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 even 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.     

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 19^th 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 19^th 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 85^th to the 70^th 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. 

 

A global ideology that was neither

 When an author writes a historical-political book whose objective is to privilege a certain point of view or a certain explanation, to show how it might have shaped events, he or she naturally tends to present the argument in as sharp a contrast (with other explanations) as possible. This was the idea behind Julia Lovell book on global Maoism. Maoism was, Lovell argues, an ideology that had a global reach and influenced many events between 1949 and approximately 1990. But the danger such sweeping hypotheses face is that by claiming too much for them, the author loses his/her credibility. Unfortunately,  this is the case here, in the otherwise very well researched and engagingly written book by  Lovell, professor of Chinese history and literature at the University of London.

In order to impress the reader with the strength of her hypothesis, Lovell mixes several layers of analysis. First, she conflates the role and influence of China as a regional power with that of Maoism as an ideology. Thus, the two most important international events where China played a role were the Korean war, when Chinese intervention saved the North Korean regime, and the Vietnam war when China provided substantial (even if inferior to Soviet) help in logistics and matériel. Both of these events had much more to do with China as a regional  communist power, than with Maoism as an ideology. And obviously, nether Vietnam nor North Korea can be considered to have been ideologically influenced by Mao—unless one takes the grotesque manifestations of dynastic adulation in North Korea as being an imitation of similar kowtowing to Mao during the Cultural Revolution. But Kim and his offspring did not need China to teach them how to create a cult of personality; nor can a cult of personality be called an ideology. For Vietnam, the case is very clear-cut: Maoism had almost nothing to do with the Vietnamese Communist Party.

The second conflation is between Mao’s role as the founder of modern China and his role of a communist ideologue. In the first role, he was surely one of the great figures of the 20^th century and probably of Chinese history. His ability to reflect in his own person deeply Chinese characteristics and communist Western modernism, to appeal to the Chinese peasantry, to lead successful military campaigns all show a brilliant political leader. But as a theoretician of communism, his contribution was very slender and the “Mao Zedong thought”, rather vacuous. It  did not appeal to many outside China. This is true despite Mao’s innovation in converting peasant masses to the idea  of communism, and moving the center of CPC's struggle from the conventionally-preferred industrialized Shanghai to Yunnan and much less developed parts of China. This  was an important tactical and political innovation, not a great ideological breakthrough in Marxism.

When it comes to global Maoism, Lovell has assembled an impressive list of Mao-inspired movements that cover four corners of the world: Naxalites in India, Communist Party in Nepal, Malayan insurgency, Communist Party of Indonesia (PKI), Pol Pot, and Sendero Luminoso. There is no doubt that they had relations with China (most left-wing movements had) and in some cases were financially and militarily supported by China. But that influence was not as deep as Lovell tends to present it. KPI was, at one moment, the second (or the third) largest communist party in the world. It had strong roots in Indonesia going back to anti-Dutch independence struggle which had nothing to do with Maoism. The Chinese who were members of KPI were so primarily because of Indonesian concerns, not because they were Chinese and admirers of Mao. Drawing the connection between China and PKI was (as Vincent Bevins argues in The Jakarta Method, reviewed here) a way for Suharto to justify the orgy of terror that he unleashed after the 1966 coup and to scapegoat the Chinese minority. Lovell all but agrees with that in her very powerful Indonesia chapter (probably the best of the book)—but because of the hypothesis on which the book is based the China connection gets a disproportionate attention.

Exaggerating Maoist influence leads Lovell to make rather implausible  claims. She believes that the struggle for influence among the left-wing and communist movements between Mao and the Soviet Union led the Soviets to ever higher and ultimately unsustainable military and economic commitments in Ethiopia, Angola and Afghanistan. That eventually brought the USSR down: “Although the Soviet Union would not collapse for another three decades [sic!], the fracture lines…caused by the row with China initiated the slow death of the Soviet bloc” (p. 147). This is, I think, wrong on many levels. The Soviet Union was helping anti-colonialist movements from the 1920s onward, and that help would not have been significantly less or very different even if China was in the Soviet corner. It would have surely given the Soviets more power (and that is why they tried to prevent the schism with China as much as they could) but in the Third World, USSR competed with the United States, not with China.

China’s financial contribution to Third World countries is, invariably, presented by Lovell is “enormous” or “huge” and then criticized for taking away from the needy and hungry Chinese masses. This leads us to an interesting issue: when Western countries are disbursing aid this is considered a valuable and worthy endeavor; they are often criticized for not doing enough. But when China is doing the same, this is apparently to be considered bad, not only because of its “nefarious” objectives but because it detracts from income that could be used locally. But should not the aid from somebody who is himself financially strained be considered even more worthy of praise?

