Left Outside

.@Give_Directly to 1,300 Poor Households in Kenya

GiveDirectly12022013

Give Directly are my favourite charity and they should be yours too. They give money to poor people. Not just any poor people, but really poor people in East Africa. There’s a minimum of bureaucracy and they are innovating new ways to remove the bureaucracy which currently exists. It is simplicity itself, and it works. And you can donate this month and double your donation.

Supporting Give Directly gives you the warm glow of helping the most needy people imaginable, but more importantly it also gives you the warm glow of having your ideological predispositions confirmed. If you’re anything like me you just can’t beat it. Donate and you too can bask in the heroin-like glow of confirmation bias.

They regularly audit and they get amazing results. Business and agricultural income increased 28% of the average grant size, implying a 28% annual rate of return. With a doubled donation you’ll be getting a 128% rate of return. Plus mental health improves, crime and conflict doesn’t change, it doesn’t cause localised price inflation and it reduces domestic violence and increases female empowerment.

They’ve also begun using community-based targeting: in a subset of villages, they got the community to help them categorize households by poverty level. Wherever there’s cost and bureaucracy they’re looking for ways to remove it. Wherever there is local knowledge they’re looking to use it. So far:

  • Most people think housing materials are the best indicator of poverty — reaffirming the criteria we already use. Furniture and source of income were also popular.
  • People generally agree on how to apply the housing criteria. When we asked communities to categorize each household as “rich” or “poor”, they agreed in 9 out of 10 cases.
  • Engaging local leaders in the process can help, but also raises a risk that they will ask for “compensation” for tasks they are supposed to do for free.

Honestly, if you’re not supporting this charity (I think this would particularly suit Jackart, Chris and Frances) I don’t know what’s wrong with you. Oh, and they have no marketing budget, so yes, you will have to put up with regular half press release, half begging letter posts here, essentially, forever. Or until we end poverty. So its up to you really.

Filed under: Economics, Foreign Affairs, Politics

Policy Bullshit Bingo: Robert Rubin in the @FT edition

I wanted an early night. But Nooooooo. Robert Rubin had to publish something stupid and now I’ve had to stay up to mock it. Scheduled to land at 9am. I hope you’re all feeling bitter this morning.

Debates persist in the US and eurozone about growth and job creation versus fiscal discipline. This false choice diverts fiscal focus away from a balanced approach that could achieve both imperatives.

Yes, it’s a false choice and that is why literally nobody on earth is proposing it.

The US recovery remains slow by historical standards – even if recent signs of improvement are borne out. One reason is that our unsound fiscal trajectory undermines business confidence, and thus job creation, by creating uncertainty about future policy and exacerbating concerns about the will of Congress to govern. Business leaders frequently cite our fiscal outlook as a deterrent to hiring and investment.

Actually, in the US policy uncertainty has come from Republic malfeasance in the legislature. It has nothing to do with fiscal policy.

A sound fiscal trajectory is also a prerequisite for interest rates conducive to growth.

Interest rates are zero, and are low a long way out. I don’t think its the 1990s anymore Mr Rubin. Although your glasses are!

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Continued unsound fiscal conditions will almost surely destabilise markets at some future point.

Oh, it will “will almost surely destabilise markets at some future point”? That’s a concrete foundation on which to make policy decisions…

1355190369_borat-not-jb

Recent reductions in deficit projections do not change the basic structural picture – except that healthcare cost increases are slowing – and are partly based on sequestration, a terrible policy that already looks too onerous to stick.

Policy successes which address exactly what I worry about do not count. For no specific reason.

In the eurozone, the threat is more immediate. Bond markets in troubled countries were in dire conditions until the European Central Bank’s famous – and as yet unimplemented – 2012 promise to do “whatever it takes”.

The promise was the action. You want to bet against the ECB? No? Then it worked, the plan was implemented.

The right criterion for action, however, is not the absence of alternatives, but an assessment of costs and benefits.

This sentence stands apart as a magnificent example of self-parody.

In the US, there are widely posed questions about the benefits of QE3, but the risks are significant. One is that central bank action will reduce market pressure on political leaders to act.

You read that right. The danger is this policy might work. Then people won’t listen to Robert Rubin’s terrible advice. Never waste a good crisis eh Robert?

Yet waiting too long to tighten heightens the risk of inflation at some point. The Fed’s dramatic expansion of bank reserves could feed excessive credit growth. Along with the possible erosion of Fed credibility on inflation, that could also feed inflationary expectations.

If they are feed inflationary expectations nobody is doing much about it. The TIPS spreads on US debt doesn’t show anything. You can lend money to the US government and get a nominal return guaranteed, or an inflation protected return guaranteed. The difference tells you a lot about expected inflation. If inflation was coming you could sell one and buy the other. But that hasn’t happened. Look at expected inflation from 5 year bonds:

fredgraph (1)

Such a regime should be enacted now to stabilise, or preferably reduce, the ratio of debt-to-gross domestic product over 10 years, and protect discretionary spending. Implementation, designed in ways difficult to undo, should be deferred for a limited period to allow for recovery. Fiscal discipline could provide room for reasonable stimulus to create jobs. The partially cancelled sequestration should be fully rescinded to eliminate its fiscal drag. Fiscal funding should come largely from revenue increases and beginning the entitlement reforms necessary for long-term sustainability – as President Barack Obama has proposed.

I WANT A PONY.

Structural deficit reduction would address growing deficits in the decades beyond the next 10 years. The eurozone, too, should reject false choices. Instead, it should strike the right balance between fiscal discipline to win market and business confidence, and macroeconomic room for growth.

Unconventional monetary policy and stimulus can be part of a successful economic programme for a period of time. But they are no substitute for fiscal discipline, public investment and structural reform.

Welcome to your policy elite, they’ve literally learned nothing in the last 15 years. They’ve especially learned nothing in the last 5.

Filed under: Economics, Foreign Affairs, Politics

A #longread for your weekend: Karl Polanyi in Beijing

Thank you for reading last week. If you would like this week’s posts collated as an essay you can download a pdf of “Karl Polanyi in Beijing.” You can also download a pdf version of Karl Polanyi’s The Great Transformation itself here. I recommend you do both. The collated posts also follow below the fold. I hope you’ve enjoyed reading these as much as I enjoyed writing it.

Read the rest of this entry »

Filed under: Economics, Foreign Affairs, History, Politics, Society, , , , , , , , ,

Karl Polanyi in Beijing: why are China’s capitalists so successful?

The economic reforms introduced in the late 1970s were, argued the CCP, essential to combat economic stagnation and waste of the Mao years. So it was the Party that created the market in China. In Europe, Polanyi described an insurgent middle classes who “developed an all but sacramental belief in the beneficence of profits” and faith in the market. In China the market was introduced to break the bureaucratic control of the economy, but reform has ironically led to the enrichment of China’s bureaucrats. It has also left land and labour deeply unprotected. In contrast, China’s private and state-owned businesses are deeply embedded in social relationships. Its a deeply contradictory and complicated place as only a country of over a billion people can be.

In The Great Transformation (full pdf) Polanyi runs three chapters concurrently, Market and NatureMarket and Man and Market and Productive Organisation. These posts have followed a similar course and this penultimate post will look at China’s breakneck economic growth and discuss whether that invalidates Polanyi’s idea that “a embedded economy will be more efficient than a disembedded market.”

I started by saying that China’s party decided to create a market, that is how Polanyi and I talk about it, but it isn’t the normal parlance. The main school of thought on liberalisation emphasises the spontaneous creation of private enterprise wherever the state withdraws; this school draws on Adam Smith’s assertion about man’s “natural propensity to truck and barter.” I haven’t much truck with this. Capitalism got going in large part thanks to the fiscal strength of the British war state being able to enforce property rights and help capitalists accumulate capital through dispossession. Likewise in the US the government opened up the west with bloodshed and dispossession which helped America’s farmers accumulate land and helped prop up the wages of its working class. But I digress.

One half of Polanyi’s theory was that while laissez-faire was planned, the response was automatic and universal, even capitalists rebelled against the market. Good free marketeers like Tim and Chris see this as lamentable, they should see it as inevitable. Polanyi insisted that against the tide of market utopianism even capitalists will strive to protect themselves against the market. In China there has been no unconditional acceptance of the market, and its implementation has been limited, even if its effects have been broad. Contrary to the liberal belief that those engaged in private business will seek further economic and political freedom, it appears that those engaged in business in China prefer stability to economic liberalism. There’s more parallels to this: authoritarian capitalism can be pretty stable, Bismark’s Prussia, Meiji-era Japan and Pinochet’s Chile were all stable for extended periods of time. Just like in these countries, embedded markets can be remarkably effective at delivering growth.

