China’s household incomes and inequality in the Year I of covid

 There has been an enormous talk of the new inequalities wrought by covid-19 between and within countries: in mortality and morbidity, vaccination rates, style of life (those who had to show up physically at work vs those who could stay at home), unemployment rates, gender, age etc. But it is only now that actual information about income inequality in year 2020, the year I of covid, is becoming available. A couple of months ago, US micro data from the Current Population Survey, harmonized by Luxembourg Income Study, showed a significant decrease in disposable income inequality in 2020. US inequality went down by 1.7 Gini points which is the largest annual drop in at least thirty years. The decrease in inequality was driven by very generous government transfers (2020 CARES Act alone disbursed funds equal to 11% of GDP) whose objective was to help individuals and businesses that were most affected by the epidemic. Since the support was (very broadly) income tested, it helped much more those in the lower income brackets.

            Chinese National Bureau of Statistics has also published (in the Statistical Yearbook for 2021 available here), the data on incomes and distribution in rural, urban areas and for China as a whole. The Chinese data that are provided are rather minimalist (as usual, the Yearbook publishes per capita incomes of only five quintiles for rural and urban areas, and all-China), but they do allow us to see the effects of the crisis, especially when we compare the developments in 2020 with the previous years. It is important to recall that for China, year 2020 was much less traumatic than for almost the entire rest of the world. China’s real GDP per capita rose by almost 2% while more than 100 countries in the world experienced negative growth, and the global real GDP shrank by more than 5%.  

            It is therefore not surprising that the average per capita incomes went up in both rural and urban areas, by respectively 3.9 and 1.4 percent (and for all-China by 2.5%). The faster growth in rural areas also slightly reduced the gap in average incomes between urban and rural areas from 2.7 to 2.6 (i.e., the average per capita income in urban areas is 2.6 times greater than the average per capita income in rural areas). As graph below shows, growth was stronger in rural areas across income distribution: income of every rural quintile increased by more than that of a corresponding urban quintile. Most interesting is what happened to the poorest (first) quintile in the two areas: poorest rural incomes went up by more than 7%, while poorest urban incomes registered a slight negative  growth.

If one looks more carefully at what happened to urban incomes (in red), it becomes apparent that growth in 2020 was pro-rich, in the sense that percentage growth was higher for richer income groups (2.3% for the top group vs. -2.1% for the lowest-income group). In the rural areas, the situation was more mixed, with the poorest, as we have seen, growing the most, while for the others quintiles growth rates were broadly the same. High growth rates among the rural poor may be related to the government explicit policy to eliminate rural poverty that was particularly actively pursued in 2020.

            The overall impact of such changes was that the rural Gini remained unchanged, while the urban Gini increased. It is important to highlight that these Ginis are calculated from only five data points (five quintiles) and thus probably understate the “true” Gini by several Gini points.  China is unusual because its rural inequality is consistently higher than urban. As we note here (graph below), rural Gini is about 35, urban around 32. To obtain the all-China Gini, one needs also to include  the differences in mean incomes between rural and urban areas. Since 2013 (when China unified its rural and urban household surveys), overall inequality was, according to the official sources, remarkably stable at just under 40 Gini points.

For the years for which we have more detailed micro data, and/or rural and urban ventiles, we can compare such results with the ones that we obtain from the much more compressed data published in China’s Statistical Yearbook: in 2013, China’s overall Gini was 43 (based on micro data) and 40 (based on government published quintiles); in 2018, it was 47 vs. 40. The published results therefore underestimate inequality by at least several Gini points.

Government statistics also provide information on aggregate consumption. Here, the interesting result is that per capita consumption decreased in urban areas by 4.5% and increased, by the Chinese standards, by the modest 2.7% in rural areas. Overall real per capita consumption, for the first time since 1978 when such results have been published recorded a decline of 2.2% (see Table 3.1 in the 2021 Statistical Yearbook). It will be noticed that the decrease in consumption occurred while real incomes went up by 2.5%. Thus obviously—if all these numbers are mutually consistent—the share of savings in household incomes must have increased substantially.

