economic governance led. It escaped the Big Bang too, having come, as Weber details, three times within the hair’s breath to implementing it. Unlike the crackdown in Poland which left Jaruzelski in a limbo, the 1989 Tiananmen violence ironically shifted the energies away from political change into economic development. When Deng made his famous “Southern tour” in 1992 (which he made as, technically, a private citizen) China was ready to embrace the other way: to attract foreign and diaspora investments, to acquire foreign technology, and to emulate the East Asian “miracle” economies.

The story told here is important for two reasons. First, in understanding the sources of Chinese success that were not planned, but the product of a number of serendipitous developments. Second, to make us understand that the main impetus behind the fall of communist regimes was economic. Western political scientists  love to write about “freedom” and “the spirit of 1989” etc. They often do not know much about communist economics, nor do they have a grasp about how inefficient economies, and a desire to reform them using Western credits, created a powerful combustion that, rather quickly (within less than a decade), broke the back of communism.     

Wednesday, May 19, 2021

Notes on global income inequality: A non-technical summary

 1. What is global inequality?

Global inequality is inequality between all citizens of the world. It treats the world as a single unit (as we normally treat individual countries). The data used to calculate global inequality come from the nationally-representative household income surveys that are increasingly (when available) corrected for the underestimation of top incomes using fiscal data. It also adjusts for the differences in price levels between countries by expressing all incomes in international (or PPP) dollars that in principle have the same purchasing power anywhere in the world. Income is defined as annual after-tax and after-transfers income per capita (where total household income is divided equally among household members).

2. How accurate are such estimates?

The estimates of global income inequality are probably biased downward for two reasons. Some of the poorest countries (many of them in Africa) do not field regular household surveys, or are engaged in civil or international wars, and thus are not included in the calculations. However, the available data cover more than 90% of world population and more than  95% of world income.

The richest people tend often not to participate in surveys or underestimate their fiscal income in order to minimize taxes they pay. Thus both the top and the bottom of global income distribution are underestimated. The  underestimation of the top is thought to be slightly increasing, but not to the extent to affect the long-term change in the level of global inequality (discussed next).

3. Long-term evolution of global inequality.

The long-term evolution in global inequality (to the extent that we can estimate things well in the 19th century) can usefully be divided into three periods.

The first period was the one of steady increase in inequality from the 1820s (when the first estimates are made) until 1914, and then of a somewhat slower, and irregular, increase up to 1950. The increase was driven by the “take-off” in economic growth and thus incomes of Western European countries, followed by North America and Japan. Meanwhile, Indian and African incomes stagnated, and China’s income went down. This created massive divergence and drove global inequality up. In addition, within-national inequalities in many countries (e.g. UK, US, Germany, Japan) increased during the Industrial Revolution.

Therefore, between the Napoleonic wars and World War I, we can with some confidence say that global inequality was pushed up by both divergence in mean country incomes and increasing within-national inequalities. The latter mostly reflected changes in functional income distribution, that is in class distribution between landowners, capitalists and workers. The between-country developments however dominated then, and continue today to play greater role in the evolution of global inequality than within-country developments.

The second period was between 1945 and 1980. Global inequality was at its all- time peak, as the world became divided in three very distinct (by their income levels) worlds. The rich countries were indeed the “cities” of the world and large Third World areas were “the countryside”. Both India and China, just maintained their relative income positions worldwide (that is, their mean income compared to the world mean was constant).

The third period commenced with fast growth of China that was followed by Vietnam, Thailand etc., and then by India. This, for the first time since the early 19th century, reversed the direction of change, and began to drive global inequality down. China was the primary engine, but around 2000, India began to play an important role. Currently, global inequality is about 63 Gini points, which is some 7 Gini points (or 10%) less than in 1980s. The level however is still extremely high: the world is about as unequal as South Africa, which is the most unequal country in the world. For comparison, US Gini (of after-tax) income is just over 40, and Brazil’s over 50 Gini points.

4. Several implications of global inequality

China. As China’s income (GDP per capita) is now slightly above the world mean, it no longer contributes to the reduction in global inequality. Moreover, China’s  faster growth (compared to the rest of the world) will begin to contribute positively to global inequality, at first modestly, and afterwards more strongly. Thus, we should not reflexively consider China any longer as an engine of global inequality reduction.

China itself is of course very unequal despite the fact that inequality is not on the rise since approximately 2010.  China’s inequality level exceeds that of the United States, and it has one of the highest urban-rural gaps in the world: the average income of China’s urban population is equal to that of Hungary, while the average income level in rural areas is equal to Vietnam’s.