China’s business operations rely more on connections than on private property, they are embedded networks of guanxi. I think you should conceptualise guanxi differently for migrant workers versus business men. For labour, it has arisen as a protective last resort, a countermovement which provides shelter in place of hollow labour laws. For businessmen it has become an integral part of “doing business.” Rather than decreasing as China’s economy develops, guanxi has increased its prevalence as businessmen develop new ties, and deepen old ones, in order to achieve their aims.On one level it functions, not as a system protecting against the market, but as a method for smoothing the transition between different state policies, in which extralegal activities are permitted in order to maintain smooth operation of business. There’s a parallel in the Soviet Union were boxes of cigarettes and bottles of vodka lubricate the workings of a badly drafted plan. In China gifts lubricate systems of insecure exchange.

At a macro level, the state also supports businesses and economic growth. The ideal developmental state, as described in Monday’s post by Evans possesses a “concrete set of social ties that binds the state to society and provides institutionalised channels for the continual negotiations of goals and practice.” Is is easy to dismiss guanxi as clientalism, or “crony capitalism” that distorts a natural market conditions. In reality China’s capitalists have the ear of the Chinese state and mutually assured destruction ensures they are focused on growth. Where Scott Sumner sees pragmatic policy making I see the fear in their eyes.

The state has laid the foundations for China’s economic growth and like other developmental states, it has sporadically suppressed market activity and supported strategic investment at the behest of its capitalists. China’s business situation is a system in which legal foundations of private property do not matter as much as ensuring that personal connections with local government and party are good. This can be a method by which private capitalists can extort money, power and influence from society at large. But it is also a method for ensuring capital investment is incentivised and profitable opportunities exploited. The institutionalisation of guanxi is a symptom of the decentralization of power which has occurred in China as both an impetus to, and consequence of, China’s economic rise.

To a degree the Chinese state has failed. For the majority of China’s development, while attempting to build global leaders the vast majority of the Chinese economy remained wedded to low-wage manufacturing. “Manufacturing” may prove to be  a superlative a word for what occurs in China. It can perhaps be better described as “assembling” imported inputs. High-value adding components are constructed outside and shipped to China for final manufacturing before being re-exported. The challenge for a developing country is to move up the value added chain. In the mid-2000s I was relatively sceptical of this happening, now I am more optimistic.

From The Independant, taken by Leonardo Finotti

From The Independant, taken by Leonardo Finotti

The tight state-industry link hasn’t been severed and remains very strong. In return for a huge degree of state control Chinese capitalists can help direct infrastructure spending. Britain has built one new runway since the Second World War. China has been building ten a year or more for over a decade. Britain was rather well endowed with runways following the war, but China’s achievement is colossal. China’s expanding its infrastructure at an astounding pace and it is a close coalition of capitalists and bureaucrats directing it. While some reports suggest lots of this investment is in empty ghost cities and roads to nowhere others are more optimistic:

In the case of Henan’s Zhengzhou—frequently dubbed China’s “largest ghost city”—Ms. Wong notes that a number of media portrayals of the city’s newer areas have used photographs taken between 2010-12, before the metro system connecting the district to the city’s more established neighborhoods was completed. On her most recent visit there in August, Ms. Wong said she saw many cars, “hordes of pedestrians” and considerable ground activity in addition to curtains and air-conditioners installed in numerous residential buildings.

“I asked local people about what they think…about Zhengzhou being a ghost city and the answer is, ‘What?’ They don’t actually have any idea they’re being labeled a ghost city,” Ms. Wong said.

Western reporters are the least likely to understand movement and patterns of production in China. Infrastructure investment is being directed by a coalition of capitalists and bureaucrats using local knowledge passed through to the might of the Chinese state.

From the BBC, taken by Pu Yongfang

From the BBC, taken by Pu Yongfang

Of course, the state can also be expected to expropriate the poor as necessary. As the poor and dispossessed become wealthier and therefore more powerful it seems that land grabs are becoming a little rarer than they used to be. This could also be because all the good land has already been grabbed. In any case, capitalist production is closely embedded in the state apparatus. Seizing land isn’t fair, but it is a pretty good way to accumulate capital. Capitalists are also more productive than poor people and development is all about putting things to their most productive use. This is the ugly side of development, and China is very good at it because its capitalists and government need to keep the economy growing.

The Chinese economy contains a business community embedded in close sets of social ties, this having given it the potential to direct its domestic industry in socially productive ways. To some degree it has certainly succeeded. In centres of development on the coast modern economies have grown up but it is unclear that this will spread to China’s interior. Firms are moving up the value added chain but China remains a very poor country. I’ve discussed in past posts that increasingly large tail risk is being built up in the poor treatment of China’s workers and its environment. China has managed to leverage some of the connections between business and state towards useful investment but at great cost to people and planet. Tomorrow’s post will tie together some of the ideas discussed over the last few days.

Filed under: Economics, Foreign Affairs, History, Politics, Society, , , , , , , , ,

Good news, bad news for LGBT asylum seekers

Remember Irina Putilova? She was going to be deported to Russia, despite being a lesbian and likely to face severe persecution. Well, she’s not getting deported. At least not yet. So well done to any of you who actually did anything after reading last week’s post.

To maintain balance, of course, our dark lady Theresa May will be instead deporting Prossie N, a lesbian, to Uganda. There’s a petition here to sign, it seemed to do some good last time so please sign and write to your MP.

Click here for an article on “corrective rape” in Uganda. If you want something shorter and therefore slightly less harrowing  please read this account of Prossie N’s life up until now:

Prossie N has fought hard to escape a lifetime of abuse and persecution. An orphan from the age of 8 years old, the only family she had was an uncle who abused and raped her. At 15, she was outed as a lesbian and forced to live on the streets. It was only through a secret relationship with a well-connected married woman that she was finally able to escape to Britain in 2010.

Now, the Border Agency wants to send her back into danger. The department has already tried to force Prossie onto a flight with Ethiopian Airways, but she bravely protested at the gate, and the pilot refused to take her back. Her new deportation date is set for 12 December, back to a country with some of the harshest anti-gay laws in the world, where she has no family and no support network.

 

Filed under: Foreign Affairs, Society

Karl Polanyi in Beijing: who are China’s workers?

The labour market in China is in its infancy. It is, in fact, incorrect to speak of a labour market in China at all; there are many disparate situations where we find working people. Although discussion will be on industrial workers it should not be forgotten that there are still more than 200 million peasants working the land in China, however for brevity these must be excluded from discussion. The state began allocating labour in the 1950s and continued until the 1980s when the attempt to commodify labour began. However, the creation of a labour market has not seen the state wither away; instead it has turned its already considerable repressive powers towards the task of creating a Labour market. Polanyi argued that the creation of markets involved a dramatic increase in the coercive power of the state; this is in marked difference to others who emphasise the natural germination of markets, which occur where the state withdraws from the economy as is typical with most economists.

In an examination of China, Polanyi’s account is by far the more convincing than that of conventional economists. Chinese workers have been reshaped into commodities. This has first been done by the central Chinese state through the smashing of the “iron rice bowl” and the stripping of state provided welfare from the employed, and the exclusion of China’s vast migrant workforce from what little support remains. Moreover, enforced redundancy and bankruptcy have created vast reserves of the unemployed, “freeing” them to find their wage on the market. These reforms were met by a series of Labour Laws, intended to mitigate their negative effects. However, the laws concerning minimum wages, factory conditions etc. go largely ignored due to a second movement towards commodification.

Local government has received much devolved power; for example, in fiscal terms, China has perhaps the most devolved government in the world. In return for this power, local government is charged with fostering economic growth, this usually entails the circumvention of these labour laws. Sole responsibility for the bypassing of these laws should not be levelled at the local state. For example, 78% of state-owned enterprise employees and 95 percent of state-owned enterprise retirees were to be covered by the state-run pension scheme. This reform replaced schemes run by individual enterprises but will not be honoured because of the fiscal limitations of the central state.

There are obvious benefits to China’s current configuration, Chinese workers no longer need to contend with the repression Maoist state, and there have been notable relaxations since the Tiananmen Square Massacre. However, this internal confrontation has been replaced by an external one; workers now have to combat the combined legal departments of several transnational corporations. For years they have been engaged in intensive lobbying against the extension of further labour rights in China, Arrogantly declaring that the labour laws in place, already largely unenforced, are enough for China’s workers.

The creation of a labour market has required de jure, and some de facto, ending of lifetime tenure. In 1983 state-owned enterprises were ordered to hire new employees on a contractual basis, this began the drive to convert labour into a commodity, to be bought and sold as a commodity, and abolished the socialist conunitment to full employment. This was consolidated in the mid-1990s with large scale redundancies at SOEs. However, those who still enjoy urban state sector employment remain very immobile; the real effects of market reforms have been felt by the vast and growing rural-urban migrants. The dissolution of the communes led to the creation of a vast migrant labour force, which numbered around 50 million in the late 1980s, and over 150 million now.

