Friday, April 13, 2018

When autarky becomes the only solution

The latest, and by far the most serious, round of US sanctions against Russia has shown two things very clearly—neither of which has received much publicity in the comments so far. The first is the extraordinary power of the modern state. The second is that when powerful states impose sanctions that limit one’s access to markets, technology and capital, the only remaining option turns out to be autarky.

I will discuss the two points in turn.

Despite all the talk about the waning power of the state and the rising power of ”foot-loose” large corporations what the sanctions do show is that the state is still the most powerful actor in contemporary global capitalism. Apple or Amazon could not impose sanctions and destroy Rusal. Actually, no company in the world —even those who are Rusal’s major customers—could not destroy it. But a state can. Putin showed the power of the Russian state, at the time when it seemed weak and insignificant, when he overnight imprisoned Khodorkovsky, the richest man in Russia, and despoiled him of Yukos. Trump, or rather US treasury, shows the power of US state in destroying overnight the largest aluminum producer in the world

The second lesson is, to a large degree, for Russia the replay of the 1920s. It is today often wrongly asserted that the USSR chose a policy of economic autarky. On the contrary, all the 1920s, as soon as War Communism and foreign intervention ended, was spent by Russia in pursuit of foreign capital with which to rebuild its destroyed industry, and optimistically, to catch up with the West. But that capital was not forthcoming. The Western powers refused to recognize the Soviet government, and since the Soviets repudiated previous debt of the Tsarist Russia, their access to capital markets was shut both because of default on the debt and because of ideological reasons.

This created the situation in which Soviet development had to be conducted entirely based on domestic accumulation and technology. As is well known, the implications of that was first seized by Trotsky and Preobrazhensky:  it meant comprehensive planning  of the economy and extraction of the surplus from the only segment of the population that could generate it: the Soviet peasantry. Soviet industrialization thus took place on the “blood and toil” of Soviet (which essentially meant Ukrainian) peasantry. This policy, which by definition included collectivization, was then, beginning with the First Five-Year plan in 1928 conducted with characteristic brutality by Stalin. 

What current sanctions, and those that may yet come (as for example on Gazprom), show is that Russia is now at the same crossroads at which it was in the early 1920s. Its access to Western markets, technology and capital is all but cut off.  It is true that there are nowadays other sources for all three, including in China. But the breadth of sanctions is such that Chinese actors, if they themselves plan to do business or raise money in the United States, will too avoid doing business with Russian entities. So Russian industry will be left to grow, if it can, using only domestic resources, which compared to global resources, are small and inadequate (given how Russia’s relative economic and population role in the world has declined). Autarky is thus preordained.

The questions is then whether such an economic choice will also entail, as it did in the 1920s, dictatorial domestic politics. This is quite possible because autarkic developments are hard to implement if there is no corresponding political pressure. Moreover, there would be for sure attempts from those who are affected by sanctions and all those who need access to global markets to reverse the policies that have led to the sanctions. Such attempts make them become direct political foes of the current government. The logic of political repression then becomes inescapable.

It would be wrong however to believe that the current impasse in which Russia finds itself can be overcome through different policies. It could have been done several years ago, but no longer. The reasons listed in the imposition of sanctions that cover everything from the annexation of Crimea to fake news are so comprehensive that no new post-Putin government of any conceivable kind can accept them all. They can be accepted only by a totally defeated country. In addition, US sanctions are notoriously difficult to overturn. The US sanctions against the Soviet Union started in 1948 and were practically never discontinued. The Jackson-Vanik amendment that linked trade to the freedom of Jewish emigration was on the books from 1974 until 2012, i.e. lasted more than a quarter century after the ostensible reason for its imposition ended. And it was repealed only to be replaced by another set of sanctions contained in the Magnitsky Act. The sanctions against Iran have been on, and despite the recent talk of their loosening, for almost 40 years. The sanctions on Cuba have lasted, and many still do, for more than half-century.  

Putin has thus, through a series of tactical successes, brought to Russia a comprehensive strategic defeat from which neither him, nor the governments that succeed him, will be able to extricate the country. There is moreover no ideology, short of extreme nationalism, on which the autarkic system can be built. Bolsheviks in the 1920s had an ideology which led them ultimately to accept autarky and to work within it. Such an ideology does not exist in today’s capitalist Russia. Yet the industrialization debate of the 1920 may again become indispensable literature for economic policy-making.

