Key Trends in Globalisation

New turbulence on US financial markets shows the limits on US growth under Trump

On Friday 2 February sharp turmoil, which had been building for some time, shook US financial markets.

• The driving force was the continuing sharp rise in US Treasury Bond yields, that it the interest rate on US Treasuries, which has risen from 1.86% when Trump was elected to 2.84%.  US Treasury rates set the floor for all long term US interest rates and are far more important for US economic trends than the shifts in Federal Reserve interest rates.
• Simultaneously US jobs data was released showing that wages in January had risen by 2.9% compared to a year earlier - seen as an indicator of inflationary pressure in the US.
• Meanwhile commodity prices, as measured by the S&P GSCI index had risen by 10.6% compared to a year earlier - adding to inflationary pressures in the US.
• This helped precipitate a 2.1% fall on 2 February on the S&P500 - the most severe daily decline since Trump was elected.

In summary the US economy was showing clear signs of rising interest rates and rising inflation - producing the market turmoil.
It is important to understand that these trends are not separate. They show that although US economic growth is low by historical standards, with only a  2.5% year on year GDP increase in the year to the 4th quarter of 2017, it is showing signs of overheating:

• Interest rates are the price of capital, and the sharp rise in interest rates shows that the supply of capital in the US is smaller than the demand for it,
• Inflation shows that supply of goods and services, including labour, is smaller than the demand for it.

In summary, despite low growth, the US is showing signs of capacity constraints.
By coincidence on the morning of the same day an article by me analysing the latest US economic data was published. This clearly predicted these trends - although it was of course written before the events on 2 February. This article is published without change below except for an updating of the US bond yields data to the end of 2 February. ​

 

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The new release of US and EU GDP data for the whole of 2017 allows a factual examination of the latest state of the US economy and constitutes a baseline for assessing the future impact of the Trump tax cuts. This new data confirms the following fundamental features of US economic performance.

• In 2017, for the second year in a row, the US was the slowest growing of the major economic centres – behind not only China but also the EU.
• In the last quarter of 2017 the US continued to undergo a purely normal business cycle upturn from its extremely bad performance in 2016
• There was no sign of an improvement in the fundamental economic structure of the US economy that would permit significantly accelerated growth in the medium/long-term.
• Therefore, the perspective is that the US will undergo a cyclical upturn in 2018 before encountering capacity constraints that will again slow its economy in 2019-2020 – the symptoms of these capacity constrains are likely to be increasing interest rates and rising inflation.

This situation of the US economy has significant implications for US-China relations. In particular, as the US is unable to speed up its medium/long term growth, those forces in the US seeking to engage in ‘zero-sum game’ competition with China can only achieve their goal of improving the position of the US relative to China by trying to slow China’s economy.  

These implications will be considered in the conclusion of the article. However, first, using the approach of ‘seek truth from facts’ the latest data on the US economy will be examined.

US was again the most slowly growing major economic centre​

The new data shows that for the second year in succession the US was the world’s most slowly growing major economic centre – see Figure 1:

• In 2016 US economic growth was 1.5%, EU growth 2.0%, and China’s growth 6.7%
• In 2017 US economic growth was 2.3%, EU growth 2.5% and China’s growth 6.9%

This data shows that the claim in sections of the Chinese media that in the last two years the US was undergoing ‘dynamic growth’ was entirely false, the opposite of the truth. Bluntly it was in the category of ‘fake news’.
In addition to the data for the whole of 2017, in the year to the 4th quarter of 2017 the US was still the slowest growing major economic centre – US growth was 2.5%, EU growth 2.6%, and China’s growth 6.8%.
Although the facts of US poor economic performance in 2017 and 2016 are therefore clear this clearly poses a question. To what degree will the US improve this performance? This in turn requires examining both the position of the US in the present business cycle and the medium/long term determinants of the US economic performance.  

Figure 1

 

Position of the US business cycle
In order to separate purely cyclical short-term movements from medium/long term fundamental trends in the US it should be noted that the medium/long term growth of the US economy is one of the world’s most predictable. Analysing the latest data, which go up to the 4th quarter of 2017, Table 1 shows that the three-year moving average of US annual GDP growth is 2.1%, the five-year moving average is 2.3%, the seven-year average is 2.1%, and the 20 year average is 2.2%. Only the 10-year moving average shows a significantly lower average - due to the great impact of the post-2007 ‘Great Recession’. Given that medium and long-term trends closely coincide the US fundamental medium/long term growth rate may therefore be taken as slightly above 2%.

 

Table 1

 

​This consistent US medium/long term growth rate also makes it relatively easy to assess the short-term position of the US in the current business cycle. The key features of the latest data, for US economic performance in the final quarter of 2017, are given in Figure 2. This shows that US year on year economic growth in the last quarter of 2017 was 2.5%. This represents an upturn from the very depressed US growth during 2016 – which reached a low point of 1.2% growth in the 2nd quarter of 2016.

To accurately analyse this data, it should be noted that confusion is sometimes created in the media by the fact that the US and China present their quarterly GDP data in different ways. China emphasises the comparison of a quarter with the same period in the previous year. The US highlights the growth from one quarter to the next and annualises this rate. But the US method has the disadvantage that because quarters have different economic characteristics (due to the different number of working days due to holidays, weather effects etc) this method relies on the seasonal adjustment being accurate. But it is well known that the US seasonal adjustment is not accurate – it habitually produces low growth figures for the first quarter and correspondingly high figures in other quarters. It is therefore strongly preferable to use China’s method which, because it compares the same quarters in successive years, does not require any seasonal adjustment and therefore gives true year on year growth figures. All data in this article is therefore for this actual year on year growth. 

In addition to showing 2.5% year on year growth for the latest quarter, Figure 2 shows that US annual average GDP growth was below its long-term average of 2.2% for six quarters from the 4th quarter of 2015 to the 1st quarter of 2017. Therefore, merely to maintain the US average growth rate of 2.2%, US growth would be expected to be above its 2.2% average growth rate for a significant period after the beginning of 2017. Figure 2 shows this is occurring, with US growth in the third quarter of 2017 being 2.3% and in the last quarter of 2017 reaching 2.5%. Therefore, the acceleration of US growth in the last quarter of 2017 was a normal business cycle development and did not reflect an acceleration in US medium/long- term growth.

More precisely, given the prolonged (6 quarters) period centring on 2016 when US growth was below its long-term average, this also means that purely for normal business cycle reasons it would be anticipated that for most of 2018 US GDP growth would be above its long-term average of 2.2%. This may allow US growth to overtake that of the EU, but not of course to overtake China. But there is as yet no indication that the US economy will achieve sustained growth of more than three percent growth rate claimed by Trump’s Treasury Secretary Cohn who stated to CNBC in justifying the tax cut that: ‘We think we can pay for the entire tax cut through growth over the cycle… Our plan was based on a 3 percent GDP growth. We think we can now be substantially above 3 percent GDP growth.’ 

It should be noted that Cohn’s claim is that three percent growth can be achieved over a business cycle – which would indeed be a substantial increase in US medium/long term growth. It is not at all the same as the US achieving three percent growth in a particular quarter or quarters – which has occurred previously and is entirely compatible with the maintenance of the current US medium/long term growth rate of just above 2.2%.
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There is, of course, even less evidence that the US economy will achieve 6% growth as claimed by President Trump in his December press conference with Japanese prime minister Abe.
In order to asses the realistic growth rate for the US it is now necessary to analyse the fundamental determinants of US medium/long-term growth.

 

Figure 2

 

No basic acceleration in US long term growth
The most fundamental trend in US long term growth is the progressive slowing of the US economy which has been taking place for over 50 years. Figure 3 shows that, taking a 20-year moving average, to remove all short-term effects of business cycles, the US economy has progressively decelerated from 4.4% annual growth in 1969, to 4.1% in 1978, to 3.5% in 2002, to 2.2% in the 4th quarter of 2017. The fact that the US economy has been slowing for over 50 years shows that this process is determined by extremely powerful and long-term forces which will, therefore, be extremely difficult to reverse. The nature of these trends is analysed below – the latest US data, however, clearly shows no acceleration in long-term US growth which remains at 2.2%.

 

Figure 3

 

US medium-term growth
Turning from long-term to US medium-term growth, this necessarily shows greater fluctuations than US long term growth – as medium term growth rate is affected by business cycles. It is therefore useful, in analysing such cyclical fluctuations, to consider not only the average trend but also to make a comparison of successive peaks and troughs of business cycles. To illustrate these a five-year moving average for US growth is shown in Figure 4 and a three-year average is shown in Figure 5. 
• Taking a five-year average, and considering the maximum growth rate in business cycles, the US economy slowed from 5.5% in 1968, to 5.0% in 1987, to 4.5% in 2000, to 3.0% in 2006, to 2.3% in the 4th quarter of 2017.
• Taking a three-year average, the US economy slowed from 5.9% in 1985, to 4.7% in 1999, to 3.7% in 2006, to 2.1% in the 4th quarter of 2017. 
Therefore, the long-term tendency of the US economy to slow down is again clear. The trend of the peak growth rates in US business cycles falling over time is precisely in line with the long-term slowing of the US economy.

 

Figure 4

 

Figure 5

 

The chief factors in US medium/long term growth 
Having shown the factual trends in US economic growth it is then necessary analyse what produces them. My article 'Trump's Tax Cut - Short Term Gain, Long Term Pain for the US Economy' analysed in detail that statistically the strongest factor determining US medium/long term growth is US net fixed investment (i.e. US gross fixed capital formation minus capital depreciation). Table 2 updates the data regarding this given in the earlier article to now include 2017. 

As may be seen, over the short-term there is no strong correlation between US GDP growth and the percentage of net fixed investment in US GDP – the R squared correlation for 1 year is only 0.21. Indeed, as 'Trump's Tax Cut - Short Term Gain, Long Term Pain for the US Economy' showed in detail, there is no structural factor in the US economy which is strongly correlated with US growth in the purely short term. That is, put in other terms, numerous factors (position of the economy in the business cycle, trade, situation of the global economy, weather etc) determine short term US growth. However, as medium and long-term periods are considered, the correlation of US GDP growth with the percentage of net fixed investment in US GDP becomes stronger and stronger. Already over a five-year period the level of net fixed investment in US GDP explains the majority of US GDP growth, and over an eight-year period the R squared  correlation is 0.71 – extremely strong. 

It is unnecessary for present purposes to establish the direction of causality in this relation. The extremely strong correlation between US GDP growth and the percentage of net fixed investment in US GDP simply means that over the medium/long term it is not possible for the US economy to acclerate without the percentage of US net fixed investment in GDP increasing. This equally means that analysing the percentage of US net fixed investment in US GDP allows the potential for the US to accelerate its  medium/long term growth to be determined. This also means that to assess Trump’s possibility to increase US medium/long term growth it is necessary to analyse trends in US fixed investment.

 

Table 2

 

US net fixed investment
Turning to analysis of these factual trends, Figure 6 illustrates the percentage of net fixed investment in US GDP – showing the extremely sharp fall in this which has occurred. This fall corresponds to the long-term slowdown in US growth already analysed.  
To be precise, taking peak levels in business cycles:

• In 1966, in the middle of the long-post World War II boom, US net fixed investment was 11.3% of US GDP;
• In 1978 US net fixed investment was 10.5% of US GDP;
• In 1984 US net fixed investment was 9.2% of US GDP;
• In 1999 US net fixed investment was 8.3% of US GDP;
• In 2006 US net fixed investment was 7.9% of US GDP;
• In the 4th quarter of 2017 US net fixed investment was 4.2% of US GDP.

It is therefore clear that while there has been some recovery of US net fixed investment since the extreme depth of the international financial crisis, US net fixed capital formation remains not only far below post war peak rates but even well below pre-international financial crisis levels. Due to this very strong medium/long term correlation between US net fixed investment and US GDP growth US economic growth cannot accelerate over the medium/long term without an increase if the percentage of US net fixed investment in GDP. Furthermore, it is clear that no such increase in the percentage of US fixed investment in GDP has taken place. Therefore, there is at present no basis for an acceleration in US medium/long term GDP growth. 

 

Figure 6

 

Economic conclusionsIn summary, the conclusions which follow from the latest US GDP data are clear:

• Nothing has yet occurred which would indicate or permit an acceleration in medium/long term US growth from its present level of slightly above two percent.
• The US is undergoing a normal cyclical recovery after its extremely poor performance of only 1.5% growth in 2016. Furthermore, in order to maintain the US long-term average growth rate, and counterbalance an extremely poor performance in 2016 and only slightly above average growth of 2.3% in 2017 as a whole, US GDP growth in 2018 would be expected to be above its long-term average – the effect of the Trump tax cut would be expected to sustain this short term increase. This trend however would not, unless the level of growth reached was extremely high, represent a break with the medium/long term slow growth of the US economy.

It is of course important to follow and check these trends factually given the importance of the US for the global economy and for China. Given the determinants of US economic performance over the medium/long term it follows that, in addition to factually registering US growth, it is necessary to regularly analyse the percentage of net fixed investment in US GDP in order to see if any new conditions for an acceleration of US medium-long term growth is occurring – so far it has not.

It should also be noted that the Trump tax cut, because it is not matched by government spending reductions, will sharply increase the US budget deficit and therefore, other things remaining equal, it will reduce US domestic savings, and therefore reduce the domestic US capacity to finance investment.

The following dynamic should therefore be anticipated in the US economy, which China’s policy needs to take into account:

• In 2018 continued cyclical upturn in the US economy.
• Due to the factors that would permit an upturn in US medium/long term growth not being present this cyclical upturn in 2018 will not turn into a much stronger upturn in 2019-2020 but on the contrary medium/long term factors slowing US growth may reduce growth from its likely 2018 level.
• As the problem in the US economy is lack of net fixed investment, that is in expansion of the US capital stock, the  form of these factors slowing the US economy after its 2018 recovery are likely to be symptoms of capacity constraints and overheating – i.e. increases in US interest rates and in inflation. This upturn in US interest rates is already clear, with the yield (interest rate) on US 10-year Treasury Bonds rising significantly from 1.86% when Trump was elected to reach 2.84% on 2 February.

 

Figure 7

 

Geopolitical conclusions
Finally, while the focus of this article is economic, it is clear certain geopolitical conclusions flow from these factual trends in the US economy.

• The inability of the US, with its present level of net fixed investment, to increase its medium/long term economic growth means that those in the US who advocate a ‘zero-sum game’ approach to US-China relations (‘neo-cons’ and ‘economic nationalists’) cannot achieve their goal of strengthening the position of the US compared to China by fundamentally accelerating the US economy. Their only practical policy option, therefore, is to attempt to slow China’s economy. This may possibly not be clear during 2018, when the US is undergoing a normal cyclical upturn, but it will become clear later as medium/long term US growth fails to accelerate.
• The reduction in US domestic saving caused by the current tax cut means that US sources of financing fixed investment, other things remaining equal, will be reduced. This will increase pressures on the US to attempt to maintain its level of fixed investment through increased foreign borrowing – as in principle US fixed investment can be financed from foreign as well as domestic sources. However, as the US current account of the balance of payments is necessarily equal to US capital inflows with the sign reversed, this means that if the US undertakes increased foreign borrowing its balance of payments deficit will increase – which goes in the direct opposite direction to Trump’s pledge to reduce the US trade deficit.
• If, however, the US does not engage in extra foreign borrowing then the reduction in US domestic saving which will result from the Trump tax cut would put downward pressure on US fixed investment – making it more difficult to achieve the US goal of increasing its medium/long term growth rate.
• Therefore, given the US tax cut, the US is faced either with the choice of increasing foreign borrowing, which would go against President Trump’s pledge to reduce the US trade deficit, or to reject increased foreign borrowing – in which case, because of the reduction in US domestic savings due to the tax cut, downward pressure on US fixed investment would be created. This would, in turn, put downward pressure on US economic growth.

The consequences of this is that given the tax cut will be seen, after the normal cyclical recovery in 2018, not to achieve its goal of boosting US growth this is likely to lead to US neo-cons/economic nationalists falsely accusing other countries of creating the problems which have prevented US medium/long term growth accelerating. This may lead to such forces increasing their pressure for protectionist measures in the US.

 

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This article was originally published in Chinese at Sina Finance Opinion Leaders.

Collection of Articles by Subject

A collection of my articles organised by subject (economic policy. foreign policy etc) is at my website 'Learning from China'. This makes it easier to find articles. That website also contains short blog entries on subjects related to China which are not at this site -  I hope readers will visit it!

The West’s ‘new mediocre’ and the rise of China’s economics

In a recent article ’The Arrival of the Century of Chinese Economics’ Justin Yifu Lin argued that the centre of world theoretical economics would pass to China:
‘I also made a prediction... in the 21st century it is quite possible that many master economists will emerge through the study of China’s economy….  
‘The importance of a theory depends on the importance of the phenomenon explained by the theory. If the phenomenon to be explained is important then explaining a phenomenon, and revealing the causal logic behind it, makes this an important theory.

‘What is an important phenomenon? Phenomena occurring in important countries are an important ones. Considering the history of the development of modern economics, Adam Smith published the Wealth of Nations established modern economics. From the late eighteenth century until the mid-twentieth century, the centre of world economics, of significant contributions to economics, was the  United Kingdom The vast majority of leading scholars were British or foreign economists working in the United Kingdom. After the 1940s and 1950s, the vast majority of economists who made major contributions to economics were American economists who worked in their United States home or were foreign economists working there....

‘After World War I, the centre of the world economy moved to the United States. The most important economic phenomena are the phenomena appearing in the centre of the world economy. With the transfer of the centre of the world economy, the research centre for world economics also followed.

‘In terms of purchasing power parity [PPP], China became the world’s largest economy in 2014. As long as China’s steady development continues, then at market exchange rates it is very likely that China will become the world’s largest economy by 2025. At present, China's accounts for 18% of the world's economy and this will be more than 20% by 2025. By 2050, China's economy is likely to account for between 25% and 50%  of the world economy…. China will be the most important centre of the world economy and the centre of world economics may shift from the United States to China. ...

'It is very likely that we are witnessing the arrival of a new era that is of great importance to humankind because China is became a middle-income country, from one of the world’s poorest countries, and it will become In a high-income country. Most of the countries in the world now are developing countries – low income… countries and… middle-income countries. The have the desire to modernize and become high-income countries. It is therefore necessary to summarize the theoretical innovations made in China's economic experience, and develop better ways to test the contribution of these theories.'

Indeed, in order to achieve the fastest sustained growth in a major economy in human history. China has already had to pass through decisive tests of the superiority of its economic thinking. Most fundamentally, from the positive, the ‘socialist market economy’ created by Deng Xiaoping, Chen Yun and their collaborators was unprecedented in human history – an intellectual and theoretical achievement of the highest order. This is analysed at length in my book The Great Chess Game and in a popular fashion in an article whose title is self-explanatory ‘Deng Xiaoping: the World’s Greatest Economist‘.

 

 

China’s success was necessarily not merely practical but theoretical because its policies were carried out in clear opposition to dominant orthodox Western economic theory, and with China putting forward its own economic concepts. As Justin Lin Yifu noted:

‘There was a [Western] consensus that the economic results of the gradual and twin-track policy that China carried out would be worse… But now, looking back, China is the fastest-growing and most stable economy in the past four decades. Countries that have undergone a restructuring by Washington's consensus shock therapy have experienced a crisis of economic collapse and stagnation. '

But if China’s theory of the ‘socialist market economy’ was demonstrated to be superior to those in the West ‘from the positive’ by China’s own economic growth it was also shown to be correct ‘from the negative’ not only in developing countries but in particular by application of dominant Western economic theories in the former Soviet Union. The application of these after 1991, in ‘shock therapy’, produced in the Russia the greatest economic collapse in a major economy in peacetime since the Industrial Revolution with a decline of GDP of 39% in a seven-year period. It was entire possible to predict this disaster in advance, as shown in my article written in April 1992 ‘Why the Economic Reform Succeeded in China and Will Fail in Russia and Eastern Europe’  This article, originally published in Russian, reflected the fact that from 1992-2000 the present author lived in Moscow attempting to persuade the Russian authorities to adopt the approach of China’s economic reform instead of the disaster of Western economics’ ‘shock therapy’. It may be noted that this article was written entirely from the point of view of economic theory, as at that time I had never visited China, nor did I have direct contact with Chinese economists – although I carefully studied material available in the West of Deng Xiaoping, Chen Yun and works on Chinese economic theory.

My agreement with the views of Justin Yifu Lin on the superiority of China’s economic thinking, and of his assessment of the movement of the centre of global economic thinking to China, is therefore not based on recent events but on more than a quarter century of study of China’s economy theory and practice and comparison of its results with dominant ideas in the West.

The present situation of the world economy
Within the overall historical framework outlined above, the aim of the present article is to make a more fine-grained analysis of the present situation – to show that the present situation of the global economy, more specifically of trends in the G7 economies, makes it more urgent to reinforce and speed up a transition of the centre of international economic thinking to China’s ‘socialist market economy’. This is due to the fact that, as will be shown, what was referred to by IMF Managing Director Christine Lagarde as the ‘new mediocre’ in the Western economies is now characterising an entire period of the world economy. More precisely, it will be shown in detail that while the downturn in the advanced G7 economies after the international financial crisis was not as violent as during the Great Depression after 1929, the extremely slow growth that has resulted from the financial crisis has now produced a situation where overall G7 growth is actually slower than in the Great Depression. This situation necessarily has not only economic but geopolitical and domestic political consequences in the G7 - which are briefly mentioned at the end of this article. In order to avoid misunderstanding it should be made clear that while a number of Chinese writers have studied the general historical shift of the centre of economic thought to China the analysis of the present situation of this trend, in relation to the West’s ‘new mediocre’, does not imply their agreement with this specific analysis.

To establish the facts regarding global economic trends, and avoid any suggestion of adopting data excessively favourable to China, the source used for analysis here is the projections for the next five years of the world economy issued twice yearly by the IMF. These indicate essentially the same dynamic for the Western G7 economies as the present author already analysed for the US in 'Why the US Remains Locked in Slow Growth​'Why the US remains locked in slow growth' - that is, the IMF predicts there will be a moderate cyclical upturn in the G7 economies 2017-2018 but that this will not turn into a strengthening boom. Instead over a five-year total G7 growth will be low with an economic slowdown in 2019-2020.

Detailed analysis of macro-economic trends confirms that the reasons for the limited scope of the upturn in the G7 economies is the same as in the US. However, detailed presentation of such analysis will be given separately. The aim of the present article is simply to outline the factual predictions of the IMF and to show their implications.
​
IMF predictionsTurning to trends in the global economy, the IMF’s predictions for the next five years economic growth in the G7 economies are shown in Figure 1. As may be seen, after very low growth in 2016,  only 1.4%, the IMF predicts growth in 2017 of 2.0% and in 2018 of 1.9% - a moderate but real upturn. However, G7 growth is then predicted to fall to 1.6% in 2019, and to a poor 1.5% in 2020-2022. The IMF’s projection is therefore a pattern of ‘two good years and then four poor ones’.

Figure 1

 

The ‘new mediocre’
The cumulative effect of these predictions is that the IMF is projecting that the G7 economies will remain locked in average low growth – the ‘new mediocre’ in Christine Lagarde’s phrase. This ‘mediocre’, low sustained growth, may be particularly clearly seen by taking moving averages for growth of the G7 economies - as such averages focus attention on longer term growth patterns compared to purely cyclical movements. Moving averages for the G7 economies are therefore shown in Figure 2.

Naturally a shorter term five year moving average shows a great cyclical impact of the sharp fall in output during the 2008-2009 international financial crisis, whereas this cyclical effect is almost removed by a long term 20 year moving average, but the fundamental trend of very slow growth, particularly compared to previous performance, is clear whichever period is taken:

• Over a five-year period, annual average growth in the G7 economies is projected by the IMF to fall from 3.1% in 2000 to 1.6% in 2022.
• Over a ten-year period, annual average growth in the G7 economies is projected by the IMF to fall from 2.9% in 2000 to 1.7% in 2022.
• Over a twenty-year period, annual average growth in the G7 economies is projected by the IMF to fall from 2.9% in 2000 to 1.5% in 2022.

​In summary, all averages show a severe fall in G7 annual average growth since the beginning of the 21st century and show growth rates of only 1.5%-1.7% in the next five years.

Consequently, the IMF is not projecting that the ‘new mediocre’ was a short-term trend which will be overcome but that it will continue throughout the next five years. The upturn in 2017-2018 is therefore purely cyclical and will not be consolidated into a new longer ‘boom’ -  the IMF projects G7 growth will weaken again after two good years. 

Figure 2

​Geopolitical consequences
To take a comparative historical framework to consider present trends it is useful to make a study of present trends in relation to the most well-known of all global economic crises - the ‘Great Depression’ after 1929. Figure 3therefore shows the yearly development of GDP in the G7 after 1929 and 2007 (i.e. 1930 is one year after 1929, 2008 is one year after 2007 etc). This shows clearly the following key dynamics of the situation after 2007 compared to that after 1929.

• The fall in output after 1929 was far more severe than after 2007 – the maximum fall in G7 GDP after 1929 was 17.5% compared to 4.0% after 2007.
• However, after the initial severe downturn, overall growth in the G7 economies in the period after 1929 was far more rapid than after 2007. The cumulative result is that by 10 years after the initial crisis overall growth in the G7 economies after 1929 was 15.9% compared to only 10.9% after 2007. This means that by the end of 2017 overall growth in the G7 economies, after the international financial crisis, will actually be slower than during the ‘Great Depression’.
• The overall slower growth of the G7 economies after 2007 than after 1929 will become progressively more pronounced due to the very slow growth projected by the IMF. By 2022, that is 15 years after 2007, total GDP growth in the G7 economies will only be 20% compared to 62% in the 15 years after 1929.

​To conceptualise this situation whereby overall G7 growth after the international financial crisis will actually be slower than after 1929 then, if the post-1929 situation is referred to as the ‘Great Depression’, then by analogy the new mediocre may perhaps be referred to as the ‘Great Stagnation’.

Figure 3

​Economic and geopolitical consequences
Finally, to briefly deal with the economic and geopolitical consequences of these trends, it must first be made quite clear that the above analysis is of the trends in the G7 advanced economies. It is not an analysis of the overall trends in the world economy. Indeed, a key feature of the projections of the IMF is that far faster growth in developing economies than in the G7 will continue as shown in Figure 4. 

• Over the entire period from 2007-2022 growth in the developing economies is projected by the IMF to be 109% compared to only 20% in the G7.
• Over the period 2016-2022 the IMF projects growth in the G7 to be only 10% compared to 33% in the developing economies.

Therefore, the ‘new mediocre’, is a specific feature of the G7 economies not of other parts of the world economy. In particular while low growth, the ‘new mediocre’, will continue in the G7 economic growth in developing countries will be more rapid - with annual average growth in developing economies in 2016-2022 being projected to be 4.9% compared to only 1.7% in the G7. Furthermore, the IMF projects that 44% of this growth in developing countries, almost half, will be in China itself. China’s key practical international economic projects, such as One Belt One Road, clearly fit within this framework.

Figure 4

​Second, the geopolitical and domestic political consequences of this very slow growth in the G7 economies are also clear. The data given above is for total GDP, but annual population growth in the G7 has averaged 0.54% over the last five years. Therefore per capita GDP growth in the G7 is significantly slower than total GDP growth as shown in Figure 5. Over the period 2016-2022 the IMF projections imply annual per capita GDP growth of only 1.1%. Not only is such a growth rate low but it means that any cyclical downturn takes per capita GDP down to extremely low levels. For example, the major political disturbances in 2016, the economically irrational UK vote for Brexit and in particular the election of Trump as President against the opposition of the overwhelming majority of the US political establishment, become readily understandable when it is noted in that year G7 per capita GDP growth fell below 1%. In the US in 2016 year on year per capita GDP growth was only 0.8% and in the second quarter of the year it fell to an extremely low 0.5%.

The evident consequence of such very low economic growth rates in the G7 is therefore that domestic political instability will continue within G7 countries.