This process shares similarities with the making of the English working class: peasants, handicraft workers, artisans and small manufacturers all suffered displacement as their livelihoods were destroyed, whether, through land enclosure or market competition from more productive capitalist fawns and factories. However, in England as the attempt was made to commodify labour in Britain a countervailing measure arose to protect society: Polanyi interpreted legislation concerning public health, factory conditions, social insurance, public utilities, municipal services and trade union rights in Victorian England as countervailing measures to check the societal effects of the unfettered expansion of capital.

This countervailing measure is far from obvious in China. The expansion of the state required to commodify labour is described above. However, the application of the commodity fictions has only been partially implemented. The local state, at times, undermines the institutions designed to embed Labour within a social minimum. Deng aimed to refashion workers as commodities, to be bought and sold. However, the appeal of the Chinese economy was not just cheap labour; there is a wealth of the desperately poor in the world. China succeeded because its labourers were healthy, educated and disciplined. A population more literate, more educated, and with longer life-spans than any country with a comparable GDP, entered the world market in the 1980s. This was achieved with meal Communes and urban Danwei which operated as miniature welfare states, providing cradle to grave security.

The communes have long since been dissolved and so, as SOEs are transformed, most working people have lost access to their social safety net, including pensions, housing, health care and increasingly even primary and secondary education. To illustrate, after three decades of reform, healthcare is in freefall and the World Health Organisation ranks China last in terms of equal access to healthcare. Furthermore, China alone is helping to partially refute the idea that “wealthier is healthier.” The marketisation of its healthcare infrastructure has caused improvements in health to accrue more slowly, and less equitably, than in any comparable state in history — the poorest now go without healthcare altogether. As discussed in my last post, the countermovement against the commodification of land is notable for its weakness and for the damage which has been wrought in its absence; regrettably the same is true, to a lesser degree, of labour. Labour laws exist in China; there are a number of rights which have been introduced, from pension reform to minimum wages. However, the Double Movement is not a matter of formal labour rights. If rights such as those above go unenforced, as they do in China, they cannot be described as constituting a Double Movement.

After examining the conditions of workers in China; both their hardship and their lack of protection offers evidence that might be used to refute the existence of Polanyi’s Double Movement. However, informal institutions of embedding have arisen in order to overcome the abusive application of China’s labour laws. This essay will argue that, as with business in China, rural-urban migrants have developed a complex system of guanxi to insulate themselves from the market. The work of Granovetter describes the limits of spot markets between anonymous individuals to transfer information and build social trust. Moreover, it helps us to understand that legal protection and social security are not the only ways in which the economy can be embedded. Within China, informal systems of embeddedness have come to be incredibly important.

A brief description of the origins of China’s migrant labourers is necessary to place them in the correct context. Revolutionary China used a hukou, or household registration system, to all welfare provision to its population. It also constituted an intrusive method of social control, preventing all but a limited amount of internal migration. Initially registering the population was simply about finding out the numbers involved, but hukou soon became a tool to restrict mobility. The hukou system’s weakening has granted labour the freedom of movement around China, but it also prevents migrant workers from claiming the pensions, schooling, unemployment benefits, etc. enjoyed by those who have an urban hukou. In official Chinese parlance peasant workers in urban jobs are not migrants; as it would denotes a more settled status. They are a “floating population,” without the rights that those who possess urban hukou enjoy. It is this group who make the most extensive use of guanxi as it is they who lack the most basic of protections.

Guanxi is an informal set of ties and obligations whose origin can be traced back to Communist China. In contemporary business relations its importance is well documented (and I will discuss it more tomorrow). Granovetter’s study examined the behaviour of individuals within a developed market, and found that they often substituted embedded social relations for rational economic maximising behaviour. A similar and more intense version is employed to glean useful information from fellow migrants to find work, and protect themselves from unemployment. To illustrate, it is argued that because of the guanxi between current migrant workers and potential migrants as few as just five to ten percent of newcomers to Chinese cities could not find work within a week of arriving. The emphasis placed on guanxi  can help us to understand why it is that China’s rural migrants can survive and remain productive in such a hostile environment.

The demands made by the market can prove utterly disastrous for human beings if their basic needs are not protected. However, the Double Movement is more fundamental than this. Guanxi has helped to explain the survival of Chinese workers in a hostile environment, often devoid of the social protection Polanyi argued was essential; however, this only addresses one aspect of the Double Movement. It is also fundamental in embedding economic relations in a legal system that ensures that the commodity fictions are upheld in a market-society. As explained the Double Movement is not anathema to markets, it is a necessary condition.

Fred Block discusses the embedding of the economy in “law, politics and morality,” the economy insist be embedded within reasonable and lawful practices. Thus, even an approximation of a market system requires embedding within a social minimum. The evasion of Labour standards illustrates the weakness of the Double Movement in China. This view, though controversial in Polanyi’s time, is now firmly embedded in the new institutional economics of people like Douglass NorthDaron Acemoglu and James Robinson.

Non-payment of wages is a major problem in China, sometimes used to discipline workers, it is used to ensure workers do not quit, as if they do they risk losing all right to unpaid wages. It is incredibly widespread, in a survey it was reported to have had affected 72.5 percent of workers. It is cited as a major cause of protest in China; but by using it to discipline workers further protests are being prevented. The non-payment of wages is a method used in China by capitalists to enforce discipline and expropriate capital from their workers. This practice is credited with allowing such a large amount of wealth to be accumulated by such a small group, in such a short amount of time.

At times this is discussed as a shocking denial of human rights, the simple right to be paid what one has agreed as remuneration for one’s labour. It is presented as an example of how brutal capitalist development has been in China. But, the true interpretation of this practice is rather different. Capitalist exploitation under a market system involves the sale of labour as a commodity. The theft of labour is evidently not part of this. This practice illustrates again the weakness of the Double Movement in China; it has failed to provide an adequate legal framework to ensure wages are paid on time, or even at all. Without a Double Movement to embed market structures they don’t exist. You don’t get capitalism you get something even more brutal.

In law the situation concerning labour appears far better than that concerning land. However, in practice both appear to be subject to the damaging infliction of commodity fictions. Giovanni Arrighi suggests that the Chinese state has presided over gradual economic reform and met these with countervailing actions to promote a “synergy between an expanding national market and a new social division of labour.” However, this represents an astonishing, though predictable, misreading of what is occurring in China. With regard to labour the Chinese economy tacks not only the protection necessary to ensure wages are paid on time, but reform has also hollowed out the institutions that made the Chinese economy a success in the first place.

Since I wrote started researching China about half a decade ago a lot has changed. It’s a country that moves at an astonishing rate. Over the past decade, China has rapidly expanded the numbers going to university from from 2.2 million in 2000 to 6.6 million in 2010 students. Job creation hasn’t keep pace and there were 100 job applicants in mid-2013 for every 80 jobs which require a university education in China. The scenario was reversed for jobs which don’t require tertiary education, there were 100 applicants for every 125 slots in China. This has led to a narrowing in wages. Since 2009, professional wages have climbed 12 percent annually. In the same period, average wages in manufacturing, agriculture, and construction have risen 14 percent annually. I’ll chalk this one up as a success for Polanyi’s Double Movement and a sign I was probably too pessimistic 5 years ago.

China has been successful in destroying the old institutions, which allowed it to enter the world economy and out perform all previous expectations. However, they have not been replaced with new institutions to guarantee further success, although some elements are improving. On one level this is evident in the endemic non-payment of of wages, and the callous exploitation of the local state. You can also see the frictions in the mass gathering incidents documented by Jamie.

I would argue there are two seams to the protests now occurring in China. These can be used to locate where people feel threatened by China’s Great Transformation. Some occur because some workers have been left to the mercy of the market, protesting against enforced SOE dissolution, low wages, and a scandalous marketisation of basic services; such as healthcare and education. Others occur precisely because the same set of commodity fictions are not enforced, people are robbed of their labour and land because a market has not been instituted inside reasonable institutions. The same is true in the countryside where Chinese robber-barons have seized huge tracts of land. Both stem from the same source, the weak countermovement in China. If action is not taken to embed the market, then the ecological and human damage that will result will be matched by the collapse of China’s economy. We’ve heard lots about China’s capitalists in passing, but I’ll go into more detail tomorrow.

Filed under: Economics, Foreign Affairs, History, Politics, Society, , , , , , , , ,

Karl Polanyi in Beijing: why is there so much smog in Shanghai?

To explain why the smog is so bad in Shanghai you can point to air pressure, christmas, temperature etc. But to really understand, like most things, you have to go back at least half a century. You might think its odd that I begin the meat of these posts with land and nature and not people. But until very recently China was an agricultural country. It makes perfect sense to start with the environment.

So, to kick off, I won’t pretend environmental damage wasn’t widespread in Mao’s China. “Political repression, utopian urgency, dogmatic formalism, and state-sponsored relocations affected and distorted Chinese relationships with nature in the Mao years” as Shapiro wrote in her Mao’s War on Nature. Among the most bizarre attacks was an utterly mad attempt to eradicate sparrows, rats, mosquitoes and flies, from the Chinese countryside. Unfortunately, the environmental degradation produced in the Mao years pales in comparison to the damage which contemporary reforms have fathered.

