From the 1950s-1990s there was a contradiction between the theory of economic growth and the facts of economic growth
A theory of economic growth said that growth was primarily due to Total Factor Productivity (TFP) as put forward by Solow.
But the facts of rapidly growing economies, above all in Asia, showed rapidly growing economies were dominated by factor accumulation of capital and labour – as shown by Young and other studies.
The prediction was therefore made by Krugrman that the Asian economies would drastically slow down compared to the US. But the the facts showed they didn't.
Science demands that where facts and theory don’t coincide the theory has to change not the facts.
More accurate methods of measurement now show there no contradiction between the facts and economic theory.
But the analysis and policy that economic development can primarily be driven by TFP has to be abandoned. Or to put it simply Solow quantification was wrong and it is necessary for economic policy and theory to understand this and its implications.
This presentation analyses the developments in the more accurate analysis in the causes of economic growth.
Criticism of the US TransPacific Partnership (TPP) in the US and more generally in 'the West' has concentrated on the entirely accurate point that it enshrines corporate interests against those of ordinary people, labour, NGOs and is profoundly undemocratic – which is why it had to be negotiated in secret. That is why both US candidates for the Democratic presidential nomination, Bernie Sanders (for genuine reasons) and Hillary Clinton (probably for purely opportunistic reasons of making sure she defeats Sanders) have come out against it.
But there is another dangerous aspect of the TPP. It is in reality highly protectionist and aimed at imposing rules which would slow down other economies to the anaemic growth rate of the US. In particular the TPP is strategically aimed to slow down China’s economy. But by so doing the TPP will also slow the development of the entire Asian-Pacific and therefore global economies. This reality does not, of course, contradict the reasons for opposing the TPP in the interests of the populations of the US and other advanced economies but gives a further reason for opposing it.
The ways in which the TPP is fundamentally protectionist in character, and aimed at slowing other economies towards the slow US rate, are examined in the following article which also contrasts China’s concept for the Pacific of a Regional Comprehensive Economic Partnership (RCEP). The following is an edited version of an an article which originally appeared in Chinese at Guancha.cn analysing these issues in the context of the Asia-Pacific Economic Cooperation (APEC) summit.
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China’s fundamental economic conception for the Asia-Pacific region is clear. In comprehensive strategic terms it is encapsulated in Xi Jinping’s concept of ‘community of common destiny.’
The specifically economic base of such a conception is that has been known since the first sentence of the first chapter of the founding work of scientific economics, Adam Smith’s The Wealth of Nations, that: ‘The greatest improvement in the productive powers of labour… have been the effects of the division of labour.’ For China’s leadership, which of course analyses in Marxist terms, Marx’s conclusion that the greatest economic power is ‘socialised labour’ builds on this reality first outlined by Smith.
But in a modern economy this division of labour is on such a large scale that it necessarily extends not only domestically but internationally – meaning only a globalised economy can give rise to the highest level of economic development. Consequently no country can create an efficient self-contained economy and each country gains from participating in international division of labour – the economic foundation of Xi’s formula of a ‘community of common destiny.’ This is the fundamental basis of the truth that in economics 1 + 1 is frequently greater than 2.
The optimal relations of China, the US, and the entire Pacific Region therefore flows from this economic reality. China and US are not only world’s largest economies but simultaneously the world’s largest trading nations. Mutually beneficial relations between China and the US are therefore potentially the strongest economic point for the entire Asia-Pacific Region. Such mutually beneficial interaction of China and the US are also consequently optimal not only for both economies but create the strongest possible locomotive for economic development of the entire Asia-Pacific.
Such an interrelation therefore certainly corresponds to China’s self-interest, as it helps constitute the optimal path to achieve China’s goal under the 13th Five Year Plan of a ‘moderately prosperous society,’ but it simultaneously corresponds to the interests of the maximum economic development of the entire Asia-Pacific.
This is the economic dimension China therefore pursues in its proposal for a RCEP and in the model of the ‘new model of major country relations’ - both of which provide the framework China will put forward at the APEC summit. Such a course corresponds to the needs of achieving prosperity of the Asia-Pacific Region. But unfortunately the facts show that currently the US is pursuing a directly counter path.