Figure 5

 

Finally, to return directly to the issues dealt with at the beginning of this article, the inability of the G7 ten years after the beginning of the international crisis to overcome these very low growth rates with their destabilising social consequences, and the projection that this will continue for at least a further five years, clearly indicates the inadequacy of dominant Western economic theories. In the 1980s, as Justin Lin Yifu noted, the dominant economic theories in the West, which became the Washington Consensus, produced stagnation in developing economies. But in the 1990s they also produced economic disaster in the former USSR, and since 2007 the inadequacy of dominant Western economic theories has been demonstrated in its failure to be able to solve the problem of the ‘new mediocre’, of the ‘Great Stagnation’, in the Western economies. The IMF’s projections for the next five years merely show that this failure will continue.

Conclusions
The conclusions for China that follow from these international economic trends are both practical and theoretical.

First, the specific feature of any situation must be understood. As Xi Jinping quoted the Chinese philosopher Mencius: ‘As early as over 2,000 years ago, the Chinese people came to recognise that “it is natural for things to be different.”’[1] Put in terms of European thought it is the words of the Greek philosopher Heraclitus, also over 2,000 years ago, ‘No man ever steps in the same river twice’ -  everything which exists is unique both in time and place.  Because the most famous crisis in world economic history, that in 1929, saw an extremely rapid economic decline, whereas after World War II there was for a for prolonged period a boom, this can create the false impression that the economy must either be in a state of rapid decline or it will be in ‘boom,. However, the specific character of the present situation in the G7 economies is neither of these – it is a very long period of slow growth, a ‘new mediocre’.

Second, within this overall situation of very slow average growth business cycles still exist. The extremely low growth of the G7 economies in 2016 is therefore logically followed by faster growth in 2017-2018 – the G7 economies are oscillating around their low growth path. What the ‘new mediocre’ does mean, however, is that such upturns are temporary and do not turn into prolonged strong booms. The IMF’s projection of a new downturn in growth in 2019-2020 is therefore precisely an expression of the ‘new mediocre’.

Third, this ‘new mediocre’ inevitably means both geopolitical instability and domestic social and political instability within G7 countries.

Fourth, errors of dominant Western economic theory, of neo-liberalism, which were already shown in the stagnation produced in developing countries in the 1980s, and in the severe economic decline in the former USSR in the 1990s, are again confirmed in the inability of the G7 economies even after a decade to escape from the ‘new mediocre’. Influence of such provenly false ideas in China is therefore also dangerous for China both from the point of view of economic policy and of social stability.

Fifth, to return to this article’s starting point, the situation of the prolonged ‘new mediocre’ in the G7 economies represents part of the transition of the centre of economic thought to China. China’s rapid post-1978 economic development was created by a new economic theory, which became the ‘socialist market economy’ which had no precedent in any country and which proved its correctness through China’s unprecedented economic growth. The correctness of this economic theory was then further confirmed by the failure of Western economic theory in the ‘Washington Consensus’ for developing countries and of ‘shock therapy’ in Russia and the former USSR. The correctness of China’s concepts deriving from these concepts is now being demonstrated again in comparison to the ‘new mediocre’ resulting from the application of dominant Western economic theories in the G7.

Sixth, the spread of initiatives which follow from China’s ‘socialist market economy’ are widely understood to be increasingly crucial globally – the Belt and Broad Initiative (BRI), the Asian Infrastructure Development Bank and others. This also applies to China’s leading role in the struggle against climate change – particularly since US announcement of withdrawal from the Paris Climate Accord. But these are also part of China’s increasing international ‘thought leadership’ – BRI goes beyond the ‘free trade agreement approach’ of US sponsored post World War II trade deals to take in infrastructure and other investment, China’s increasingly leading role on climate change is an expression of its concept of a ‘community of common destiny’.  Naturally such an approach has its greatest mass international impact when articulated by China’s political leaders, as for example in the wide international praise given to Xi Jinping’s speech on globalisation at the Davos World Economic Forum analysed in 'How Xi Jinping’s Marxism Out-thinks the West ​'How Xi Jinping’s Marxism out-thinks the West'. 

​But while economists naturally do not have the same mass impact as state leaders this increasing impact of China’s thinking is also clear the more narrowly defined sphere of economics. ‘Classical’ works of China’s economic policy, of the period of launching of its economic reform, have of course for a long period been readily available outside China. But China’s economic success, and the cumulative impact of this in contrast to very slow growth in the West’s ‘new mediocre’, mean products of China’s contemporary economic thinking are also increasingly regularly translated and known among non-Chinese economists – for example Yu Yongding’s column on the prestigious Project Syndicat has appeared for seven years but he is now is frequently quoted in Western mass media on financial issues, Hu Angang’s books on green growth and related issues are translated, numerous works by Justin Yifu Lin on economic development which led to his Centre for New Structural Economics and Institute of South-South Cooperation are available internationally. I know directly from work in Chongyang Institute for Financial Studies, Renmin University of China the increasing international impact and connections of China’s think tanks. But numerous important Chinese economists are not yet available outside China. The combination of very low growth in the advanced Western economies and continued growth in China, is progressively speeding up overcoming this situation.

The G7 ‘new mediocre’ is therefore not merely important in its practical consequences for the world economy: the increasingly proven inability of Western economic thinking to overcome the ‘new mediocre’ is helping create the shift of the centre of world economic theory and thinking to China. As the G7 is incapable of overcoming this very slow growth, the ‘new mediocre’ in the G7 economies means this shift of the centre of international economic practice and thinking to China will intensify.

*   *   *

​This article was originally published in Chinese at Guancha.cn.  A shorter version was published in English by Global Times.

​Notes
[1] Xi, J. (2014). Exchanges and Mutual Learning Make Civilizations Richer and More Colorful. In J. Xi, The Governance of China (Kindle Edition) (pp. Location 3797-3909). Beijing: Foreign Languages Press.

China's increasing impact in Central and Eastern Europe

The Financial Times carried on 27 November a long article on China's increasing impact in Central and Eastern Europe under the self-explanatory title 'Eastern Europe’s China pivot'. Unfortunately for copyright reasons it is not possible to republish the article and a subscription to the FT is necessary to read it. However the general analysis of China's impact can be understood from the following excerpts:

'In Hungary it is hailed as the “Eastward Opening”. Serbian authorities see it as the glue in a “reliable friendship”, while the Polish government describes it as a “tremendous opportunity”. ... the 16+1, a grouping of 16 central and eastern European countries led by China... [is a] catalyst for... China’s ability to finance and build the roads, railways, power stations and other infrastructure that some poorer central and eastern European countries need....

​

'as the 16 countries — Hungary, Bulgaria, Romania, Poland, Bosnia and Herzegovina, Serbia, Croatia, Slovenia, Slovakia, Albania, Macedonia, Montenegro, Czech Republic, Lithuania, Latvia and Estonia — prepare for an annual summit in Budapest on Tuesday, it is clear that Beijing’s star is rising in central and eastern European nations.

'“The world economy’s centre of gravity is shifting from west to east; while there is still some denial of this in the western world, that denial does not seem to be reasonable,” Viktor Orban, the Hungarian prime minister, said in October. “We see the world economy’s centre of gravity shifting from the Atlantic region to the Pacific region. This is not my opinion — this is a fact.”

The lure for central and eastern European nations is clear. Since 2012, Chinese companies, backed by state banks, have announced an estimated $15bn in investments in infrastructure and related industries, according to data collected by the Center for Strategic and International Studies, a Washington think-tank, in co-operation with the Financial Times. “To China, the 16 countries are important in their own right but also as a bridge into the EU,” says Jonathan Hillman, director of the CSIS Reconnecting Asia Project...
​'Serbia, with which China has a “comprehensive strategic partnership” and an “all-weather friendship”, is due an estimated $1.9bn in infrastructure investments, according to the CSIS data. Hungary, with which China officially has a “high level of mutual trust”, has been promised an estimated $1.5bn. Milos Zeman, the Czech president, last year described his country — with whom some $3bn worth of deals has been announced — as “a gateway for the People’s Republic of China to the EU”.'

The evidence of China's increasing impact in Central and Eastern Europe is therefore clear from the article despite the fact that unfortunately its authors, James Kynge and Michael Peel, instead of welcoming this 'win-win' outcome for both Central and Eastern Europe and China, spend a lot of time criticizing it both on political grounds and quoting unsubstantiated charges China is trying to compete with existing international institutions.

In addition to the interest of the FT's clear statement of China's increasing impact in Eastern Europe readers may therefore be interested in the comment I have put on the article:
'The article cites "Jonathan Hillman, director of the Reconnecting Asia Project at the Center for Strategic and International Studies. “Under both the 16+1 and the Belt and Road, China is the common denominator. To shift from balancing against existing institutions to effectively competing with them, [Beijing] will need to deepen these parallel structures.”

'But there is no indication China wants to create, or has any strategy, for competition with existing structures. What it states it wants, and is consistent with its actions, is appropriate weight for its new economic position within existing structures. The AIIB, which in any case is not a competition for existing structures, was created only after a long period of failure to adequately reform the IMF and World Bank - in particular an inordinate delay of the US Congress in ratifying changes to the IMF which were agreed by governments during the international financial crisis.

'As regards economic strategy as China is demonstrably producing faster growth than the EU the Central European countries can scarcely be blamed for wanting to learn from China's success.

Economic Growth & Human Well Being - the Example of China

The following article analyses in detail the relation between economic growth and human well-being. Its focus is a comparison of China with developing and advanced economies. However the key principles apply to all countries.

*   *   *

Recent discussion in China rightly emphasises that GDP growth is not the objective of national and social development – economic development is simply the means to achieve other ends of national rejuvenation and human well-being. But this undoubted truth immediately poses two other questions:

• What is the relation between GDP growth and human and social well-being?
• As China’s economic growth is outstanding, with the highest economic growth over a sustained period of a major country in human history, how does China’s overall performance compare internationally in factors affecting human well-being other than economic development?

To aid answering these questions this article makes a systematic international comparison of China with other countries. Such international comparisons clearly reveals the following:

• It is important not to ‘throw the baby out with the bathwater’. The level of GDP, in its effect on per capita GDP, is not only a matter of non-human ‘concrete and steel’ but remains a decisive factor affecting overall human well-being.
• China’s international rankings in factors of human well-being other than economic development are even higher  than its achievements in economic development.

Such comparisons immediately settle another question. A new form of the attempt to ‘bad mouth’ China has appeared in the international media and among China’s ‘comprador intelligentsia’. Because attempts to claim China was heading for an economic ‘hard landing’ were shown to be completely false by events in 2016-2017, in parallel with the way they have also always been previously refuted, the new attempt to ‘bad mouth’ China is to claim that China’s social and environmental situation is negative and that this more than outweighs the advantages of achievements of economic growth. This issue will be analysed in detail later, but it may be noted immediately that international comparisons in fact show the reality is the exact opposite to such claims. China’s social situation, in terms of international comparisons, is even higher than that which would be expected from its level of economic development – i.e. from China’s per capita GDP.

 

 

These facts are naturally not meant to imply that there are not real and well known social or environmental problems to be tackled in China, as is again discussed later. But it is to give a base for understanding these, to evaluate which problems are normal and any that are abnormal at China’s level of economic development, to see the means necessary to correct problems, and to show in a systematic fashion the distortions, in some cases lies, by China’s comprador intelligentsia.

Finally, as China’s goal is the achievement of a high-income society, an analysis is given of trends among high income economies. Establishing the facts regarding the latter is aimed to aid understanding which high-income societies are most usefully studied to draw both positive and negative lessons.

China’s economic growth  
It is unnecessary in this article to repeat in detail the facts of China’s economic growth as these are well known. International comparisons show that China’s growth in the 39 years since the 1978 economic reforms is the fastest sustained economic growth by a major economy in world history. From 1978 to 2016 China’s annual average GDP growth was 9.6% and its economy increased in size by 3,200%. China’s annual average increase in per capita GDP was 8.5% - its per capita GDP increased by over  2,100%. For comparison in the same period US per capita GDP increased at an annual average 1.6% and by a total of  83%.  But what, in terms of international comparisons, would be expected to be the effect of such economic growth on social conditions in China and how do these compare to the actual effects?

Life expectancy
It is well known to economists that the best and most comprehensive criteria for judging the overall impact of social and environmental conditions in a country is average life expectancy. Life expectancy sums up and balances the combined effect of all positive and negative economic, social, environmental, health, educational and other trends. Life expectancy is therefore a more adequate measure of social well-being than purely per capita GDP. As Nobel Prize winner Amartya Sen summarized regarding the relation between these different variables:

‘Personal income is unquestionably a basic determinant of survival and death, and more generally of the quality of life of a person. Nevertheless, income is only one variable among many that affect our chances of enjoying life… The gross national product per head may be a good indicator of the average real income of the nation, but the actual incomes enjoyed by the people will also depend on the distributional pattern of that national income. Also, the quality of life of a person depends not only on his or her personal income, but also on various physical and social conditions… The nature of health care and the nature of medical insurance – public as well a private – are among the most important influences on life and death. So are the other social services, including basic education and the orderliness of urban living and the access to modern medical knowledge. There are, thus, many factors not included in the accounting of personal incomes that can be importantly involved in the life and death of people.’

Life expectancy data sums up and balances all positives and negatives – a far more rigorous method than simply seizing on individual factors or anecdotes. In China, for example, to take negatives, it is known pollution is a damaging factor, symbolised by the publicity given to smogs in Beijing and other cities, while to take positives the OECD’s studies show China’s education system is strong in terms of international comparisons, and China’s strong advances in life expectancy after 1949 were correlated in time with great emphasis to primary levels of education and health care.

Factors in life expectancy
Turning to international comparisons, global data shows conclusively that the single biggest factor in a country's life expectancy is per capita GDP. A long-term analysis of this is given in my book The Great Chess Game (一盘大棋? ——中国新命运解析) so in this article only the latest statistics from the World Bank are analysed – this new data however is fully in line with the longer term trends analysed in The Great Chess Game

On the latest World Bank data, the level of per capita GDP accounts for 68% of the difference in life expectancy between countries – see Figure 1. The data shows that at any level of income a doubling of per capita GDP adds 3.4 years to a country’s average life expectancy.

 

Figure 1

 

Per capita GDP is a life and death question
The strong correlation between per capita GDP and life expectancy necessarily means per capita GDP is quite literally a ‘life and death question’. A person in a low-income economy by World Bank classification has a life expectancy of 62 years, whereas someone in a high-income economy has a life expectancy of 81 – a difference of 19 years.

In more detail, as shown in Figure 2, analysing the official World Bank classifications of countries by their level of economic development:

• average life expectancy in a ‘high-income’ economy is 80.8 years;
• life expectancy in an ‘upper middle-income’ economy, the international classification to which China belongs, is 74.9 years.
• life expectancy in a ‘lower middle-income economy’ is 67.4 years,
• life expectancy in a ‘low-income economy’ is 61.7 years.

This data immediately shows why it is necessary not to ‘throw the baby out with the bath water’ in discussions in China of per capital GDP growth. If China were to achieve the average life expectancy of a high-income economy this would be more than five years higher than the average life expectancy of an upper middle-income economy, and almost five years above China’s present life expectancy - with all the improvements in quality of life that would underlie this. Per capita GDP, and therefore GDP, is therefore not ‘socially neutral’. Higher per capita GDP is strongly beneficial in terms of its consequences in social and human well-being. This strong correlation between per capita GDP and life expectancy shows why although GDP is not the aim of social development, it is  simply impossible to achieve desirable social goals without high levels of per capita GDP and therefore of per capita GDP growth.

 

Figure 2

 

Comparison within countries
It is also significant, and illustrates the processes involved, to note that the difference in life expectancy between countries at different levels of per capita GDP strongly parallels the effects of differences in income within countries. The effect of differences in income within countries has been much studied in advanced economies, as their higher levels of economic development means fairly large sections of the population can achieve high income levels and therefore comparisons of the effects of differences of income affecting large sections of the population can be made.
In the US  the richest one percent of men live 15 years longer on average than the poorest one percent of men - while among women the difference is 10 years. Within US cities the differences are even greater. In New York the difference in life expectancy between richer and poorer parts of the city is 11 years, in Atlanta, it is 13 years, in Chicago it is 16 years, and in Philadelphia and Richmond there is a 20 year difference. In the UK in London the difference in life expectancy between the richest and poorest parts of the city is 25 years.

It should be noted that internationally there is no evidence ethnic factors play a substantial role in life expectancy. Of the world’s 10 countries with the highest life expectancy seven are predominantly European in ethnicity (Italy, Spain, Switzerland, Iceland, France, Sweden and Australia) and three are Asian (Hong Kong SAR, Japan and Singapore). The key common feature of these European and Asian countries, of course, is not their ethnicities but that they have high per capita GDPs. It is per capita GDP, not ethnic factors which are decisive in life expectancy.
The data within countries, as well as between them, therefore again confirms that high levels of per capita GDP are not ‘socially neutral’. Due to the strong correlation of per capita GDP and life expectancy, high per capita GDP levels are a necessary condition to achieve long life expectancy.

Non-economic factors
This fact that per capita GDP accounts for 68% of differences in life expectancy between countries, however, necessarily also means that 32% is accounted for by positive factors other than per capita GDP (e.g. good education, good health care, environmental protection) or negative factors other than per capita GDP (e.g. poor education, poor health care, pollution). How well, therefore, is China doing in terms of these other factors? Obviously as per capita income is the largest single factor in life expectancy China, as a developing country, cannot yet match the life expectancy of the advanced economies. But how is China doing compared to countries at a similar stage of economic development?
This can be measured in two ways.

• Because per capita GDP accounts for such a large part of life expectancy it is possible to predict what a country’s life expectancy would be from its per capita GDP.
• A country’s rank in per capita GDP in the world can be compared to its rank in life expectancy. Thus, if a country ranks 60th in terms of GDP per capita but ranks 45th in life expectancy its life expectancy is longer than would be expected from its per capita GDP, but if it ranks 70th in life expectancy then that is lower than would be expected from its per capita GDP.

​
The World Bank supplies data for  183 countries, constituting almost all the world’s population. Both of the comparative measures confirm China’s position is better than would be predicted by its level of economic development, i.e. its per capita GDP. As China, by World Bank classification, is an ‘upper middle-income’ economy’ the relevant comparison, in order to analyse the impact of social and environmental factors other than per capita GDP, is to make a comparison with other upper middle-income economies. This is shown in Table 1 below, which also gives data for the largest group of developing economies – the BRICS. An analysis of the situation with high income economies is also given below.

China’s comparative position
China’s predicted life expectancy from its per capita GDP is 73.3 years but China’s actual life expectancy is 76.0 years, a difference of 2.7 years – that is, people in China live over two and a half years longer than would be expected from its level of economic development. China ranks 72nd in the world in per capita GDP but 58th in life expectancy – that is China’s global rank in life expectancy is 14 places higher than its rank in per capita GDP, indicating that the overall effect of China’s social and environmental conditions is clearly positive.

Making a comparison of China with its direct peer group, that is upper middle income economies by World Bank classification, the average life expectancy for such countries, excluding China itself, is 73.6 years. Life expectancy in China is therefore 2.4 years longer than the average for other upper middle-income economies. The balance of China’s economic and social conditions therefore clearly adds significantly to its life expectancy compared to what would be expected from its per capita GDP.

Making a comparison specifically to large developing economies, the BRICS group, Figure 3 shows that China has the highest life expectancy of any BRICS country, despite Brazil and Russia both having higher per capita GDPs than China - all BRICS countries are upper middle-income economies by World Bank classification, except for India which is a lower middle income economy.
As an aside it may be noted that among the BRICS countries India also does well, although not as well as China, while Russia, Brazil and South Africa do badly.

 

Table 1

 

Figure 3

 

 

Trends among the G7
So far trends among developing economies have been analysed. These clearly show China has a significantly higher life expectancy than would be expected from its level of economic development – indicating that the overall effects of social and environmental factors in China are better than the international average and add to life expectancy. Nevertheless, the close correlation between per capita GDP and life expectancy means that it is completely impossible for China to achieve the high level of social and environmental conditions reflected in high life expectancy without a major increase in per capita GDP. This is shown clearly by the fact that no upper middle-income economy has a life expectancy reaching 80 years – the highest is 78 years. In contrast, the average life expectancy of high income economies is 80.8 years – almost five years higher than China’s present level. In short, the most fundamental requirement for China to achieve the social and environmental conditions reflected in high life expectancy is to achieve a substantially higher per capita GDP. 

However, while the data show it is impossible for China to achieve high life expectancy without a high per capita GDP, and it is China’s aim is to make the transition to a high-income economy, nevertheless the choices facing China cannot be reduced simply to how to achieve high per capita GDP. The reason for this is that it was already shown that that differences other than per capita GDP can have a significant effect on life expectancy – accounting for 32% of the difference in life expectancy between countries. This reality is also confirmed by examining the situation among high income economies.

Excluding extremely small countries, whose situation is entirely different to China’s, the effect of social models and other factors among high income economies can be clearly seen. For example in the US life expectancy is 4.0 years shorter than would be expected from its per capita whereas in Spain it is 4.4 years longer. As a result although Spain’s per capita GDP is 54% lower than that of the US, Spain’s life expectancy is 4.6 years longer than the US – 83.4 years in Spain compared to 78.7 years in the US.
Therefore, while a high per capita GDP is a necessary condition for China to achieve a high life expectancy the choice of model of development, and other factors, will have a significant effect on China’s life expectancy. As significant number of high income economies are very small the focus here will be a comparison with large developed economies, the G7,  as these are evidently the relevant ones to compare to a country of China’s size.
​
The G7 Figure 4 therefore show life expectancy in the major advanced countries – the G7. This shows an average American has a life expectancy of only 78.7 years - compared to 83.8 years in Japan, 83.5 years in Italy, 82.7 years in France, 82.1 years in Canada, 81.6 years in the UK, and 81.1 years in Germany. The US is the only G7 country with a life expectancy of less than 80.

 

Figure 4

 

Detailed examination shows the relative situation of the US is even more serious. ​As the US has the highest per capita GDP of any major country it would therefore be expected that its life expectancy would be the highest of any major country. But the facts show that that the US has a much lower life expectancy than any other G7 economy - average life expectancy in the US is four years less than would be expected from its per capita GDP. The US also ranks 8th in the world in terms of per capita GDP but only 40th in terms of life expectancy – that is the US rank in life expectancy is 32 places lower than its position in per capita GDP. This US data is by far the worst for any G7 country.
The G7 countries which have a higher life expectancy than the US all achieve this not by having a higher per capita GDP than the US but by having better social and environmental conditions – shown by their having a rank in life expectancy that is far higher than their rank in per capita GDP. Therefore social, environmental etc. conditions in these countries are far more conducive to a long life than the US despite having lower per capita GDPs. The US performs far worse than any other G7 country.

 

Table 2

 

 

Differences in social model
The fact Americans die earlier than those in the other major advanced economy shows that component parts of the American system – a US health care system which is private, US pollution, US poverty and interlinked ethnic discrimination, the US’s high level of civic violence, and other features mean Americans die far younger than would be expected from the country's per capita GDP - and younger than in other comparable economies. It turns out the 'American way' literally subtracts from the life of Americans. No system which condemns its citizens to an early death could be called ‘the greatest’ as US politicians claim.

In contrast, as already noted, of the world’s 10 countries with the highest life expectancy all have high per capita GDP with seven being in Europe (Italy, Spain, Switzerland, Iceland, France, Sweden and Australia) and three in Asia (Hong Kong SAR, Japan and Singapore). For studying the combination of per capita GDP and non-economic factors these countries are therefore the key ones from which to draw positive lessons. It is therefore clear that if the goal is not highest per capita GDP, but the maximising of social well-being, then the lessons of the US model are negative while the lessons of Europe and some high income Asian countries are positive.

Conclusion
Finally, of course, the method of ‘seek truth from facts’ means this situation has implications for choices for China.

• It was already emphasised that the analysis that the goal of social and national development is not GDP growth is entirely correct. But international comparisons also make clear that without high levels of per capita GDP China cannot achieve its other social goals – as shown by the close correlation of per capita GDP and the measure of overall social conditions shown in life expectancy. Furthermore, this is confirmed not only by international comparisons but by the situation of those of China’s cities which, if they were countries, would already have achieved high-income status by international classification.  Shanghai of course has a per capita GDP considerably above the average for China and in in 2016 life expectancy in Shanghai  reached 83 years, substantially above China’s national average and higher than the 81.2 years in New York. This trend is also clarificatory as New York’s per capita GDP is still far higher than Shanghai - confirming that as parts of China achieve high income status China keeps its lead in non-economic factors over the US.

• Xi Jinping has stressed that China’s development is ‘people centred’: ‘The fundamental goal of maintaining growth pace and promoting economic development is to seek proper solutions to prominent issues of people’s common concerns.’[1] Given life expectancy key role as an indicator of social well-being it is logical, and in line with China’s emphasis on ‘people centre development’, for China to indicate goals in life expectancy as part of its development strategy. China nationally has set the target of increasing life expectancy by one year during the current 13th five-year plan. To assess situations in regions it may even be appropriate to set regional goals for increases in life expectancy. However, in light of the data given, it is clear any goals in life expectancy must be related to the per capita GDP both nationally and regionally. It should also be noted that international data shows clearly that increases in life expectancy are proportionate to the percentage increase in per capita GDP and not to the arithmetic increase in the amount of per capita GDP. That is, internationally for example, an increase from $5,000 a year per capita GDP to $10,000 per year, that is doubling, will lead to a greater increasing in life expectancy than an increase from $10,000 to $15,000, a 50% increase – although, of course, life expectancy at $15,000 per capita GFP would be expected to be higher than at $10,000 per capita GDP.

• Given the close correlation of per capita GDP and life expectancy, as China’s GDP grows its life expectancy will increase. But it can also be seen from international differences, and from the divergences analysed among high income economies, that choices made by these countries significantly affect their life expectancy. In particular the US model has significantly negative effects on life expectancy. Neo-liberals who urge China to adopt features of the ‘US model’ as China develops – a system based on private medicine, no welfare state etc – have to explain why they believe China should  adopt a model which leads to its citizens will dying earlier than in other advanced economies? And if China is to adopt a model in which its citizens are condemned to an earlier death than necessary shouldn’t this be explained clearly to China’s people? Positive examples of the interaction of high per capita GDP with other social factors that increase life expectancy even further may be seen in a significant number of European and Asian countries, whereas in the US, as analysed, non-economic factors significantly shorten life expectancy.

• Finally, it may be noted that the claims by China’s comprador intelligentsia that China’s rapid economic development is more than offset by negative social and environmental conditions is the precise reverse of the truth – China’s social indicators in global comparisons are higher than its economic ones. Far from detracting from China’s situation China’s social achievements add to its economic ones. This naturally does not mean there are not real problems, as with pollution, but that the balance of social benefits and negatives is clearly and strikingly positive in relation to China’s level of economic development – whereas in the US, for example, the balance of social positives and negatives is clearly negative in relation to the US’s level of economic development.

As all these, as has been seen, are literal matters of life and death for people study and accuracy on these issues is vital is vital for China’s goal of people centre development and the overall progress of its people.

Notes
[1] Cited in ‘President Xi says people first in seeking economic growth’ 22 December 2016 http://english.gov.cn/news/top_news/2016/12/22/content_281475522307959.htm

*   *   *

This article was originally published in Chinese at Guancha.cn under the title 'How Important is GDP Growth to the Well Being of the Chinese People'. (GDP增长对提升中国人幸福感有多重要？)

The ‘Anglo-Saxon’ Political Crisis - from Reagan & Thatcher to Trump & Brexit

​Every day the media reports deepening political destabilisation gripping both major ‘Anglo Saxon’ countries - the US and UK.  Most important for the world, of course, is US political instability where almost daily crises hit the Trump administration – resignation of the President’s Chief of Staff, sacking of the head of the FBI, public attacks by the President on members of his Cabinet, virulent public and even obscene denunciations by the President’s advisers of each other, numerous Congressional investigations, sensational leaks from inside the national security agencies the FBI and CIA, open campaigns by key mass media such as the New York Times and CNN to remove the President etc. This US domestic political instability is clearly tightly intertwined with crises and developments in world politics – US relations with Russia, US disputes over the Iran nuclear deal, differences over US policy to China etc.