Saturday, March 24, 2018

Chinese income distribution in 2002-3 and 2013

Chinese official micro-level data on income distribution are difficult to get and of questionable reliability. The best source are urban and rural nation-wide household surveys (HS) that have been running since at least 1982 (”at least” is a qualifier because the surveys have been fielded from 1954, but, were discontinued during the Cultural Revolution and, as far as I know, the data from these earlier years been lost).  HS was composed of two distinct parts, one for urban and another for rural population. They were not exactly the same surveys and putting them together to obtain China-wide results, which was done only by the National Bureau of Statistical (NBS), was hard and never fully explained. Since 2013, however, the two surveys were folded into one with the same questionnaire, so in principle the results should be much more reliable. However, a presumably better survey was accompanied by as apparent clamp-down on data release so that even fewer numbers from this new survey are released in the official publications like Chinese Statistical Yearbooks. This is unfortunate because the Chinese official survey, like in almost all countries, is the best source of income data thanks to the its coverage of all Chinese provinces, large sample size, and experienced numerators.
            A sample from within the HS, with micro data available, has been in existence since 1988. It is called Chinese Household Income Project (CHIP) and is run by the Chinese Academy of Social Sciences. (The discussions of various surveys, including a recent proliferation of surveys conducted by public institutions, mostly universities, and generally covering only a part of China are provided here, here and here.) CHIP is considered the best available survey because it “originates” from within the NBS,  is relatively large (2013 survey includes about 18,000 households), covers most of China (15 provinces comprising 63% of the Chinese population) and, most importantly, researchers have access to individual (household-level) data. It is this survey that Luxembourg Income Study (LIS) uses as representative of China and harmonizes its income and other data with those for other countries. It is therefore probably the best survey to study the changes in income distribution in China, and is certainly the best survey to compare China with other countries (because LIS makes variable definitions the same and thus comparable across the countries). LIS has harmonized 2002-3 CHIP, and has recently harmonized and added the 2013 CHIP.  This is a big event not only because we now have two years for China but because the 2013 CHIP data are coming from the “unified” national 2013 survey.
            In this post I will look at two things: (1) how has Chinese income distribution changed between 2002-3 (called for simplicity 2002) and 2013, and (2) how does Chinese income distribution compare with American.
            Figure below shows, on the vertical axis, the annualized change in real household per capita disposable (after tax) income between 2002 and 2013 and on the horizontal axis percentiles of income distribution, from the poorest (on the left) to the richest. (In my tweet from several days ago, I showed this graph but wrongly used the unrevised 2002 figures. LIS has in the meantime done some improvements on 2002 data and the graph below is based on the “correct”, i.e. revised 2002 version.) The average annual inflation-adjusted growth rate was 9.3%. As the graph shows, the rate was fairly similar across income distribution, with highest growth rate however among the middle of the income distribution. People between the 30th and 60th percentile saw their incomes rise by more than 10% per annum. (At that rate, you double your income every 7 years.) There was also an uptick of growth at the very top of the income distribution. 

Such relatively even growth across income distribution left the Gini coefficient almost unchanged: it decreased modestly from 0.45 to 0.43. This stability/slight decline of inequality agrees with results from other surveys (including the government-produced Ginis published without any discussion of how they were obtained) and the evidence that shows that wages of low-skill workers or sectors are rising faster than wages of high-skill workers and sectors. All of these relatively equalizing developments are observable from around the turn of the century. Note however that Chinese inequality, even if not increasing, is very high. It is higher than the US inequality:  US Gini coefficient for 2013, calculated from LIS-harmonized data and using the same per capita definition as for China, is 0.41.
            How far has Chinese income distribution converged toward American, in other words how much have the Chinese (since their incomes have obviously grown much faster than the incomes of Americans) become more similar to the Americans? Two graphs, for the years around 2002 and for 2013, display this in a rather dramatic fashion. The horizontal axis gives disposable per capita income in international (PPP) dollars, so that having $100 in China is equivalent, in terms of purchasing power, to having $100 in the United States. (The axis is shown in logs.) This makes comparison of incomes possible. It is obvious, even by a simple visual inspection, that Chinese incomes have “moved” much more closely to American incomes by 2013, than they were in 2002. 