Mao’s death in 1976 ended the lost decade of the Cultural Revolution, but also created a power vacuum and a period of instability in the Communist Party of China. The elevation of Deng Xiaoping to leader offered a welcome solution to the Chinese people, and he entered office with a mandate for change. The change he proposed was described as “market adjustment” and “adjustment by the plan” at the December 1978 Third Plenum. Reform began in urban areas with an attempt to create an urban labour market by allowing selected managers to hire on a contractual basis. The reforms also included provisions to allow state owned enterprises to raise prices and retain profits. In 1981, amid rising inflation and urban unrest, urban reforms were brought to a halt and focus was switched to rural areas.

Rural reforms began not long after their urban counterparts in September 1980. They initiated a major step in the rural reform process; the commune based agricultural system was to be replaced by the Household Responsibility System (HRS). You don’t understand anything about China unless you understand this. The commodification of land began in the countryside; the HRS divided commune land into individual family farming plots, and tied earnings to the yields produced by each family. They had to make compulsory deliveries to the state but anything above that was free to be sold on the market. Within three years 98 percent of peasant households had been incorporated into this new system. Eager to taste the new life offered to them the Chinese peasants were keen to undertake this transition.

Although the land remained communal property, which was leased out to individual tenant farmers, the HRS amounted to a de facto commodification of land in the countryside. As well as abolishing the old order and implementing the HRS, the Chinese state has also played, and continues to play, a vital role in forcibly commodifying land; dispossessing China’s peasants of their plots . Reflecting on the HRS, The Economist credits the spectacular growth in the Chinese countryside to the free play of market forces. However, what Meisner calls the most “economically successful period in the history of Chinese agriculture” can more accurately be described as the culmination of thirty years of successful state led investment. The rise in productivity being the results of a one-off price increase on compulsory grain deliveries that corrected, previously low, state prices.

Most economists would argue that China suffers because of its ambiguous property system — uncertainty prevents long term planning and investment. However, by equating commodification with free-hold, they ignore that the commodification of land can be done largely on a leasehold basis, as it was in London and New York. Within the Chinese context it is important not to equate the commodification of land merely with status as “private property.” Even as commentators denounce China as Communist in name only, domestically the term private property has still not lost its subversiveness. Therefore, in urban areas, land is often traded in “primary” and “secondary” land-markets, while also remaining state property. This essay will argue, for both land here, and labour in the next chapter, that although unconventional, the commodification which has occurred is subject to the same analysis Polanyi used in The Great Transformation.

The Double Movement does not occur in a vacuum, class interests play an active role in fermenting and directing the countermovement. By mediating the enclosure movement in early-modern England, the monarchy and the Church represented the interests of society and prevented it from massive social upheaval. The countermovement against commodifying land slowed the pace of change and allowed new measures to be developed to deal with the new problems which were part of this new social system. After the experiment of Communal life many peasants were keen to taste the new life offered to them by the HRS. Moreover, the CCP officials who oversaw the dissolution of the Communes, often themselves profited directly from this process. Both of these factors may help to explain the initial weakness of the Double Movement in China. Unfortunately, the enthusiasm of the Chinese peasantry and the CCP for reform, has not prevented a catastrophic destruction of the Chinese environment.

The annihilation of the Chinese countryside is not a certainty; there are some embryonic examples of a countermovement. The Western Development Programme was an attempt to demonstrate the government’s commitment to national unity. It is not a simple or straightforward programme with a discernible single aim. Rather than just attempting to eliminate inequality, most of the programme aims at incorporating the underdeveloped Western China into an enlarged home market. However, this would ignore the element aimed at protecting the environment, the “Grain for Green” programme. In essence it asks farmers to refrain from using the land for profit, and instead to return it to natural forests and grasslands. This serves to protect the natural environment from over-exploitation and callous destruction.

However, projects such as the WDP do not alter the fact that the success of Chinese agriculture is threatened by the market. The institutions which had maintained the major works that allowed China to equitably feed the largest nation on Earth, have been dismantled in an effort to commoditise land. This has not been met by new coping mechanisms or new social projects. Polanyi argues that economies which are embedded will be more successful than those which are not. The HRS was the cause of a cumulatively huge one-off increase in the living standards of millions, but was followed by stagnation in living standard and declining grain yields. Grain yields declined because, precipitated by Deng’s call to diversify, many farmers turned to small-scale private business instead of farming. Moreover, most damaging for individual wealth of those Chinese tied to the land the HRS has put a halt to much mechanisation of Chinese agriculture – a centuries long Chinese ambition.

In 1997, it was suggested that China could take advantage of its backwardness, evade chemical pesticides and fertilisers, refuse to make extensive use of automobiles etc. and bypass the most destructive elements of development. One look at Shanghai shows you that this advice was not heeded and the Chinese people and natural environment have paid the price. The market as instituted in China is incapable of delivering the environmentally balanced development essential in China. Polanyi argued that only by mediating the change and embedding the economy, did the enclosure of England not result in social calamity.

The literature on the environmental damage of modern China abounds, but to be succinct we can restrict our discussion to idea of a “Green GDP” which has been considered by the CCP. A simple idea, the “Green GDP” subtracts the economic cost of environmental degradation, from the increase in a traditional calculation of GDP, more net domestic product than gross. Despite the fact that it “used low estimates of environmental damage to health and did not assess the impact on China’s ecology” the new growth calculations were so meagre that they were politically unusable. The CCP could not maintain its economic credibility with such poor growth figures. The commodification of land has caused huge damage; Vaclav Smil estimated that one seventh of China’s potential GDP in the late 90s was sucked up by environmental abuse. Despite, and perhaps because of, this widespread destruction, there have been some recent movements towards a rebalancing countermovement; such as the WDP described above.

I’ve tried to outline and analyse the problems that have confronted the commodification of the Chinese countryside. In light of; the “Green GDP,” the decline of public works, and the stagnation in peasant living standards since the mid 1980s, the foresight of Polanyi’s argument become clear. An embedded economy will be more efficient than a disembedded market. China is experiencing a continent-wide expropriation of social property, but without being coupled with a concerted effort to maintain the standard of the natural environment essential for the well-being of the Chinese people.

The market is systemically unable to deliver economic growth without doing environmental damage. It is possible to price these externalities, but just because it is possible does not mean it is happening. Pricing externalities requires complex institutional design and a class of people to make the case. The people most badly affected by the damage done to the environment are too weak politically to respond. That a pigou tax is possible but not in place strengthens Polanyi’s position that an economy works better when embedded. Wednesday’s post looks at labour and tells a similarly ugly story.

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No, @chakrabortty‎, Britain is not a developing country, we just need to quit hitting ourselves in the face

Moderat_cover1There is a production possibility frontier. That’s the posh way of saying there’s a technological limit to riches. Then I think about developing vs developed countries I think about how can countries get closer to that frontier. Britain is at, or close to that limit. Britain’s challenge is finding new ways to do things and splitting the proceeds of what we can already do.This is why I think Chakrabortty (and by association Larry Elliott) is wrong here:

Let’s admit it: Britain is now a developing country

We have iPads and broadband – but also oversubscribed foodbanks. Our economy is no longer zooming along unchallenged in the fast lane, but a clapped-out motor

Britain has decided through its imperfect institutions that we want to have a little more of the economic pie in the hands of banksters (via bailouts), a little less in the hands of the unemployed and disabled (via cuts) and the rest more directed by the market than by benefits. That’s the consensus policy view since about 2009/10.

Until the 1870s [1] Lancashire was the high-tech centre of the world (stop sniggering at the back). To get richer we had to invent new things and new ways of doing things. That’s what the UK looked like then and its what it looks like now. A developed country needs to think of new ways of doing things to get richer. A developing one (or, to be less more accurate, an undeveloped one) needs to adopt them.

Argument by definition is the worst, but how else can this argument proceed? Britain doesn’t need to adopt new ways of doing things from elsewhere to solve the problems of poor investment in R&D, bad infrastructure, income inequality or gender inequality, that Chakrabortty discusses. We already know how to deal with them we’ve just decided, as a polity, not to.

The coalition slashed capital spending because it looks like an easy short term fix for the deficit, same goes for the disabled and the poor. Bankers got bailed out because they made a convincing case they would drag everyone else down if they weren’t. Manufacturing got dismantled in the 80s and 90s and fixing the UK’s supply chain will be hard because its a bit of a mystery for how we get from here to there. We can’t just set up a factory manufacturing lead toys with “Made in England” on them like the Germans did,  [2] we have to work it all out again.

As to being overtaken by Taiwan or South Korea. Good for them! This is what successful developing countries look like…

Export (1)

…that’s right. They look like developed countries. This is as good as reason to get the champagne out as any.