 
The UK political crisis, with the loss by Theresa May’s government of its parliamentary majority, coming only a year after the economically irrational referendum vote for Brexit and resignation of Prime Minister Cameron, is less globally decisive than US political instability but an important factor in European politics and strikingly confirms the crisis in the main ‘Anglo-Saxon’ countries.

 

 

 
This US/UK political crisis has major lessons. Because these ‘Anglo-Saxon’ countries were the ones in which neo-liberal policies were most famously implemented. The fact that deepening political instability has broken out in the two major countries where neo-liberal policies were inaugurated by their most famous representatives, Reagan and Thatcher, is evidently not accidental. However, while numerous analyses have been made of the economic aspects of neo-liberalism less attention has been paid to the present clear demonstration of its dangerously destabilising political consequences. This article therefore analyses in detail the relation between the economics of neo-liberalism and the deepening US/UK political destabilisation.
 
But, in addition to analysis of immediate events, it must be borne in mind that the UK and US were successively for two centuries the world’s most powerful economies. Analysing the deepening political crisis in the Anglo-Saxon countries, in its fundamental historical context, therefore also allows a clear understanding of the present dynamics of the global economy and geopolitics – as well as making clear why US domestic instability is inextricably linked with international geopolitical instability.
 
Historical position of the Anglo-Saxon economies
 
Starting with the fundamental historical framework, during the two centuries in which the ‘Anglo Saxon’ economies, first the UK and then the US, were the dominant countries in the world economy they both, at the respective peaks of their power, played a decisive global role in stabilizing the world economy through being large scale suppliers of capital for economic development of other economies.
 
The economic process involved, and its relation to the geopolitical dominance of first the UK and then the US, was simple. Throughout most of this period the UK and US were the world’s most internationally competitive economies. This competitiveness generated large balance of payments surpluses from overseas trade and property incomes. But, in economic terms, a balance of payments surplus necessarily involves an equal export of capital. Therefore, this high competitiveness of the US and UK economies generated balance of payments surpluses, which were used to generate capital exports to other countries, which in turn helped stabilise recipient states and the global economy as a whole. While this essential mechanism was the same in both countries certain specific features of the two economies will now be briefly examined in chronological order.
 
Pax Britannica
 
The period of UK global economic dominance in the 19th and early 20th centuries was classically  studied in Imlah’s masterpiece Economic Elements in the Pax Britannica. This analysed the way in which throughout most of the 19th century large scale capital exports from the UK stabilised the world economy and geopolitical situation. Imlah’s study was of the detailed economic background to the reality that general conflict between the great European powers, which for most of this period were also the world’s most powerful states, did not occur for almost a century between the end of the Napoleonic Wars in 1815 and the beginning of World War I in 1914. Imlah noted that throughout this century the UK, at that time the world’s most powerful economy, was a large-scale exporter of capital - Figure 1 shows this process and extends the data to the present day.
 
Figure 1 shows that huge UK export of capital, generated by its balance of payments surpluses, already reached eight percent of GDP by 1870 and by 1913 it was approaching 10% of GDP - to understand the consequences of the trends in this chart, as already noted. it should be appreciated  that running a balance of payments surplus is equal to exporting capital.

Figure 1

 

 

Imlah noted that massive supply of UK capital to other states, by compensating for shortage of capital in them, stabilised both the individual recipient countries and the world economy. It was for this reason that Imlah termed the 19th century the ‘Pax Britannica’ – supply of capital to the other countries by the world’s most powerful economy of that period stabilised the global situation.This period of avoidance of generalised conflict between the major European powers in 1815-1914 was, of course, used by them to colonise other countries - but that is another issue.

But after 1913, as Figure 1 shows, the economically devastating consequences of World War I for Britain meant that the UK could no longer play its former global stabilising role. By 1928 British export of capital had fallen to 2.6% of GDP. Britain’s ability to stabilise the global economy was then further weakened by the Great Depression – by 1935 UK export of capital was only 0.5% of GDP. During World War II the UK became a massive recipient of capital in aid from abroad – above all from the US.

After World War II UK export of capital resumed, but only at around of one percent of GDP. By this time also the UK had so declined as a percentage of the world economy that its capital exports were too small to play a globally stabilising goal.

Britain moved briefly into balance of payments deficit in the mid-1970s but then from the early 1980s onwards the UK moved into a permanent and worsening balance of payments deficit – this deficit indicating its economy had lost its international competivity. This date of the severe deterioration of Britain’s international competitiveness is of course significant – it was the Thatcher period.

This UK balance of payments deficit from the early 1980s had great domestic economic significance as analysed below. However, in terms of its global consequences by the late 20th/early 21st centuries the UK had lost its position as an economic ‘superpower’. While the UK balance of payments deficit was still internationally significant, being the world’s second largest in dollar terms after the US as shown below, by this time the global role of the UK deficit was very subsidiary compared to the US.
​
To avoid the UK data being dominated by purely short-term movements, and therefore to allow the trend to be seen clearly, a five-year moving average of the UK balance of payments is shown in Figure 2. As may be seen after 1913 the UK never regained its position as a massive exporter of capital and therefore lost its ability to stabilise the world economy. This role passed to the other great Anglo-Saxon power, the US – which is analysed in the next section.

 

Figure 2

 

 

Rise and decline of the US stabilising role in the world economy
 
The US became world’s largest economy in approximately the 1880s but there was naturally a time lag before its period of global economic dominance began. In the 19th century the US had been a large-scale capital importer – a major part of which came from the UK. However, by the beginning of the 20th century the US economy’s rising power meant it had become a capital exporter – see Figure 3. The US remained an exporter of capital until the beginning of the 1980s. As the gigantic export of capital by the US during the World Wars, reaching its peak at 7% of GNP, was exceptional a five-year moving average for this data is also shown in Figure 4.
 
After 1945 the US acquired hegemony among the capitalist economies – completely replacing the UK. US capital exports were important not only in general but also specifically for particular regions and countries US foreign policy wished to stabilise/aid. For example, the US granted massive economic aid to Western Europe after World War II (the Marshall Plan), the US gave large scale aid to key military allies (e.g. Israel), the US subsidised numerous countries in the ‘Third World’ it wished to support US foreign policy, US company investment into numerous economies stabilised recipient states etc.  
 
As with the UK during the ‘Pax Britannica’, from World War II until the 1980s the US could use large scale capital exports to maintain the stability of global order in which it was the dominant economy. These capital exports, in turn, were made possible by the US balance of payment surplus – reflecting the US’s high degree of international competitiveness.
 
However, Figure 3 shows that from the early 1980s a fundamental change took place. The US moved from balance of payment surplus into balance of payments deficit - that is the high international competitiveness of the US had disappeared. From a balance of payments surplus in 1980 the US had moved to a deficit of 2.8% of GDP by 1988 – an annual deficit of over $400 billion in today’s prices.
 
The date of this sharp decline in US international competitiveness is of course significant as it is the period in which Reagan was president. It is equally extremely striking that the US moved into balance of payments deficit, that is the international competitiveness of its economy declined, at exact the same time as the UK – in the 1980s. The leaders of the US and UK during this fundamental decline in economic competitiveness being, of course, Reagan and Thatcher.
 
This worsening of the international competitive position of the US and UK would necessarily lead to deterioration of their domestic and global positions – the trends which are analysed below are merely the precise mechanisms by which the deteriorating international competitive positions of the US and UK worked themselves out. The present political destabilisation of the US and UK will be seen to be an inevitable consequence of these fundamental economic processes.

 

Figure 3

 

 

Figure 4

 

 

The Anglo-Saxon economic ‘black hole’
 
The net effect of the huge decline in US and the UK international competitiveness under Reagan and Thatcher, with both the US and UK moving into large balance of payments deficits, was that the major Anglo-Saxon economies became a type of global economic ‘black hole’. This may be seen clearly in Figure 5 which shows the 10 economies in the world with the largest balance of payments deficits in 2016. No other country even comes close to the $481 billion balance of payments deficit of the US or the $116 billion deficit of the UK.
 
This movement of the ‘Anglo-Saxon’ economies from balance of payments surplus to balance of payments deficit, that is from being suppliers of capital to requiring large amounts of capital from the rest of the world, necessarily changed their entire role in the world economy. From the UK and US position in the 19th and most of the 20th centuries, of being large scale suppliers of capital to the rest of the global economy, the US and UK by becoming dependent on capital from other countries reversed their role to becoming a ‘black hole’ in the world economy. From being globally stabilising exporters of capital the US and UK became dependent on capital from other countries. This meant that the US and UK have been transformed from stabilisers of other countries’ economies to destabilising the world economy.
 
As the impact of the US under Reagan was globally most important this will be concentrated on. But it will be seen that Thatcherism was simply a small scale variant of Reaganism – naturally with certain specific national features.

 

Figure 5

 

 

Decline of US international competitiveness

Analysing first the international dimension of the US economy, It was already noted above that the  Reagan period witnessed a radical decline in US international competitiveness. As shown in greater detail in Figure 6, prior to Reagan winning the presidency in 1980 the US balance of payments, the key indicator of the US economy’s competitiveness, had remained essentially in balance despite the negative impact of the international oil price rise in 1973 – the largest US balance of payments deficit was 0.7% of GDP in 1977. In contrast, following Reagan’s election the US balance of payments deteriorated sharply – i.e. the US economy suffered from rapidly declining international competitiveness. By 1987, Reagan’s penultimate year in office, the US balance of payments deficit reached 3.3% of GDP – showing unprecedented post-World War II worsening US competitiveness. Overall in the period from 1980, the last year before Reagan came to office, and 1988, his last year in office, the US balance of payments deteriorated from a surplus of 0.1% of GDP to a deficit of 2.3% of GDP – a worsening of 2.4% of GDP, or almost $450 billion at today’s prices.
 
This sharp decline in US international competitiveness under Reagan, and the creation of a large US trade/balance of payments defict, necessarily had major consequences for the domestic economic structure of the US and US political stability which logically culminated in the Trump period. As a higher proportion of US goods were imported, due to the widening balance of payments deficit, jobs were lost in the US in industries which had previously produced for the home market those products which were now imported. This created the beginning of the notorious phenomenon of the US ‘rust belt’ – whole regions of the country characterised by shut down industries and unemployment. These ‘rust belt’ regions voted for Trump in 2016. However, before analysing these political consequences, a decisive feature of the Reagan period, in addition to loss of international competitiveness, will be examined – Reagan’s commencement of the massive build up of US debt.

 

Figure 6

 

 

​Reagan and the accumulation of US debt
 
The declining international competitiveness of the US economy illustrated in Figure 6 shows that from Reagan onwards the US became increasingly dependent on inflows of capital from abroad – i.e. on external sources of capital.  Figure 7 however shows that Reagan also simultaneously commenced large scale US domestic borrowing and debt build up .
 
US state debt sharply increased from 38% of GDP when Reagan became president to 60% of GDP when he left office. While in mere words Reagan talked about ‘small government’ in reality a policy of high state spending, focussed on the military, was carried out which could only be financed by debt. In summary, the area in which the Reagan showed real economic skill was large scale borrowing and debt accumulation.
 
Once again Reagan created a policy framework which was then followed by most subsequent US presidents. Initially Clinton, reversing Reagan’s policy, reduced US state debt to 50% of GDP, but George W Bush rapidly restored US state debt to Reagan’s levels – state debt reaching 61% of GDP by 2007 as shown in Figure 7.  With the beginning of the international financial crisis US state debt then rose rapidly further – reaching 99% of GDP in the 1st quarter of 2017.
 
This data therefore shows clearly that large scale build-up of US state debt was begun under Reagan, not simply during the international financial crisis – although the latter of course augmented US state debt further.

 

Figure 7

 

 

​Rising US household debt
 
Alongside this large-scale US state borrowing the Reagan period saw a rise in US household debt – which increased from 47% of GDP in 1981 to 57% in 1988 (see Figure 8). Once again Reagan began a process which successor US presidents continued. Under Clinton, while state debt fell as a percentage of GDP, household debt continued to rise. This process continued under George W Bush – household debt reaching 98% of US GDP by 2008.
 
Such a large-scale build-up of US household debt was clearly unsustainable – US households were spending beyond their real incomes. The violent consequences of the international financial crisis therefore necessarily forced a sharp reduction in US household debt, with it falling from 98% of GDP in 2008 to 78% in the 1st quarter of 2017. This greatly exacerbated the fall in US living standards from levels which had been temporarily sustained by the large-scale debt increase under Reagan and his successors. This in turn necessarily destabilised US politics.

 

Figure 8

 

 

​Overall rise in US debt
 
In summary, the overall consequences of the process inaugurated by Reagan was therefore a huge build-up of total US debt, which rose from  135% of GDP in  1980 to 188% in 1988. to  250% by 2009 – see Figure 9. The process unleashed by Reagan’s military spending, continued on the state side by the military expenditure of George W Bush, and on the household side under both Clinton and Bush, might therefore be likened to a huge ‘credit card binge’. While the huge bill on the credit card is being run up the card owner feels good as they are spending a lot! But when the credit card debt necessarily has to be paid the owner feels the deeply damaging effects.
 
The repayment became due with the international financial crisis. With the beginning of this crisis US state debt dramatically rose from 62% of GDP in 2007 to 101% of GDP by 2015, but simultaneously with this explosion of state debt the economic consequences for the population was extremely severe. Not only did US median incomes fall below 2009 levels, as analysed  below, but US households were forced to run down debt by almost 19% of GDP.. With this combination of a fall in household incomes and the necessity of households running down debts accumulated from Reagan onwards, the deep economic and social discontent of the US population shown in the 2016 US elections was inevitable. 

 

Figure 9

 

 

Trends in US income inequality
 
Turning to other features, Reagan inaugurated a massive increase in US inequality, and a falling share of total incomes received by the great majority of the US population - the consequences of which culminated in current US political instability.  
 
Table 1 below shows the percentages of US total incomes received by different levels of US income groups. As it will be seen that a clear change took place in 1980 the changes are shown in two periods – 1967-1980 and 1980-2015.
 
Analysing first the richest and poorest groups, from 1967-1980 the share of total incomes received by the 20% of American households with the lowest incomes rose marginally from 4.0% to 4.2%. The percentage of total income received by the top 5% fell from 17.2% - 16.5%.  A small but definite evening out of the most extreme US income differences was therefore occurring in 1967-1980.
 
After 1980 this trend radically reversed. The share of incomes of the bottom 20% of US households fell from 4.2% to 3.1%. Simultaneously the share of incomes of the top 5% of US households rose by an extremely sharp 5.6% - from 16.5% to 22.1%.  Furthermore, the share of total incomes in every income group in the bottom 80% of the US population declined – the total fall for 80% of the population being an extremely severe 7.1%, from 55.9% to 48.8%. 
 
In monetary terms, the total income of the top 20% of US households in 2015 was $5.1 trillion while that of the entire bottom 80% was only $4.9 trillion. The total income of the top 5% of the US population in 2015 of $2.2 trillion was over seven times that of the bottom 20% of the US population of $0.3 trillion.
 
In summary, if from 1967-80 there had been some evening out of the most extreme US income inequalities, after 1980 there was instead a massive increase in the share of incomes of the top 5% of the population with and a simultaneous severe loss of the share of incomes of 80% of the population. 

 

Table 1

 

​US median incomes
 
Finally, the trends after the international financial crisis undoubtedly exacerbated the trends in US inequality already established under Reagan. As Figure 10 shows US median household incomes by 2015 were still below the level of 16 years previously in 1999.  At the trough of incomes in the Great Recession, in 2012, US median household incomes were more than 9% below their 1999 peak level. The US population had therefore suffered more than a decade and a half serious fall in incomes – which would produce deep political discontent and anger in any country.

 

​Figure 10

 

 

 
Summary of US trends
 
The Reagan period was therefore characterised by the following features:
 

• A major fall in the international competitiveness of the US economy;        
• The US economy losing its previous position as a large-scale exporter of capital and it becoming dependent on imports of capital;
• A very sharp increase in US state debt;·         
• An increase in US household debt,
• Sharply increasing inequality

·         
These fundamental trends established under Reagan were continued by his successors.
 
Thatcher
 
Data confirms that Thatcherism was essentially a smaller scale version of Reaganism – naturally with certain specific national features.
 

• The first fundamental parallel between Thatcherism and Reaganism was the sharp deterioration in the UK’s international competitiveness under Thatcher. This was already shown in Figure 1 above. The UK moved from a balance of payments surplus of 0.6% of GDP in 1978, the year before Thatcher came to office, to a deficit of 3.6% of GDP in 1990, the year she left office. Therefore, under Thatcher the UK balance of payments deteriorated by 4.2% of GDP. This worsening of UK international competitiveness under Thatcher was consequently even worse than the US under Reagan – the UK’s balance of payments situation deteriorating by 4.2% of GDP compared to 2.4% for the US.

       

• This rapid deterioration of the UK’s international competitiveness under Thatcher, the increasing proportion of products which were imported, necessarily produced the same phenomenon as the growth of the ‘rust belt’ under Reagan. In the case of the UK it was the north of England that suffered massive unemployment and closure of industries. The political destabilisation and anger produced by this began the process leading to these regions voting in favour of the economically irrational policy of Brexit as a protest.

        

• UK unemployment  rose dramatically under Thatcher – increasing from 6% when Thatcher came to office to 12% by the mid-1980s. Under the impact of rising unemployment and regressive tax changes introduced by Thatcher UK inequality rose rapidly. The Gini coefficient went from 0.25 in 1979 to 0.34 in 1990. Under Thatcher, as under Reagan, a massive increase in proportion of income going to the better off occurred. The real income of the bottom 10% of the population fell by 2.4 per cent, so the poor were worse off in 1990 than in 1979, while the income of the top 10% of the population rose by 48%. As a result, the number of those living in poverty under Thatcher rose sharply. Taking a standard UK measure of poverty, those with incomes below 60% of median incomes before housing costs, in 1979, 13.4% of the population were in this category while by 1990 this had almost doubled to 22.2%.

     
Thatcher enjoyed one major advantage compared to Reagan. In the 1980s, due to the discovery of North Sea Oil, the UK became a massive oil exporter. This economic windfall, due to geography not economic innovation, became even more valuable after the huge international oil price increase of 1979. The great tax revenues from oil and gas meant that Thatcher was able to avoid the large-scale build-up of state debt which occurred under Reagan. But, as can be seen from the increasing UK balance of payments deficit in this period, despite the enormous economic windfall from North Sea oil and gas this was not used to improve the competitiveness of the UK economy – on the contrary the international competitiveness of the UK economy substantially worsened under Thatcher.
 
With the worsening of the competitiveness of the UK economy which had begun under Thatcher, and which continued to worsen after her, Thatcher’s successors were not able to avoid a huge debt build up. Therefore, with a certain delay, the Reagan pattern of not only worsening international competitiveness and sharply rising inequality but also a huge build up of debt was replicated in the UK – making the parallel of the economic courses launched by Reagan and Thatcher complete.   
 
In summary, the Thatcher period, as with the Reagan period, saw:
 

• a massive deterioration in UK international competitiveness, and in consequence an increasing dependence of the UK economy on capital from abroad;
• an extremely rapid rise in inequality.

·         
Destabilisation of US & UK domestic politics
 
Having analysed the key trends under Reagan and Thatcher it is abundantly clear why their policies led directly to the domestic political instability which is currently gripping the US and UK.
 

• The drastic loss of international competitiveness of both the US and UK economies under Reagan and Thatcher led necessarily to elimination of jobs in industries which had previously supplied the domestic market as imports replaced domestically produced products. This culminated in the creation of the ‘rust belt’ in the US, which voted for Trump in 2016, and economic depression in the North of England – which voted for Brexit in 2016.   
• Inequality rose dramatically under both Reagan and Thatcher, inaugurating the trend which has deepened further since.  
• Reagan immediately launched a course of massive build-up of US private and state debt and, with a certain delay, a huge debt build-up also developed in the UK.

       
Global destabilisation 
 
Finally, it should be noted that in one sense Reagan and Thatcher merit being considered as fundamental turning points – in the sense that they inaugurated policies which their successors continued. The deterioration of US and UK international competitiveness which began under Reagan and Thatcher became worse under their successors. While Reagan took the US balance of payments from surplus to a maximum balance of payments deficit of 3.4% of GDP, George W Bush took the US to a maximum deficit of 6.3% of GDP. The massive US debt build-up which began under Reagan became worse in the private sector under Clinton, and worse in both private and state sectors under George W Bush. The simultaneous accumulation of state and private debt which the UK had been able to avoid under Thatcher, due to revenue from North Sea Oil, became dramatic under Blair and his successors.
 
The inevitable result of this domestic and international destabilisation launched by Reagan was the 2008 international financial crisis – as both US reliance on foreign sources of capital and the build up of US personal debt had become unsustainable. The resulting international financial crisis forced retrenchment on the US both internationally and domestically:
 

• The US balance of payments deficit contracted from 4.3% of GDP in the last quarter of 2007 to 2.4% of GDP in the 2nd quarter of 2009 – while in the 1st quarter of 2017, the latest available data, the US balance of payments deficit was 2.5% of GDP.

        

• US total debt stopped rising after it reached 250% of GDP in the 3rd quarter of 2009 - but the financial resources available to US households sharply contracted with debt falling from 98% of GDP at the beginning of 2008 to 78% of GDP by the 1st quarter of 2017.

·         
This forced retrenchment of the US of course produced the deepest US recession since the Great Depression – and shook the entire global economy in the international financial crisis.
 
Geopolitical and domestic political destabilisation
The international financial crisis in turn destabilised not only US/UK domestic politics but the entire international situation. The course of increasing international political instability after 2008 is extremely clear:
 

• In 2010 the Arab Spring and the generalised destabilisation of the Middle East began;

• Following the collapse of Gaddafi’s Libyan regime in 2011 ‘jihadists’ were powerfully reinforced in West Africa;

• In 2012 the electoral breakthrough of Marine in Le Pen in France began the rise of ‘populist’ movements in advanced countries;

      

• In June 2016 the UK voted for Brexit;

• In November 2016 Trump was elected US President, against the opposition of the establishment of both Republican and Democratic Parties, inaugurating almost continual severe political clashes in US politics;

• In May 2017 Macron was elected French President against the opposition of both right and left wing traditional political parties, and then Macron proceeded to crushingly defeat the traditional French parties in the legislative elections,

• In June 2017 Theresa May lost her Parliamentary majority in UK general election. 

·         
In short, the course embarked on by Reagan and Thatcher culminated in the destabilisation of not only domestic but international politics. This is of course why US the domestic political turmoil around Trump has been intertwined with international geopolitical destabilisation.
 
Why the delay in destabilisation?
 
Finally, the economic policies of Reagan and Thatcher clearly explain why the temporary ‘feel good factor’ while they were in office was replaced by deepening economic and political destabilisation ever since. As noted above Reagan and Thatcher may be compared to drunken ‘credit card bingers’. While the spending spree on credit goes on the drunk feels good because of all the things they are buying on debt but while simultaneously the strength of their business, their international competitiveness, is weakened by excessive consumption. But the drunk then feels terrible when they suffer first the hangover and then the extraordinary financial hardship involved in repaying the massive debts that have been run up – and when this has to be done under conditions in which their business is now far less internationally competitive than it was previously.
 
The world is still paying a terrible price for the drunken credit card binge of Reagan and Thatcher and the global financial ‘black hole’ it created in the Anglo-Saxon economies. The deep political instability now wracking the US and UK is the indelible legacy of Reagan and Thatcher.
 
Conclusion

Numerous correct economic critiques of neo-liberalism have been published, including in China – and therefore these analyse why China must avoid its damaging consequences. But another dimension is that the deepening political destabilisation playing out in the US and the UK, the historic homes of neo-liberalism, also gives another warning of why neo-liberalism is so dangerous and damaging. China and other countries must also clearly avoid the damaging political consequences of neo-liberalism.

 

*  *  *   

 

This article was originally published in Chinese at Guancha.cn on 8 August 2017. For an international audience a few references to purely domestic Chinese issues have been omitted.

 

China's Economy is Growing Three Times as Fast as the US

Publication of US GDP for the 2nd quarter of 2017 means data is now available for both China and the US for the first half of this year. This allows a systematic comparison of the performance of the world’s two largest economies. Such comparison shows that China’s economy is growing more than three times as fast as the US. Because, as will be shown below, China’s growth has not decelerated significantly the main issue to clarify in comparing China’s and the US’s growth is trends in the US. This article, therefore, analyses the new US factual data, errors made by made by Western media and economic institutions in analysis of the US economy, and conclusions which flow for comparisons with China. To use, in the wise Chinese phrase, the method of ‘seek truth from facts’, the publication of US GDP data for the 2nd quarter of 2017 is the latest test of analyses of the US economy.

US growth in the 2nd quarter of 2017
US GDP growth in the year to the 2nd quarter of 2017 was 2.1% - a very slight increase from 2.0% in the year to the 1st quarter. Figure 1  compares this to China’s 6.9% growth in the same period. China’s economy was growing more than three times as fast as the US.

This year on year US growth is a much more reliable indicator of US economic performance than the comparison between annualised US growth in the 1st quarter and the 2nd quarter because it is known, including to the US statistical authorities, that that their seasonal adjustment for the 1st quarter of each year systematically underestimates growth – an error they have not yet succeeded in correcting.

Making a comparison of the latest data to the beginning of 2015, the peak of the recent US growth cycle, it may be seen that China’s economy has slowed very marginally, from 7.0% to 6.9%, while the US economy has slowed significantly – from 3.8% to 2.1%. Therefore, the claim in Bloomberg and other sections of the Western media that in the last period the US was undergoing ‘strong recovery’, while China faced the threat of a ‘hard landing’, was the opposite of the truth. Not only was China growing more than three times as fast as the US but China’s economy scarcely slowed while the US decelerated substantially.

 

Within this overall framework of slow US growth, and much faster growth in China, it may however be noted that that the latest data shows some US recovery from the extremely depressed growth of 1.2% in the 2nd quarter of 2016.

 

Figure 1

 

Situation of the US business cycle
However, to assess the significance of the latest US data it is necessary to bear in mind that market economies are inherently cyclical. It is therefore necessary, to avoid exaggerating or underestimating growth, to separate long term trends from purely short-term cyclical fluctuations. This may be done by taking a sufficiently long-term average that it smooths out business cycle fluctuations – the economy will then be seen to show cyclical fluctuations above and below this long-term average. Figure 2 therefore shows the latest US annual GDP increase of 2.1% compared to its 20-year moving annual average of 2.2%. A five-year moving average shows an extremely similar annual average 2.1% growth. In summary, US long term average growth is approximately slightly above two percent – US statistical forecasters, and the IMF, give projected close rates closer to two percent.

Compared to this long-term US average growth Figure 2 shows in 2016 US growth was significantly below its long-term average – the US was undergoing a cyclical slowing. In 2017 it would therefore be expected, purely for business cycle reasons, that the US economy would grow at or faster than its long-term average – in order to compensate for very slow growth in 2016.

The slight speeding up of the US economy in the 2nd quarter of 2017, compared to the depressed level in 2016, which shows this trend is therefore a normal cyclical movement and not an indication of acceleration of the fundamental US growth rate. President Trump may, therefore, want to claim credit for some recovery of the US economy, but in fact this is a purely statistical process and not a serious acceleration.

To summarise, the latest US data shows a normal process of recovery from very depressed growth levels in 2016, but no acceleration from a US basic long-term growth rate of at or slightly above two percent.

 

Figure 2

 

Comparison to predictions
Turning to the test of analyses of the US economy against these facts, this is of considerable practical importance as an accurate analysis of prospects for the US economy is crucially important for China both economically and geopolitically, However, until recently three factors produced estimates in some circles in China for likely estimates of US growth which proved to be inaccurate because they were far too high:

• As already noted, some Western media outlets projected stories of a ‘strong US recovery’ when in fact the data shows this was not occurring – that is, such media were engaging in propaganda not factual analysis.
• As will be analysed below, leading Western institutions, in particular the IMF, made systematic errors in projecting too high US growth rates.