 We can show that by doing a very simple exercise in “overlapping”, that is, finding the percentage of Americans whose incomes fall within the range of Chinese income distribution, and vice versa. The “range” is defined here as the range between the 2nd lowest, and the 100th percentile of income distribution (I drop the very poorest percentile because it may be composed of people who, temporarily, may have zero or negative incomes.)
            We ask, “where in the Chinese income distribution would be the poorest Americans?” In 2002, even the poorest Americans were better off than 77% of the Chinese; in 2013, the poorest Americans were better off than only 30% of the Chinese. So, from the Chinese point of view, less than a quarter (100%-77%=23%) of the Chinese were within the range of US income distribution in 2002. By 2013, however, more than 2/3 were (100%-30%=70%).
Let’s now ask “where in the American income distribution would be the richest 1% of the Chinese?” In 2002, their income was equivalent to the income of people at American 30th percentile, while in 2013, Chinese top 1 percent had income that would place it at the 78th American percentile. From the American point of view, therefore, in 2002, only 30% of the population was within the range of Chinese incomes, but in 2013, more than ¾ of Americans were within the range of Chinese incomes.
This was a remarkable development, probably unrivaled by any other country. If Chinese incomes across income distribution continue to grow much faster than US incomes, the overlap of the two distributions will become even greater. The overlap is certainly greater today than it was in 2013. Moreover, the overlap as calculated here is, in some sense, biased against the Chinese data because it treats each percentile in the US and China as equally “important”. But Chinese percentiles have four times as many people so if we were to define income fractiles to contain the same number of people (and thus to divide Chinese population into approximately 400 fractiles), the overlap would increase. 

Saturday, March 17, 2018

India at the time of the Globalization Raj. A review of Rana Dasgupta, “Capital: The explosion of Delhi”

It is the story of Delhi, the city of imperial courts, colonialist city-planners and above all of administrators that in the past three decades has become the heart of Indian, and perhaps worldwide, political capitalism. The story of Delhi is a metaphor for the story of global capitalism and the energies that it unleashed, both for the good and ill.  As one would have gone to Manchester and London and later to New York to observe the effects of the Industrial Revolution, one should go to Delhi, Mumbai, Beijing, Shanghai, Jakarta to find out about the this new technological revolution.  Or, as Rana Dasgupta, says in the beginning of his marvelous book, “it is a report from the global future” (p. 45).

As one would expect from a tremendous “earthquake” brought about by Indian liberalization in 1991 and subsequent globalization, it is first of all a book of discontinuities and disconnects. Not only the obvious ones of farmers who ether leave their land in search of improbable city jobs or are driven from their land by developers; not only between the Nehruvian parents and their BMW-obsessed kids; but even geographically, it is the story of disconnect between the polished shopping malls built in the midst of squalid wilderness, of disconnect between the outside where every knavery is permitted and the inside where strict family rules are enforced. It is as if nothing had remained stable, as if persons themselves are at every moment becoming disconnected from their own pasts.

Turbo capitalism has unleashed huge heretofore thwarted energies of millions of Indians. Dasgupta tells us of people for whom work becomes most important part of lives because work allows them not only personal fulfilment in a reasonably meritocratic environment, but enables them to conquer freedom from narrow and constricted family life. This is especially true for women who virtually escape to companies, these enclaves of human freedom, far from their mothers in law, arranged-marriage husbands and family rules. Even for young men, job is a liberation of sorts, and one gets the impression that many of them would work for almost nothing—work being not a source of disutility but rather its opposite. The Indian industrial revolution too is, a nice phrase coined by Jan de Vries, above all an “industrious revolution”.

There are “business warriors”, often coming from the post-partition Punjab, for whom business is the continuation of war by other means. Amassing enormous amounts of money (and the book is littered with almost inconceivable examples of wealth) they see it, as in Weberian description of Calvinist ethic, not only as a sign of worldly worth but a premonition of even greater transcendental prizes.

But, as in Greek dramas, the same tools of self-interest that were at the origin of this immense energy, also destroy family and social connections, ethical principles and replace all values with only one, that of money. As one of  Dasgupta’s interviewees implies, in a Dostoyevskian fashion, if “there is no society, you might as well despoil it away because you cannot harm [something] that does not exist” (p.312). This leads not only to the gaudiness where “the ideal home is… a [replica of] a five-star hotel, and the ideal city seems to be an airport” (p. 118), but to generalized amorality which we can observe well in Dasgupta’s book but of which we can also read daily in any place in the world.

The second theme of the book that I find important is political capitalism. The pre-1991 corruption scandals, of which India was not shy, and even the largest one of them, the Bofors scandal, appear quaint; they pale in comparison with the true deluge of corruption unleashed after liberalization. It was wrongly believed by neoclassical economists that the removal of regulations will diminish the need for corruption. The opposite has happened in India, China, Russia, Ukraine. Government officials could now either transform themselves into business operators, or use politics as a line of business and together with capitalists work on a much grander scale than before. “Politics became a business; bureaucracy provided the structure for a particularly intense and original kind of entrepreneurship” (p. 317).