India and Africa. This makes the roles of India and Africa more important. The recent disastrous developments in India (with two successive years of likely high negative growth) as well as the long-standing problem of lack of convergence of African countries, opens up a real possibility that global inequality may cease its decrease, and might increase again.

This is even more likely as Africa is the only region of the world with projected high population growth. A back-of-the-envelope calculation that would require Africa to grow at about 5% per capita annually, implies a growth rate of 7% or even 8% for the economy as a whole. For comparison, in very “good” years before the Financial Crisis, African (population-weighted) growth was around 3-3.5% per capita, and more recently, before the covid crisis it was 1.5% per capita. Absence of sufficient African convergence will likely increase migrant flows, especially towards Europe. Thus, the European migration crisis should be seen as a secular, not at all as a temporary, issue.  

Global inequality in historical perspective. The income changes described above bring the distribution of relative incomes within Eurasia at the same point where it was around approximately 1500. At that time, incomes in the richer parts of China were on par with incomes in richer parts of Europe (Italian city states, the Netherlands). Prior to that, it is likely that the Yangtze valley and coastal areas of China had even slightly higher incomes than Europe.  The level of incomes at that time was, at best, 2 to 3 times the subsistence, so the differences in absolute incomes were small. Nevertheless, this fact is important in order to understand better that the period from approximately 1800 to 2000, with large income gaps between European (and North American) areas compared to China and India, was a historical anomaly.

Russia. The likely future equalization of incomes between Europe and East Asia (China) highlights the potential problem of lower mean incomes in the vast and sparsely-populated land mass of Russia and Central Asia.

Global positional reshuffling. As Asian countries improve their relative positions, an increasing number of Asian countries’ citizens (not only Chinese and Indians, but also citizens of Thailand, Indonesia, Vietnam etc.) will populate the top quintile of the global income distribution. This is a development of historical importance as the top parts of the global income distribution were, in the past two centuries, populated mostly by Western European, North American and Japanese citizens. The current development is the most dramatic reshuffle in (notional) individuals’ relative income positions since the Industrial Revolution.

The importance of such development cannot be overemphasized. Even if gaps between the rich, the middle class, and the poor in advanced economies do not increase, these three national groups will belong to different parts of the global income distribution. Western distributions, reflected in global income distribution, may increasingly resemble Latin American distributions. The income gaps may not be as large, but relative global positions of  domestic social classes may be substantially different.

Rich countries’ middle class. The big losers in this reshuffle will be again the middle (and lower) classes of the rich countries. This is not shown only in the so-called “elephant graph” that summarized the lack of growth among the rich countries’ middle classes between 1988 and 2008 (or 2014), but also in what was just mentioned regarding middle classes’ relative global positioning. A person in (say) Italy whose relative global position drops from the 85th to the 70th global percentile may not at first feel very much of a change, if his domestic position vis-à-vis the top stays the same. Still he or she will gradually realize that their access to some global and often positional goods (travel, type of housing, electric cars and hi-tech gadgets) becomes more difficult. As the world gets more globalized, such loss of status will be more keenly felt. Even the most attractive locations may be increasingly purchased by richer foreigners. What seems today to be a fringe phenomenon of “Venecization” is just a reflection of changing relative economic power between the countries and globalization of the world.

Europe. These developments, both through greater migration from Africa to Europe, and through the loss of relative income position of Europe compared to Asia, will influence European populations at several levels. That effect, due to the geographically different position of North America, may not be as dramatic there.

5. Meaning of global inequality

It is not immediately obvious what is the meaning of global inequality nor why lower global inequality would be advantageous. Two reasons come to mind though: first, lower between-country inequality is supposed to moderate labor flows, and second, it makes global inequality of opportunity between individuals less. A very high level of global inequality (as currently) means that life chances are heavily skewed in favor of people born in rich countries (after adjusting for education level and effort). This is not different from having high inequality of opportunity within a nation—except that the latter is politically considered problematic and there are instruments, notably through government policy, that are supposed to correct it. But on the global level, short of global government, there is no political institution that can handle inequality of opportunity.

Nostalgia. The fact that many people in America and to lesser extent in Western Europe often seem to look longingly toward the 1950s and 1960s makes sense from the point of view of their having then had much higher incomes than people in Asia and Africa. Recently, a (left-wing) author rued the times when “even a working-class Englishman could stand strong and tall” in the rest of the world. But what is not explicitly recognized is that that period of relatively high incomes of the West was, by definition, the period of relatively low incomes in the Third World, and thus the period with historically highest level of global inequality. These relative positions are unlikely to be reproduced in near future—nor would it be desirable, from the global perspective, if they were.