The first of these factors has already been dealt with, therefore here the second factor, misanalysis by the IMF, will be dealt with.

Errors in IMF projections
​It is easy to factually establish that over a prolonged period the IMF made systematically overoptimistic projections for the US economy – in technical terms the IMF had an ‘optimism bias’ regarding the US economy.

The IMF publishes twice a year five-year projections for countries. To compare these forecasts to actual growth the latest available annual growth data for the US is for 2016. Figure 3 therefore shows the projections made by the IMF for the US economy in April 2011, the earliest year in which it made a forecast for 2016, compared to actual US growth. It may be seen that for every single year the IMF predicted higher US growth than actually occurred – the annual exaggeration in the growth projections being up to 1.2%.

Figure 3

 

 

Figure 4 shows the cumulative result of these overoptimistic IMF projections. The IMF projected that in 2010-2016 the US economy would grow by 17.7%, whereas actual growth was 12.7% - that is, the IMF was over optimistic regarding US growth by 5% over this period. Put in current prices, the US economy in 2016 was $920 billion, almost a trillion dollars, smaller than the IMF projected.

 

Figure 4

 

While at least some errors are inevitable, in a well-constructed economic model errors should be random – that is, projected growth should be sometimes above the actual rate and sometimes below. However, if the differences between projection and reality are always in the same direction there is a systematic bias in the model – that is, the IMF model was biased to systematically exaggerate prospects for US growth.

To be fair it should be stated that the IMF has recently corrected its estimates by sharply revising downwards projections for US growth - in its latest World Economic Outlook the IMF projects annual average US growth at 2.0% from 2016-2022, approximately in line with current factual trends. It was however extremely unacceptable that for a prolonged period the IMF had systematically too optimistic projections for the US economy – this did not correspond to the method of ‘seek truth from facts’. It was also a serious error that some circles in China, including in universities and research organisations, accepted such projections without checking them against actual data.

Conclusion

Because of the importance of correct estimates of developments in the US economy for China the present author has devoted considerable attention to seeking to correct the exaggerations of US growth potential which existed in some circles in China. The actual situation of the US economy is:

• There will be a real but relatively limited upturn in the business cycle in 2017.
• This increase will not be large enough to alter the fundamental trend of slow US medium/long term growth – which will remain at approximately two percent or slightly above.

The reasons for these trends were analysed from the point of view of the theoretical economic issues in my book  The Great Chess Game (一盘大棋? ——中国新命运解)析and from the point of view of factual study of the actual forces determining 'US growth in Why the US Remains Locked in Slow Growth' The latest US economic data is clearly in line with these analyses.
It is therefore very much to be hoped that, using the method of ‘seek truth from facts’, the latest US economic data will lead to correction of exaggerated assessments of US economic growth in some circles and lead to more accurate assessments of developments in the US economy.

 

*   *   *

 

This article originally appeared in Chinese at Sina Finance Opinion Leaders. A shorter version for international readers appeared in English at China.org.cn. Some points for the version for international readers have been incorporated here into the version originally published for Chinese readers

New Economic Data Confirms Disorientation of US China Analysts

The IMF published this week the update of its projections for the main countries in the world economy for this year and next. This showed:

• Upgrading of predicted growth in China in both 2017 and 2018;
• Downgrading of predicted US growth in both 2017 and 2018,
• That in both 2017 and 2018 China’s economy would grow more than three times as fast at the US – in 2017 this would be 6.7% to 2.1%.

These new projections, particularly for 2017, were based on hard facts. They came as a result of actual economic growth in both China and the US in the first half of the year. This data is not only important in itself but because it shows that while China attempts to pursue the method of ‘seek truth from facts’, regrettably numerous US foreign policy analysts have adopted an ‘ostrich method’ – to put their heads in the sand and ignore reality.
The aim of this article is to show the scale of the gap which now exists between reality and the current analysis of many US foreign policy experts - and note the dangers which flow from this.
  
China’s latest economic data
Starting with the factual data, as widely reported China's second quarter 2017 GDP data, and data for the month of June, showed solid strong growth on the key indicators. Compared to the same period in the previous year taking the latest data:

• GDP rose 6.9%;
• Industrial value-added rose 7.6%;
• Retail sales grew 11.0%;
• Urban fixed asset investment rose 8.6%.

It is important to note China’s performance exceeds any major Western economy by a large margin. To give a comparison, US year on year GDP growth to the first quarter of 2017 was 2.1%, and when the new US 2nd quarter GDP data is published it will probably show year on year growth of under 3%.
The international impact of this data should be clearly understood. China continues to be the main locomotive of the world economy. The IMF in its new update to its economic forecasts predicts this year that China’s economy will grow at 6.7% and the US by 2.1% - revising China upwards from the earlier prediction of 6.6% and revising the US downwards from the earlier prediction of 2.3%. Based on the first half year’s data both these latest projections appear approximately accurate. This downward revision of the projection of US growth by the IMF of course strongly confirms the analysis made in my book The Great Chess Game (一盘大棋? ——中国新命运解析) and updated earlier this year in 'Why the US Remains Locked in Slow Growth'.

Translating these growth rates into contributions to world economic expansion, predictions at current exchange rates are difficult due to the well-known problems in predicting short term currency movements (anyone who could regularly accurately predict short term exchange rate movements would be so rich they would make Bill Gates look like a pauper!). For example, the IMF predicted that China’s RMB would fall against the dollar by 3.5% this year while at the time of writing it has actually risen by 2.9%.

But at comparable international prices, purchasing power parities (PPPs), which automatically compensate for fluctuations in exchange rates, the IMF predicts than in 2017 China’s contribution to world GDP growth will be slightly over twice that of the US - China contributing 26% of world growth and the US 13%.
Taking other major international economic centres, the IMF projects India will contribute 13% of global growth, the same as the US, and the EU 11%.

As analysed in 'Why the US Remains Locked in Slow Growth' US economic growth in 2016, at 1.6%, was extremely low, and significantly below the annual average US growth of 2.2% over the last 20 years.  Year on growth to the 1st quarter of 2016 of 2.1% was also below this long term average - as shown in Figure 1 . Therefore, for purely statistical reasons some moderate upturn of the US economy from 2016’s extremely low level is likely. The IMF’s new projection of 2.1% for 2017 as a whole is therefore likely to be a reasonable approximation. But this means that China’s economy in 2017 will grow three times as fast as US.

To summarise, China’s first half year economic data therefore confirms both its own strong growth and that it is by far the biggest contributor to world economic expansion. US economic growth in contrast has been far weaker. This lies behind both the IMFs new upward revision for China’s growth and downward revision for the US.

 

Figure 1

 

'Econo-fiction' on a 'China hard landing'
​Turning to comparison of the actual results of China’s economic performance with economic analysis in the US, it is illuminating to compare these actual results of China’s economic development with the predictions that were being made in parts of the media by Western so called ‘China experts’. During the last year a dominant theme in sections of the Western media, such as Bloomberg and the Wall Street Journal, was that China was supposedly going to suffer a 'hard landing'? In the US this was clearly the overwhelming majority opinion in key research institutes – particularly those influencing US foreign policy. For example, on 5 April 2016 the Wall Street Journal reported:

'At a recent workshop hosted by the Council on Foreign Relations, a nonpartisan U.S. think tank, participants—35 or so academic economists, Wall Street professionals and geopolitical strategists—lined up around three different growth scenarios for China. Only 31% chose the optimistic one, defined as 4% to 6% annual growth, dependent on leaders successfully implementing reforms; 61% foresaw a “lost decade” of 1% to 3% growth; the rest thought a so-called hard-landing, or contraction, was most likely.''

'Of course it wasn’t a scientific survey, but what’s interesting is that apparently nobody considered the possibility that the Chinese government could deliver on its promise of “medium to fast” growth, meaning 6.5% or higher.'

​Given China's 6.9% GDP growth over a year later, if this was the quality of analysis in the Council on Foreign Relations, one of the US's most august institutions, it is little wonder US foreign policy will make mistakes!

Regrettably similar examples of this genre of ‘econo-fiction’ continue to appear in the US foreign policy media. For example, the US magazine Foreign Policy analysed this month: ‘given China’s deep-seated economic woes… many experts are…. worried about a Chinese slowdown.’ The reality is that in the nine years since the beginning of the international financial crisis the US economy grew by 12% while China’s economy grew by 106% - as shown in Figure 2.

 

Figure 2

 

​
Out of touch with reality
This entire genre of 'econo-fiction' in the West regarding China has a long and inglorious history.  Probably its most notorious example remains Gordon Chang. In June 2002, in is book The Coming Collapse of China, Chang declared: 'A half-decade ago the leaders of the People's Republic of China had real choices. Today they do not. They have no exit. They have run out of time.’ As unfortunately for this analysis China failed to ‘collapse’ Chang declared thirteen years later in December 2015:  '"China's leaders no longer have the ability to prevent the economy from tumbling down… The leadership is now without tools"' Why the BBC, who featured this pronouncement by Chang, consider someone who has been perennially inaccurate a China expert shows propaganda bias as opposed to attempts to analyse reality. Such an approach is dangerous in foreign policy.

There is a well-known saying in economics, to describe the fact that reality sometimes coincides with the views of out of touch economic dogmatists, that ‘a stopped clock is right twice a day’. The ‘hard-landing’ school of analysts of China have succeeded in exceeding this - by never being right!
Some Western media analysis is very serious. Martin Wolf, chief economics commentator of the Financial Times, for example noted last week: ‘It is likely that Chinese capital, capital markets and financial institutions will become as influential in the world economy in the 21st century, as US capital, capital markets and financial institutions were in the 20th century.’

​Serious analysts, who want to have an accurate view of China's, and therefore the global, economy and who made predictions of a China 'hard landing' or 'crash', will honestly admit 'I was wrong' - that is to be respected. Unfortunately, experience shows that portrayers of 'econo-fiction' predicting a China hard landing will continue to turn out their misanalysis.

Publishing such false analysis is an error itself. But It can also lead to wrong foreign policy positions, or cost companies hundreds of millions, even billions, of dollars due to a wrong understanding of China’s economic dynamics.

China’s latest GDP data, and the new revised projections by the IMF, are therefore not only important themselves but confirms once more the China’s ‘coming hard landing’ school has been wrong literally thousands of times in the 39 years since China’s economic reforms were launched. It may be pointed out to US foreign policy analysts that all such predictions may be taken with very much more than a grain of salt!

Definition of diplomacy
​Finally, turning from economics to geopolitics, it is important for China to convey an accurate estimate of world economic trends - as opposed to the inaccurate ones shown above to be widely held by US foreign policy analysts. A good friend of mine, a Russian diplomat, gave to me the most scientific definition of diplomacy. He said ‘some people think diplomacy is mainly about tricks or stratagems. It is not. No one can prevent a great power acting on the basis of its own interests. The danger is that if may act on the basis of wrong information. The job of diplomacy is therefore to ensure other countries never act on the basis wrong information.’

In the Middle East US overestimates of its military strength, and of the appeal of the ‘Western democratic model’, led to reckless US adventurism in the invasion of Iraq – with consequent deeply damaging consequences for the US and other countries. Overestimation of the US economy, and underestimation of China, might also lead US foreign policy to reckless and damaging confrontations with China.

China has nothing whatever to gain from empty boasting – in serious matters there is no virtue in ‘optimism’, no virtue in ‘pessimism’ only a virtue realism. Formulating an accurate estimate of the real situation of the world economy is a major task of China’s Think Tanks - and conveying this to counter currently unrealistic US foreign policy analysis is therefore an important major task both of China’s economic policy and diplomacy.

*   *   *

This article originally appeared in Chinese at Sina Finance Opinion Leaders on 28 July 2017.

China's GDP data destroys 'hard landing' myth - again

China's latest economic data

China's recently-published second quarter 2017 GDP data showed solid growth in regard to all key indicators. Year-on-year:

• GDP rose 6.9 percent;
• Industrial value-added rose 7.6 percent;
• Retail sales grew 11.0 percent;
• Urban fixed asset investment rose 8.6 percent.

This is a performance exceeding any major Western economy – American GDP growth for the first quarter of 2017 was 2.1 percent, and the second quarter figure is likely to show growth under 3 percent.

China also continues to be the main locomotive of the world economy. The IMF in its latest World Economic Outlook predicts China's 2017 growth will reach 6.7 percent, compared to an American figure of 2.3 percent.

Translating these growth rates into contributions to world economic expansion, predictions at current exchange rates, are difficult due to currency fluctuations – for example the IMF predicted that China's RMB would fall against the dollar by 3.5 percent this year while so far it has actually risen by 2.8 percent. But at comparable international prices, purchasing power parities (PPPs), which automatically compensate for fluctuations in exchange rates, the IMF predicts that in 2017 China's contribution to world GDP growth will be slightly over twice that of the U.S. – 26 percent to 13 percent.

The IMF also projects that India will contribute 13 percent of global growth, the same as the U.S., and the EU 11 percent.

China's first half year economic data therefore confirm both its own strong growth and that it is by far the biggest contributor to world economic expansion.

​‘Econo-fiction' on a ‘China hard landing'

Turning to one of the implications of these data, there is a wise Chinese saying "seek truth from facts." Therefore, it is illuminating to compare these actual results of China's economic development with the predictions being made by many so-called "China experts" in the Western media.

Remember all those media stories last year about how China was supposedly going to suffer a "hard landing?" For example, on April 5, 2016, the Wall Street Journal reported: "At a recent workshop hosted by the Council on Foreign Relations, a non-partisan U.S. think tank, participants – 35 or so academic economists, Wall Street professionals and geopolitical strategists – lined up around three different growth scenarios for China.

"Only 31 percent chose the optimistic one, defined as 4-6 percent annual growth, dependent on the government successfully implementing reforms; 61 percent foresaw a "lost decade" of 1-3 percent growth; the rest thought a so-called hard-landing, or contraction, was most likely.

"Of course it wasn't a scientific survey, but what's interesting is that apparently nobody considered the possibility that the Chinese government could deliver on its promise of ‘medium to fast‘ growth, meaning 6.5 percent or higher."

Given China's 6.9 percent GDP growth over a year later, if this was the quality of analysis in the Council on Foreign Relations, one of the U.S.'s most august institutions, it is little wonder U.S. foreign policy will make mistakes.

Regrettably similar examples of this genre of "economic fiction" continue to appear in the media. For example, the U.S. magazine Foreign Policy analysed this month: "Given China's deep-seated economic woes… many experts are…. worried about a Chinese slowdown." The reality is that in the nine years since the beginning of the international financial crisis the U.S. economy grew by 12 percent while China's economy grew by 106 percent – as shown in Figure 1.

Figure 1

 

​Out of touch with reality

This entire genre of "economic-fiction" in the West regarding China pursues the policy of an economic ostrich – put your head in the sand so you can't see reality. Probably the most notorious example of wishful thinking is Gordon Chang. In June 2002, in his book The Coming Collapse of China, Chang declared: "A half-decade ago the leaders of the People's Republic of China had real choices. Today they do not. They have no exit. They have run out of time."

Amazingly, despite China's failure to "collapse," Chang again declared in December 2015: "China's leaders no longer have the ability to prevent the economy from tumbling down… The leadership is now without tools."

Why the BBC that featured this pronouncement by Chang, considers someone who has been perennially inaccurate a China expert shows propaganda bias as opposed to attempts to analyze reality.

There is a well-known saying in economics, to describe the fact that reality sometimes coincides with the views of out of touch economic dogmatists, that "a stopped clock is right twice a day." The "hard-landing" school of analysts of China have succeeded in exceeding this – by never being right!

Some Western media analysis is far better. Martin Wolf, chief economics commentator of the Financial Times, for example, noted this week: "It is likely that Chinese capital, capital markets and financial institutions will become as influential in the world economy in the 21st century, as U.S. capital, capital markets and financial institutions were in the 20th century."

Serious analysts, who want to have an accurate view of China's, and therefore the global, economy and who made predictions of a China "hard landing" or "crash," will honestly admit "I was wrong" – that is to be respected. Unfortunately, experience shows that there are still many clinging to their "fiction."

Publishing such false analysis is wrong in itself. It can also lead to wrong foreign policy positions, or cost companies hundreds of millions, even billions, of dollars due to a wrong understanding of China's economic dynamics.

*   *   *

This article originally appeared at China.org.cn on 22 July 2017.

China Faces Slower Western Growth than in the Great Depression

Introduction - the situation in the global economy since 2008
​China is used, after repeated experiences, to the ‘China is in/about to enter a deep crisis/hard landing’ genre in sections of the Western media.(1) The picture presented in such claims is that in contrast to a ‘stagnant’ China the West, in particular the US, is showing economic dynamism driven by a wave of innovation. This situation allegedly interrelates with China’s domestic trends. Such analysis is repeated in parts of the Chinese media by what might be referred to as China’s ‘comprador intelligentsia’. These analyses, for reasons that will become speedily apparent below, are invariably characterised by lack of any systematic factual analysis.
Regular accurate refutations of such claims appear in China’s media and therefore the aim of the present article is rather different. It goes beyond individual cases to examine systematically the fundamental situation of the Western economies. The results show clearly why the anti-China material referred to above lacks any systematic factual analysis of the global economy - because such examination shows that their claims are the precise opposite of the facts. Far from ‘dynamism’, the fundamental reality of the West today is very slow economic growth, the extremely striking character of which becomes apparent by comparing it to previous economic periods in the global economy during the last century. The factual reality is that the Western economies are in the midst of what is best described historically as a ‘Great Stagnation’ - to be precise it will be shown that in the present overall period, commencing with the international financial crisis, the growth rate of the Western economies is actually slower than in the ‘Great Depression’ after 1929. The data used to establish this does not come from any Chinese or peripheral sources but from the bastion of international economic orthodoxy - the latest report on the global economy by the IMF.
To avoid any misanalysis it is shown below that of course the violence of the onset of the Great Depression in 1929 was much greater than after the international financial crisis in 2008. The feature of the present period is of a prolonged phase of slow growth, rather than of a violent recession followed by relatively rapid growth as occurred in most major economies after 1929. Nevertheless, this does not alter the reality that the present period as a whole is actually seeing slower average Western economic growth than during the Great Depression. This economic trend also means that whereas the political crisis after 1929 was rapid and violent the development of the crisis after 2008 is much slower and cumulative.
Clearly establishing this real factual situation of slow growth in the Western economies, however, does not only cast light on short term processes. It creates an integrated framework for understanding the relation of the current period in China with international trends. In particular:

• This relative stagnation of the Western economies explains the interconnection between underlying economic trends and immediate events such as US actions in Syria, US policy to North Korea, major Western political events such as Trump’s election and Brexit, China’s current economic situation, and strategic developments such as One Belt One Road (OBOR), etc.
• Key new initiatives in China’s policy launched by Xi Jinping are coherently interrelated with the objective changes in the global economy since 2008.
• The international financial crisis of 2008 inaugurated a new period of the global economy, and therefore of China’s interrelation with it, compared to the preceding ones since the creation of the People’s Republic of China (PRC). It will be demonstrated that this response is an integrated response to the new period of the global economy since the international financial crisis. A brief analysis of some of the key consequences for countries outside China, and their interrelation with China’s foreign policy, will be given.
• It should be made clear that in this article only some international features of China’s policies are analysed – other domestic ones, such as the struggle against corruption are equally important but beyond this article’s scope, while some are domestic Chinese matters it is inappropriate for a non-Chinese citizen to comment on. But, despite this limitation, it is hoped an international analysis focusing on the new period in the world economy, as it interrelates with China, throws some light on developments both in China and internationally.

IMF data indicates predicts West’s economic stagnation will be worse than the Great Depression
To establish the fundamental features of the present period of the world economy, and given that  the post-1929 Great Depression is generally regarded as the worst crisis in the history of the advanced ‘Western’ economies, a careful comparison of the similarities and differences of trends since the international financial crisis of 2008 with post-1929 developments will help produce clarity.(2) It will be shown that a statement sometimes made in the Chinese media that the period commencing with the international financial crisis of 2008 is the West’s ‘worst economic crisis since the Great Depression’ is somewhat misleading put in that form as in one crucial way it understates the problem. It will be demonstrated that the overall slow growth and stagnation in the Western economies is already almost equivalent to that after 1929 while the factual projections for the next five years lead to the conclusion that the cumulative slow growth/stagnation of the Western economies will be worse, although different in form, from that during the following 1929. Such extremely slow growth of the Western economies since the crisis of 2008 clearly has profound effects on the entire international situation and therefore analysing it casts a clear light on current trends facing China. The practical conclusions following from this are analysed below.
First, however, the key facts must be established. To do this Figure 1 illustrates three sets of data:

• Growth trends in the advanced Western economies after 1929.
• The factual trend in the advanced Western economies from 2007-2016;
• The latest IMF predictions for 2016-2021

In this section the factual data will be focussed on - IMF projections will be analysed below.
The ‘Great Depression’ compared with the ‘Great Stagnation’
Figure 1 confirms the well-known fact that the onset of the ‘Great Depression’ after 1929 was much more violent than what will be referred to as the ‘Great Stagnation’ which commenced with the 2008 international financial crisis. After 1929, during only three years, overall GDP of the advanced economies plunged by 16%. Taking the dominant capitalist economies, and measuring from 1929 until the bottom of the economic decline in each country, US GDP fell by 29% in 1929-33, German GDP fell 16% in 1929-32, UK GDP fell 6% in 1929-31, and Japan’s GDP fell 7% in 1929-30 – overall West European GDP fell 9% in 1929-32.

Figure 1

As is equally well known the very rapid post-1929 economic collapse created immediate political crisis:

• In September 1931 Japan invaded Manchuria, beginning its military attack on China.
• In September 1931 Britain abandoned the gold standard, resulting in collapse of the then existing international financial system.
• In November 1932 Roosevelt was elected US President, leading to the ‘New Deal’.
• In January 1933 Hitler became German Chancellor.

But alongside these well-known and accurate facts it is not so widely understood that after the initial post-1929 economic collapse recovery during the 1930s was rapid and post-crisis growth was strong – the US being the most important exception. This can be clearly seen in Figure 1 and by examining the situation in 1938, the last year before World War II. By a convenient statistical coincidence, 1938 was nine years after 1929, and 2016, the most recent year for current factual data, was nine years after the last pre-international financial crisis year of 2007. Therefore, in comparing 1929-38 with 2007-16 the same length of time is being analysed. This makes historical comparison particularly easy - and clarifies why the present period is most clearly thought of as a ‘Great Stagnation’.
The strong recovery of most advanced economies following the post-1929 recession is demonstrated by the fact that by 1938 the GDP of most major advanced economic centres was substantially above 1929 levels. To be precise by 1938:

• Japan’s GDP was 37% above its 1929 level;
• Germany’s GDP was 31% above its 1929 level;
• UK GDP was 18% above its 1929 level;
• Western Europe’s GDP was 13% above its 1929 level;
• The GDP of the advanced economies as a whole was 7% above its 1929 level.

The US was an exception - US GDP in 1938 was still 5% below its 1929 level.
Therefore as Figure 1 shows the ‘Great Depression’ in the advanced economies was in reality a very steep ‘V’ shaped economic development - with the rising leg of the ‘V’ significantly higher than the falling one. Economic activity fell extremely sharply after 1929 and then rose sharply - the US being the chief exception. 
The term ‘Great Depression’ is therefore, with the exception of the US, slightly misleading – its use reflects the dominance of analysis of the US in studies of the period rather than examination of the trends in the majority of advanced economies. After 1929, most advanced economies experienced first an extremely rapid fall in output followed by a strong and rapid recovery. The term ‘Great Depression’ is entirely accurate in the case of the US but not most other major economies.
The situation after the international financial crisis
Comparison of present trends since the international financial crisis of 2008 with those after 1929 immediately makes clear both similarities and differences. These may be seen in Figure 1 and can be summarised in three fundamental facts:

• The fall in output in the advanced economies after the international financial crisis of 2008 was far less severe than after 1929 – the maximum fall in GDP after 2007 was only 3.3% compared to 15.6% after 1929.
• However, after the 2008 international financial crisis there was no rapid recovery and strong growth as there was after the post-1929 collapse;
• By 2016, nine years after the last pre-financial crisis year, the recovery from the crisis in the advanced economies was almost as slow as during the ‘Great Depression’ of the 1930s and by the end of 2017 it will be significantly slower. More precisely due to the slow growth by 2016, total GDP growth in the advanced economies in the nine years after 2007 was only 10.1%. By the end of 2017, on IMF predictions, the growth in the advanced economies  after 2007 will actually be lower than after 1929 – total growth of 12.3% in the 10 years after 2007 compared to 15.1% in the 10 years after 1929. Furthermore, as analysed in the next section, IMF data shows that the future growth in the advanced Western economies after the international financial crisis will be far slower than in the same period after the 1929. IMF projections are that by 2021, fourteen years after 2007, total growth in the advanced economies will be less than half that in the 14 years after 1929 – average annual growth of only 1.3% compared to 2.9%, and total growth of 20.6% compared to 49.8%. 

It is this very slow growth in the advanced economies since 2007 which means that the present period is best characterised as a ‘Great Stagnation’.(3)
2016-2021
For analysing trends after 2016 economic projections must be used. Those analysed here are the IMF’s latest projections made in April 2017. There are three reasons for using this data.

• The IMF’s data on the advanced economies is not in any sense controlled by China or ‘anti-Western forces’ – there cannot be any accusation the data is biased against the West.
• The IMF’s are the most widely used international economic growth projections;
• IMF projections have persistently projected more rapid growth in the advanced Western economies than has actually occurred – particularly in the US.(4)

  Taking the five-year predictions of the IMF for the period 2016-21, and making a comparison for the entire period 2007-2021 to the period after 1929, leads to clear and extremely striking conclusions:

• From 2016-2021 the IMF predicts total growth in the advanced economies of 9.6% - an annual average 1.5%. Regarding individual countries, the IMF predicts annual average growth of 1.8% for the US, 1.4% for the UK,  1.2% for Germany, and 0.6% for Japan. Total growth for the advanced economies over the entire fourteen-year period 2007-2021 will be 20.6%.
• In comparison, in the fourteen years after 1929 total growth in the advanced economies was 49.8% - growth in the advanced economies after 1929 was therefore more than two and a half times their projected growth in the fourteen years after 2007. (5)

To give a scale of comparison, and to confirm the character of the present period, only if annual growth in the period 2016-2021 rose to 6.4%, instead of the IMF’s projected 1.5%, would economic growth in the advanced economies in the 14 years after 2007 be equal to that in the 14 years after 1929 – such a scale of acceleration is evidently completely implausible. There is therefore an inescapable conclusion for characterising the present trend in the world economy:

• The period 2007-2021 will see far slower average growth in the advanced economies than during the period after 1929 – i.e. the ‘Great Stagnation’ will see far slower growth over this period than the ‘Great Depression’.