Government connections were still needed everywhere: from land ownership to telecommunication and patent rights, to insurance and drug testing, preservation of monopolies, curbing of competition. Black money stashed away in Singapore and Mauritius could be brought back as “foreign investment”. As the economy expanded and opened externally, opportunities for corruption grew exponentially, locally and worldwide. This is why Delhi, like Washington DC, became a  hub of political capitalism. It attracted thousands of lobbyists, budding capitalists, entrepreneurs-dreamers and entrepreneurs-stealers: everybody had to be present, directly or through their trusted lieutenants, in Delhi to partake in these monumental deals.

It is therefore not by accident but by an iron logic that the era of liberalization has seen the growth of administrative-political megapolises at an unheard of scale: not only Delhi, but Beijing, Moscow, Lagos, Istanbul, Jakarta. In many ways, they replicate Rome where too business and imperial elites intermingled in order to, working symbiotically, expand their wealth.

The subtitle of the book is well chosen. We are witnessing nothing less than a worldwide explosion. We do not know at all where it would take us: the chances are 50-50 whether it may take us into a world free of abject poverty and with the standard of living that was unimaginable to anyone living only a century ago, or would lead us to a nuclear or climatic cataclysm.  At the origin of both was this huge release of energy, so well described by Dasgupta, and the breaking of millennial chains “of idiocy of village life” into which people were born and where they died. But it was wrong to believe that self-interest and the “desire for human betterment” must necessarily lead us to a better world.

They are as likely to lead us into an abyss. “The system we are part of feeds on desperation. And each system that demands such levels of desperation will produce more and more disorder, and the only way to keep everything in check will be increasing militarization of the world” (p. 268).

Tuesday, March 6, 2018

Will bourgeoisie ever rule the Chinese state?

[I am publishing early and somewhat modified versions of self-contained sections  from my forthcoming book “Capitalism, alone”, Harvard UP, hopefully 2019. They may be a bit longer than my usual posts. This is the first such piece. All comments are welcome]

China is not the West. But what exactly is the difference, in the long-term context, between China and the West? This is a huge question that has recently (by recent, I mean the past two decades) acquired additional importance due to the rise of China, its contrast with the West in terms of the organization of its economy,  and much better historical data we now have. Here I would like to make use of an interesting take on that issue made by Giovanni Arrighi in his Adam Smith in Beijing: Lineages of the Twenty-First Century.

Arrighi starts from a dichotomy that I think he was the first to have defined in a series of articles, between Smithian “natural” path of development of capitalism and Marx’s “unnatural” (the term is Arrigihi’s) path. Smith’s natural path, “the natural progress of opulence” in the terminology of The Wealth of Nations, is that of a market economy of small producers that grows, through division of labor, from agriculture into manufacturing and only later goes into domestic trade and eventually into long-distance foreign trade. The path is “natural” because it follows our needs (from food to textiles to trade, from village community to town to faraway lands) and thus does not jump over the stages. Throughout—Smith is careful to mention—the state lets market economy and capitalists thrive, protects property and imposes tolerable taxes but does maintain its relative autonomy when it comes to economic and foreign policy. (This is why, in one part of The Wealth of Nation Smith praises The Navigation Act, entirely based on the argument of national security while in the other part of the Wealth of Nations, perhaps having forgotten that he praised it, he savages it on the grounds of monopoly.)

Arrighi summarizes it thus: “The Smithian features…[are] the gradualism of reforms and state action aimed at expanding and upgrading social division of labor; the huge expansion of education; the subordination of capitalist interest to the national interest and the active encouragement of inter-capitalist competition” (p. 361).

Marx’s approach in contrast was that he took what he observed in Europe in his time to be a “normal capitalist path”. But what Marx thought of “normal” was a system which, in Smith’s words applied to Holland, (1) inverted the natural progress by developing commerce first and agriculture last, a system that was thus ”unnatural and retrograde” and where (2) the state had lost its autonomy to the bourgeoisie. 

In fact, capitalist interests became dominant in running the states in the West, from Marx’s time all the way to today, both when it comes to economics (think of the tax cuts under Trump) or foreign policy (think of the Iraq war profiteering). Capitalists took over the state and, famously as Marx wrote, the government became “a committee to manage the common affairs of the bourgeoisie.” Such a path inverted Smithian “natural” development, by jumping the stages and going into long-distance trade and colonialism before it laboriously and sufficiently developed local production. Most importantly, however, Marxian path differs from the Smithian in that there is no state autonomy vis-à-vis bourgeoisie. Since European capitalists thrived in conditions of conquest, slavery and colonialism, they needed the state for such an “excentic” development, that is, for the projection of power abroad, and thus had to “conquer” it. This made the European path aggressive and warlike.  