Chakrabortty has a point about the concentration of economic wealth leading to a concentration of political power. That’s something I’ve been writing about since I started this blog….so…I guess this isn’t a “developing country problem” at all, it’s a problem of power and it will never go away. Relegating the abuse of power by elites to a pathology of poor countries is unhelpful. Britain has problems but they’re problems we have created. We don’t need to learn anything new – the hallmark of a developing country – we just need to quit hitting ourselves in the face.

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[1] After that things got a bit more complicated ask in the comments for MOAR History if you want.

[2] Okay! You get MOAR history anyway. The first things to carry “Made in X” on them were toy soldiers from, I believe, Sheffield because the Germans had got hold of some machinery and were making cheap knockoffs. The Germans didn’t know how to get richer when they were a developing country, so they adopted processes from us. Britain couldn’t steal back so it invented “Made in England” as a crude and effective branding to protect their business. See how it works?

Filed under: Economics, Foreign Affairs, History, , , , ,

Karl Polanyi in Beijing: what the hell is an embedded economy?

The account of economics provided by Polanyi rests on two connected facts. Firstly, that people rely on their natural environment and each other for their satisfaction of needs. Secondly, that the economy requires institutions, that distribute skills and knowledge, and guarantee the worth of human beings as things other than commodities. Traditionally, the economy is discussed as an autonomous sphere of human activity, in which the social environment plays only a supporting role, and modelled at a high degree of abstraction such that a “pure market” becomes an unreachable platonic ideal. However, Polanyi believed that the economy can only be examined within social relations, and that markets are therefore only useful when embedded within those social relations; they are marvellous servants but terrible masters.

Within the Chinese context it is important to examine others who have expanded on Polanyi’s concept of an embedded economy, most notably Mark Granovetter, and Peter Evans. Granovetter’s work is instrumental in understanding the social ties which have been essential in insulating China’s business and migrant workers from the market. The role of the state in economic transformation is examined in Evans’ Industrial Transformation. As addressed Thursday’s post, while the Chinese state has been central in fostering economic growth, it has failed to create an economy which promotes equitable national development. Their contribution to understanding the thought of Karl Polanyi will be examined later in this chapter.

In an oft quoted introduction Polanyi stated that “the idea of a self-regulating market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society.” Utopian, because a self-regulating economy is an impossible fantasy which can never be realised. Annihilation, because Polanyi believed that equating the economy with the market represented a slight-of-hand which presents an impoverished conception of the economy. The economy is the setting for numerous social interactions, equating the economy with the market ignores its role in reproducing ethics and protecting society. If man’s economic role is reduced to an input in the market “human beings would die of the effects of social exposure.” Polanyi’s theory of history views the expansion of the state apparatus and the creation of markets as intimately entwined.

In all previous societies, Polanyi believed, the economic had been subsumed within the social. “Capitalism” was not a term Polanyi used frequently in any of his works; he preferred the term market society. I think Tim Worstall might approve of this split. Besides a desire to distance himself from Marx, he used the term to draw attention to the idiosyncratic nature of his theory. The term market society does not refer to private property, or the means of production. What was unique, and dangerous, about it, was that land, labour and money were treated as commodities. His definition of a commodity as “not merely as a good exchanged on markets but a good produced for sale on markets” is irreconcilable with land, labour, or money. Therefore, he describes labour, land and money as fictitious commodities, that is to say that “labour is only another name for a human activity that goes with life itself . land is only another name for nature, which is not produced by man, actual money, finally, is merely a token of purchasing power.”

Thus, the attempt to commodify these three fictitious commodities is doomed to failure. For Polanyi it would have meant the destruction of society, of man, and of the natural environment. ‘therefore, the tendency towards the creation of a self-regulating market is met by a protective countermovement. This is what Polanyi dubbed the Double Movement and cannot be examined as anathema to markets, instead being essential in mediating the rate of change and instituting the process in society. “If improvement demands too great a social dislocation, society disintegrates” as Lord Glasman has written. Polanyi examined the attempt to create a self-regulating market in nineteenth century society, and witnessed its collapse into the New Deal, Soviet Five-year plans and Fascism.

Class is also central to Polanyi’s analysis; each class participated in the self-protection of society and at some point stood for interests wider than its own. In Polanyi’s view of history laird was protected by the landed aristocracy and peasants. Labour, or man, and hence the whole of society, was protected by the working classes. Hence they worked to protect the whole of society. Although they were the originators of the market, the middle class itself even turned against the demands of the self-regulating market “in the final instance even capitalist business itself had to be sheltered from the unrestricted working of the market mechanism.” Traditionally capitalist development has been led by a middle class keen to win more freedoms, but in the 1980s that class was missing in China. Now, it appears that business, and businessmen, are content within the embedded business environment of contemporary China.

The countermovement, examined above as a protective movement, describes one way of interpreting the Double Movement. However, Fred Block offers another reading, and argues that Polanyi describes an “always embedded economy,” in which countervailing movements not only act as a protection against the commodity fictions, but also help shape the initial environment for the development of a market society. This creates an economy that is instituted by exchange but is also “embedded in law, politics and morality.” The creation of a labour market by the 1834 New Poor Law was met by Factory Acts, and an education system, to provide the needed skills; farmers were protected from rapid price fluctuations that might force them from the land; and to embed money there was the institution of central banking. The countermovement not only works to create an acceptable level of protection, but is also responsible for embedding the market institutions in practices acceptable to society. However, this does not represent an optimum level of protection, the natural environment may still be degraded, infants may go without secondary education and business, and the economy may perform less well than it could otherwise do.

However, workers in China, specifically those who make up the vast migrant workforce, lack even the level of protection described above. In the context of a reformed socialist economy, and one of such massive size and regional variation, some deviation from Polanyi’s original thought is essential. Mark Granovetter examines the importance of examining social ties when analysing economic relations. As a practice, guanxi (personal relationships or social connections) has spawned a mass of literature in China, and it would therefore be foolish to ignore the influence it has there, even if it falls outside the remit of what was described in The Great Transformation. Guanxi, as an idiom of social trust, appears to have grown out of Communist-era China, and is now essential for the conduct of business in China. This essay will argue that for both workers and businessmen, this represents, not a distortion of a natural market order, but an informal institution of embedding, and one that has arisen directly as a consequence of China’s growth.

Expanding upon Polanyi’s work Granovetter works to dispel the notion that economic activities occur within a vacuum. He attempts to overturn both the “undersocialised” and the “oversocialised” accounts of economic behaviour. He argues that people do not ignore the social relations they find themselves in. They can rarely be described as searching for the most efficient solution to the set of preferences, instead using previous formed social relations rather than form new efficiency maximising ones. However, neither do they find themselves so “overwhelmingly sensitive to the opinion of others… that obedience [to social norms] is not perceived as a burden”  in that, they do not rationally follow a predetermined set of preferences to achieve their aims. Rather, it is proposed, a constant toing and froing occurs, in which preferences are formed and changed. His “embeddedness hypothesis” bears heavily in this essay because of the odd nature of reform, and countermovement in China.

The Double Movement has been read as presenting a minimum level of protection. But, Polanyi’s work has also been drawn upon by other writers to explain and advise economic behaviour and policy. That is to say, the minimum level provided is not an optimum level for, individual welfare, environmental protection or economic development. Most useful for this is the work of Peter Evans on the state’s role in industrial transformation. The function of the state has traditionally involved making war and ensuring internal stability. Evans argues that modern states are also charged with guaranteeing minimum levels of welfare and fostering economic transformation. Evans uses Polanyi as a starting point in describing the role that states have played in shaping their economies, and creating markets.

Evans recommends an active role for the state in directing businesses towards sectors of the economy that produce “multi-dimensional conspiracies” in favour of development. In his study, by directing entrepreneurs towards the information technology industry, states, which in the 1950s had no prospect of developing in this lucrative field, achieved unforeseen successes. Imperative to these successes were the close ties between state and business communities, and the ability of states to remain autonomous; to not become rent seeking cartel builders. Evans reiterates Polanyi’s point that it is useless to talk of “how much” state intervention, it is more useful to discuss how, where, and why, a state intervenes.

Important is the ability to cultivate close ties between both; bureaucracy and domestic business, and between those same individual businesses. Evans examines the most successful “developmental” states — Japan, Taiwan and Korea — and discusses their bureaucracies and industrial policies. He also contrasts them with both Zaire, the archetypal “predatory state,” and with the “intermediate states” of India and Brazil. Zaire, rather than having too many bureaucrats, had too few; everything was for sale, even justice and influence. Rather than being embedded in law, politics and morality Zaire’s officialdom were free to maximise their individual gain through corruption and exploitation. Evans asserts that not only were the benefits of a “coherent meritocratic bureaucracy” confirmed, but links between state and society were shown to be essential as well. Both, with some qualifications, are present in China, but whether or not they can be effective in fostering further economic transformation, remains to be seen.