It is correct to point out that rapid economic growth after 1938, the final phase of recovery from the crash of 1929, was not achieved by ‘normal’ peaceful means. The period after 1938 was characterised by massive state intervention in the economy to prepare for and then wage war. In particular, in the case of the US, as analysed in The Great Chess Game (一盘大棋? ——中国新命运解析): ‘the US state largely took over from the private sector as the driving force of fixed investment – by 1943 83% of US fixed investment was carried out by the state…. the most rapid period of expansion in US economic history, the one which established it as the undisputed economic superpower, was driven not by private but by state investment…. It was the ‘visible’ hand, not the ‘invisible’ one that propelled the US to a position of unparalleled global economic dominance.’
But this fact does not alter economic reality. Economic expansion produced by massive state intervention, or oriented to war, is still economic growth. Furthermore, this growth, with the exception of the US, built on the rapid recovery already taking place after the post-1929 collapse. Nor does it alter the fact that the period after 2007 will see far slower average growth than following 1929.
The reality is therefore clear. In terms of slowness of economic growth the ‘Great Stagnation’ will be worse than the ‘Great Depression’. Only the gigantic crisis surrounding World War I, in the whole history of modern capitalism, has seen a slower period of economic growth than that since the international financial crisis – the extreme depression of economic growth in that earlier period being due to the onset of World War I leading to a major decline in output in advanced economies. Clearly these facts of the deep stagnation of the Western economies has major strategic and immediate consequences for China – some of which will now be analysed.
Periods in China’s development
Having established the factual situation of the global economy first and  most fundamentally such analysis of global economic trends makes clear the interrelation between international processes and China’s own development. The simultaneous existence of both international and domestic factors makes it clear why it is necessary to put forward an overall analysis of the present period.
Taking such a starting point integrating international and domestic developments, however, creates a somewhat different perspective on the periodization of China’s development than that sometimes used in China. More specifically:

• Based on purely domestic events frequently in China five phases since the creation of the People’s Republic of China (PRC) are noted – each corresponding to the chief figures in the country’s leadership of that period.
• However, based on the interrelation of global economic developments with China, three fundamental periods may be seen since the creation of the PRC – these being 1949-78, 1978-2008, and from 2008 onwards.

The three fundamental phases during the development of the PRC, in their interrelation with international trends, may be clearly identified by analysing the relation of trends in China with these different periods in the global economy. To illustrate this Figure 2 shows these periods and gives data on the advanced economies prior to the creation of the PRC. Exact dating is analysed below, and there is naturally some very small differences in precise timing between phases internationally and those in China, but the fundamental periods in the development of the international economy and their interrelation with China are clear. Taking first the global economic trends these periods are:

• 1913-1950 – period of slow average annual growth in the advanced economies (2.0%)
• 1950-1978 – period of rapid average annual growth in the advanced economies (4.4%)
• 1978-2007 – period of slower but still relatively rapid average annual growth in the advanced economies (2.6%)
• Period commencing after 2007 - very slow average annual growth in the advanced economies (1.1% in 2007-16, and IMF projected 1.3% in 2007-21)

The data in Figure 2 therefore shows clearly why the situation since 2008 should be considered a new and integrated period in China’s development interrelated with a new period in the global economy.

Figure 2

Analysing these very sharp differences between fundamental periods in the global economy also demonstrates clearly the interconnection of international developments with those in China. To show this interconnection:

• First the fundamental periods in the development of the global economy and their interrelation with China will be briefly considered;
• Then the light these trends cast on the features of the present situation will  be analysed.

Four periods in the development of the international economy
The four distinct economic periods in the global economy during the last century each also had clear consequences for and was interrelated with trends in China. In chronological order:

• The first period, commencing after 1913, is the crisis of the international economic system marked by World War I, the 1929 crash, and World War II – this period of fundamental instability definitively ended with the beginning of the stable post-World War II boom in the advanced economies. This period was characterised by radical fragmentation of the world economy both by war and by generalised protectionism after 1929. The starting point of this period is World War I while its international conclusion, the commencement of a stable post-World War II boom, may be put at approximately 1950. Developments within China culminating in the creation of the PRC were clearly not autonomous from these processes in the international economy but were related to international events and their geopolitical consequences.  The creation of the PRC in 1949 was directly related to this period – its culmination in a fundamental historical sense. During this historical period, average annual growth in the advanced economies was low - an annual 2.0%. However, this was not a low stable average but the statistical result of extreme fluctuations between strong booms and severe recessions. This overall international period may therefore be taken as 1913-1950.
• The second global period is the stable post-World War II ‘golden age’ boom in the advanced Western economies. The pure ‘boom’ phase of this, characterised by relatively uninterrupted rapid economic growth in all major advanced economies, was from 1950-73 - during this period ‘Keynesian’ economic techniques were dominant in Western economies. After 1973 there was economic instability, following which in 1979/80 a radically new economic policy was embarked on by Reagan/ Thatcher - with the reintroduction of ‘neo-liberal’ methods into the Western economies and a clear break with Keynesianism. Almost simultaneously in 1978 China embarked on a radically new, and very different economic policy to neo- liberalism, with a ‘socialist market economy’ created by ‘reform and opening up’. This economic period could therefore be taken as either 1950-78, in line with domestic Chinese developments, or as 1950-1980 in line with international ones – the last date being Reagan’s election. As this article’s focus is the interrelation of international with China’s domestic trends 1950-78 will be used for statistical purposes – although it would make no major difference if it were defined as 1950-80. During this period 1950-78 average annual growth in the advanced capitalist economies was high at 4.4% and until 1973 without severe recessions. In China, this was the period of the planned economy which produced average economic growth only very marginally higher than that for the world economy - in the period 1950-78 world economic growth was 4.6%, growth in the advanced economies 4.4%, and China’s growth 4.9%.
• The third economic period lasted from 1978 to the onset of the international financial crisis in 2008. In the advanced economies, this period was characterised by the neo-liberal policies inaugurated by Reagan/Thatcher and in contrast in China by the ‘socialist market economy’ policies inaugurated by Deng Xiaoping. In this period growth in advanced economies slowed significantly compared to the post-war boom, to an annual average 2.6%, but remained higher than the period of deep crisis commencing with World War I. In this period, China’s socialist market economy model far outperformed neo-liberal policies in the advanced economies –  China’s annual average growth in 1978-2007 being 9.9%. To enable a comparison with analysis more usually used in China, it may be noted this internationally defined period 1978-2007 takes in most of three of the domestically defined five leadership periods.
• In 2008, the international financial crisis commenced. As already analysed growth in the advanced economic since then is extremely low – an annual average 1.1% in 2007-2016 and on IMF projections 1.3% in 2007-2021. This average growth rate is actually significantly lower than in the period of great crisis in the advanced economies commencing with World War I. But the low average in the present period is created, after the 2007-2009 recession, by very slow but relatively stable growth rather than a low average created by extreme fluctuations of boom and recession seen in the crisis commencing with World War I. Because of this extremely slow recovery after the international financial crisis the term ‘Great Stagnation’ most fits the present period since 2008. This phase in the global economy, of course, provides the international context for the ‘new normal’ in China.

The interrelation between international and domestic factors for China is clear in all these periods – the aim of the earlier part of this article being merely to establish the international features of the third period of this development starting with the international financial crisis of 2008. To be precise:

• No serious scholar suggests that the PRC’s creation in 1949 was unrelated to the great period of international crisis starting with World War I, proceeding through the Great Recession after 1929, and culminating in World War II.
• All analysis in China notes the great turning point of 1978 and Deng Xiaoping’s ‘Reform and Opening Up’. While in some literature insufficient attention is paid to the fact that this coincides almost exactly in time with the great turn in the Western economies in 1979/80 inaugurated by Reagan/Thatcher the present writer’s experience is that immediately this is pointed out Chinese scholars note that such a fundamental turn in both China and the Western economies occurring at almost exactly the same time cannot be a coincidence. Whatever explanation is then given it is therefore evident that 1950-1978/80 constitutes a period in the history of both China and the Western economies and a new one started with 1978/80.
• It is noticed inside and outside China that the international financial crisis of 2008 was the greatest peacetime financial crisis since 1929. But in some analysis this is inaccurately treated, explicitly or implicitly, as simply a temporary episode, a somewhat large ‘blip’ in the advanced economies which will be followed by a ‘return to normal’. Put in terms of a comparison to a well-known discussion in China it is explicitly or implicitly suggested that the advanced economies after 2007 entered a ‘V’ shaped period – a sharp downturn followed by a return to a relatively rapid rate of growth.(6) It has instead been established earlier in this article that, to make a comparison to discussion in China, in terms of growth rates the advanced economies after 2007 entered more an ‘L’ shape – a downturn without this being followed by a return to a rapid average rate of growth. The facts given demonstrate that the years since the international financial crisis of 2008 constitute a single historical period characterised by a new low average growth rate in the advanced economies. This constitutes a new period of the international economy and therefore its interrelation with China.

It is clear this situation in the advanced Western economies has major implications for the situation which confronts China. It is also for this reason, as analysed above, that the development of the PRC from the point of view of international trends may be analysed as in three periods:

• 1949-78
• 1978-2007
• 2008-

In that framework, China’s current policy is a response to this new period since the international financial crisis.
​
Key trends in the new international period facing the Chinese economy
The fact that China faces a protracted period of slow growth in the advanced economies establishes a coherent link between the overall character of the period and immediate events. It also shows that international initiatives by China are not individual or uncoordinated but form a coherent pattern. However, to complete this picture these international trends must be integrated with cumulative Chinese domestic economic achievement – because it is clear that each of these fundamental international periods also corresponds to a phase of China’s domestic development:

• 1949-78 in China was a period of a ‘social miracle’ without precedent in world history. Life expectancy, well known in economics as the most sensitive overall indicator of social conditions, as it sums up in a single figure all positive trends (prosperity, good education, good health provision, environmental protection etc.) and negative trends (poverty, poor education, bad health care, pollution etc.), rose in China by 29 years from 1949 until Mao Zedong’s death in 1976 – from 35 to 64. China’s life expectancy increased by more than one year for each chronological year that passed, rising from 73% of the world average in 1950 to 105% in 1976. However, this period’s stupendous social achievement was not accompanied by exceptionally rapid economic growth. As already noted in 1950-78 China’s overall GDP growth was only marginally above the world average – China’s GDP rose by an annual average of 4.9% compared to a world average of 4.6%, and China’s annual average increase in per capita GDP was 2.8% compared to a world average of 2.7%.
• In 1978-2007 China’s socialist market economy far outperformed the economic growth rate of the Western economies – China’s annual average GDP growth rate was 9.9% compared to 2.6% in the advanced Western economies. By this very rapid economic growth China successfully achieved the transition from a ‘low income’ to an ‘upper middle income’ economy by international classification – and was taken to the threshold of achieving ‘high income status’.
• The period from 2008 onwards has seen China rise towards achieving ‘moderate prosperity’ by 2020 and attaining ‘high income’ status by World Bank criteria shortly thereafter. In short, the period of the ‘Great Stagnation’ in the Western economies will simultaneously see China rise into the ranks of high income economies – this transition to ‘moderate prosperity’ and then to ‘high income’ status by international criteria constitutes a key domestic feature of the present period.

In summary, this new period since 2008 is characterised by:

• From the domestic economic viewpoint, the transition of China from ‘high middle income’ status to ‘moderate prosperity’ and then ‘high income’ status by international criteria.
• From the viewpoint of international economic development by very slow growth in the advanced Western economies.

This combination is of course in economic terms significantly different to either of the earlier periods 1950-78 or 1978-2007.

Implications of the new period
There are numerous implications from the interaction of these domestic Chinese factors and the current extremely slow growth in the Western economies, which are too numerous to analyse here, but the following provide key examples. First, purely economic trends will be analysed, then their geopolitical consequences, and finally their implications and attractions for countries other than China:

• The characteristic of the present period in the advanced economies is slow average growth but not violent oscillations of expansion and crash - as in the last period of very slow growth in the advanced economies commencing with World War I. While no major acceleration of the advanced economies is to be expected neither is there reason to anticipate a massive economic crisis of the 1929 type – the crisis commencing with World War I was produced by the disintegration of the global economy amid both war and then after 1929 due to generalised protectionism. These conditions do not currently exist. Prolonged slow growth in the advanced economies, not sudden deep crisis, is therefore the central perspective.
• As China faces a substantial period during which growth in the advanced Western economies will be low, while no sharp crisis is expected the prospects for the growth rate of China’s exports to these countries will be relatively limited.
• Continued slow growth of the US economy creates protectionist trends within it – although other advanced economies, most importantly in terms of size the EU, remain strongly opposed to this.
• These international trends provide the overall global context for China’s ‘new normal’.

To avoid any misunderstanding, it should be made clear that this analysis, as with all others in this article unless otherwise specified, is of medium term economic trends. The average very slow growth in the advanced economies in the period since the international financial crisis does not mean that there may not be individual short phases of somewhat faster growth within an overall period of slow growth. For example, as analysed in 'The economic logic behind Trump's foreign policy - why the key countries are Germany and China' US economic growth was so slow in 2016, at 1.6%, that it is likely that there may be some improvement in 2017 for purely statistical reasons. What is precluded by overall trends is a major sustained upturn in growth. What are dealt with here are cumulative characteristics of the period as a whole, not purely short term economic predictions.
Turning from purely economic trends to geopolitical consequences:

• As advanced economies are in a period of very slow growth US neo-cons, and others  who think not in terms of ‘win-win’ outcomes but of zero sum games, cannot deal with rising ‘competitors’ such as China by accelerating their own economies. The competitive strategy of those such as US neo-cons which think in such negative terms therefore has to be to attempt to slow other economies such as China. This point is analysed in detail for US relations with China in 一盘大棋? ——中国新命运解析. In relation to China, this means that the previous US strategy was to attempt to undermine and disintegrate China by fake campaigns on ‘human rights’, finding and supporting a ‘Chinese Gorbachev’ etc. – i.e.  centring on political offensives. This perspective was, however, almost immediately blocked by Xi Jinping with the ‘four comprehensives’, the emphasis on the role of the Communist Party of China (CPC) etc. Given the present situation of the US and advanced economies, which precludes any major sustained acceleration in economic growth, US neo-cons have instead to seek to achieve their strategic goals by attempting to slow and create crisis within China’s economy.
• A prolonged period of slow growth in the advanced economies necessarily creates political instability within them. Developments such as Trump’s coming to office against the wishes of the majority of the US political establishment, the UK’s economically irrational Brexit decision, the lesser but still significant upheavals in other Western countries (e.g. rise of Le Pen’s National Front in France, ‘left’ leaders such as Sanders or Corbyn, strength of overtly xenophobic currents in a number of EU states etc) must therefore not be understood as temporary but should be expected to persist.
• Given very slow growth in the advanced economies, the US is less able to use its old post-World War II/Cold War policy of large scale economic aid to developing countries to stabilise them – i.e. the US is less able to use an economic ‘carrot’ as well as a militarily ‘stick’. The US is therefore increasingly forced to rely solely on military force in attempting to ensure carrying out of its policies in developing countries. This policy, shown in the bombing of Serbia, invasion of Iraq, and the bombing of Libya would be further intensified if Trump’s budget policy of drastic reductions in foreign aid and large increases in military expenditure is ratified by the US Congress.
• While a number of major developing economies continue to grow rapidly, very slow growth in major advanced economies necessarily produces stagnation and chaos in some weaker developing economies or those which are struck by side effects of the advanced economies slowdown – for example oil and commodity producing states are severely affected by low commodity prices. This produces social instability and in some cases war.  An area defined by different levels of military conflict now extends from West Africa, through parts of North Africa, into the Middle East, upward into Ukraine and, stepping over relatively stable Iran, into Afghanistan. Given the slow growth in the advanced economies, and the inability of the US to pursue its old post-World War II policy of using economic means to stabilise situations, such instability and military conflicts may be expected to continue in the coming period – although the regions and countries in which such conflicts take place may change. US foreign policy has shown, in Iraq and Libya, that in a number of cases it prefers ‘failed states’, even if this leads to strengthening of ‘jihadism’, to the existence of stable regimes which do not follow US interests. This clearly has geopolitical and even military consequences for China.
• There is a danger that a situation where the US is unable to break out of its slow economic growth, which faces acute political instability in parts of the less developed world, and in which China’s growth continues to far outperform it, will result in US military measures to attempt to resolve the problems facing it. The facts of the global economy make clear that Ian Johnson’s warning of an economy which ‘continues to stagnate’ and therefore of the risk of ‘overseas adventures and blaming foreigners for the country’s woes’ is highly accurate – but it applies to the Western economies. The strengthening of China’s military forces is therefore extremely necessary, and in the interests of global peace, as a counterbalance to the risk of such military adventurism by the US. The emphasis on modernisation and strengthening of China’s armed forces is a necessary response to this. Equally other countries, therefore, have an interest in the success of China against dangerous and adventurist tendencies which potentially flow from trends in the Western economies.

So far, the interrelation of the international economy and China has been analysed primarily from the angle of its consequences for China. However, there is of course an increasingly strong causal effect in the opposite direction – the impact of China on the global economy and on countries outside China. This in turn naturally affects China itself. This causal effect has grown greatly due to two mutually reinforcing processes since 2007:

• The increasing weight of China in the world economy;
• The slow growth in the Western economies.

The result of these processes is that in PPP terms from 2007-2016 31% of world GDP growth was due to China, compared to 10% for the US – at current dollar exchange rates 44% of world GDP growth from 2007-2016 was due to China. The IMF projects that in PPPs 27% of world GDP growth in 2016-2021 will be due to China compared to 14% for the US.
A new feature of the present period is therefore the very strong direct impact of China on the world economy and the objective interest of other countries in cooperating with this. This fact provides the clear interconnection between key international initiatives launched under Xi Jinping.

• The emphasis on a ‘community of common destiny’ is correct from a fundamental theoretical and long term viewpoint - as it flows from the fact that the advantages of division of labour mean international economic cooperation is mutually beneficial. This cooperation corresponds to the reality that in economics, due to the advantages of international division of labour, ‘one plus one equals more than two’ and therefore there exist in reality ‘win-win outcomes’, not the ‘zero-sum game’ concept of US neo-cons. But more immediately the concept of a ‘community of common destiny’ is also opposed to the protectionist strategy of key members of the Trump administration. It is for this reason that Xi Jinping’s speech to the Davos World Economic Forum earlier this year emphatically defending globalisation received widespread international support.
• Slow growth in the advanced economies creates the  specific form of relation of other countries to both China and the US. China’s economy is much more rapidly growing than the US but the US retains global military superiority. Therefore, China’s attraction for other countries is strongly economic while the US possesses military power. Put in aphoristic terms China offers other countries inclusion in OBOR, or the AIIB, whereas the US offers the ‘stick’ of a military attack or the ‘carrot’ of military alliance.
• The slow growth analysed above is specifically of the advanced economies. Growth in the developing economies is much faster. A specific characteristic of the present economic period is therefore of slow growth in the advanced economies and much more rapid growth in a number of developing economies. This clearly shows the strategic importance of key initiatives for China such as OBOR, the AIIB, the BRICS bank etc. The growth potential of the OBOR region, in both percentage and absolute terms, is much greater than either that of North America and Europe – giving other countries a strong incentive to participate in its benefits.
• Very slow growth in the advanced economies provides the context of  the ‘Washington Consensus’, which continues to be promoted by the US but which facts show has been far less successful in producing economic development than China’s socialist market policies and the increasing number of countries influenced by this – a detailed analysis of this was given in 世行数据中隐藏着一个秘密. It is therefore important that China actively promote its economic policies internationally. More rapid international economic growth resulting from this naturally benefits China but also aids those countries experiencing such growth.

Conclusion
The above data demonstrates that once the factual situation of the global economy is analysed the various trends of the present period are not separate but integrated and interrelated with domestic trends in China. Nor is China’s response to them simply a series of individual initiatives. On the contrary it flows coherently from the fundamental character of the new period of the global economy and its interrelation with China.
It should be noted that accurately understanding the trends operating both internationally and within China corresponds to the requirement in both Chinese and advanced Western thought that any situation must be understood in terms of the totality of forces operating in it – which includes both domestic and international ones. This is opposed to an erroneous analysis which attempts to analyse a situation by looking only at one or a few (normally domestic) forces operating in it.
As an aside it may be noted that this shows the continuing contemporary importance of Mao Zedong thought for analysis in China. For it was Mao Zedong who gave the most precise analysis of this requirement in his famous essay ‘On Contradiction’:
‘To be one-sided means not to look at problems all-sidedly, for example, to understand only China but not Japan, only the Communist Party but not the Kuomintang, only the proletariat but not the bourgeoisie, only the peasants but not the landlords, only the favourable conditions but not the difficult ones, only the past but not the future, only individual parts but not the whole, only the defects but not the achievements, only the plaintiff's case but not the defendant's, only underground revolutionary work but not open revolutionary work, and so on…  There are many examples of materialist dialectics in Shui Hu Chuan, of which the episode of the three attacks on Chu Village is one of the best.
‘Lenin said: “... in order really to know an object we must embrace, study, all its sides, all connections and "mediations". We shall never achieve this completely, but the demand for all-sidedness is a safeguard against mistakes and rigidity.”…
‘To be one-sided and superficial is at the same time to be subjective. For all objective things are actually interconnected and are governed by inner laws, but instead of undertaking the task of reflecting things as they really are some people only look at things one-sidedly or superficially and who know neither their interconnections nor their inner laws, and so their method is subjectivist.’
Applying this method to an integrated analysis of tendencies in the global economy and within China shows clearly the trends operating casts a clear light on the global economic perspectives facing China. Whether such an international analysis of the three fundamental periods of China’s development in relation with the international economy is useful for China itself is naturally is not for someone who is not Chinese to decide. However, it is clarificatory internationally in understanding the relation between trends in China and the fundamental periods of development of the global economy.

Notes
(1) The most notorious example of such ‘econofiction’ is Gordon Chang’s ‘The Coming Collapse of China’, the most widely quoted recent example is David Shambaugh’s ‘The Coming Chinese Crackup’, and a typical wild diatribe was by Ian Johnson in the New York Review of Books claiming China’s ‘economy continues to stagnate’ creating risk of ‘overseas adventures and blaming foreigners for the country’s woes.’ Such claims have been repeated for decades regardless of how regularly they are refuted by events.
(2) The term ‘advanced economies’ prior to 1980 constitutes the main advanced economic centres - the US, Western Europe, and Japan - plus Canada, Australia, and New Zealand as defined in Maddison’s Historical Statistics of the World Economy 1-2008 AD. After 1980, the IMF data from World Economic Outlook October 2016 adds to these countries a few economies which have more recently attained advanced economy status – e.g. South Korea and Singapore. However, the US, Western Europe and Japan are so overwhelmingly dominant in terms of weight within the advanced economies that this small geographical expansion makes no substantial changes to the results.​
(3) The present author wishes to make clear the term The Great Stagnation is used by Tyler Cowen as the title of a book. However, Tyler Cowen’s explanation of this stagnation is rooted in technology and entirely different to the data given here.  
(4) Regarding the last point, it is an elementary rule that in analysing a development assumptions least favourable to a argument being tested should be used. If the IMF had underestimated growth in the developed economies use of its projections could be interpreted as excessively ‘pessimistic’. However, successive IMF forecasts, in its biannual World Economic Outlook, have over predicted growth in the advanced economies. Even more strongly, as will be seen, the trends are so clear that any deviation from IMF predictions within any reasonable order of magnitude would not alter the fundamental perspective.
(5) Taking the individual countries growth in the US in the 14 years after 1929 was 87.8%, in Japan 67.4%, in Germany 58.1% and in the UK 50.3%.  In the years 1938-43 itself growth was exceptionally rapid. For the advanced economies as a whole total economic growth in the period was 39.5%, or an annual average 6.9%. Annual average growth in the UK in 1938-43 was 4.9%, in Japan 4.0% and in Germany 3.9%. In the US growth in the five-year period 1938-43 was an extraordinary 97.8%, an annual average 14.6% - the fastest growth over a five-year period in a major economy in human history.​
(6) This perspective is suggested by the term ‘Great Recession’ which, in contrast to ‘Great Depression’, suggests a downturn followed by a ‘return to normal’​

Trump's economy - cyclical upturn and long term slow growth

It is crucial for both economic and geopolitical perspectives to have an accurate analysis of trends in the US economy. The publication of the latest revised US GDP figures is therefore important as it provides the latest opportunity to verify these developments. This data confirms the fundamental trends in the US economy under Trump:

• The US remains locked in very slow medium and long-term growth – particularly in terms of per capita GDP growth.
• Due to extremely weak growth of the US economy in 2016 a purely short-term cyclical upturn is likely in 2017 - but any such short-term cyclical upturn will be far too weak to break out of this fundamental medium and long-term trend of US slow growth.

This article analyses these economic trends in detail, considers some of their geopolitical consequences, and their impact on domestic US politics.

US GDP and per capita GDP growth

In the 1^st quarter of 2017 US GDP was 2.1% higher than in the first quarter of 2016. Making an international comparison to other major economic centres:

• US total GDP growth of 2.1% was the same as the EU’s 2.1%.
• Making a comparison to the largest developing economies, US 2.1% growth was far lower than China’s 6.9% or India’s 6.2%.

This data is shown in Figure 1

However, in terms of per capita GDP growth the US was the worst performing of the major international economic centres, because the US has faster population growth than any of these except India. US annual population growth is 0.7%, compared to 0.6% in China and 0.4% in the EU – India’s is 1.3%. The result therefore, as Figure 2 shows, is that US per capita GDP growth in the year to the 1^st quarter of 2017 was only 1.3% compared to the EU’s 1.7%, India’s 4.9% and China’s 6.3%.

In summary US per capita GDP growth is very weak – only slightly above 1%.

Figure 1

Figure 2

 

Business cycle

In order to accurately evaluate the significance of this latest US data it is necessary to separate purely business cycle trends from medium/long term ones – as market economies are cyclical in nature failure to separate cyclical trends from long term ones may result in seriously distorted assessments. Purely cyclical effects may be removed by using a sufficiently long term moving average that cyclical fluctuations become averaged out and the long term structural growth rate is shown. Figure 3 therefore shows annual average US GDP growth using a 20-year moving average – a comparison to shorter term periods is given below.

Figure 3 clearly shows that the fundamental trend of the US economy is long-term slowdown. Annual average US growth fell from 4.4% in 1969, to 4.1% in 1978, to 3.2% in 2002, to 2.2% by 1^st quarter 2017. The latest US GDP growth of 2.1% clearly does not represent a break with this long-term US economic slowdown but is in line with it.

Figure 3

 

Cycle and trend

Turning from long term trends to analysis of the current US business cycle, it may be noted that a 5-year moving average of annual US GDP growth is 2.0%, a 7-year moving average 2.1% and the 20-year moving average 2.2%. Leaving aside a 10-year moving average, which is greatly statistically affected by the severe recession of 2009 and therefore yields a result out of line with other measures of average annual growth of only 1.4%, US average annual GDP growth may therefore be taken as around 2% or slightly above. That is, fundamental structural factors in the US economy create a medium/long term growth rate of 2.0% or slightly above. Business cycle fluctuations then take purely short-term growth above or below this average. To analyse accurately the present situation of the US business cycle therefore recent growth must be compared with this long-term trend.

Figure 4 therefore shows the 20-year moving average for US GDP growth together with the year on year US growth rate. This shows that in 2016 US GDP growth was severely depressed – GDP growth in the whole year 2016 was only 1.6% and year on year growth fell to 1.3% in the second quarter. By the 1^st quarter of 2017 US year on year GDP growth had only risen to 2.1% - still below the 20-year moving average.

As US economic growth in 2016 was substantially below average a process of ‘reversion to the mean’, that is a tendency to correct exceptionally slow or exceptionally rapid growth in one period by upward or downward adjustments to growth in succeeding periods, would be expected to lead to a short-term increase in US growth compared to low points in 2016. This would be purely for statistical reasons and not represent any increase in underlying or medium/long US term growth. This normal statistical process is confirmed by the acceleration in US GDP growth since the low point of 1.3% in the 2^nd quarter 2016 – growth accelerating to 1.7% in 3^rd quarter 2016, 2.0% in 4^th quarter 2016 and 2.1% in 1^st quarter 2017.

Given the very depressed situation of the US economy in 2016 therefore some increase in speed of growth may be expected in 2017 for purely statistical reasons connected to the business cycle.