TPP – a US ‘slow growth’ Pacific club
The real character of the US TPP becomes clear immediately the fundamental economic data for its 12 intended signatory countries is examined. The potential signatories are dominated by the G7 economies of the US, Japan, and Canada. These, together with Australia, constitute 90% of the GDP of potential signatories. Participating developing economies – Mexico, Malaysia, Chile, Vietnam and Peru – make up only 8%.
Figure 1 also shows that in 1985 economies in the proposed TPP accounted for 54% of world GDP while by 2014 this had dropped to 36%. The TPP therefore does not constitute a comprehensive framework for the Asia-Pacific Region but a group of advanced economies, with a ‘fringe’ of developing countries, whose share in world GDP has been significantly declining.
The percentage of world trade accounted for by potential TPP economies is also substantially less than their combined weight in world GDP and is falling – World Banks data showing it declining from 33% of world merchandise trade in 1984 to 25% in 2014 (the claimed figure of 40% published by media agencies such as the BBC is grossly irresponsible as it is entirely inaccurate).
That the percentage of world trade accounted for by the TPP economies is significantly less than their percentage of world GDP shows this is a grouping of relatively ‘closed’ economies in which trade plays a lower than average role. The TPP is therefore fundamentally different to the World Trade Organisation which covered the overwhelming majority of world trade, or China’s proposed RCEP which would cover the great bulk of Asia-Pacific economies.
The declining trends of world GDP and trade represented by the TPP economies clearly contrasts with China, whose role in world GDP and trade has sharply increased but which the US excluded from the TPP negotiations. What, therefore, was the real US rationale in creating a TPP of relatively closed economies with a declining weight in world GDP and trade instead of a far more dynamic grouping, with much greater potential, that would include China?
Decelerating growth of the US economy
The answer regarding US goals in the TPP lies in trends in the US economy itself. The US dominates the TPP accounting for 62% of its GDP. The US promotes a mythology that it is a dynamic economy but the reality is that the US economy has been sharply slowing and its weight in the world economy declining. Such US mythology flows from one of the worst of statistical tricks of taking individual examples, in this case the genuine success of companies such as Apple, to conceal the overall declining trend. In reality from 1984-2014 the US share of world GDP fell from 34% to 23%, at current exchange rates. In the same period the US share of world merchandise trade dropped from 15% to 11%.
Even more significantly the US economy has been decelerating for over half a century. Taking a 20 year moving average, to eliminate the effects of short term business cycle fluctuations, Figure 2 shows that US annual average GDP growth fell from 4.4% in the late 1960s, to 4.1% in the late 1970s, to 3.5% by 2000, and 2.4% by 2015. Detailed analysis shows this was rooted in the falling percentage of fixed investment in US GDP, but for present purposes it is sufficient to note the impossibility of rapidly reversing a half century long decelerating trend.
US goal to slow other economies
Given the impossibility of short term US growth acceleration the only way to maintain US economic and geopolitical supremacy is therefore to slow competitor economies. Once this is understood then the apparently illogicality of grouping a number of relatively slowly growing and closed economies into the TPP becomes clear.
In essence the TPP extends the mechanisms responsible for slowing US growth to cover competitors. To secure this the TPP enshrines that the legal rights of private companies in TPP participating economies are superior to those of member governments. Private companies, therefore principally US ones, have the right under the TPP to sue participating governments in courts which will be dominated by the US but whose decisions are binding on national governments. As the well-known US economist Jeffrey Sachs noted of these TPP provisions: ‘Their common denominator is that they enshrine the power of corporate capital above all other parts of society, including… even governments… The most egregious parts of the agreement are the exorbitant investor powers implicit in the Investor-State Dispute Settlement system as well as the unjustified expansion of copyright and patent coverage. We’ve seen this show before. Corporations are already using ISDS provisions in existing trade and investment agreements to harass governments in order to frustrate regulations and judicial decisions that negatively impact the companies’ interests. The system proposed in the TPP is a dangerous and unnecessary… blow to the judicial systems of all the signatory countries.’