If we examine China’s history the tradition of bureaucratic examination extends back to the Song dynasty in the seventh century CE. This bureaucratic tradition is supplemented by the close state-society ties created by the system of guanxi described above. Contemporary trends may however, see the domestic economy increasingly dominated by foreign firms, with little domestic integration. The history of China’s development has cast a shadow over what is now occurring. Therefore, Thursday’s post will discuss the dual nature of China’s economy. Dual, because it is embedded within close ties of social relationships, while also displaying systemic weaknesses that stand in the way of domestic upgrading.

There are, of course, difficulties in using Polanyi’s work. It was developed within a specific historical situation, and it reflects its immediate surroundings; Bolshevism, Fascism, the New Deal and Total War. Polanyi presented class as the mechanism for social change; peasants and landed gentry sought to protect land, while the working class ultimately sought to protect the whole of society from the commodification of man. Thirty years of Marxist-Leninist party rule, state ownership of the means of production, and relentless Maoist mass movements, have weakened class relations in China, and this will inevitably alter how they react to the massive upheaval it is currently experiencing.

Sixty years of economic discussion on the limits of markets has passed since the publication of The Great Transformation. However, Polanyi’s work remains important his lessons have not been learnt. The pope would agree. I’ll leave you with that thought. tomorrow we’ll pick this up with a post on the natural environment of China since Deng’s reforms were introduced. For now I’ll leave you with a photo of Shanghai at the moment and a link to the official safety advice.

From Instagram user euro_spring

Smog in Shanghai from Instagram user euro_spring

Filed under: Economics, Foreign Affairs, History, Politics, Society, , , , , , , , ,

Karl Polanyi in Beijing: what is happening in China?

Mao’s China has been transformed – a market society has been created. This week I will be writing about the political and economic consequences of this event. Karl Polanyi dubbed a similar occurrence, that began in England over two centuries ago, The Great Transformation, and I will argue that no less a great transformation is taking place in China. The similarities between the two events are striking. Firstly, the processes of commodifying land and labour, which began two centuries ago in England are underway in China today. So too is the endemic environmental and personal degradation which occured throughout the first industrial revolution. Indeed the similarities continue, both China and nineteenth century earth have populations approaching one and a half billion.

Just thirty years on from the beginning of reform, an economy largely built on society principles has seen such a transformation that it now unarguably operates according to a capitalistic logic. However, this is not an occasion to celebrate. Polanyi argues that the attempt to commodify land, labour and money will only lead to social calamity. As will be be explain in tomorrow’s post, Polanyi insists that the trio of land, labour and money represent only fictitious commodities, because they are not created for sale. Representing the loci of weakness in a market economy they provided the structure for these posts.Tomorrow’s post will concentrate on land and environment the degradation which has resulted in its commodification. Wednesday we will talk about labour and the colossal upheavals as a market was forced upon China’s labour force. On Thursday we will discuss the productive organisation of China. It will examine the close ties between state and society. Friday I’ll try to tie it all together.

Contrary to the liberal fallacy that markets form naturally when humans interact Polanyi insists that “the road to the free market was opened and kept open by an enormous increase in continuous, centrally organised and controlled interventionism.” This is evident in China where state involvement has been central to the creation of markets in both labour and land. Polanyi argues that economic action is at all times embedded in social relations, thus to disembed it – to commodify land, labour and money – is tantamount to “annihilating the human and natural substance of society”. Therefore, to protect society the initial tendency towards the creation of the market is met by a countermovement; this countermovement is not antagonistic to the creation of markets, it is a necessary corollary. Polanyi not only argues that a countermovement is inevitable, but also that, when embedded, an economy will perform more efficiently. To illustrate this point we can examine the manner in which China entered the world economy at the beginnings of the 1980s. It did so not just with a cheap workforce, but with the best educated and healthiest workers in the world for any country of comparable GDP per capita. However, the imposition of the market has destroyed some of the institutions which created this competitive advantage.

As will be discussed, land and labour in China possess very little in the way of social protections, but constitute vital elements in one of the world’s most dynamic economies. This seemingly contradicts Polani’s assertion that embedded economies are more efficient, and will thus need to be addressed. The next post will unpick the theory of Karl Polanyi which will be applied throughout. Stay tuned, next post up at 10.

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Double your donations to the poorest people in the world

GiveWell, the charity rating company, has promoted GiveDirectly to top charity in the world. The Malaria Foundation used to be top but has been finding it difficult to put extra money to use. GiveDirectly doesn’t have that problem and can be scaled up unlimitedly so all donations over the next few weeks will be doubled. Donate!

You’ll remember GiveDirectly as the charity that directly transfers cash to people living in absolute poverty in East Africa. They’re getting a 28% annual rate of return, improving mental and physical health, reducing hunger, reducing domestic violence without promoting anti-social behaviour like alcoholism or gambling.

Good Ventures will match donations to GiveDirectly over the next few weeks, up to a total of $5 million dollars. They don’t have marketing department and at least 90% of your donations end up with the world’s poorest. For the next few weeks 190% of your donations will go through. Beat that for a good deed.

Filed under: Economics, Foreign Affairs, Politics

Capitalism can be good for your teeth

I hope all my readers are familiar with the idea of the hedonic treadmill and capitalisms relentless push for new markets. The first is the idea that you’re never happy and that each desire fulfilled is soon replaced with a new one. The other describes the way you want an iPad now when before you didn’t because it didn’t exist. Supply creates its own demand but never makes you happy.

torches of freedomSometimes capitalists search for new markets is altogether more sinister. In the 1920s cigarettes were seen as masculine and unbecoming of a lady, associated with louche behaviour and loose morals. Anyone familiar with Adam Curtis’s documentaries will have heard of Edward Bernays. The nephew of Sigmund Freud he turned his uncle’s insights into the  human mind to marketing and successfully got women smoking. A new market was created, new capital and workers were employed and tobacco companies’ bottom line fattened.

That was when capitalism was bad for your teeth. Sometimes it can be good. In India people tend to only brush their teeth in the morning. To brush in the evening just seems a bit pointless. Brushing once a day is better than nothing but you’re still very likely to need teeth pulled and develop gum disease.

Enter Unilever. Unilever is one of the largest firms in the world and they’re in the toothpaste business (not to mention detergent, bovril, petroleum products, ice cream, hair gel…). Just like Edward Bernays planned on doubling cigarette consumption by getting women smoking, Unilever are planning on doubling the amount of tooth paste consumed in India. That, needless to say, is a lot of extra toothpaste to sell and everyone involved in those extra transactions will be very happy.

One four levels this is interesting. Two nominally left wing, two nominally right wing.

First of all, even simple information is “expensive.” Finding out that you need to brush your teeth twice a day and finding out that this information is valuable is difficult. A lot of writing on economics assumes that information is easy to find and distribute but it is not. A lot of public effort in producing and distributing information is necessary. Secondly, behaviour is sticky. I don’t want to bang on about how people are irrational but they are. Even knowing how important brushing is people still don’t. 

Thirdly, the economy is fiendishly complex. Some of you might care about the dialectic but I bet none of you care about the Indian toothpaste market. Hayek had this right, a more distributed approach to collecting information and organising action has its advantages. Lastly, the profit motive is not all bad. Unilever is full of people who care about health but it is also full of accountants. Together they’re able to invest in marketing in India to increase toothpaste penetration and make the world better for everyone.

The hedonic treadmill may roll on and on, but there’s nothing in the world worse than toothache.

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Everything you never knew you wanted to know about Islamic Central Banking

iran.

This is cool! [1] Hassan Rouhani talking about monetary policy? Could I be any more excited? No.

Despite inventing zero, arabs have no use for it, [2] at least not when it comes to central banking. Lending money at interest is haram in Islamic finance so the use of interest rates to control demand as is normal in the west doesn’t apply. So does this also means that unlike in the UK and the US there is no danger of interest rates going to zero and the economy entering the liquidity trap?

Most reporting on Iran focuses at its very high inflation but nobody is paying much attention to the tools used by the central bank. This is understandable, inflation has skyrocketed and the central bank has no independence and is controlled by the Iranian state. My rhetorical question is largely irrelevant at the moment, but if we look at the tools Iran’s central banks uses the question is likely “yes”. I think we should look a little at the tools of Islamic central banking anyway as they give us a window into a world of central banking with interest rates or a zero rate problem.

To begin, a little history. The first Islamic savings bank was established in Mit Ghamr in 1963 by Ahmad El Najjar, an economist. In the 1960s Nasser was trying to modernise egypt and so the bank kept secret its overtly Islamic nature. Riba – charging interest – is haram so the saving bank operated on a profit share basis. Today, the much larger Islamic finance industry – in 2011 $1.357 trillion of shariah-compliant assets existed globally - has a variety of alternatives to charging interest.