Figure 4

 

Conclusion

The economic and domestic US political conclusions of the trends shown in the latest US data are therefore clear

• US economic growth in 2016 at 1.6% was so depressed below even its long term average that some moderate upturn in 2017 is likely. President Trump’s administration may of course claim ‘credit’ for the likely short-term acceleration in US growth in 2017 but any such short-term shift is merely a normal statistical process and would not represent any acceleration in underlying US growth. Only if growth continued sufficiently strongly and for a sufficiently long period to raise the medium/long term rate average could it be considered that any substantial increase in underlying US economic growth was occurring.
• This fall of US per capita GDP growth to a low level clearly has major political implications within the US and underlies recent domestic political events. Very low US per capita growth, accompanied by increasing economic inequality, has resulted in US median wages remaining below their 1999 level – this prolonged stagnation of US incomes explaining recent intense political disturbances in the US around the sweeping aside of the Republican Party establishment by Trump, the strong support given to a candidate for president declaring himself to be a socialist Sanders, current sharp clashes among the US political establishment etc.
• Even a short-term cyclical upturn in the US economy, however, is likely to be translated into increased economic confidence by US voters. This may give some protection to Trump despite current sharp political clashes in the US with numerous Congressional investigations of President related issues and virtually open campaigns by mass media such as the New York Times and CNN to remove the President. The latest opinion poll for the Wall Street Journal showed that men believed the economy had improved since the Presidential election by 74% to 25%, while women believed by 49% to 48% that the economic situation had not improved.

In terms of geopolitical consequences affecting China:

• The short term moderate cyclical upturn in the US economy which is likely in 2017 will aid China’s short term economic growth – particularly as it is likely to by synchronised with a moderate cyclical upturn in the EU. Both trends aid China’s exports
• Nevertheless, due to the very low medium and long-term US growth rate the US will not be able to play the role of economic locomotive of the G20. In addition to economic fundamentals IMF projections are that in the next five years China’s contribution to world growth will be substantially higher than the US. It is therefore crucial China continues to push for economic progress via the G20 and China has the objective possibility to play a leading role in this.
• Very slow growth in the US in the medium and longer term creates a permanent temptation to the US political establishment to attempt to divert attention from this by reckless military action or ‘China bashing’. China’s foreign policy initiatives to seek the best possible relations with the US are extremely correct but the risks from such negative trends in the US situation, and therefore of sharp turns in US foreign policy, must also be assessed.

To keep this article short only a factual summary of the key recent trends within the US economy are given here. A detailed analysis of why the US remains locked in slow medium and long term economic growth is given in my article  Why the US economy remains locked in slow growth  A long term historical analysis of US growth and its relation to economic growth theory may be found in my book The Great Chess Game (一盘大棋? ——中国新命运解析).

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This is a slightly edited version of an article that was originally published in Chinese at New Finance. 

G20 summit highlights new stage of China’s international ‘thought leadership’

The Hamburg G20 summit will come in a year which has seen a new stage in China’s global impact. Ever since the international financial crisis the growing objective weight of China’s economy in the global economy has been recognised internationally. But 2017 has seen a new stage in which China, and in particular major speeches by China's President Xi Jinping, have had a major impact on international ‘thought leadership’ - to use the Western. Notably the Chinese President's speech at the Davos World Economic Forum attracted wide international attention. There has therefore been international media analysis of the positions to be taken by China at the G20 summit.

​But it is important to understand that the two issues of the objective economic situation and the interest in the analyses of Xi Jinping are not separate. The increasing role of China in global ‘thought leadership’ results from the fact that its current analysis and policies systematically respond to interrelated issues of China’s domestic economic situation and global economic developments. This also clarifies why key Chinese programmes such as One Belt One Road (B&R) are not 'one-off' initiatives but form part of an integrated perspective. It is therefore useful to step back from individual policies and look in the most general terms at the new situation reflected in China’s global ‘thought leadership.’ This is the goal of this article.​

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The situation following the international financial crisis

​The situation facing China since the international financial crisis, and therefore during the period of the Presidency of Xi Jinping, differs in crucial aspects from previous periods of development of the People’s Republic of China (PRC) and therefore from that confronting previous Chinese leaders of the PRC. Regarding the international aspect of this, and given there may be shock at the reality of global trends, a non-Chinese source will be used here to establish these- IMF projections accompanying its latest World Economic Outlook. 

The interrelation of two realities, domestic Chinese and international, define the features of this new period during Xi Jinping's  Presidency. The conclusion flowing from their interrelation explains why Deng Xiaoping’s dictum ‘hide brilliance, cherish obscurity’ has been modified, due to the new objective situation, to instead showing the objectively great importance of explaining China’s position to a global audience.​

• Domestically, China is in transition within five years to its own criterion of ‘moderate prosperity’ and within a decade to the World Bank’s definition of a ‘high income economy’. Attaining the latter in a single stroke would double the number of those living in such countries – a transformation of the global economy.

• Internationally, China’s 2016 chairmanship of the G20 confirmed it hopes for, and plays a role in aiding, growth in advanced economies. But China cannot depend on any guarantee of  Western growth – indeed IMF data projects that following the international financial crisis advanced economies face prolonged average growth slower than after the Great Depression started in 1929.​​

Given slow global economic development makes it harder for China to achieve its target of a high-income economy China must therefore pro-actively take not only domestic initiatives but aid world growth – hence policies such as B&R and the significance of explaining China’s analyses globally.

​The ‘Great Stagnation’​

Analysing first the international dimension of the present situation, the term ‘Great Recession’ is primarily used referring to events after 2008. But several analysts have gone further – Larry Summers, former US Treasury Secretary, speaking of ‘secular stagnation’ and the IMF Managing Director Christine Lagarde talking of ‘new mediocre’. Nevertheless, it may still come as a shock to realise that IMF economic projections imply that the common phrase Western that economies face the deepest economic problems since the Great Depression in one crucial aspect understates the situation.​

IMF projections show that by the end of 2017 the total 12 per cent growth in advanced economies after 2007 will be slower than the 15 per cent in the decade after 1929. Strikingly, by 2021, fourteen years after 2007, total growth in advanced economies will be less than half that in the 14 years after 1929 –  21 per cent compared to 50 per cent after 1929.​

It is not possible for the US, or for similar reasons the other advanced economies, to break out of this slow growth for reasons analysed in my book The Great Chess Game (一盘大棋? ——中国新命运解析).

Decisive role of B&R​

As relative stagnation in the Western economies will be not be accompanied by corresponding trends in Asia a striking transformation of the world economy is projected in the next half decade which makes graphically clear the role both of China and of the development of the ‘B&R region’. A detailed analysis of this was given in my article 'Why the 'Belt & Road' region will be the main locomotive of the world economy' so only the chief results will be summarised here.​

Taking a ‘core’ definition of China’s B&R region (developing Asia, East Asia excluding Japan, former USSR excluding the Baltic States, Iran, Iraq, Turkey):​

• At current exchange rates projections from IMF data show in 2016-2021 the B&R region accounting for 45 per cent of global growth - compared to North America’s 24 per cent and the EU’s 10 per cent.​

• In purchasing power parities (PPPs) the B&R region would account for 57 per cent of world growth - compared to North America’s 14 per cent and the EU’s 11 per cent.​

By 2021 at current exchange rates B&R region’s GDP will be 31 per cent of world GDP – compared to North America’s 27 per cent and the EUs 19 per cent. In PPPs, the respective proportions will be 47 per cent, 18 per cent, and EU 15 per cent.​

World economic growth consequently more depends on the B&R region’s success than on North America or the EU and China’s role in the B&R regions growth will be decisive.

Analysis by Xi Jinping​

Xi Jinping therefore faces a fundamentally different situation to previous Chinese leaders.​

The analyses of Mao Zedong and Deng Xiaoping were, of course, of great impact internationally. But this was due to the primarily geopolitical, not economic, impact of China.​

• In 1949 only approximately 10 countries had a lower per capita GDP than the China Mao took leadership of. China in the ‘pre-reform’ period of Mao Zedong made the greatest social advances in a major country in world history.  In the 27 years between the establishment of the People’s Republic of China in 1949, and the death of Mao Zedong in 1976, life expectancy in China increasing by 31 years, or over a year per chronological year – the fastest rate ever experienced in a major country. ‘Maoism’ raised China’s life expectancy from 73 per cent of the world average in 1949/50 to 105 per cent in 1976, Important foundations of industrialisation were also laid. But overall China’s 4.9 per cent annual average GDP growth in 1950-78 was only slightly above the world average 4.6 per cent.​

• China’s leaders from Deng Xiaoping until the international financial crisis produced rapid growth. In 1978-2007 China’s annual average GDP growth rate was 9.9 per cent, achieving the transition from a ‘low income’ to an ‘upper middle income’ economy by international classification. In this period China benefitted from relatively rapid 2.8 per cent annual advanced economy growth. Therefore, in both the ‘Mao Zedong period’ and the ‘Deng Xiaoping’ period the Western economies were themselves undergoing relatively rapid growth – which continued until the 2008 international financial crisis.​​

This international situation changed fundamentally in 2008.

Impact of China's international initiatives​

Xi Jinping is the first Chinese leader facing a simultaneous combination of China’s transition to a high-income economy with very low Western growth. This is therefore the new combination of international and domestic factors analysed by Xi Jinping. It is for this reason that objectively this represents a new period in the development of analysis in China after the earlier phase of development of Mao Zedong and Deng Xiaoping.

The great international impact of Xi Jinping’s analysis, as shown in events leading to the G20 summit, therefore reflects this combination of ‘objective’ and ‘thought leadership’ factors.​

• Objectively China has come through the protracted period since the international financial crisis with far more rapid development than any other major economy and is clearly successfully making the transition to a ‘high income’ economy by international standards.

• In terms of ‘thought leadership’ China, as highlighted in Xi Jinping’s speeches at Davos and the Beijing B&R summit, has responded to the ‘Great Stagnation’ in the Western economies  not only with precise policy initiatives, such as B&R and AIIB, but with clear analyses of globalisation and present global economic problems. It is for these reasons that distinctive concepts such as ‘community of common destiny’ which underpin China’s approach have had  their impact in forming policy, and why there is international interest in China’s analysis as shown in preparation of the G20 summit.​​

Put in terms of the objective processes Martin Wolf, chief economics commentator of the Financial Times, and one of the West’s most influential journalists, stated bluntly at the end of May that the question now being discussed in all countries was: ‘Would it not be wiser, they wonder, to move closer to China?’ In terms of ‘thought leadership’ Ian Bremmer, President of the Eurasia Group, the most influential Western ‘risk analysis’ company, noted regarding one of the key indicators of China’s success in projecting not only practical power but also ideas: ‘Davos reaction to Xi speech: Success on all counts.’​

Therefore, to return to the point at the beginning of this article, the speeches of Xi Jinping have attracted  great international attention in 2017 not only because of the objective economic impact of China but because the concepts developed during the new phase of Chinese analysis have corresponded to the new situation of both the international and Chinese economies.​

*   *   *

​This is an edited version of an article which originally appeared in Chinese at Sina Finance Opinion Leaders.

Why the US economy remains locked in slow growth

Summary

The latest US economic data confirms the US remains locked in a prolonged period of slow growth with major consequences for geopolitics and destabilising consequences for US domestic politics. 

The latest US economic growth data

Almost no international issue is more crucial for economic and geopolitical strategy than economic trends within the US. It is therefore crucial to have an accurate analysis of these. Regarding such a serious issue and such powerful forces there is no merit in ‘pessimism’, underestimating US growth, and no merit in ‘optimism’, overestimating US growth – there is only a virtue in realism.

This article therefore analyses the latest US GDP data. The conclusion is clear. The data confirms the US fundamentally remains in a period of medium/long term slow growth which will last for at least a minimum of several years.

Strikingly, taking a period of 15 years after the beginning of the international financial crisis, average US growth will be slower than after the beginning of the Great Depression in 1929. Analyses which appear in parts of the media claiming the US is entering a significant new period of rapid growth are fundamentally in error – for reasons analysed in detail blow.

Such slow US growth necessarily has major geopolitical consequences and provides a backdrop for continuing instability and turns in US politics. The recent period within US politics has already seen:

• Trump selected as Republican Party Presidential candidate against the wishes of that Party’s establishment, and elected President against the opposition of the overwhelming major of the US mass media.
• Since Trump’s election sharp clashes have continued within the US political establishment with leaks against the President by the US security services, the President’s sacking of the FBI head, investigations by the US Congress and US police of close aides to the President, and open campaigns to force the President to change policies or to remove him from office by major US media such as the New York Times and CNN.
• Within the Democratic Party a serious challenge mounted to the Party establishment’s candidate Clinton by the first figure declaring themselves to be a socialist to receive major US public support for almost a century – Sanders.

As US medium/long term slow economic growth will continue sharp turns and tensions in US politics will not disappear but are likely to continue.

The consequences for US relations with China flowing from this situation, and geopolitical tensions between the US and its traditional allies such as Germany shown for example at the recent G7 summit, are analysed at the end of this article. The conclusion is that China’s constructive approach to the Trump administration is clearly correct but that the risk of sharp turns in the situation must be taken into account due to the tensions within the US created by its historically low growth.

This prolonged period of slow growth in the US, and in the advanced economies in general, combines with China’s own transition to ‘moderate prosperity’, and then to a ‘high income’ economy by World Bank international standards, to create under Xi Jinping a qualitatively new period in China’s development.

The Great Stagnation

Starting with the global background to the latest US economic data, a defining feature of the present overall international situation is extremely slow growth in the advanced Western economies.

In nine years since the 2008 international financial crisis average growth in the advanced Western economies is already almost as slow as during the ‘Great Depression’ of the 1930s and by the end of 2017 it will be significantly slower. By 2016, total GDP growth in the advanced economies in the years since 2007 was only 10.1% and by the end of 2017, on IMF projections, the growth in the advanced economies after 2007 will be lower than in the same period after 1929 – total growth of 12.3% in the 10 years after 2007 compared to 15.1% in the 10 years after 1929.

Even more strikingly IMF data projects that future growth in the advanced Western economies, following the international financial crisis, will be far slower than in the same period after 1929. IMF projections are that by 2021, fourteen years after 2007, total growth in the advanced economies will be less than half that in the 14 years after 1929 – average annual growth of only 1.3% compared to 2.9%, and total growth of 20.6% compared to 49.8%.

This data is shown in Figure 1. An aim of this article is instead to carry out the necessary factual checks that the latest US data does not represent a break with long-term trends.

Figure 1

 

US GDP growth

In the 1^st quarter of 2017 US GDP was 2.0% higher than in the first quarter of 2016.[1] To evaluate this 2.0% growth, given that a market economy inherently displays business cycles, it is necessary to separate purely cyclical trends from medium/long term ones. Failure to do so leads to false analysis/statistical trickery – comparing a peak of the business cycle with the trough will exaggerate growth, while comparing the trough of the business cycle with the peak will understate growth. Such cyclical effects may be removed by using a sufficiently long term moving average that cyclical fluctuations become averaged out and the long term structural growth rate is shown. Figure 2 therefore shows annual average US GDP growth using a 20-year moving average – a comparison to shorter term periods is given below.

Figure 2 clearly shows that the fundamental trend of the US economy is long-term slowdown. Annual average US growth fell from 4.4% in 1969, to 4.1% in 1978, to 3.2% in 2002, to 2.2% by 1^st quarter 2017. That is, the most fundamental long term growth trend in the US economy is that it has been slowing for half a century. The latest US GDP growth of 2.0% clearly does not represent a break with this long term US economic slowdown but is in line with it.

Figure 2

 

Per capita

US per capita GDP growth follows the same falling trend. Figure 3 shows a 20-year moving average for US per capita GDP growth. Annual average US per capita GDP growth fell from 2.8% in 1969, to 2.7% in 1977, to 2.4% in 2002, to 1.2% by the first quarter of 2017. The latest US data shows no break with this trend of long term slowdown - it is in line with it and continues these long term trends.

This data shows clearly claims the US economy is currently ‘dynamic’ driven by a ‘wave of innovation’ are therefore factually false – a pure propaganda myth repeated by US media such as Bloomberg with no connection with factual trends. US per capita growth has in fact fallen to a low level.

This fall of US per capita GDP growth to a low level clearly has major political implications within the US and underlies recent domestic political events. Very low US per capital growth, accompanied by increasing economic inequality, has resulted in US median wages remaining below their 1999 level – this prolonged stagnation of US incomes explaining recent intense political disturbances in the US around the sweeping aside of the Republican Party establishment by Trump, the strong support given to a candidate for president declaring himself to be a socialist Sanders, current sharp clashes among the US political establishment etc.

Figure 3

 

Cycle and trend

Turning from long term trends to analysis of the current US business cycle it may be noted that a 5-year moving average of annual US GDP growth is 2.0%, a 7-year moving average 2.1% and the 20-year moving average 2.2%. Leaving aside a 10-year moving average, which is greatly statistically affected by the severe recession of 2009 and therefore yields a result out of line with other measures of average annual growth of only 1.4%, US average annual GDP growth may therefore be taken as around 2% or slightly above. That is, fundamental structural factors in the US economy create a medium/long term growth rate of 2.0% or slightly above. Business cycle fluctuations then take purely short term growth above or below this average. To analyse accurately the present situation of the US business cycle therefore recent growth must be compared with this long-term trend.

Figure 4 therefore shows the 20-year moving average for US GDP growth together with the year on year US growth rate. This shows that in 2016 US GDP growth was severely depressed – GDP growth in the whole year 2016 was only 1.6% and year on year growth fell to 1.3% in the second quarter. By the 1^st quarter of 2017 US year on year GDP growth had only risen to 2.0% - in line with a 5-year moving average but still below the 20-year moving average.

As US economic growth in 2016 was substantially below average a process of ‘reversion to the mean’, that is a tendency to correct exceptionally slow or exceptionally rapid growth in one period by upward or downward adjustments to growth in succeeding periods, would be expected to lead to a short-term increase in US growth compared to low points in 2016. This would be purely for statistical reasons and not represent any increase in underlying or medium/long US term growth. This normal statistical process is confirmed by the acceleration in US GDP growth since the low point of 1.3% in the 2^nd quarter 2016 – growth accelerating to 1.7% in 3^rd quarter 2016 and 2.0% in 4^th quarter 2016 and 1^st quarter 2017.

President Trump’s administration may of course claim ‘credit’ for the likely short term acceleration in US growth in 2017 but any such short-term shift is merely a normal statistical process and would not represent any acceleration in underlying US growth. Only if growth continued sufficiently strongly and for a sufficiently long period to raise the medium/long term rate average could it be considered that any substantial increase in US economic growth was occurring. The latest US growth data, 2.0% year on year, however does not represent any acceleration in US growth compared to longer term averages and is therefore in line with the pattern of US slow growth and does not represent a break with it.

Figure 4

 

Key determinants of US growth

Turning to the causes of this slow US growth, and therefore evaluation of the possibility of overcoming it, statistical analysis shows numerous factors explain purely short term fluctuations in US growth. Factors ranging from fiscal or monetary policy, to international trade fluctuations, even to the weather may therefore affect short term US growth. However, over anything except the short term Table 1 shows clearly that two factors are decisive in US growth – total US net saving/capital creation (the sum of household, company and government saving) and US net fixed investment. Over a 5-year time frame the correlation of the percentage of net savings in US GDP and the percentage of net fixed investment in US GDP with US growth is over 0.5, more powerful than any other factors, while over an 8-year time frame the correlation of net fixed investment with GDP growth is an extremely strong 0.72.

Consequently, while over the short term numerous factors are correlated with US short term growth, making short term trends difficult to predict, over a medium-long term frame the correlation of US economic growth with US net savings and net fixed investment is decisive.

It is unnecessary for present purposes to analyse whether US net fixed saving and US net fixed investment causes economic growth, or economic growth causes high net fixed savings and net fixed investment, or a third process causes both - it is merely sufficient to note that these high correlations means that over the medium/long term US GDP growth cannot be substantially increased without an increase in either US net savings or US net fixed capital investment. As changes in US net savings and net fixed capital investment have significantly different implications for US domestic and foreign policy and politics they will be considered in turn.

Table 1

 

Net saving

Figure 5 shows the long-term trend of US net savings/net capital accumulation since 1929. The curve of long term development of the US economy can be seen clearly and the slow growth of the US economy in the present period therefore placed in a clear historical context:

• During the deep crisis at the beginning of the Great Depression in 1929-33 US net capital accumulation was negative – the US economy was consuming more capital through depreciation than it was creating. This necessarily produced deep economic crisis. After this the rate of US savings/capital creation rose, with a powerful acceleration during World War II, to reach a long-term peak as a percentage of the US economy in 1965. This coincided with the great boom in the US economy during World War II and decades immediately following it.
• After 1965 US net savings/capital creation steadily fell as a percentage of the US economy until it once again became negative during the ‘Great Recession’ in 2008-2009. Given the strong correlation of US net saving/capital creation with US growth this declining trend of US capital creation naturally explains the long-term growth US slowdown that was shown above.

Figure 5

 

Turning to the latest data for the 1^st quarter of 2017, to analyse if there has been any break with the long-term trend, Figure 6 clearly shows that at the latest date available there has been no long-term recovery in US net capital creation. Naturally there has been some recovery since the extreme depth of the financial crisis, when US net capital creation again became negative, but the present level of US net saving is still below the pre-crisis period. Furthermore since 4^th quarter 2015 there has been a small but definite fall in the share of net saving in the economy – a decline from 3.3% of Gross National Income (GNI) in 4^th quarter 2015 to 2.3% of GNI in 1^st quarter 2017. As an extremely strong correlation exists between US net capital creation and medium/long term US GDP growth a medium/long term US economic acceleration could only take place when there was a major increase in US net capital creation – which has not occurred.

As investment must necessarily be financed by an exactly equal amount of savings it may therefore be noted that no increase in the percentage of US domestic resources available for investment has taken place.

Figure 6

 

The implications for US domestic politics

Turning from economic trends to their implications for US politics, as US net savings are US domestic capital creation, and the total US economy is necessarily equal to consumption plus savings, any attempt to increase the level of net capital creation in the US economy has major implications for US politics as it reduces the proportion of the economy allocated to consumption by the US population.

Purely in principle, the level of US net capital creation/net savings could be raised without attacks on the living standards of the US population. In particular US military expenditure, from a technical economic point of view, is a form of consumption. Reducing US military expenditure could therefore raise US savings without lowering the proportion of the economy devoted to the population’s living standards. However, the Trump administration has rejected this policy - projecting a major increase in US military expenditure.

Other measures by the Trump administration to increase the percentage of the US economy devoted to net capital creation would necessarily be politically unpopular under conditions of slow US growth. For example

• Reducing the proportion of the US economy devoted to wages, with the aim of increasing company profits and therefore potential company savings, would be unpopular as it would involve a reduction of the proportion of the US economy devoted to the main source of the population’s income.
• Reduction of the US budget deficit (that is decreasing the level of government dis-saving) through reductions in state expenditure on health, education, social protection etc. would involve reduction in the population’s living standards.

For these political reasons, given the commitment to increased military spending, attempts by the Trump administration to increase US net savings are likely to be politically unpopular and therefore difficult. Indeed, if US taxes are cut without corresponding state expenditure reductions the resulting increase in the US budget deficit would actually reduce the US net savings level.

Net fixed investment

Turning to US net fixed investment, it should be recalled that total investment is equal to total savings.[2] However US investment does not necessarily have to be financed by domestic US savings. US investment can also be financed by foreign capital/savings and foreign borrowing. This, however, as analysed below, has major implications for US foreign policy.

Analysing the fundamental data on US net fixed investment Figure 7 shows that the overall historical trend of this follows the same historical pattern as US net savings – reflecting that in the US, as in all major economies, the main source of financing of new investment is domestic. In more detail, historically:

• US net fixed investment was negative during the onset of the Great Depression - that is more capital was being consumed through depreciation than was being newly invested.
• US net fixed investment then rose very sharply during World War II and the decades long boom following it, before declining from the mid-1960s onwards. This decline was correlated with the long slowdown of the US economy shown above in Figure 2.

The chief difference to be noted between the trends in US net fixed saving and those of US net fixed investment is that during the international financial crisis after 2007 US net fixed investment fell to a very low level but did not become negative as US net savings did. The reason for this is that during the international financial crisis the US continued to finance its fixed investment through foreign borrowing – as analysed below.

Figure 7

 

Turning to the latest data, for 1^st quarter 2017, Figure 8 shows that there has been no fundamental recovery in the US net fixed investment level. There is again naturally a recovery from the extremely low level during the 2007-2009 international financial crisis but US net fixed investment remains substantially below pre-financial crisis levels.

Given the close correlation of US medium/long term economic growth with US net fixed investment no basis therefore exists at present for any medium/long term US economic growth acceleration.

Figure 8

 

The possibility of US foreign borrowing

The considerable domestic US political obstacles to increase US domestic savings were analysed above. However, an increase in US investment could in principle also be financed by foreign borrowing. What, therefore, are the practical possibilities of an increase in US investment financed from foreign savings/capital?

To analyse this precisely, it should be noted that statistically the US balance of payments on current account is necessarily equal to the US capital account balance with the sign reversed – i.e an increased positive flow of foreign capital into the US must be reflected in a corresponding increase in the negative US balance of payments on current account. Figure 9 therefore shows the US current account balance of payments. The trends are clear:

• Prior to Regan’s election in 1980 the US balance of payments was close to balance. Excluding foreign transfers, which were primarily payments on US overseas military expenditure and foreign aid typically tied to US foreign policy objectives, the US balance of payments was usually in surplus. Therefore, prior to Reagan the US was not dependent on, and did not undertake, significant net foreign borrowing;
• Under Reagan a new policy was adopted of large scale US foreign borrowing. This may be seen in the very sharp deterioration in the US balance of payments during the Reagan period - the US balance of payments on current account worsened from a surplus of 0.3% of GDP in the 4^th quarter of 1980, the last quarter before Reagan came to office, to a deficit of 3.4% of GDP by the 3^rd quarter of 1986. This 3.7% of GDP worsening of the US balance of payments is equivalent to over $700 billion at today’s prices.
• Under George H. W. Bush (Bush Senior) the US temporarily abandoned large scale foreign borrowing. With foreign sources of financing US investment reduced US net fixed capital formation fell sharply, from 7.5% of GDP in the last quarter of 1988 to 4.8% of GDP in 1^st quarter 1992. The US fell into recession in the last quarter of 1990/1^st quarter 1991 – the unpopularity of this leading to Bush’s electoral defeat.
• Under Clinton and George W Bush US foreign borrowing increased massively, rising to 6.3% of GDP by the last quarter of 2005 – such huge borrowing was unsustainable, was a significant contributory factor to the international financial crisis, and necessarily had to be reduced.
• The onset of the international financial crisis forced a huge reduction in US foreign borrowing – reducing net inflows of capital into the US from 5.3% of GDP in 1^st quarter 2007 to 2.5% of GDP in the 2^nd quarter of 2009. The level of US foreign borrowing has since remained essentially unchanged - net inflows of capital into the US were 2.4% of GDP in the latest available data in the last quarter of 2016.

Figure 9

 

If the US once again turned to financing its investment through a major increase in international borrowing there are very clear geopolitical and political consequences.

• Prior to Reagan US net export of capital/outward transfers from the US were a stabilising factor in the world economy – increasing the supply of capital for other countries and therefore aiding their economic development.
• After Reagan the reliance of the US on large scale foreign borrowing to finance its investment was a destabilising factor in the world economy – decreasing the supply of capital in other countries and thereby making more difficult their economic growth.
• As the US from Reagan onwards was dependent on large scale foreign borrowing to finance its investment, and given the strong correlation of US growth with net fixed investment, US growth became strongly dependent on sources of foreign capital.

Therefore, analysis of the ability of the Trump administration/US to tap large scale sources of foreign finance requires examining which countries could potentially supply this and the issues in US foreign policy this creates.

Can Trump achieve large scale foreign borrowing?

It was analysed above that considerable political obstacles exist to raising the US domestic savings level. However, the US obtaining capital/savings from other countries also raises significant issues in foreign policy - as becomes clear when it is analysed which countries could supply such capital/savings to the US as they possess large balance of payments surpluses. The fundamental data on this is shown in Figure 10 - in this chart the percentages at the end of the graph lines are for the country/region’s balance of payments surplus/deficit as a percentage of the US’s 2016 balance of payments deficit.