Arrighi believes that what we hold today to be a standard capitalist path is  the one described by Marx. (Peer Vries in his excellent “Escaping poverty” defines capitalism as rational profit seeking plus commodification of labor plus projection of power outside.) But that path was specific to Europe and cannot be generalized or “deified”. An alternative path, much closer to Smithian, was followed by China, from Song to Qing dynasties. There, market economy was even more developed than in Western Europe (probably until about 1500) but commercial interests were never able to organize themselves sufficiently so that they could come even close to dictating state policy. The authoritarian state left rich merchants in peace so long as they did not threaten it, in a word so long as they did not “grow too big for their boots”. But it always kept a wary eye on them.  

As Jacques Gernet writes in Daily life in China on the eve of Mongol invasion 1250-76 (p. 61ff) regarding the Song China, many merchants did became rich but they failed to create a “class”, like the Third Estate in France or similar propertied classes elsewhere in Western Europe that managed to first win political representation and later power. In China, by contrast, there was a strong central government from the start to check the power of merchants or anybody else. A similar theme is reprised by Debin Ma in his paper on fiscal capacity of the Chinese state and the Great Divergence (“Rock, Scissors, Paper”): “…in China, the precocious rise of absolutism [centralized state based on hierarchically-organized bureaucracy] with the absence of any representative institution ensured that the economic rents from the control of violence were firmly in the hands of political interest divorced  from those of commercial and property interest” (pp. 26-7). It was surely not a government at the behest of the bourgeoisie.

This leads us to the present-day China. The current Communist-party dominated government, and the distribution of political power between it and the already formed capitalist class, is reminiscent of this traditional relationship. The government is helpful to the interests of the bourgeoisie but only so long as these interests do not run contrary to the objectives of the state (that is, of the elite that runs the state).

The distinction between state-owned, purely privately-owned and a myriad of ownership arrangements in-between (state-owned corporation raising private capital on the stock-exchange, communal property mixed with private property, state firms with foreign private participation etc.) is quite blurred in today’s China. Communist-party organizations exist within fully privately-owned companies. For sure, they may be useful for capitalists to the extent that they are able to coopt such organizations to lobby the party-state on their behalf. But differently, their presence can also be enervating as they are yet another constituency to be pleased and bribed or another body that could, if such is the political climate, turn against capitalists. And do that regardless of what formal ownership structure and the rights are.

Even the Chinese official statistics have difficulties catching the distinctions so numerous are the forms of ownership, and so many are different rights of ownership from ability to dispose and sell the assets to usufruct only. This multitude of ownership and corporate structures was one of the main headaches for the unconditional partisans of the Washington Consensus who insisted on the importance of clearly defined property rights for growth. It was impossible to fit China with its myriad of property relationships into the neoliberal straightjacket. Moreover some of the most murky types of ownerships, like Township and Village Enterprises, registered the most spectacular rates of growth. (M. Weitzman and C. Wu had an excellent paper on that).

But will Chinese capitalists who exist and thrive in this jungle of ownership types and uncertain property rights, forever acquiesce to that particular role where their formal rights can be limited or revoked at any moment, and they are under the constant state tutorship;  or will they as they become stronger and more numerous, organize, influence the state, and finally take it over as it happened in Europe?  The European path as sketched by Marx seems in many respect to have certain iron logic: economic power tends to emancipate itself and to look after, or impose, its own interests. If capitalists have economic power in their hands, how can they be stopped? But, on the other hand, almost two millennia of that uneasy and unequal partnership between the Chinese state and Chinese business represents a formidable obstacle, knit of tradition and inertia, that might keep the state autonomous and on what Arrighi calls the Smithian path.

Thus the question of democratization of China needs to be posed in a very different fashion from what we normally do; the key question is whether Chinese capitalists  will come to control the state and, in order to do so, use representative democracy as its tool. In Europe and the United States, that tool was used by capitalists very carefully; it was administered in homeopathic doses as the franchise expanded often at the snail’s pace, and was retracted whenever there was a potential threat to property-owning classes (as in England after the French Revolution or in France after the Restauration, or in Hungary and somewhat less in Austria throughout the existence of the Dual Monarchy). But by 1918, it was politically impossible to continue with the imposition of literacy tests or income censuses, and even the Southern United States were ultimately pressured by the Civil Rights Act of 1965, to stop using a variety of means to disenfranchise voters. Chinese democracy, if it comes, would thus be, in the legal sense, of one-person one-vote, that is, of the kind observed elsewhere. Yet given the weight of history, the precarious nature and still limited size of the propertied classes (one study of the middle class in China puts it at 1/5th of the urban population), it is not sure whether it could be maintained. It failed in the first two decades of the 20th century, may it be re-established with greater success one hundred years later?