Some features of the TPP are extraordinary. For example, one of the most astonishing is that it de facto gives legal protection to software companies, overwhelmingly US, to essentially spy on signatory states. Article 14.17 states: ‘No Party shall require the transfer of, or access to, source code of software owned by a person of another Party, as a condition for the import, distribution, sale or use of such software, or of products containing such software, in its territory.’ While it is stated this does not apply to ‘critical infrastructure’ it does not exclude banks, commercial companies etc.
In short the conception of the TPP is not to maximise prosperity for the Asia-Pacific Region but to enshrine US supremacy. As Madam Fu Ying, Chairwoman of China's National People's Congress and former Ambassador to Britain put it: ‘The focus of attention in the United States is how to ensure that the United States maintain its leading position in the world.’ Given that the US economy cannot accelerate the only way for the US to maintain its dominant position is to slow down competitors, and that is the purpose of the rules of the TPP.
If the US can succeed in slowing China’s economy this will also have major implications for foreign policy – lessening China’s economic appeal for other countries.
The slowing of competitor economies by the US, is of course, directly against the interests of China, as it seeks to prevent China becoming a ‘moderately prosperous society’ under the 13th Five Year Plan and then passing on towards a ‘high’ level of prosperity. But by lessening overall economic growth in the Region the TTP is against the interests of the Asia-Pacific as a whole.
Interests of the Asia-Pacific region versus interests of the US
The different conceptions at the APEC summit, therefore, flow directly from the different approaches of China in the RPEC and the US in the TPP. The approach of China in RPEC corresponds both to the interests of China and to the maximum economic development of the Asia-Pacific. The US in the TPP, in contrast, would slow the development of the entire Asia-Pacific region in order to seek to ensure US dominance within it.
The response required by China and other countries to maximising their own development at the APEC summit therefore flows from the fundamentally different character and goals of the RPEC and the TPP. As RPEC corresponds to the maximum development of the entire Asia-Pacific it represents the interest of the people of the entire region – and indeed of global development. As the TPP legally enshrines features which led to slowing US growth, creating negative direct and indirect consequences for the US population, the TPP has domestically become the subject of major US political opposition. The two leading Democratic Party presidential candidates, Hillary Clinton and Bernie Sanders, oppose the TPP as well as the leading populist Republican candidate Donald Trump. It remains to be seen if the US will ratify the TPP.
The degree of domestic US opposition will both determine whether TPP is ratified and hamper further US attempts to extend the present restrictive framework of the TPP. It creates a new situation whereby the interests of China, and the people of other Asia-Pacific countries, are aligned with those of strengthening forces within the US opposing the TPP.
As regards tactics within this overall framework, in addition to China promoting Free Trade Agreements and the RPEC the institutions the TPP imposes on participating economies, and the rights the US and its companies acquire to override participating countries governments, will inevitably lead to rising opposition in TPP participating countries as well as locking them into slow growth. This will necessarily lead participating countries to seek free trade and other agreements with non-TPP members such as China whose economies are undergoing more rapid growth.
Finally, it should be clearly understood that the US strategic aim is not to exclude China from the TPP. Indeed this would defeat the TPP’s purpose as China would then not be subject to TPP constraints which slow other economies. If China remained among more rapidly growing economies outside the TPP this would inevitably lead to other countries seeking agreements with China. The aim of the US is therefore to negotiate with China at a later date. But the intent of the US is to attempt to impose rules on China that would limit China’s growth and therefore ensure it did not achieve prosperity.
Assuming that the TPP is finally ratified then China’s interests, and those of other countries, therefore lie in allowing it to be clearly shown over a period that the TPP will not work to enhance growth. This will then give China the choice, depending on the circumstances, of either negotiating agreements with individual TPP members as part of its RPEC strategy, or negotiating a more general revision to remove the more damaging features of the TPP and to allow China to participate in a wider agreement aimed at more rapid economic development.
But therefore at the APEC summit both politics and global governance, as well as the prosperity of the entire Asia-Pacific region is involved in the different approaches of China and the US. The Asia-Pacific can either adopt the road of maximum prosperity involved in China’s ‘community of common destiny’ or it can accept the economic slowdown, and consequent lower living standards, necessary to seek to preserve the US’s economic supremacy. This is the key economic framework for issues to be discussed at the APEC summit. Given the magnitude of these questions they will not be finally resolved there but will dominate the Asia-Pacific region for several years to come.