The source of the huge US foreign borrowing from Reagan to Clinton was clear – Japan. Japan’s balance of payment’s surplus was equivalent to 54% of the US balance of payments deficit under Reagan, 127% under George H.W. Bush, and 60% under Clinton. As Japan cannot defy the US on any major issue Japan could, therefore, easily be forced into policies which supplied capital to the US even if this damaged Japan’s economy – as indeed it did from the 1980s onwards in the creation of the ‘bubble economy’.[3]

However, by the beginning of the 21^st century, Japan alone became too weak to finance a large part of the US deficit. During George W Bush’s presidency, 2001-2008, the percentage of the US balance of payments deficit that could be financed by Japan’s surplus fell to only 24% - too little to finance US needs. However fortunately for the US, prior to the international financial crisis, weakening of Japan’s ability to meet US financing needs did not lead to severe problems for the US as George W Bush found two additional international sources of finance. These were:

• Middle East oil exporters, whose balance of payment surplus was equivalent to 27% of the US balance of payments deficit due to the high oil price,
• China – whose balance of payment deficit was equivalent to 24% of the US balance of payments deficit.

The ability of the US to tap these two new sources of finance, however, necessarily entailed foreign policy choices. The easy one of these for the US was with the Middle Eastern oil exporters. Many of these (Saudi Arabia, Kuwait, UAE etc) are essentially in the same position as Japan in being entirely subservient to the US and can therefore, if necessary, be instructed/pressured to finance US deficits.

China, however, is not in that situation – it is not a semi-colony of the US or subservient to it. But George W Bush, throughout most of his presidency, maintained reasonable foreign policy relations with China – not seeking to create great tensions. This created a mutually beneficial situation in which China was content to de facto aid financing the US balance of payment deficit in return for no major trade or political tensions existing with the US.

The severe fall in the international oil price from mid-2014 onwards, however, sharply changed the situation for US borrowing by eliminating the balance of payments surpluses of the Middle East oil exporters – as shown in Figure 10. Recent aid from Saudi Arabia, following Trump’s trip to the Middle East, is useful but too small to fundamentally affect the situation of the US economy. The only countries with sufficiently large surpluses to finance very large scale borrowing by the US are China, with a balance of payment surplus equivalent to 58% of the US deficit, and Germany – with a balance of payments surplus equivalent to 64% of the US deficit.

It is for this reason that the key foreign policy countries for the US, from an economic viewpoint, are now China and Germany – Russia is important for the US geopolitically and militarily but not economically. To revive US economic growth by foreign borrowing either or both China and Germany must be peruaded or forced into substantially increasing supplies of capital to the US. This, of course, in turn necessitates key foreign policy decisions by the US.

Figure 10

Geopolitical conclusions

The geopolitical conclusions flowing from these fundamental economic factors are clear – the implications for domestic political instability in the US have already been analysed. The rational US economic course, to minimise geopolitical risk and domestic political tension, would be to increase its net savings/net fixed investment via a reduction in military expenditure. This however, has already been rejected by the Trump administration. Therefore, regarding Germany and China:

• In the run up to Trump’s election, and early in this presidency, he clearly attempted to intimidate/pressure Germany into greater economic subordination to the US. Politically this was carried out by reversing the historic US policy of support for the EU and instead seeking to weaken/break it up by supporting anti-EU currents such as Brexit and LePen in France. This led to a clear clash with Germany – for which the EU represents a decisive economic reserve and chief market. Merkel made clear Germany was not prepared to subordinate its interests to Trump’s requirement either by an inordinate increase in German military expenditure or accepting US protectionism. Germany also secured a crucial strategic political victory against Trump with the overwhelming election of Macron against LePen in the French Presidential election. These clashes between US and German policy were clearly reflected at the recent G7 summit and in Merkel’s declaration following it, in which she was clearly referring to the US, that: ‘The times in which we can fully count on others are somewhat over, as I have experienced in the past few days.’ German diplomacy followed this up actively with in rapid succession the visit of Indian Prime Minister Modi to Germany, the visit of China’s premier Li Keqiang to Germany, and the invitation of Putin to visit France by Macron – such an invitation was clearly discussed by Macron in advanced with Merkel. It is important not to exaggerate, a serious split between Germany and the US on military matters is not possible. But refusal of Germany to be intimidated into significantly subordinating itself to US economic demands blocks one of the only two major sources of large scale foreign capital which could be transferred to the US.
• Regarding China, the other major potential foreign source of capital, Trump’s team again initially appeared to attempt intimidation – the notorious phone call with Taiwan leader Tsai Ing-wen in violation of the bedrock 'One China' policy followed by the US since establishment of diplomatic relations with China, the bringing of hard line anti-China ideologues such as Navarro and Barron into the administration etc. However, China made clear it would not accept any intimidation regarding ‘core interests’ such as the One China Policy, the South China Sea etc. China is certainly correct to propose positive ‘win-win’ policies for both the US and China, but it is not subordinate to the US as Japan was – and therefore will now allow its economy to be fundamentally damaged to subsidise the US, as Japan did, and China will not be intimidated regarding fundamental issues.

The US therefore certainly has some economies (Japan, Middle East oil exporters, Taiwan province) that are entirely subordinate to its policies and which can transfer capital to it – but, unlike in the Reagan period, these are now too economically weak to meet the needs of very large scale US foreign borrowing. The only two economies which could potentially transfer capital/savings to the US on a sufficiently large scale, Germany and China, are too strong to be economically intimated to the US. Germany and China certainly seek ‘win-win’ outcomes with the US but they cannot be intimidated into undertaking policies which would finance the US at the cost of serious damage to their own economies.

Therefore, unless either Germany or China can be persuaded/forced into large scale capital transfers to the US the basis for accelerating US economic growth through very large scale foreign borrowing does not exist at present.

IMF predictions

Finally, while the above analysis is made in terms of economic fundamentals, in case it may be argued that the above analyses suffer from a ‘pessimism bias’, an underestimation of the growth potential of the US, it worth doing a cross check against the implications of IMF projections. These show that in terms of medium/long term growth the IMF projects that the US economy will not accelerate but even slow further.

In the next six years 2016-2022 the IMF projects that annual average US GDP growth will be 2.0% - below the 20-year moving average for the US economy, although in line with the 5-year moving average. As a result, taking into account the sharp recession in 2009, US long term growth, the 20 year moving average, will actually fall further to 1.9%. This is shown in Figure 11.

Figure 11

 

Once again it is useful to make a comparison of the period since the international financial crisis to that of the Great Depression after 1929. In the 15 years after 1929 US economy more than doubled in size, growing by 112%, an annual average 5.1%. In comparison IMF projections are that in the 15 years after 2007 the US will grow by 26%, with an annual average 1.6% growth. In short in the 15 years after 1929 US total economic growth was over times four times that projected in the 15 years after 2007, which results for a post-1929 average US growth rate over a 15 year period that was over three times that projected after 2007.

Conclusion for discussion in China

Analysis of the latest US GDP data therefore leads to a clear conclusion – the US remains locked in a period of slow growth which will last for at least a number of years. Claims to the contrary in sections of the media that there will be a substantial increase US growth, in anything other than a purely short term sense already analysed, results either from ‘wishful thinking’ or basic economic errors. As China’s policy, particularly on such a fundamental issue, must be based on the principle of realism and ‘seek truth from facts’, not on wishful or confused thinking, it is therefore worth analysing the errors of some claims in part of the media that there will be a substantial increase in US medium/long term economic growth.

• The simplest form of ‘wishful thinking’ is that it would be highly ‘helpful’ from the point of view of China’s trade and development if the US economy grew rapidly. This is undoubtedly true - but because something would be desirable does not mean it will happen!
• Since Trump’s election China has rightly proposed numerous forms of economic cooperation with the US – setting these out comprehensively in the Ministry of Commerce’s ‘Research Report on China-US Economic and Trade Relations’. This is extremely important in foreign policy terms, showing clearly the goodwill of China to the US, the search for win-win outcomes, and that any problems in US-China relations do not arise from China. Such proposals, because they are win-win can aid sectors of both the US and Chinese economies. But the sums of finance involved are not sufficient by themselves to overcome the deep-seated problems creating slow US growth which have been analysed. To give the scales of finance involved it may be recalled that the extra foreign borrowing undertaken under Reagan would be equivalent to over $700 billion at today’s prices.
• A confusion (whether deliberate or objective) is sometimes expressed in parts of the Chinese media between purely short term growth fluctuations and basic trends. For example, it was noted above that US growth has increased from an extremely depressed 1.3% in the 2^nd quarter of 2016, and for statistical reasons it is likely that in 2017 US growth will increase from the low 1.6% annual level of 2016. Any such short-term acceleration in growth does not alter the fundamental trend of the US economy – only if such more rapid growth were continued for a significant period would it represent a basic acceleration in the rate of US growth.
• It is sometimes claimed that the US will experience rapid economic growth due to a ‘wave of innovation’. However, as has already been shown factually, the US has not been experiencing ‘rapid growth’ but very low growth. Furthermore, while there is ample evidence that innovation embodied in increasing fixed investment leads to faster growth, there is no evidence from the US that innovation which is not accompanied by increased fixed investment leads to rapid growth.
• It is sometimes claimed tax reductions proposed by Trump will lead to rapid growth. This is based both on errors in economic theory and wrong factual information regarding what occurred under Reagan – whose administration did cut taxes. First, tax cuts if unaccompanied by equivalent state spending reductions, increase the budget deficit and therefore reduce the overall domestic US savings level – which, because of the close correlation of net savings and growth will reduce GDP growth. Second, Reagan used massive foreign borrowing to sustain US growth as was shown in Figure 9. Certainly, if Trump could achieve huge foreign borrowing by the US growth would be expected to increase during the period of such borrowing. But as already analysed only two countries have the resources necessary for this, Germany and China, and for different reasons neither is likely to supply the huge borrowing required.

Claims appearing in sections of the media that there will be a basic acceleration of the US economy from its present state of low growth are therefore false – as such analyses have been previously tested and rejected by events during the very prolonged slowdown of the US economy analysed at the beginning of this article and was shown in Figure 2.

Practical Conclusion

The practical conclusions of this situation for China’s policy are clear and provide a clear backdrop showing the coherence of the initiatives taken by China under Xi Jinping.

The latest US data confirms there is no break in the trend of long term slow growth in the US. Numerous geopolitical conclusions affecting China follow from this – these are too numerous to analyse all here. However, some are fundamental:

• The fact that China has to base its economic perspective on the continuation of slow US growth for a prolonged period means that while initiatives are rightly being taken for ‘win-win’ outcomes between the two countries a very rapid increase of China’s exports to the US cannot be relied on. Furthermore, as the US is not merely the world’s largest economy, but it particularly influences trends in the other advanced Western economies. overall growth in the advanced economies will remain relative slow by historical standards.
• As this extremely slow growth is confined to advanced economies, and not to developing economies, it means that economic role of developing economies, and in particular the OBOR region, will be even more decisive for China. IMF projections are that total GDP growth in the developing economies from 2007-2021 will be 98% compared to only 21% in the advanced economies Measured at current exchange rates in 2016-2021 the OBOR region will account for 46% of world economic growth.
• The unfolding development of geopolitical and political events is significantly affected by the fact that while long term economic growth after 2007 in the Western economies is becoming even slower than after 1929 nevertheless the form is significantly different. The slow average growth during the ‘Great Depression’ after 1929 was produced by an extremely violent recession follow by sharp recovery in the majority of advanced economies. This extreme initial recession unleased rapid political crisis. In September 1931 Japan invaded Manchuria, beginning its military attack on China; in September 1931 Britain abandoned the gold standard, resulting in collapse of the then existing international financial system; in November 1932 Roosevelt was elected US President, leading to the ‘New Deal’, in January 1933 Hitler became German Chancellor. In contrast, after 2007 the initial recession was far less severe but the long term slow growth in the crisis was prolonged. Instead of being extremely rapid the political crisis after 2007 was therefore slow building and cumulative – leading eventually to key turning points such as Brexit and Trump’s election.
• Within the US as very slow growth will last for a prolonged period there will be a not rapid return to US political stability. The sharp turns represented by the election of Trump, the rise in support for Sanders, the continued severe fighting within the US political establishment over Trump and foreign policy will continue. While continuing with its correct policy of seeking ‘win-win’ solutions with the Trump administration China must, however, be prepared for sharp turns in the situation. This is why issues such as military reform, as emphasised by Xi Jinping, are correctly running side by side with economic initiatives such as OBOR and seeking win-win economic relations with the Trump administration.

The character of the international period

Finally, this continuation of very slow US growth confirms one of the two key features defining the present period facing China under Xi Jinping:

• Domestically, China is making the transition first to ‘moderate prosperity’ and then within a decade to a ‘high income’ economy by World Bank classification.
• Internationally China faces a situation of slow growth in the US and advanced economies.

This combination of domestic and international trends constitutes a new period in China’s development and has not faced any previous Chinese leader. This may therefore be understood as a background to the distinct policies launched under the Presidency of Xi Jinping.

*  *  *

The original version of this article originally appeared in Chinese at Sina Finance Opinion Leaders.

Notes

[1] For economic specialists’ differences between the way GDP data is presented in the US and in China are explained here.

Some media reported US GDP growth in 1^st quarter 2017 as 1.2%. This reflects the way the US Bureau of Economic Analysis presents the data – ‘real gross domestic product (GDP) increased at an annual rate of 1.2% in the first quarter of 2017.’ But it is not sufficiently widely understood that US GDP data is presented in a different way to China’s data.

US data in the above form is presented as the percentage growth between one quarter and the next on an annualised basis. That is, the new US data in that form is presented as the growth of 1st quarter 2017 compared to 4th quarter 2016 presented on an annualised basis. Actual US GDP growth between 4th quarter 2016 and 1st quarter 2017 was 0.3% on a seasonally adjusted basis – 1.2% on an annualised basis.

China however emphases presentation of GDP growth year on year growth – China’s GDP growth of 6.9% in 1st quarter 2017 was the change compared to 1st quarter 2016.

What may appear a technical issue has considerable significance due to a serious and known problem in the US data. The US method has the disadvantage that for accurate data the seasonal adjustment between quarters must be correct – different quarters of the year have features which strongly speed or slow growth in that period. But as is widely known among Western analysts the seasonal adjustment in US data for the 1st quarter of the year is inaccurate as it understates growth – the US statistical authorities are aware of this but have not so far succeeded in resolving the problem. To avoid this, it is better to use the system of comparing the 1st quarter of 2017 with the 1st quarter of 2016 – as this automatically avoids the need for seasonal adjustment. On that basis US year on year GDP growth was 2.0% not 1.2%. In order to avoid understating US growth this 2.0% is used in this article.

A second issue is that a market economy inherently displays business cycles. It is therefore necessary to separate purely cyclical trends from medium/long term ones. Such cyclical effects may be removed by using a sufficiently long term moving average that cyclical fluctuations become averaged out and the long term structural growth rate is shown – as is done in this article.

[2] From a theoretical point of view US savings and investment includes inventories as well as fixed investment. However taking a quarterly average since 1947 97% of US gross investment has been fixed investment and only 3% inventory formation, therefore by focusing here only on fixed investment and not dealing with inventories no significant distortion of trends occurs.

[3] To allow capital to flow out of Japan to the US, particularly after the 1987 Wall Street stock price crash Japan’s interest rates were held at a low level, therefore creating huge financial bubbles within Japan’s economy which duly exploded in the 1990s.

Why the 'Belt & Road' region will be the main locomotive of the world economy

The importance of the Belt and Road (B&R) summit for China and participating countries is well known. What is not so widely grasped is that the B&R region is now by far the most powerful locomotive not only of the regional but of the global economy. To be precise:

·        Measured at current exchange rates the IMF projects that in the next five years’ growth in the B&R region measured in absolute dollar terms will be almost twice that in North America and four times that in Europe.  

·        Measured in purchasing power parities (PPP’s) growth in the B&R region will be almost five times that in North America and more than five times that in Europe.

Growth in the B&R region, in summary, will dwarf that in North America and Europe.

This fact that the B&R region has now emerged as the most powerful locomotive of the world economy is due to two simultaneous developments:

·        Rapid growth in the B&R region,

·        Extraordinarily slow growth in the West by historical standards.

The aim of this article is therefore to put more precise orders of magnitude on these trends. The data used is the five-year growth projections of the IMF. It should be made clear that using these figures does not at all mean that they are being taken as a 100% accurate prediction of what will occur. But the IMF data clearly establishes that the economic growth potential of the B&R region is so much greater than that of either North America or Europe that entirely implausible assumptions of future development patterns would have to be made for the far stronger growth of B&R not to be strikingly apparent.

This data therefore clearly establishes that the B&R region will be the main locomotive of the global economy during the next period.

Slow growth in the Western economies

The first feature creating this new situation in the international economy is the quite extraordinarily low growth in the Western economies by historical standards. The statement sometimes made in the Chinese media that the period commencing with the international financial crisis of 2008 is the West’s ‘worst economic crisis since the Great Depression’ is somewhat misleading put in that form as in one crucial way it understates the problem.  The overall slow growth and stagnation in the Western economies is already almost equivalent to that after 1929 while the factual projections for the next five years lead to the conclusion that the cumulative slow growth/stagnation of the Western economies will be worse, although different in form, from that during the following 1929. To  show this Figure 1 illustrates three sets of data:

• Growth trends in the advanced Western economies after 1929.

• The factual trend in the advanced Western economies from 2007-2016;

• The latest IMF predictions for 2016-2021.

The data in Figure 1 of course shows that the onset of the ‘Great Depression’ after 1929 was far more violent than that of the international financial crisis in 2008. After 1929, during only three years, overall GDP of the advanced Western economies plunged by 15.6% compared to only 3.3% after 2007.

But it is not so widely understood that after the initial post-1929 economic collapse recovery during the 1930s was rapid and post-crisis growth was strong – the US being the most important exception. This can be clearly seen in Figure 1 and by examining the situation in 1938, the last year before World War II. By a convenient statistical coincidence, 1938 was nine years after 1929, and 2016, the most recent year for current factual data, was nine years after the last pre-international financial crisis year of 2007. Therefore, in comparing 1929-38 with 2007-16 the same length of time is being analysed.

The strong recovery of most advanced economies following the post-1929 recession is demonstrated by the fact that by 1938 the GDP of most major advanced economic centres was substantially above 1929 levels. To be precise by 1938:

             • Japan’s GDP was 37% above its 1929 level;

             • Germany’s GDP was 31% above its 1929 level;

             • UK GDP was 18% above its 1929 level;

             • Western Europe’s GDP was 13% above its 1929 level;

             • The overall GDP of the advanced economies 7% above its 1929 level.

The US was an exception - US GDP in 1938 was still 5% below its 1929 level.

However, in contrast after the 2008 international financial crisis there was no rapid recovery and strong growth as there was after the post-1929 collapse. By 2016, nine years after the last financial crisis year, the recovery from the crisis in the advanced economies was almost as slow as during the ‘Great Depression’ of the 1930s and by the end of 2017 it will be significantly slower. More precisely due to the slow growth by 2016, total GDP growth in the advanced economies in the nine years after 2007 was only 10.1%. By the end of 2017, on IMF predictions, the growth in the advanced economies  after 2007 will actually be lower than after 1929 – total growth of 12.3% in the 10 years after 2007 compared to 15.1% in the 10 years after 1929. Furthermore IMF data shows that the future growth in the advanced Western economies after the international financial crisis will be far slower than in the same period after the 1929. IMF projections are that by 2021, fourteen years after 2007, total growth in the advanced economies will be less than half that in the 14 years after 1929 – average annual growth of only 1.3% compared to 2.9%, and total growth of 20.6% compared to 49.8%. 

Figure 1

 

Developing economies

To grasp the present pattern of global development, and the background of B&R, it should however be noted that the data given above is specifically for advanced economies. Growth in developing economies is far faster both than in the advanced economies after 2007 and in the advanced economies after 1929.  As shown in Figure 2  on IMF projections total GDP growth in the developing economies from 2007-2021 will be 98% compared to only 21% in the advanced economies. Annual average growth in developing economies in 2007-2021 will be 5.0% - not merely faster than the annual average growth of the advanced economies of 1.3% in the same period but much faster than the average 2.9% in the advanced Western economies in the 14 years after 1929.

The extreme slowing of economic growth in the present period is therefore specifically an issue of the advanced Western economies.

Figure 2

 

The B&R

Turning specifically to the B&R, which as will be seen is the most powerfully growing region among the developing economies, this is of course closely connected with China - which is now one the three great centres of the world economy with the US and the EU.

Comparing these three economic centres it is well known that measured at current exchange rates China’s economy is smaller than either the US or the EU – in 2016 China’s GDP was $11.2 trillion compared to $16.4 trillion for the EU and $18.6 trillion for the US. Measured in PPPs China’s economy is actually larger than the US but to avoid discussion of PPP calculations, and because data on savings is not available in PPPs, in this article all measures are at current exchange rates unless specified otherwise.

However, while China’s GDP is smaller than the US or EU it is not yet sufficiently widely understood that China already enjoys a decisive advantage over these other economic centres in one decisive field -  savings, that is finance for investment. Furthermore, China’s considerable lead in this will get bigger with time. As shown in Figure 3 by 2016 China total annual savings - that is the sum of company saving, household saving and government dissaving – was $5.1 trillion compared to $3.5 trillion for the US and $3.6 trillion for the EU. By 2021 on IMF projections China’s annual finance created for investment will be $6.9 trillion, compared to $4.2 trillion for the EU and $4.0 trillion for the US.

In summary, while China’s GDP is smaller than the US China has already overtaken the US as a financial ‘superpower’. It is this which enables China to take initiatives such as AIIB and international fixed investment and infrastructure initiatives which are crucial in the B&R.

Figure 3

 

B&R as locomotive

Based on these economic fundamentals the comparative growth potentials of the B&R region, North America and Europe may now be analysed. As B&R is a regional initiative  IMF data for North America, including Canada and Mexico, is given - rather than simply that for the US. For Europe the European Union (EU) as a whole is taken. Given this framework then:  

·        Measured at current exchange rates projections from IMF data from 2016-2021 shows that in the next five years the B&R region will account for 46% of world economic growth - compared to 24% for North America and 10% for the European Union - as shown in Figure 4.

Figure 4

 

The situation in 2016

Turning now to the impact of the different growth potentials in the main world economic centres on the structure of the global economy,  as a starting point Figure 5 shows that in 2016 the GDPs of the B&R region and the North American region were approximately equal in size while the EU was slightly smaller than either – B&R being equivalent to 27.5% of World GDP, North America 28.1%, and the EU 21.8%.

Figure 5

 

However, as the average growth rates in countries in the B&R region are much faster than those in either North America or the EU within five years the structure of the world economy will be sharply changed - as is shown clearly by Figure 6 and Figure 7. By 2021 the GDP of the B&R region, calculated from IMF data, will be $29.7 trillion, compared to $21.1 trillion for North America and $18.3 trillion for the EU. In percentage terms the B&R region will be 31.3% of world GDP - compared to 27.3% for North America and 19.2% for the EU.

Figure 6

Figure 7

 

Can another country block B&R?

The fundamental economic data also makes clear why no other individual country can block the success of B&R – specifically India cannot block B&R. This is due to the fact that while B&R is open to numerous countries economic realities make clear which countries are indispensable for B&R’s success.

Four large economies are within the B&R region – in descending order of GDP size China, India, Russia and Indonesia.  Together these make up 79% of the GDP of the B&R region in 2016 and 85% of its projected growth in 2016-2021. However no other country makes up even 5% of the GDP of the B&R region or 2% of its projected growth – therefore no single other country than these four is by itself large enough to ensure the B&R initiative did not succeed.

Of these four large economies Russia and Indonesia are strong supporters of B&R and their presidents will attend the Beijing summit. India is therefore the only large economy in the B&R region which has indicated at the time of writing it will not participate in the Beijing summit.

This reticence is regrettable, and India’s enthusiastic participation in B&R would undoubtedly strengthen B&R. But in 2016 India was only 11% pf the B&R region’s GDP and 15% of its projected growth in 2016-2021. Put in other terms, 89% of the GDP of the B&R region and 85% of its growth potential was outside India. Given this weight India could not block B&R’s development even although its participation would be extremely valuable.

Tasks for the B&R

 These macroeconomic trends naturally do not mean there are no problems for B&R. The advantage of North America and the EU is that their per capita GDPs are much higher than the B&R region, and both NAFTA and the EU have an institutional structure which B&R does not have nor is projected to have at present.  But the much greater growth performance in the B&R region compared to any other, and therefore the vastly greater market expansion of the B&R region than any other, is much stronger than the institutional framework of the relatively stagnant North American and European economic centres.  

It is clear that the B&R region is aided by, and can build on, the existence of a number of partial institutional frameworks within its area. These include the Association of South East Asian Nations (ASEAN), the Shanghai Cooperation Organisation (SCO), the existing Eurasian Economic Union (EAEU – Russia, Belarus, Kazakhstan, Armenia, Kyrgyzstan) and the Asian Infrastructure Investment Bank (AIIB). The wider proposed initiatives include the Regional Comprehensive Economic Partnership (RCEP) promoted by China. The wider concept of a Eurasian Union promoted by President Putin clearly overlaps with the B&R – as President Putin states.

The Beijing summit on 14-15 May will therefore have numerous tasks to work on not only its own projects but building and integrating existing initiatives. But the reshaping of the world economy by the B&Rs much greater growth potential than any other region is clear.

Conclusion

It may be seen from the data above that the differences in growth potential between the B&R and other major economic centres are not small – that is within the margin of error of five year economic forecasting . On IMF data projections:

·        In the next five years, the B&R region will account for 46% of total world growth.

·        The growth of the B&R region in the next five years will be almost twice that of North America, and over four times that of Europe.

·        By 2021 the B&R region will account for a substantially higher share of world GDP than North America or Europe.

No plausible margin of error therefore alters the fundamental fact that in the next five years the B&R region will be by far the most important locomotive of the world economy. In particular, that the growth potential of the B&R region far exceeds that of North America and Europe. This reality  must therefore be the basis of economic strategy in the coming period.

*   *   *

This article originally appeared in Chinese at Sina Finance Opinion Leaders.

 

The economic logic behind Trump's foreign policy - why the key countries are Germany and China

This article was published in Chinese before the recent summit between Chancellor Merkel and President Trump - which strongly confirmed its analysis.

The first steps by Trump as US President confirmed that he will pursue an anti-China policy but also that he will use different tactics to Obama and Clinton. Simultaneously Trump has launched a serious conflict with Germany, supporting countries leaving the EU and demanding European states rapidly increase their military spending – policies rejected by Merkel at the recent Munich Security Conference. What, therefore, is the internal logic uniting such apparently different actions as:

• Trump bringing hard line China forces into the core of his administration;
• New Defence Secretary Mattis’s first foreign trip being to Japan and South Korea to emphasise support for THAAD and US military support for Japan;
• A new US policy by Trump of attempts to weaken or break up the EU, as opposed to supporting it;
• Trump’s criticisms of Germany;
• Trump’s deliberate confrontation with Mexico and fierce criticism of Australia,
• Trump’s announced economic strategy.

There is clarity regarding Trump’s actions towards China - the Tsai phone call, THAAD deployment in South Korea, Trump’s initial attempts in interviews to challenge the ‘One China’ policy and then his necessary acceptance of it in his phone call with Xi Jinping. But some actions by Trump’s are incorrectly seen as unrelated to China, as being counter-productive, or even as ‘bizarre’ – for example virulent criticism of Germany, one of the US’s most important allies, or a telephone shouting match with another close US ally, Australia’s prime minister. But the internal logic of these actions becomes clear when the real economic situation facing Trump is understood. Once the real US economic situation is analysed Trump’s foreign policy steps fall logically into place, and it will be seen that Trump’s actions towards Germany, Australia, Japan etc are indeed related.

To most adequately understand and respond to Trump’s policy, therefore, it is necessary to clearly understand its aims, its internal logic, and the ways it differs from Clinton/Obama. This article, therefore, focuses on the constraints on Trump’s economic policy and the way these determine his administration’s foreign and military strategy. First the real situation of the US economy will be demonstrated and then the possibilities for Trump to improve this analysed. From analysis of these realities the coherence and constraints which dictate Trump’s tactics in his foreign policy can be clearly understood.