            Overall, based on the published numbers, 2020 certainly was not a “normal” year in China either. Household overall income growth slowed down, the poor in urban areas saw negative growth (very unusual), while the real incomes of the poor in rural areas increased by more than 7%. Urban inequality slightly increased. The typical features of China’s distribution, namely that rural incomes are more unequally distributed than urban, and that they are much lower on average, remained unchanged.

 

 

A short essay on the differences between Marx and Keynes

 This short piece is stimulated by my recent reading of the French translation of Joan Robinson’s 1942 Essay on Marxian Economics published together with several additional texts on Marx, Marshall and Keynes written by Robinson over the years. (The translation and preface by Ulysse Lojkine.) It was also stimulated by a very nice review of Joan Robinson’s life and The Essay just published by Carolina Alves in “The Journal of Economic Perspectives”.

Before I begin, let me set the knowledge limits right. My knowledge of Marx had always been good, and since only a couple of months ago I finished writing a long chapter on Marx’s views on income distribution (for my forthcoming book) that deals with the usual topics of the real wage, rising organic composition of capital, tendency of the profit rate to fall etc., all of that is fresh in my mind.

Keynes is much less so—although I have to say that I had many years ago an extraordinary person as my tutor in Keynes’s General Theory. I had a year of tutoring (one-on-one) from Abba Lerner who, of course, was one of the earliest disciples of Keynes. Lerner’s approach was to make me read a chapter from the GT, then to summarize it and discuss it and send it to Abba, who next week would bring my text all corrected in red. I admired Keynes for his brilliance. I still remember vividly (and I am writing this very far from any book by Keynes) his chapter on the “own rate of interest” and the “carriage cost of money” that Lerner made me read and reread.  But I have not at all followed Keynesian macroeconomic developments, and I am generally quite uninterested in macroeconomics. So here I will speak of what I think of Keynes, not of Keynesians.

The objective of Joan Robinson’s Essay was to enact a “rapprochement” between the Marx’s and Keynes’ economics, by showing similarities between Marx’s view of capitalist relations of production resulting in a lack of effective demand and the themes from The General Theory. Here is one of the supporting quotes from Marx: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses, in the face of the drive of capitalist production to develop the productive forces as if only the absolute consumption capacity of society set a limit to them.” (Capital, vol. 3, Ch. XXX). One can produce more,  and Joan Robinson does. Or as Marx writes—I paraphrase—for every individual capitalist, his own workers are his antagonists: he wants to pay them less; but workers of other capitalists are his “friends”, they are his customers. When all capitalists try to squeeze workers, and when they all succeed, the outcome is the economic crisis.

The other explanation of economic crises in Marx is the unbalanced growth of departments that produce consumption goods and those that produce investment goods but this explanation holds less interest for Keynesians. Robinson also provides a very nice summary of other Marx’s ideas, including the labor theory of value, the transformation problem, the tendency of the profit rate to fall etc.,  but the emphasis is, as I mentioned, on the origin of crises and the effective demand.

When she contrasts Marx, Marshall and Keynes, Robinson argues that we should try to separate in the study of each the “scientific” prepositions about the functioning of the economy from the “ideological” drivers present in all three authors: in Marx, the conviction that capitalism is a historical (and thus transitory) mode of production, in Marshall, the assumption of capitalism as the “natural” way to organize production, and in Keynes, a desire to improve capitalism or to save it from self-destruction.

To me, it seems that the difference at least between Marx and Keynes is not so much ideological (although I would not deny that it is real) but in the time-horizon they use in their analyses. (I think that Schumpeter had something similar in mind, so this may not be a very original view.)

For Marx, the time horizon is always long-term, even when he discusses crises. Crises are temporary manifestations of the long-term (inherent) issues faced by capitalist production, and it is thus not surprising that Marxist authors  like Grossman, Bukharin and Mandel would –I think closely following Marx—see the overlap between the long-run declining rate of profit and the short-term instability as bringing capitalism to an end. (It is also not surprising that Robinson rejects the tendency of the rate of profit to fall, but supports the explanation of the crises.)  Everything in Marx, as Joan Robinson rightly says, is historical. The reader is always directed to look forward, to think about the fundamental forces that drive capitalism.