Of course, nobody knows how important that aid was. Chinese historical data were probably destroyed, or have been eaten by mice, or perhaps never existed. But Lovell does not help her case by presenting numbers that are totally incomparable. She asks the readers to compare Zhou Enlai’s statement that in 1971 “China was throwing” (Lovell’s terms) 5% of its national budget on foreign aid with British international aid commitment of 0.7% of national income. Assuming that these numbers are correct, 5% of the national budget could be less that 0.7% of the national income is the national budget is less than 14% of national income (which is quite plausible). Thus throwing around the numbers that even technically are incomparable is meaningless.    

China indeed was not a big player in Third World politics; it was not even a member of the Non-Aligned Movement despite its presence  at the original meeting in Bandung. It was not a member of G77. It remained aloof. It boxed (to use a famous metaphor), throughout the Maoist period, below its weight. Mao’s histrionics and frequent infantile behavior (documented by Lovell), and robotic repetitions of slogans by Chinese officials alienated many serious revolutionaries (FLN, PLO, Turkish Communist Party). How could China even have much influence when during the years of the Cultural Revolution it withdrew all but one of its ambassadors around the world? That it played a role way below its potential can be inferred from the fact that, when it eventually began to project more coherent policies in the 1970s, it was easily voted back to the United Nations by the huge majority of Third World countries, and despite American opposition. One could, in effect, argue the very opposite of Lovell—namely that Maoism reduced the global role of China below the one that she could have played.

It is not surprising therefore that Maoism tended to attract mostly fringe movements. Some of them like Pol Pot in Cambodia (incidentally, supported by both China and the United States, like Holden Roberto’s—another fringe—movement in Angola) produced disaster and murder. Guzman’s Sendero Luminoso enjoyed popular appeal at first but then veered into plain terrorism. Mao’s ideology thus appealed to those on the left who were unhappy with stolid and bureaucratic Soviet communism, but were more often interested in theatrics and not in either reading or understanding Marxism. It is no surprise that it attracted such intellectual lightweights like Malcolm X and Shirley MacLaine. (Lovell’s chapter on Maoism in Western Europe and the US is by far the weakest of the book.)

If one were to define Maoism as a pragmatic application of Marxist principles to bring about a revolution to China, get rid of “landlordism” and feudal institutions, and liberate China from undue foreign influence, it was indeed a great success. But if one were to look at Maoism as an “exportable” ideology, it was a failure. Maoism in the world, as opposed to Maoism in China, could best be described as the ideology of a senescent classical left-wing movement that lost faith in working class revolutionary potential and hated bureaucratized socialism of the Soviet Union. But it produced almost nothing that is intellectually challenging or durable.

 

Capital gains: My reply to Alyssa Battistoni

In an excellent review of “Capitalism alone” Alyssa Battistoni very correctly summarizes the book and makes a number of very good points; I would certainly recommend to read her review. There are however three points on which Alyssa disagrees with the ideas presented in the book.

Only two capitalisms, what about the rest?

The first is the fact that the book deals with two capitalisms only, namely liberal capitalism exemplified by the United States and political capitalism where China is considered as the best example. The book does not discuss where in this particular framework would other countries, especially Latin America, some countries in Africa, and Russia, fit. Now my objective in the book was not to make a taxonomy of capitalism although I do start by drawing distinction between classical capitalism, social-democratic capitalism and meritocratic/liberal capitalism. When it comes to West European countries and the United States I think that they belong to the same species of liberal capitalism with some, but diminishing, differences. It seems that in Western Europe in the past thirty years the movement has been in the direction of the American type of capitalism. The proofs are not only increased inequalities in almost all OECD countries, but also lower marginal tax rates, reduced trade union density, and very high concentration of wealth ownership in Nordic countries. Further, even countries that used to be considered social-democratic like Israel and Sweden have registered high increases in inequality over the past thirty years, in percentage terms higher than those of the United States.

Why other parts of the world are not included in the discussion has to do with a very particular way in which I wanted to define and study political capitalism. My objective in  Chapter 3 was to give a genealogy of political capitalism, and by doing so to propose a general historical role of communism. I start with a  significant change in policy that occurred after the Russian Revolution, and was embodied in the so-called “Eastern Turn” in 1920 when, at the instigation of Lenin and  M N Roy the decision was made to broaden the anti-imperialist struggle so as to include not only the working class but national bourgeoisies in the colonized countries.