Islamic finance seeks to avoid unearned income, which is seen as exploitative. Instead of lending money and charging interest, which is seen as just transferring risk, risk is shared through a variety of mechanisms; as profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijar). This can be illustrated with an example: Unlike in western finance a mortgage transaction does not involve interest payments. Instead the bank would arrange to buy the house from the seller and sell it on to the buyer at a profit with payments arranged as installments.This arrangement is called Murabahah and is the most relevant for our discussion of central banking.

Sukuk is also an important concept too. This is similar to a bond in which interest is regularly paid on a principal. However, because riba is haram in Islam it cannot be structured like this. Instead sukuk imply a transfer of ownership and can look like a form of repurchase agreement. You agree to repurchase something at a certain price over a certain period of time. This echoes previous posts of mine of what saving really is. Interest rates are just symbolic, what is really happening is people buying durable things today with an expectation they will be able to sell them on for more in the future. Interest rates are our way of expressing that, Murabahah or Sukuk are another. The latter seems clearer and more honest on the mechanism actually.

(At this point, I do want to point out to all the snooty economists, engineers, mathematicians who mock post-modernism…who’s laughing now?)

So what does all this mean for Islamic central banking? The most prominent method of controlling monetary policy is the control of the profit rates allowed by banks when they lend, the Mudharabah discussed above. Anything from an 18% to 20% on non profit-and-loss sharing arrangements, and slightly lower on profit-and-loss sharing arrangements. In a country shrinking around 5% a year finding a 20% return implies a high rate of nominal GDP growth which is split between negative growth and even higher inflation.

We can see that the implied maximum profit rates require very high growth in nominal incomes and we also see very fast growth in the monetary base. Entering into a profit-and-loss agreement will guarantee you a high nominal return in a low growth environment and monetary growth is high to accommodate these contracts. There is no reason however that the profit share cannot be set to a lower number. This would amount, via the Kalecki equation, [3] to a monetary tightening and NGDP and inflation would both have to decrease to accommodate this lower allowable rate of profit. Weirdly a shrinking of the nominal profit rate could increase it in real terms. Money is weird.

This piece from Cato, caveat lector, says that Iran stopped publishing information on its money supply in March 2011, at the time they showed continued very rapid growth in the money supply. If Rouhani has changed this that’s great. The country’s monetary policy at the moment is chaotic but once the chaos fades it will be useful to bear in mind how Islamic monetary policy works. The details in this post are broad sketches only. I took lots from these documents [12345] and I’m not sure of their quality. This is an area where I don’t even know anyone who might know an expert, so any input in the comments or on twitter is welcome. Likewise please share this as this might get picked up by someone better informed than me.

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[1] Yes. Cool. You’re here aren’t you?

[2] Yes. Persian or Iranian is more appropriate but I’ve been looking for a chance to use that line since I drafted this post months ago. UPDATE: As Lorenzo tells me, actually the Indians invented zero as a concept, the Arabs were miles behind. More here.

[3] I’m making the Kalecki equation  [1, 2, 3] do some heavy lifting here, but I think that’s right…

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Remember, there’s a charity that fights mental illness and domestic violence that will double your donation every three years

The last time we checked in on GiveDirectly they’d published a report outlining the amazing results they’d recently registered from their latest trial project.

The full report detailed, amongst other things, that a pound given freely, without condition, to someone in absolute poverty generated a 28% annual rate of return. Restated, that means that every two years your donation doubles in value. It’s not Wonga levels of accumulation, but it’s pretty good.

Today I found out that GiveDirectly had successfully expanded into Uganda. Up until now they’ve only operated in Kenya which is an anglophone country with a reasonably centralised state. Uganda has many more languages and its government is more decentralised. If GiveDirectly is going to be successful it is going to have to change the way it works to operate in the myriad different circumstances in which the absolutely poor live.

Instead of another stats dump you can listen to the field workers directly explaining their initial scepticism and current enthusiasm for the programme. Enjoy!

“The first time I heard about GiveDirectly, I couldn’t believe [an NGO could] just come in and give free money…and I thought people were going to waste it….” in this video, GiveDirectly Uganda field officers Rosemary Apolot and Charles Omoding share their initial skepticism about giving cash to the poor, and explain how their experiences with GiveDirectly recipients changed their thinking.

Filed under: Economics, Foreign Affairs, ,

One way I think about development, for @bickerrecord

I’ve always cared a lot about “development”. Even before I knew the word I was always concerned about really poor people over there, even when I was really young and thought the world was divided into Britain, Europe, Centre Parcs, America and Ethiopia.

I linked to this Scott Sumner piece on China which picked up something I find really intuitive but which maybe other people don’t get. You can be a really, really poorly run country and still see tremendous economic growth. The majority of modern world history is the history of this fact actually. [1]

Factories are really, really productive. I think a lot of people now don’t interact with them, but modern factories are really something. Manufacturing itself is rather unique in that even poorly run countries will see their manufacturing sector’s productivity catch up with the developed world. This unconditional convergence has been one of the major drivers of economic growth and convergence for countries like Germany, China, Korea etc.

This doesn’t happen in most sectors though. There really is something unique about the industrial working class and a manufacturing base. However, most of your economy is not manufacturing. Most of any economy will be services and a bit of construction and a little agriculture. This is the problem.

So there is an ideal type out there at any moment: a technological frontier of efficient production and rational organisation. This will oscillate wildly but predictably outwards as we work out new ways to do good things. This is, hypothetically speaking, the toolkit the world has to become wealthier and drag itself out of poverty.

Even with minimally functional institutions and rampant corruption, so long as things are kept broadly predictable manufacturers can upgrade their equipment, staff will refine processes and they can easily ship and trade their product. Manufacturing catches up to the technological productivity frontier, possibly because it happens in one place and you can trade globally.

This doesn’t happen in other sectors and I’m not, and I don’t think most people are, entirely sure why. The main concern of development is to get manufacturing clusters as well established in the developing world as possible and to try to work out how to get the other sectors to pull their weight. [2]

Beyond a certain level of stability, manufacturing is uniquely able to chase down this moving target. But this isn’t generally true and this is where I see institutions coming in. Institutions set how closely your non-manufacturing sectors can approach this technological frontier. They also set how large your manufacturing base will become relative to other sectors. 

Many developing countries have subsidised their manufacturing bases. In days gone by this was because manufacturing was ideologically fashionable and its capitalists relatively strong. Coincidentally they hit upon unconditional convergence and this rent seeking and ideological patchwork worked out.

These days manufacturing’s days of dominance are over. Manufacturing employment is shrinking everywhere because it is just so damn productive. The technological frontier will carry on working its way out as we work out more and more productive ways to put resources to work but the days of catch up might be largely over. It is just a lot harder to get non-manufacturing to catch up with global best practice.

___________
[1] This is why I’m not so concerned as Tim about the developed world’s regulations stifling growth. I agree they may make it a bit of a bugger but largely the rules of the game are predictable and the returns are possible. Growth won’t stop but it might proceed from a slightly lower base and this may be worth it or it may be not.
[2]Incidentally, this is why I’m a particularly poor leftist when it comes to the West’s declining manufacturing base and attendant job losses. I wave happily goodbye as they sail across the ocean because I’m buggered if I can think of a better way to export prosperity abroad. Taking good institutions to the developing world is really hard, and the developing world’s population are against moving the poor here where we already have good institutions.

Filed under: Blogging, Economics, Foreign Affairs

Nestlé takes primitive accumulation to a whole new level in Pakistan

From Sum of us

In Pakistan Nestlé is draining drinking water, bottling it and selling it back to people. This is your classic primitive accumulation in action. But there’s lots more going on too.

First off, what’s happening? Nestlé has set up water processing plants for their “Pure” water and locals are claiming that they are draining ground water and essentially stealing their water. Nestlé denies they’re doing anything wrong, and even if they were they’re providing water for the locals too, so there.

Here’s your primitive accumulation, as Marx called it. Or accumulation by dispossession, as David Harvey named it. I think Harvey’s is better because primitive implies it has stopped happening, when it hasn’t. The process describes the seizure of what was public and its transformation into private property. The classic example is the enclosure of land in Elizabethan England, but water in Pakistand fits the bill too. What was public becomes private.

I don’t think this particularly makes Nestlé the villain. I mean sure, they are a villain, but their behaviour is normal for a capitalist firm. Formula milk is the most famous, but E.coli scandals abound, child labour features and of course they use palm oil too. In this case though there was capital lying around used inefficiently, so they rounded it up told everyone it was theirs and put it to profitable use.

It looks like the locals haven’t been adequately compensated, they’re poor Pakistanis with poorly defined rights to nearby water without proper legal representation. They never had a chance. This is bad, but this is normal. This is what the creation of a capitalist system looks like. In a historical context the seizure of previously community managed water isn’t a scandal as a well documented stage in capitalist development.

Three further points spring to mind.