In Keynes, the situation is different, almost the reverse. The entire Keynes’s edifice (not necessarily Keynesian) is short-term: the objective is to stabilize the economy and to return it to the condition of full- or near-full employment. Keynes is not particularly concerned with capitalism’s long-term. Implicitly, I think, he believed that capitalism can go on forever so long as it is “fixed” in such a way as to produce full employment of resources. “Fixing” it might involve government-directed investment, or the euthanasia of the rentier, but Keynes is not a purist: he would take any, including seemingly socialist, tool to mend things.

Let me illustrate the difference between the Marx’s long-run and Keynes’ short-run on two concepts where our authors seem to speak of the same thing: “the animal spirits” and “the reserve army of labor.” “The animal spirits” was, as is well-known, the idea that Keynes introduced to explain capitalists’ investment decisions; capitalists are most the time not led by the exact calculus of expected gain and  loss but act on their gut feeling (“animal spirit”), and if, for whatever reason, that gut feeling changes, the economy can experience sudden expansions or contractions of demand. Joan Robinson mentions how this largely irrational (in the strict sense) incentive to invest is similar to Marx’s point of view where capitalists qua capitalists always strive not only to achieve maximum profit but also to reinvest it. For Marx, they become capitalists only when they do not consume profit but reinvest it. Accumulation is (to use another famous quote) “Moses and all the prophets.” In both cases we see that the incentive to invest is given from the outside the economics proper: through sudden bursts of optimism or pessimist, or by the definition of what we may call “the capitalist spirit.” But in Keynes’ case, the concept is used to explain short-term fluctuations; in Marx, it is the definitional feature of the whole class, and thus obviously long-term.  

            Or take the “reserve army of labor” which shrinks and expands as the economic activity waxes and wanes. It is very similar to the cyclical unemployment that plays such a big role in Keynes (actually, one could say, motivates the entire book). But Marx’s “reserve army” is an ever-present, hence long-term, feature of capitalism. Capitalists need it in order to discipline labor, and if, in some periods, the reserve army shrinks, thus reducing the relative power of the capitalist class, it immediately sets in motion forces that will bring it back to life: labor-saving investments. The reserve army can never disappear in Marx. In Keynes, however, cyclical unemployment is ideally to be reduced to zero. It is something that capitalism, being judiciously managed, can eliminate. Again, the horizons are different: for Marx, it is the long-term structural feature, for Keynes, it is the short-term interplay between key economic variables.

            Marx was the first student of fundamental historical features of capitalism, Keynes, the last cameralist. Marx was a historian who believed that economics shapes history, Keynes, the smartest adviser to power. In Capital, we have a Bible of capitalism, in General Theory, we have The Prince for economic management of capitalism.  

  

What if Putin’s true goals are different?

 By any standard indicator that measures the achievements by the extent to which the stated objectives have been realized, Russia’s war against Ukraine has been a failure. Ukraine is much more militarized than ever; it is probably one of the most militarized countries in the world right now; Russia’s security has markedly deteriorated; NATO has not returned to its 1997 positions, but has further advanced and become much more consolidated. The West is stronger than before. So, is Putin failing?

Perhaps. Or perhaps not. For suppose that the real objectives of the “special military operation” were not the announced ones, but very different.

Sovereignty vs. income. To see what they might be, I have to go back to my October 1996 paper published as a World Bank Working Paper and later in an edited volume (available here) which I recently briefly summarized on Twitter here. The paper is pretty complex because it deals with economic and political forces that lead countries to create unions and conglomerates, or to prefer secession, but its core model is simple. It is as follows. Countries (and their leaders) aspire to two goods: sovereignty and wealth. Sovereignty means freedom to make political and economic decision as little constrained by other countries as possible; wealth means having high income level (high GDP per capita). Now, the problem is that there is a trade-off between these two objectives. Countries can become rich only if they become less sovereign, that is more globally integrated. To be rich requires to trade, develop technology jointly with others, send people abroad to learn new skills, consult with and even hire foreigners. All of this implies much greater interdependence between the economies and observance of international norms and rules regarding trade, intellectual property rights, domestic economic policies, convertibility of currencies and the like.