That was a big change which made anti-imperialist struggle an integral part of communist movement worldwide. I argue in the book that this put in front of the communist parties two goals: national independence and the destruction of feudal or quasi-feudal growth-retarding institutions. To achieve these two goals and then to create a domestic, autochthonous capitalism was the global historical role of communism which we can appreciate only now. Communist and other left-wing parties played in non-Western (and colonized) countries functionally the same role that domestic bourgeoisies played in the West. China, Vietnam, Tanzania, Algeria, Angola, Ethiopia, Singapore even Malaysia fit that pattern closely. India and Indonesia to some extent only although in both countries, the left-wing and communist organizations were strong (Indonesia had the second most numerous communist party in the world) and they pushed the revolution in the decidedly left-wing direction. In Indonesia that came to an end with the coup which led to the destruction of the PKI and the death of almost million people. But in India the left-wing and communist influence continued, was reflected in early nationalizations and planning, and without that influence it is very likely that Indian and British bourgeoisies might have come to an understanding which would have kept India in a "soft" colonized relationship. 

What I just said clearly shows that political capitalism has its roots in national liberation struggles conducted by left-wing parties. I did not think it useful to discuss other political capitalisms that exist today and whose roots are different. That of course includes Russia which in this reading of history takes a secondary role in the sense that the meaning of the Russian Revolution, as an event of global political significance, lies in that it launched colonized countries on their way to freedom and creation of a new capitalism. 

Since my objective was not simply to slap together and to study political capitalism and liberal capitalism regardless of their genealogy I did not  engage in the discussion of other political capitalist countries. Clearly if I wanted to do so I could have selected a number of them including in Europe; Russia, Belarus, Hungary, Serbia, Montenegro and Turkey would probably fit the ideal-typical view of a political capitalist system.

Multi-tiered citizenship

The second critique that Alyssa Battistoni makes is one that was made by a number of reviewers  and it relates to the proposed multi-tiered citizenship. As many readers know, I have proposed that foreign workers come to the rich countries only if they have jobs, that they can stay in those countries up to a certain number of years (say, five), and that they can stay in that particular job only, where indeed they would enjoy all the same conditions as domestic workers in terms of pay, advancement, protection from accident, health care etc. However they would not have an open path to citizenship and would be required to return to their countries of origin at the expiration of the agreed period. The critique of this approach is manifold including that it might create a sort of an underclass. Moreover, in Alyssa Battistoni’s opinion that particular “contortion” to placate right-wing anti-immigrant parties would not achieve anything because the people who are xenophobic or against migration would remain so regardless. 

However to understand my proposal it is wrong to simply focus at the very end point of that proposal without looking at how I came to it. I come to that proposal first by pointing out the incontrovertible fact that the free circulation of labor, like the free circulation of capital, must lead to an increase of global income and lower global poverty. It seems to me that this can be easily proven ad absurdum since if movement of labor internationally were not income-enhancing then we would also have to stop movement of labor within countries. In other words, if workers coming from Mexico to California are not good for the economy, then workers from California moving to New York must also not be good for the economy. This is obviously false: so free movement of labor worldwide must be overall economically good.

The lack of acceptance of migration among some people is due to the existence of what I have defined as the “citizenship rent”. Citizenship rent is the income gain that accrues to people who are born in rich countries compared to people who are born in poor countries even if their levels of education and effort are the same. This is very similar to the rent that, within the same nation, people born to richer families enjoy compared to identical people born in poor families. For many people in rich countries the increase of immigration means the dilution of the citizenship rent because they are afraid of losing easy access to some services (free health or education), they are afraid that their wages would be reduced, they are afraid that their unemployment benefit may be lower, and they are afraid of losing their jobs. Thus they resent migration—even if it is globally speaking beneficial--because they believe that migration might have negative impact on their own welfare. Other people resent migration for cultural and ethnic or religious reasons and that resentment is unrelated to economics. But it has to be taken into account.

I fear that the rejection of migration on these two grounds, economic and non-economic, might lead recipient countries (the European Union and the United States) to shut their doors; this may not be good for the world and probably would not be even economically good for the recipient countries themselves. How to avoid that outcome? I then come to the last point of the argument: is there a trade-off between the willingness to accept migrants and the number of political rights they are given. So my argument is to ask metaphorically people whether they would be willing to accept an additional migrant if that migrant is not given full array of rights that a citizen receives. If domestic people are willing to accept more migrants only if these migrants are given fewer rights and are obliged to return to their countries I thereby establish the negative correlation between the willingness to accept migrants and extent of their political rights. This is how I come to the idea of multi-tiered citizenship. It is an attempt to save migration and all the positives that come with it.