One, it wouldn’t really matter if Nestlé stop or don’t. At the local level they’ll be very harmful. Nationally, they’ll be paying tax and exporting water a reasonably high value product. This is my inner bastard coming out. So I apologise if I sound callous. Part of me has always felt: fuck it, let’s dispossess the peasants and be done with it.

Two, Nestlé isn’t even close to the biggest offender when it comes to water waste. One cruelly efficient capitalist company is as nothing compared to millions of well meaning but capital and knowledge poor farmers. While at Bhati Dilwan Nestlé is a major water users, nationally 90% of Pakistan’s water is used in agriculture, and only 30-35% of this reaches the crops. The rest is lost to seepage, evaporation and field run-off.

Three, the real reason Nestlé is being so damaging is because they are using water in an unconventional way. There are systems both formal and informal for managing farmer use of water. Draining the immediate area’s ground water is something new Pakistan doesn’t have rules to deal with. There are several capitalism. All of them contain things like accumulation by dispossession but they are all instituted in different ways so that certain uses of property can be managed and others cannot. 

Filed under: Economics, Foreign Affairs, ,

Why the coalition won’t tear itself apart over evidence based policy

It continues. It intensifies! This time its interdepartmental rather than stroppy bloggers attacking IDS. The Foreign Office is getting stuck into Theresa May (alternative). There is a view within the Home Office that there is electoral gold in them thar hills of health tourism and immigrants squeezing local services, but they’re having difficulty turning up any evidence to support their policy. As one government official put it…

..Ms May is frustrated that the evidence she has received “doesn’t fit the Home Office view”, adding: “Theresa wants to go big on impact of immigration on local services and health tourism and the reality is there is very little evidence to demonstrate this. There is a political view from May’s people, but this report has to be evidence-based.”

The evidence she has received doesn’t fit the Home Office view. What a wonderful vignette of official thinking. Anyway, this is all around a report being prepared by the Home Office for the FCO on the negative impact of free movement in European on the UK. Problem is they can’t really find any…

Health tourism is really very small. Figures like from 2% to 0.06% of the NHS budget are bandied about, the official views of the right and left. The first figure is so ludicrous I remain a little convinced that much of the right is engaged in an elaborate performance piece and they’re on the verge of yelling “The Aristocrats!” The other figure might be a bit on the small side but it corresponds to 40,000 people or so, which is at least the right ballpark.

Anyway, the battles between different government departments are fun to watch. Hopefully the FCO will win in this one and the Home Office will have to tone down its rhetoric and adopt slightly less disastrous policies. Luckily we’re at the point where the coalition’s deficit fighting zeal might help poor people.

We’re well below the optimum level of immigration for debt reduction. This is the officialish position as set out by the Office of Budget Responsibility. More immigrants means more workers means more taxpayers means a bigger denominator on the debt to GDP ratio. There’s also the clusterfuck around preventing foreign students studying in the UK as discussed by Paul Sager (Yes! Really!) here. If the FCO can help wear down May’s position then both of these policies could be reversed in the name of fiscal rectitude.

I’m not arguing that there is any coherent pro-evidence based policy putsch in action, just that evidence based policy is a tool of actually existing politics not a new approach to politics.

Filed under: Economics, Foreign Affairs, Migration, Politics, ,

An ethical investment with a 28% annual rate of return that reduces domestic violence

So, charity update. As you’ll know I signed up with GiveDirectly to transfer my beer money to slightly more useful purposes. They’re the charity that Less sclerosis for me, more money for poor people. It’s so pareto optimal.

They’ve done a trial, and it was good news! Of course, they publish plans for all their trials in advance so that even if it wasn’t good news we would still know about it. Take note everyone who’s written a blog post and quietly binned it when the ONS didn’t back you up.

Most of you know I’m a simple kinda guy, so giving poor people money seems like a good idea to me. I see a problem: people lack money. I pretty quickly hone in on a solution. Of course, there are lots of solutions, that are neat, plausible and wrong so I’m happy to see my priors confirmed empirically. 

The full report into their trial recent in Western Kenya took place over 2011-2012 and had some remarkably positive effects. 

  • Business and agricultural income increased 28% of the average grant size, implying a 28% annual rate of return. 
  • Expenditures increased in nearly every category so poor people had more stuff.
  • But not nicotine, alcohol, or gambling. My beer money did not become theirs.
  • Food security improved substantially and children were 42% less likely to go entire days without eating.
  • Mental health improved substantially and it is likely recipients were less stressed. [1] 
  • Transfers did not affect the incidence of crime and conflict or lead to changes in local prices.
  • They found suggestive evidence that cash transfers reduce domestic violence and increase female empowerment.

So that is more investment, more consumption, better mental health, less domestic violence and no increase in other crimes. Seriously, once one starts to think about what giving poor people money can do, it is hard to think about anything else. So, what can I put your down for?

____

[1] I’m currently giving £10 a month to Mind, the mental health charity, but I’ll have to work out whether I might be able to help with mental health problems more by just consolidating all my charity into giving money to poor people. The advantage of having an analytical, utilitarian streak is that you can be awesome at charitably giving, but only if you want to.

Filed under: Blogging, Economics, Foreign Affairs

Historic hours worked

I was pretty sceptical of the end of scarcity meme doing the rounds with FT Alphaville, Rick, John Aziz, and Chris all contributing so I looked up some figures.

Hours worked historically

 

 

Now I’m not one to just plot a trend line and follow it… but, if I was I’d say The Dutch only have another two generation of workers left, which is nice.

 

Filed under: Foreign Affairs, History

The end of growth, open borders, feeling pessimistic

I was thinking about economic growth, as you do, and I got really optimistic about how quickly people’s lives can change for the better, in decades not generations, then I got sad because I’m not sure that will last.

There have been lots of growth miracles. First was the UK, which moved from about zero annual per capita growth to 1% at the start of the 19th century (that’s the real miracle, btw, sod China). Then there was Germany which went to 2% at the end of the nineteenth century. Japan got up to 6% in the middle of the 20th century, Korea got towards 8% a year and at the start of this century China was clocking in at 10%.

The living standards for people living in the UK in 1870 were only marginally less miserable than those alive in 1770. And industrialisation had introduced whole new classes of misery. Incomes had more than doubled over a century, but people were still dirt poor. Generations saw change slowly. In China people see change quickly. The same generation of people is twice as wealthy as they used to be and before they retire they’ll be at least twice as wealthy again.

If this keeps but only a handful countries or so begin real catch up growth each year, in a generation we’ll have no more poverty. Plus those last few people who are in poverty will see their income double every couple of years. I know how good a 5% raise feels, imagine 50% wage growth, which is entirely realistic under the above assumptions. It would suck to be poor so long, but it would be awesome (in the proper sense of the word) to see your world change for the better so rapidly.

On my cycle home, I began to think those assumptions were just wrong. 

Manufacturing drives convergence. There’s very convincing evidence that productivity in manufacturing catches up with first world levels quickly regardless of policy. Services, resource extraction, farming just do not have the same kick to them. This is why our list of miracles features exporters.

Sadly manufacturing employment is declining worldwide. I say sadly, but this is good, because factory work is famously dull, arduous and monotonous. Not that being an office drone is a lot better, but at least its easier to tweet at a desk. Even in China manufacturing jobs are being lost as productivity surges ahead.

It is sad because as manufacturing declines there will be fewer factories in the developing world and this will decrease growth. Employment isn’t the best metric, but a similar trend is visible in value add for manufacturing. We want more services as we get richer. But services don’t help pull people out of poverty.

Added to this is a change in how we manufacture. At the moment clusters of factories in certain locations make stuff and send it to you. 3D printing will disintermediate this process and stuff will be made just where you are. This will lead to more investment in labour-free manufacturing in the west (where the money is) and less investment in transport to the global south (where the cheap labour is).

Where does this leave Africa, which is destined by history to develop last?

It is destined to be the continent most reliant on offering service exports because manufacturing will continue to shrink. India has shown there is a market for overnight service, doing paralegal work and admin while the wealthy west sleeps. But most services and admin need doing while people are awake. This means that due to timezones Africa will have to do business with Europe. A Europe which is going to get a bit richer and a lot older. This is not a recipe for a vibrant export market.

This means that Africa is still fucked, my dream of someone waking up on day a Lesotho farmer and quadrupling their income in a decade is receding. We need to look back to the 19th century. Migration improved more lives in the 19th century than automation did. Moving to where the work was or the land was plentiful was how people got on.

It is fashionable to say that we can have open borders, but not until the poor are richer. We will be flooded. But we may be heading for a world where the poor stay poor because there is no wage we can employ them at that distance. The only option will be to watch them suffer and wring our hands or let them come here and open a nail salon. An easy choice right? They haven’t got a chance. 

Filed under: Economics, Foreign Affairs, History, Migration

When NGDP is Depressed, Employment is Depressed

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