To fix the ideas take the two extreme examples: North Korea and Belgium. North Korea is practically unconstrained in its economic and political decision-making: it can make nukes because it is not a signatory to the non-proliferation treaty, it can impose tariffs or ban imports of goods as it likes, it can print as much or as little money as it wants because its currency is not exchangeable for any other etc.  But, for all these reasons, it is also very poor. On the other end of the spectrum is Belgium, which does not have own currency, whose fiscal policy is hemmed in by the EU rules (the Maastricht treaty), trade determined by the EU and WTO (Krugman, as cited in my 1996 paper: "Europe’s 1992 is not so much a trade agreement as an agreement to coordinate policies that have historically been regarded as domestic”), foreign policy decided by the EU, and military engagement by NATO. In terms of domestic policy autonomy or sovereignty, it practically has none. But it is rich.

Other countries will be aligned along the different points of the sovereignty-income trade-off.  The size of the county will matter also: the US will enjoy more sovereignty for a given level of income because it is a big country: it issues a reserve currency, it is the main actor in a number of trade negotiations, it leads NATO etc. But it will not be immune to the trade-off. Consider Trump’s decision to start the trade war with China. It gave greater political space to the US (including the very ability to impose new tariffs), but it probably reduced its income.

Russian isolationism. Now, with this idea of a trade-off between these two desirable things, let’s go back to Putin and his group of advisers from the power ministries. Suppose that they came to the following conclusion: Russia’s attempts to Westernize since Peter the Great have been a failure. Russia failed to catch up with the West prior to 1917, it then it adopted an extreme Westernizing doctrine that diminished Russia by giving independence outright to Finland, Poland etc., and then proclaimed equality of nations and self-determination for all which ultimately led to the break up of the country in 1992. Afterwards, it adopted liberalism, also imported from the West, whose results were the dramatic impoverishment of the population, increased mortality and suicides, and the astounding stealing of assets created by the millions of Russian citizens. During that period Russia lost its ability to decide alone on its policies: it blindly followed the West. It offered its military bases in Kyrgyzstan to the US; it got nothing in return; it acquiesced to limited expansion of NATO, but was treated to an expansion up to its borders; it joined various European bodies, but only to be criticized by them; it privatized its economy as Western experts suggested, but all the money went abroad. Thus, in order to regain its economic and political autonomy, it needs to break decisively with the West. It needs to become an independent Eurasian power whose interaction with Europe will be limited to the minimum. Eventually, Russia has to move in the direction opposite from the one charted by Peter the Great in the early 18^th century.

West builds the Iron Curtain. Such increase in sovereignty would lead to lower income. But the problem is: neither would the break with Europe, if announced by the leaders, nor lower income, be welcome by the population. Russian government cannot thus, on its own, begin to create a new Iron Curtain. But what if the Iron Curtain were built by the West against Russia as a punishment for something that, from the Russian point of view, could be considered an entirely justified policy? Enter Ukraine. Reconquista, in some ways, was always popular among the Russian public. But the West will not see it as such but will impose sanctions and pile up costs on Russia. The West would,  by its own will, cut Russia off from Europe. It will build a new, impenetrable Iron Curtain. The objective of detaching Russia from the West –desired under this scenario by the Russian leadership—will be achieved not by the Russian leadership, but by the West. The Russian leaders will not be seen by its population (or at least not by the majority of the population) as responsible for undoing Peter the Great’s dream. On the contrary, the West will be seen as unwilling to accept Russia as an equal partner, and Russia hence will have no option but to become a Eurasian power, fully sovereign, untrammeled by treaties and rules, and free of Western ideologies of Marxism and liberalism.