I fully agree and admit that this multi-tiered citizenship should be discussed and criticized, and possibly improved. But I think it is not fair to take the end point of the discussion and focus only on it as if all the previous points had not been made. It would be better  to have discussed each (or at least some) of the points and establish whether they seem reasonable, and whether my recommendations follow from them or not.

I think that the idea should also be considered in the context of the current departure from the traditional view of citizenship where historically citizens were  “grounded” in their nation-states. By “grounding” I mean that citizens normally lived in their country of citizenship, they worked there, and they made their income from the work or investment in that country. But nowadays an increasing number of people not only live outside their countries of citizenship but also receive income which is earned outside their countries of citizenship. For example, an American living in France and receiving social security benefits from the United States might have this benefit being paid out of taxes paid by an American company investing  in China. Income is thus created in China, delivered and consumed in France; it just transits through the United States. This shows citizenship to be an “ideal” commodity, a fictitious commodity, a piece of paper. If the standard “grounded” citizenship is mostly dead, and it is now just a piece of paper which gives the right to a number of benefits, this reinforces my argument that such a fictitious commodity can also be converted into a commodity-light which yields fewer benefits; in other words, it can easily accommodate several layers of citizenship.

This last argument is important because some people like Robert Kuttner in his review of “Capitalism, Alone” in The New York Review of Books take me to task for not understanding what citizenship really means. They have in my opinion an old-fashioned view of citizens sharing some ineffable bonds with each other. But that bond is getting weakened by the day and it now consists of financial advantages to which citizenship gives rise. A very good example of how strong that bond is was provided during the early stages of Covid-19 when many Americans scrambled to get a second citizenship so that they would be able to travel across the world at the time when American passports were not accepted by many European countries. If their bond was so strong, as Kuttner implies, they would have been less eager to replace American passport with another one, and thus not to share their fate with the rest of their co-citizens.

Capitalism and climate change

The third critique that Alyssa Battistoni makes is in my opinion the easiest to answer. She criticizes the absence of discussion of climate change in “Capitalism, Alone”, calling such absence “irresponsible”. This is because development of capitalism is hitting the planetary limits and might lead to substantial catastrophes through the change in climate and loss of livelihood for many people, especially in Africa. I find this critique relatively easy to answer because it is based on a misunderstanding or even sloppy thinking. What is responsible for climate change is economic growth, not capitalism as such. Economic growth in turn comes from our desire, in poor and rich countries alike, among poor and rich people alike, to lead better lives and to have more goods and services. It is the production and consumption of these goods and services that is responsible for climate change. So if one wants to stop the climate change one needs to reduce the production of goods and services that are CO2 emission-intensive. But doing so through a combination of taxes and subsidies does in no way change capitalism.

No partisan of climate change, however radical, whether it be Alexandria Ocasio-Cortez, Bernie Sanders, or Greta Thunberg has suggested that large oil companies be nationalized, or that many of the companies responsible for emissions be run by worker councils; they have not suggested that profits of “bad” companies be confiscated. All such movements would indeed spell the end of capitalism in at least some sectors. Yet such ideas are never mentioned. No partisan of struggle against climate change is ever advocating policies that would effectively stop capitalism even in one small part of the economy. What they are advocating is a specific combination of taxes and subsidies, discouragement of consumption, carbon permits, and moral suasion (or moral shaming) which would result in the reduction of emissions.

But whether electricity or oil companies or meat producers or a person using air conditioning are working within one set of incentives, where the products that are responsible for climate change are cheap or expensive, they are still working within the capitalist framework. The company is still privately owned, the objective of the company is still maximization of profit, the objective of individuals is still maximization of wealth. It is just taking place under a different structure of prices. Differently structured prices may, one hopes, curb climate change but they have really nothing to do with eliminating capitalism. Since my book is about capitalism, I have very little to say about proposals which have nothing to say about capitalism as a mode of production. Despite much “noise”, capitalism, as accurately defined, and climate change, even in the words of their most vocal opponents, are really orthogonal. Whatever policies are adopted regarding climate change—even if they are of the most radical kind currently on offer—will have very little impact on capitalism as an economic system. Such policies can reduce profit rates of some companies or some branches of production but they will simply redistribute profits within the capitalist sector, not end capitalism as a system. To be blunt: capitalism and greed would be pursued under different relative prices.