The new Brest-Litovsk. But, in the longer-run –the leaders might fear—would not people, having realized that the greater sovereignty comes with lower income, try to find some accommodation with the West? How to avoid this? How to make the rupture permanent? The only way to do so is to make the costs of returning to the West extraordinary high. That is, to make sure that, when the first feelers of reconciliations are sent by the post-Putin governments, the bill submitted by the West will be so high that most of the Russian policy-making elite and the public opinion will reject it out of hand. Think of another Brest-Litovsk, but this time without Lenin who put all his power and authority on balance to have it accepted. The new Brest-Litovsk may include not only the withdrawal of all Russian forces from the Ukraine, and the return of Crimea to Ukraine; it might include reparations, extradition of officers responsible for war crimes, reduction in the size of the army, limits to military exercises, even possibly control of Russia’s nuclear program. Thus, the Putin government has an incentive to make the West pile up demand upon demand from which it will have hard time climbing down. For only such extensive and even unreasonable demands will ensure that they are rejected by the successor Russian governments, and that the anti-Petrine policy favored by Putin and his entourage will remain in force for a very long time.

This does not mean that the current government is totally indifferent to the cost of sanctions. But it will accept increased sanctions so long as the income cost of new sanctions is less than the gain in sovereignty. At some point, it will decide that the trade-off had gone far enough, and at that point it will negotiate. But before it does so it will make sure that it has gained sufficiently, and for a long time, in the ability to independently decide on its policies.

The implication of this way of seeing the Russian objectives is that sanctions and decoupling between the West and Russia are no longer seen only as costs that Russia is paying, but rather as West doing what the current leadership believes is in the fundamental long-term interest of Russia: breaking off of all links between Russia and the West, and thus freeing Russia to follow its own course.

 

From dilettantism to war: a review of Andrei Kozyrev’s political memoir

 Russia is remarkably ill-starred by having had very incompetent leaders. They have done the opposite of what they intended to accomplish. Brezhnev planned to introduce a degree of predictability in domestic and foreign policy; he presided over a long period of technological decline of the Soviet economy.  Gorbachev wanted to create a democratic federation; he ended by having to accept the break-up of the Union and the rise of nationalism everywhere. Yeltsin set out to create a democratic Russia; he oversaw the greatest plunder of assets in history and in the end could rely on old KGB hands only.  Putin’s objective was to overturn the decay of Russia, but when he leaves the office, Russia will be weaker, smaller, and more isolated than it has been in at least 250 years.

Andrei Kozyrev was Yeltsin’s minister of foreign affairs between 1990 (when Russia was still part of the USSR) and 1996. He was the most pro-American foreign minister in Russia’s history, dubbed the “Mr Da” as a contrast to Andrei Gromyko, the long-serving Soviet minister of foreign affairs, who was called by the Western press “Mr. Nyet”. In “Firebird: The Elusive Fate of Russian Democracy”,  Kozyrev has written the political reminiscences of his ministry. They are well-written and easy to read. (The subtitle is misleading: the book has hardly anything to do with democracy, but a lot with Russia’s foreign policy.) The book however lacks any analytic framework whether regarding diplomacy or international relations, and has none of the usual scientific “apparatus”: there is not a  single footnote in the book, nor reference to anything –article or book—except various Russian and American newspapers.  One has the feeling that Russian foreign policy was conducted unencumbered by any theory of international relations. (Compared to similar political memoirs by Henry Kissinger “On China”, reviewed here, and Soviet diplomat’s Ivan Maisky’s extraordinary war diaries, Kozyrev’s book is much inferior.)

And whatever “theory” existed was an incredibly naive view that Kozyrev held throughout the first half of the 1990s, that “democracies” have a specific “friendly” relations amongst themselves, and “totalitarian” counties like the Soviet Union have an entirely different, imperialist foreign policy. It was, unawares of Kozyrev, just the same old Soviet theory, except that the absence of contradictions that was supposed to adorn communist regimes, was now transposed to democratic regimes. Kozyrev uses the same “boxes” but just fills them with a different content. Both “theories” were, of course, unrealistic: countries have interests and fight for them regardless of the domestic political set-up. Kozyrev was soon, if grudgingly, to realize this in face of American intransigence and contemptuous treatment of all Russian demands. The second part of the book is thus much darker.

All the problems that have led to the Russian invasion of Ukraine are already there—and one somehow feels that the current war was almost preordained. (That was not the objective of the book, published in 2019, however. And Kozyrev has been scathingly critical of Putin’s decision to invade Ukraine.) The Russian-Ukrainian problem emerges from the moment No. 1 of the Belovezha accords that dissolved the USSR (Kravchuk’s aides, while being in Belovezha, refused to participate in the drafting of the accords, and the Ukrainian parliament passed the version of the accords that included an additional amendment regarding inviolability of the republican borders). The accords themselves were of the most dubious legality: not least because presidents of the three republics made a decision that properly should have been made by the presidents of all fifteen republics. (Predictably, Kazakhstan’s president was not amused by having to read that the USSR was dissolved, and that his republic became independent, in a morning paper.)

The NATO expansion takes the center-stage commencing from the second year of the Clinton administration and never leaves its role of the most important issue in the US-Russian relations all the way to 1996 (when Kozyrev resigns). It is very clear that the conflict over NATO expansion cannot be thought of as originating in George W. Bush 2007 explicit invitation to Ukraine and Georgia to join the military alliance, nor in Putin’s 2007 Munich speech, but at the very beginning of the debates as to how to transform/expand NATO, i.e. basically to the early- to mid-1990s.

That history is full of bizarre details, related by Kozyrev, including Lech Wałęsa’s sly organization of a tête-a-tête meeting with Yeltsin where the Russian president is supplied by endless quantities of vodka so that he accepts a sentence to the Polish-Russian communiqué agreeing to Poland’s NATO membership. Alarmed Kozyrev (having seen an earlier similar “treatment by vodka” of Yeltsin by Nursultan Nazarbayev) walks into Yeltsin’s room to find him incapable of rational conversation. The next day, the Russian ministry tries (so to speak) to water down the sentence, but most of the damage has already been done.

Other than by the absence any analytic framework, and thus the realization that the Russian foreign policy was conducted by dilettantism, the reader is also surprised that Kozyrev does not seem to realize the main contradiction which is at the heart of the US-Russian misunderstanding. Once the Bush administration that treated the USSR (and Russia) with respect gone, for the Clinton administration and, one presumes, increasingly so for the next US administrations, Russia was a supplicant country that would beg for financial help while asking to be treated as a global power. The gap between the two “roles” widened even further as Russia declined economically in the 1990s. Neither Yeltsin nor Kozyrev could expect that, while in the first part of the conversation, they would beg Clinton for money, their pretenses as to the global power status would, in the second part of the conversation, be taken seriously.

If Russia wanted to “punch in its desired weight” it had not to make meaningless claims to its democratic status, but to strengthen its economy, introduce order in its political system, reduce corruption, begin producing useful things that the world wants to buy, and cease being a petro-state. Had Russia done so in the next two decades, it would have been regarded entirely differently by the US. The US might not have ceased to see Russia as a strategic competitor (a thing which it did apparently since 1991), but it would have treated it with respect, the way that the US treated China until Trump came to power. But this simple truth seems inaccessible to Kozyrev who (explicitly) evinces no interest in economics, nor in corruption that was at the same time destroying the fabric of the Russian society and the foundations of Yeltsin’s regime.

Since Russia could not accept not to be treated as a great power, and was unable under either Yeltsin or Putin to transform itself into a meaningfully important international player, it could rely on only one type of power where it was indeed a force to be reckoned with: nuclear arms and the ability to annihilate half of the world. It thus had to rely on this “negative” power, that is, the power of destruction, because economically or ideologically (unlike during the Soviet times) it could provide very little even in the areas of the world where historically its cultural influence, language, and exposure to the great Russian art of the 19^th century was common.

Kozyrev does not acknowledge, or perhaps realize, this main issue. His memoirs are interesting to read, but, above all, they illustrate, despite the author’s wishes, the amateurish nature of Russian diplomacy as it was conducted in the 1990s.