The economic situation facing Trump

Self-evidently Trump’s goal is to strengthen the position of the US compared to all other states (‘America First’) and he recognises that improving the position of the US economy is the key to all aspects of this – including sustaining his promised US military build-up. But to understand the possibilities available for Trump to achieve this it is necessary to analyse accurately the situation of the US economy.

Various forces which either simply repeat propaganda without comparing it to facts present a myth that the US is undergoing ‘strong growth’ allegedly driven by ‘dynamic innovation’. This creates disorientation and inability to understand the logic of Trump’s actions. For the exact opposite is the case - it is the difficulties of the US economy which create the internal logic of Trump’s approach.

It was precisely because of the problems in the US economy that Trump was elected. US median wages are lower than in 1999 while simultaneously inequality has risen to the point where the total income of the top 20% of the US population is now greater than the combined income of the bottom 80%. It was deep popular economic discontent created by this situation which led to the candidates of the traditional Republican elite being swept aside in favour of Trump during the Republican primaries and to manual working class votes in previously Democrat voting states supporting him at the presidential election.

The real long term situation of the US economy is therefore demonstrated in Figure 1 which shows US annual average GDP growth, using a 20-year moving average to remove all purely short term fluctuations due to business cycles. This data shows clearly that the most profound trend in the US economy is a half century long economic slowing – the peaks of US growth progressively falling from 4.9% in 1969, to 4.1% in 1978, to 3.5% in 2003, to 2.3% by the latest data for the 4^th quarter of 2016.

Figure 1

 

The immediate situation of the US economy

Turning to the more immediate situation for the US economy, this is shown in Figure 2 which confirms clearly the sharp slowdown in the US economy during 2016.

• US GDP growth fell from 2.6% in 2015 to only 1.6% in 2016 – that is during 2016 the US economy slowed down by almost 40% from its previous growth year’s rate.
• US per capita GDP growth fell from 1.9% in 2015 to only 0.9% in 2016 – US per capita GDP growth therefore declined to under half of its previous year’s growth rate, and fell to less than an annual 1%, which is approaching stagnation.

These trends show clearly that the claim of ‘strong recovery’ of the US economy during 2016 was entirely a myth. In fact, the US economy was slowing sharply compared even to the previous years

Figure 2

 

Comparison to other major economic centres

This data on the slowdown of the US economy is still more striking when compared to the statistics for the other two major world economic centres – China and the EU. What this data shows is that far from the US undergoing ‘strong recovery’, the US was the slowest growing of the major world economic centres in 2016

Final data for 2016 for China and the US is already published. Final data for the EU is not yet available, but it is published up the 3^rd quarter of 2016, showing growth at 1.9%. The October 2016 IMF World Economic Outlook, based on the most up to date statistics, concludes this growth rate will continue until the end of the year. Given the closeness of this data to the end of the year it would be unlikely the final figure would differ greatly from this projection.[Note publication of the final EU data confirmed its 2016 growth rate at 1.9% - JR]

Given these trends GDP growth in 2016 would be:

• China – 6.7%
• EU – 1.9%
• US – 1.6%

Therefore, not merely did the US economic decelerate sharply in 2016 but the US was the slowest growing of the major economic centres.

Figure 3

 

The present US business cycle

Finally, the position of the US economy can be seen particularly clearly by comparing this US business cycle to previous ones.

As an economy is cyclical, for the most accurate analysis it is crucial that equivalent positions in the business cycle are compared. If only chronological measures are used then, for example:

• comparing a position at the peak of a business cycle to one at the bottom will give an exaggerated indication of economic growth,
• comparing the bottom of a business cycle to the top will understate average growth.

The peak of the last US business cycle was in the 4^th quarter of 2007. The latest data for the US is for the 4^th quarter of 2016 – exactly nine years since the peak of the previous US business cycle. Figure 4 therefore compares growth in the nine years between the 4^th quarter of 2007 and the 4^th quarter of 2016 with growth nine years after the peak of US previous business cycles in 1973, 1980, 1990, and 2000. This shows clearly that US growth in this business cycle is weaker than in any of these previous business cycles. Total US GDP growth after nine years during this business cycle is only 12.1%, compared to 14.7% after 2000, 18.9% after 1973, 33.2% after 1990, and 33.3% after 1980.

In summary, the factual situation is that far from Trump inheriting a US economy undergoing ‘strong growth’ due to ‘innovation’ Trump has inherited a US economy growing very weakly compared to its previous economic performance. It is therefore necessary to assess Trump’s possibilities to reverse such slow US growth.

Figure 4

 

Short term trends in the US economy

Confronted with this reality of very slow growth in the US economy Trump has claimed he will accelerate annual US GDP growth – he has announced a target of 4% annual growth. To accurately evaluate the chances of Trump’s success in this, given that the US economy is cyclical, it is necessary to separate short term from medium/long term trends.

In calculating the medium/long term rate of growth of the US, trends are severely affected by any period which includes the Great Recession of 2008-09. Any short-term calculation including the Great Recession will necessarily show a very depressed US growth rate – long term trends will average out such effects. To analyse US growth trends Table 1 therefore shows 5, 7, 10 and 20 year moving averages for annual US GDP growth. The 10-year period, commencing in 2006, diverges strongly from the others as it shows a very low annual US growth rate – due, as noted, to the huge impact of the Great Recession. However, the 20-year moving average, which is a sufficiently long period to average out the impact of the Great Recession, and the 5 and 7-year growth rates all show US GDP growth rates relatively close together in the range of 2.0% - 2.3%. The medium/long term growth rate of the US economy, which should be used for evaluating the effects of Trump’s policies, may reasonably be calculated to be around 2% or slightly above.

Table 1

 

Short term upturn

To evaluate purely short term trends as was noted above in 2016 as a whole US GDP only grew by 1.6%. This is significantly below the average long term growth rate of the US economy. Taking quarterly data, in the year from the 4^th quarter of 2015 to the 4^th quarter of 2016 US GDP growth was 1.9% - an acceleration from the very slow growth in the first half of 2016 but still below the US long term average. Therefore, US economic growth in 2016 was below its long-term average.

Figure 5 therefore shows a comparison to the 4^th quarter of 2016 compared to the 20-year average – other comparisons can easily be calculated from Table 1. It may be seen that by any measure, except the 10-year average, which is severely depressed for reasons already noted, the US economy in 2016 was growing below its trend rate. The conclusion that flows from that is that there should be a short-term acceleration of growth during the early period of the Trump presidency, for the simple statistical reason that in 2016 the US economy was growing significantly below its long-term average and a move of the US economy up towards its long-term average growth rate will therefore create the illusion that the US economy is improving during the early period of Trump’s administration – when it is in reality a predictable statistical effect.

As this would coincide with the initial period of Trump’s presidency this would lead to the claim ‘Trump is improving the US economy’. But this is false, such acceleration would be expected purely for statistical reasons. The key question, however, is whether Trump can raise the long-term growth rate of the US economy?

Figure 5

 

The determinants of US growth

Turning from purely short term trends to assessing the potential for medium and long term US growth the reasons for the US long term slowdown already shown in Figure 1 are easy to analyse. The most fundamental of all features of the US economy is that it is a capitalist economy. This means when there is a high rate of capital accumulation the US economy grows rapidly, when there is a low rate of capital accumulation the US grows slowly – this basic theoretical analysis is fully confirmed by the data which follows.

Elsewhere, in ‘The Relation of Innovation and Fixed Investment in the US ICT Revolution’ [in Chinese] modern growth accounting methods were used to show factually that capital investment/accumulation is a decisive factor in US economic growth. For the most precise and accurate methods of analysing economic growth the data there can be consulted. However, the same fundamental result can easily be demonstrated using the simpler and familiar categories of US national accounts data so these are used in this analysis. In terms of economic statistics two measures could be taken as showing additions to capital in the US:

• The first is US net savings – new capital added by the US itself,
• The second is net investment – US savings plus investment in the US financed by saving from abroad.

Both will be analysed in turn. They show similar trends, as would be anticipated from the fact that the largest source of finance for US investment is US domestic savings, but they show some differences, due to US use of foreign savings for financing investment. It will be seen these differences have significant consequences for Trump’s foreign and economic policies.

Long term trends

A comprehensive study of the long-term development of the US economy was given in The Great Chess Game? [in Chinese] which should be consulted for further detail. A brief summary however clearly demonstrates the main underlying trends in the US economy.

Analysing first capital accumulation by the US itself, in terms of economic statistics net capital accumulation by the US is equal to US net savings. Figure 6 therefore shows the long-term trend in the US savings rate/capital accumulation rate since 1929. The curve of long term development of the US economy is clear:

• During the crisis creating the beginning of the Great Depression in 1929-33 US capital accumulation was negative – that is the US economy was creating no capital. This necessarily produced a deep crisis of the US economy. After this the rate of US savings/capital creation rose, with a powerful acceleration during World War II, to reach a long-term peak as a percentage of the economy in 1965.
• After 1965 US net savings/capital creation steadily fell as a percentage of Gross National Income until it once again became negative during the ‘Great Recession’ in 2008-2009. This declining trend of US capital creation explains the long-term growth slowdown shown in Figure 1.

Figure 6

 

US use of foreign capital

Turning to net fixed investment in the US, that is fixed investment financed not only be US but by foreign capital/savings, this is shown in Figure 7. This shows the same fundamental curve as for net savings by the US itself – rising from a low point in 1929-33, reaching a post-World War II peak (in this case in 1966), before declining again towards the Great Recession.

However, there is one significant difference between net savings by the US, and US net fixed investment – the latter including fixed investment financed by use of foreign savings/capital. Net fixed investment in the US did not actually become negative during the Great Recession as the US was able to use savings from abroad to finance US net investment. This use of foreign savings to finance investment meant that US net fixed investment remained higher than US net savings.

In short, during the Great Recession, the US was able to use foreign savings/capital creation to cushion and lessen the negative effect of the fall of the US’s own savings. This use of foreign savings/foreign capital creation helps determine the foreign policy choices for Trump – as will be analysed.

Figure 7

 

Shorter term trends on the US supply side

The above trends allow the basic economic constraints on Trump to be clearly analysed. The best fundamental approach to analysing the US economy, as with China’s, is via the structural features of its supply side - which brings out clearly the choices facing Trump and the interrelation of his economic policy with foreign and military strategy.

In the purely short term, as in all countries, numerous influences affect US economic growth– overall demand, trade, investment, consumption etc. This is clearly confirmed in Table 2 which shows the year by year correlation between US GDP real (i.e. inflation adjusted) growth and the size of components of the US economy measured as a percentage of GDP. This shows:

• The only such component of US GDP for which there is a strong correlation with real GDP growth in a single year (0.60) is the build-up or run down of inventories – which is logical as inventories are highly sensitive to economic accelerations and declarations.
• For other such components of US GDP there are correlations over a single year with real US GDP growth but none of these correlations are high - for example a positive correlation of the percentage of net fixed investment in GDP with GDP growth (0.25) and a negative correlation of the percentage of total consumption in GDP with GDP growth (-0.19).

Therefore, over the very short term, a single year, with the exception of inventory build-up/run down, there is no single major component of US GDP whose change of weight in the economy has a high correlation with US GDP growth.

These low correlations merely express in statistical form that in the purely short-term US economic growth cannot be predicted from changes as a percentage of US GDP of any single variable (except inventories).

Table 2

 

Long term determinants of US economic growth

However, while short-term correlations between the structure of the US economy, the size of components of US GDP, and US GDP growth are weak a number of the medium/long term correlations are extremely high. This is illustrated in Table 3, which shows moving averages of from 1-10 years for the percentages of components of US GDP which have a positive correlation with real GDP growth. This shows clearly:

• There is essentially no correlation between the percentage of US government consumption in GDP and US GDP growth – the highest correlation is only 0.07. This data is important for reasons other than those forming the subject of this article, as it shows that for the US it is a myth that lowering government consumption as a percentage of US GDP leads to faster growth, and that raising government consumption as a percentage of GDP leads to slower economic growth – there is no evidence for this.
• There is a positive correlation between US gross fixed investment (fixed investment without deducting capital depreciation) and GDP growth but it is not high – a maximum 0.36.
• The very strong positive correlations with US GDP growth are with total gross savings (0.61), total net savings (0.62) and net fixed investment (0.72). For clarity, it should be noted total gross savings are not only household savings but also include company savings and government savings; net savings are total savings minus capital depreciation, and net fixed investment is gross fixed investment minus capital depreciation.

Such a difference between short and long term correlations regarding US economic growth is easily explained. It indicates that some structural components of US GDP are very powerful over the medium/long term but are simply overlaid in the short term by purely shorter term factors.

The decisive power of some of the key components of US GDP is therefore clear from both medium and long term trends. Already over a five-year period, which might be taken as the medium term, a correlation of the percentage of net saving and net fixed investment with US GDP growth is over 0.50. Over the longer term, the correlation of 0.72 over an eight-year period between US net fixed investment and US GDP growth is extremely high.

As the highest positive correlation is between net fixed investment, that is the annual net addition to the US capital stock and US GDP growth, it is this which will be analysed in detail.

Table 3

 

The correlation of US net fixed investment and GDP growth

As is well known, correlation is not the same as causality. The high correlation between medium/long term movements in the percentage of net fixed investment in US GDP and US GDP growth does not by itself prove that a high percentage of net fixed investment in GDP causes higher GDP, that high GDP growth causes a high percentage of net fixed investment in GDP, or that some other factor(s) causes both. From the point of view of Marxist economic theory, as is used in China, it would be argued that the high percentage of net fixed investment in GDP causes higher economic growth, but for present purposes it is unnecessary to establish this. But this extremely high correlation (0.72) between US net fixed investment and GDP growth simply means that without achieving a higher level of net fixed investment Trump cannot achieve higher GDP growth. This extremely high correlation is shown in Figure 8.

Figure 8

 

Determinants of US growth

These facts regarding the long-term determinants of US economic growth necessarily decisively affect Trump’s ability to raise the long-term US growth rate. They demonstrate it is a myth that this can be achieved merely by innovation, tax cuts etc. The very close correlation between US net fixed capital formation and US GDP growth dictates that Trump can only realistically succeed in substantially speeding up the US economy’s medium/long term growth if US net fixed investment is raised. Put in the simplest terms, Trump can only accelerate US medium/long growth if the level of US capital accumulation can be raised – as is entirely logical given the capitalist nature of the US economy.

However, fixed investment necessarily requires exactly equivalent savings to finance it. Therefore, the question of whether Trump can raise the US long term growth rate in turn depends upon whether his administration can find sources of finance (savings) to raise US net investment.

To finance such an increase in US net fixed investment two potential sources exist – US domestic savings and foreign savings/capital. To raise net fixed investment in the US Trump’s policies must therefore either or both:

• Raise the US savings level,
• Increase US use of foreign savings

These two policies necessarily have very different political effects both within the US and internationally. In particular, as will be seen, they determine the basic features of Trump’s foreign policy.

Possibilities to raise US savings

Analysing first the US domestic economy, as this is divided into only consumption and savings, raising the percentage of the US economy devoted to savings necessarily means reducing the percentage of consumption in US GDP. Considered abstractly there are certainly ways Trump could achieve this without squeezing the percentage of US working class consumption in GDP – i.e. without squeezing the proportion of the US economy going to those who elected him. For example:

• Military expenditure from an economic viewpoint is consumption. Reducing military expenditure as a percentage of US GDP would therefore raise the US savings level without reducing the percentage of US GDP used for the living standards of the majority of the US population.
• Not all consumption is by the average population. Reducing consumption on luxury items would cut the consumption of the rich but would raise the US savings level without reducing the percentage of the US economy devoted to the consumption of the great majority of the US population.

But such economic methods go against Trump’s political priorities. Trump has stated his intention to increase military expenditure while a tax cut primarily for the rich is his key budget priority. Increased military expenditure, tax cuts on high incomes, and a possible government infrastructure spending programme will increase the US budget deficit – cutting government saving and, other things remaining equal, therefore reducing the US savings level. Given such commitments by Trump the only practical way he could achieve an increase in the US savings level would be to lower the proportion of the US economy allocated to consumption by the mass of the population. That is, given his other policies, the only way Trump could raise the US savings level would be to lower the proportion of the US economy used for the consumption of those who elected him – the consequences of which would be extremely unpopular.

As Trump only became President due to the non-democratic character of the US electoral system, with Clinton defeating him by almost three million in the popular vote, a significant part of the US political establishment is against him, and as his opinion poll satisfaction ratings have fallen faster than any previous US president, launching a strong economic attack on his own electoral base would be a risky policy for Trump.

Therefore, once Trump’s political goals are taken into consideration, it is highly improbable that the US savings level will rise – on the contrary it is likely to fall. This is certainly the market judgement regarding increased government borrowing – the yield on US 10 Year Treasury bonds rose from 1.83% on the day before Trump’s election to 2.35% on 9 February.

Use of foreign savings

If the level of savings by the US itself is not raised this only leaves the option of the US financing investment from foreign savings. Indeed, such a shift to greater reliance on borrowing foreign capital was a great historical change in the international position of the US inaugurated by Reagan. This relates to the difference of policies between Trump on the one hand and Clinton/Obama on the other. Clinton/Obama considered that it was necessary to make concessions to allies in order to form a broad ‘anti-China alliance’ – for example in the TPP and in Obama’s close political friendship with Merkel. Trump, as will be seen, in contrast considers that other countries must more directly subordinate their economic interests to the US, so that the US can strengthen itself for confrontation with China. US reliance on foreign borrowing for financing its investment, however, necessarily means that US economic policy becomes more tightly connected its foreign policy.

Analysing these trends historically prior to 1980, as Figure 9 shows, the US was normally a net lender of capital abroad – i.e. a net supplier of capital to other countries. This meant the US stabilised the international economy - both generally and more specifically in that the US could loan/grant capital to other countries if required to alleviate their economic/political situation. This was a key element of US foreign policy during the 1950-70s. US foreign policy in that period was able to use the powerful combination of not only the ‘stick’ of military threats but also the ‘carrot’ of large scale economic aid.

But after 1980, as Figure 9 shows, the US became a net international borrower of capital - using other countries capital to finance its own investment. Such borrowing reached a peak of almost 6% of US GDP in 2006 on the eve of the international financial crisis. This meant that the US itself was using other countries capital instead of them using it for their own development. In foreign policy terms, the US overall no longer had the ‘carrot’ of large scale aid to the rest of the world but only the ‘stick’ of military force. US economic policy became a net destabilising factor internationally – this overall position naturally not excluding US support to certain privileged states (e.g. Israel, Egypt, Ukraine).

Reagan, who launched this turn to financing US investment by foreign capital, did not stop the slowing of the US economy - as was clear from Figure 1. But Reagan was effective in ensuring other countries financed US. In particular Japan provided the main international source of funds for the US throughout the Reagan period - as analysed below. The consequences of this huge extraction of funds from Japan by the US was one of the chief reasons for the two-decade long economic stagnation of Japan after the 1980s.

Figure 9

 

Financing of US investment from abroad

Turning to a more detailed examination of this US turn to financing its investment by foreign capital this is shown in Figure 10, which gives - data for the financing of US net capital creation, i.e. US investment not financed by US depreciation allowances on existing capital. This shows that from Reagan onwards the US became increasingly dependent on the use of foreign capital/savings for financing net investment. Indeed from 2002 to 2012, astonishingly, more US net capital formation was financed from abroad than was financed by the US own savings! After 2012 US net savings regained a positive level but:

• The level of net US savings by 2015, the latest available full year data, remained low by historical standards - 3.3% of Gross National Income. The data for the first three quarters of 2016, the most recently available, shows this declining to an average of 2.8%.
• A significant part of the improvement of US net saving was due to the reduction of military expenditure under Obama – US military expenditure fell from 4.7% of GDP in 2007 to 3.9% of GDP in 2016.

In summary, US net saving remains low while simultaneously Trump’s proposed economic policies are likely to reduce US savings. Given Trump’s policies, therefore, there is little scope to raise US net savings levels. Therefore, any moves by Trump to accelerate US GDP growth, which depends on raising fixed investment, require greater use of foreign savings. This in turn underlies Trump’s foreign policy choices.

Figure 10

 

Which countries can finance US investment

The real situation of the US economy therefore immediately poses the question of which countries could potentially finance Trump’s projected accelerated US growth? The number of countries able to do this is extremely small given the huge size of US foreign borrowing.

The IMF estimates, in October 2016’s World Economic Outlook, that the US balance of payments deficit in 2016 would be $469 billion – the current account balance of payments of any country is statistically equal to the foreign inflow of capital with the sign reversed. To show which countries could potentially finance such a scale of borrowing as by the US Figure 11 therefore shows the US balance of payment deficit together with the five countries/regions with the largest dollar balance of payments surpluses – these are, in descending order, Germany, China, Japan, South Korea, and Taiwan Province of China. The combined Middle East oil exporters are also shown as in the past these played a major role in financing the US.

Due to the size of the US foreign borrowing other countries have surpluses which are too small to play a decisive role in financing this and therefore analysis will concentrate on these major surplus countries. Once these are analysed the internal logic of Trump’s foreign policy positions falls clearly into place.

Figure 11

 

The international economic situation facing Trump

In carrying out a policy dependent on foreign borrowing Trump faces a situation much more complex than US presidents from Reagan to Obama due to the cumulative changes in the international economy brought about by the 2008 international financial crisis.

First, to demonstrate the simple situation for foreign borrowing faced by US presidents from Reagan to George W Bush, Figure 12 and Table 4 show the surpluses available from countries for financing of the US balance of payments deficit - and therefore for US foreign borrowing. For each country/region its cumulative balance of payments surplus/deficit during a presidency is shown in absolute terms in Table 4 and as percentage of the US balance of payments deficit in Table 4 and Figure 12. Thus, for example, during Reagan’s presidency the total US balance of payments deficit with all countries was $681 billion while Japan’s balance of payments with all countries was $366 billion – under Reagan Japan’s balance of payment surplus was equivalent to 54% of the US balance of payments deficit.

This data shows clearly that from Reagan to Clinton Japan was the decisive country for financing US international borrowing. Japan’s balance of payment’s surplus was equivalent to 54% of the US balance of payments deficit under Reagan, 127% under George H.W. Bush, and 60% under Clinton. Prior to George W Bush, therefore, Japan could be the essential international source of US finance - provided Japan followed economic policies satisfactory to the US merely adding resources from a few smaller other countries to Japan’s finance could satisfy US borrowing needs.

Figure 12

 

Table 4

 

Weakening of Japan’s economy

But while this situation of financing the US deficit from Reagan to Clinton was satisfactory for the US it was disastrous for Japan. In particular, after the 1987 Wall Street stock market crash the US demanded Japan follow ultra-low interest policies to allow finance to flow out of Japan into the US, thereby allowing the US to avoid the negative consequences of the stock market crash. The result within Japan of such ultra-low interest rates was the late 1980s Japan ‘bubble economy’ and the ensuing disastrous Japan financial crash beginning in 1990s. Japan’s economy has still not recovered over a quarter of a century later from this financial catastrophe, passing into more than two decades of near economic stagnation.

The huge transfer of resources from Japan to the US under Reagan/George Bush/Clinton therefore financed the US economy but devastated Japan’s. However, as Japan is a semi-colony of the US, Japan was simply forced to follow policies which damaged its own economy but aided the US.

However, the cumulative effect of the huge economic blows dealt to Japan was that by the beginning of the 21^st century Japan alone became too weak to finance a large part of the US deficit. During George W Bush’s presidency, 2001-2008, the percentage of the US balance of payments deficit that could be financed by Japan’s surplus fell to only 24% - too little to finance US needs. However fortunately for the US, prior to the international financial crisis, weakening of Japan’s ability to meet US financing needs did not lead to severe problems for the US as George W Bush found two additional international sources of finance. These were:

• Middle East oil exporters, whose balance of payment surplus was equivalent to 27% of the US balance of payments deficit due to the high oil price,
• China – whose balance of payment surplus was equivalent to 24% of the US balance of payments deficit.

The ability of the US to tap these two new sources of finance, however, necessarily entailed foreign policy choices. The easy one of these for the US was with the Middle Eastern oil exporters. Many of these (Saudi Arabia, Kuwait, UAE etc) are essentially in the same position as Japan in being entirely subservient to the US and can therefore, if necessary, be instructed/pressured to finance US deficits.

China, however, is not in that situation – it is not a semi-colony of the US or subservient to it. But George W Bush, throughout most of his presidency, maintained reasonable foreign policy relations with China – not seeking to create great tensions. This created a mutually beneficial situation in which China was content to de facto aid financing the US balance of payment deficit in return for no major trade or political tensions existing with the US.

George W Bush’s presidency, by balancing three major sources of foreign financing for the US – Japan, the Middle East oil exporters, and China – therefore did not prior face great problems in meeting US foreign borrowing needs prior to the international financial crisis.

Trends after the international financial crisis

The consequences of the 2008 international financial crisis, however, cumulatively radically changed the previous relatively easy situation regarding potential sources of US international borrowing. This is shown in Figure 13 - in this figure the percentages at the end of the graph lines are for the country/region’s balance of payments surplus/deficit as a percentage of the US’s 2016 balance of payments deficit. The data is calculated from the IMF’s October 2016 World Economic Outlook.

Figure 13

 

As may be seen, Japan’s balance of payments surplus remains too small to play the same decisive role in financing US deficits as under Reagan/George Bush/Clinton – Japan’s surplus is only 38% of the US deficit. But the crucial new factor confronting Trump is the collapse in the surplus of the Middle East oil exporters due to the fall in the oil price.

As recently as 2013 the Middle East oil exporters balance of payments surplus was equivalent to 94% of the US balance of payments deficit. Therefore, Middle East Oil exporters by themselves could virtually finance US foreign borrowing needs. Two sources of finance wholly subordinate to the US, Japan and the Middle East, could potentially meet all US foreign borrowing needs.

But the oil price fall, produced by the cumulative slowdown in the global economy after the international financial crisis, devastated the international position of Middle East oil exporters. By 2016 the Middle East Oil exporters had moved from surplus into a large collective balance of payment deficit of $142 billion. Only a major increase in the oil price, due either to a strong upturn of the world economy or increased fossil fuel use, could restore the Middle East oil exporters balance of payments surpluses and therefore their ability to finance the US. Certainly, an increase in the oil price would aid the US fracking industry, and it is a deliberate policy of Trump to seek to increase the use of fossil fuels whatever the consequences for global climate change, but no such large increase in the oil price has yet occurred. Therefore, Middle East oil exporters are currently in no position to finance the US balance of payment deficit.

Germany and China

The result of all these international changes is that only two countries, Germany and China, now have very large balance of payments surpluses. On the latest IMF data in 2016:

• Germany had a balance of payments surplus of $301 billion, equivalent to 64% of the US $469 billion deficit.
• China had a balance of payments surplus of $271bn, equivalent to 58% of the US deficit

But neither China nor Germany is anything like as easy for the US to force to finance its requirements as are Japan or the Middle East oil exporters.

• Germany is military dependent on the US, and seeks good relations with it, as vividly shown in close Obama-Merkel ties. But Germany is the centre of the EU whose total economy is larger than the US. Germany, therefore, has considerably greater leverage for negotiation with the US than does Japan or Middle East oil exporters.
• China is not at all dependent on the US in the same way as Japan/Middle Eastern oil exporters. China certainly prefers friendly/stable relations with the US, and would be prepared to make sensible economic compromises in that framework. But China is not in any sense a US semi-colony. China can be negotiated with, but China cannot be ordered around, and has clear red lines on issues such as territorial integrity, the South China Sea etc.

In summary, both countries with very large scale balance of payments surpluses, Germany and China, to different degrees, are much harder for the US to extract resources from than Japan or the Middle Eastern oil exporters.

Outside of these, two areas exist where modest US gains for international financing can be made. South Korea and Taiwan Province of China are both now accumulating medium sized balance of payments surpluses – in 2016 South Korea’s was $102 billion and Taiwan Province of China’s was $78 billion. Neither South Korea nor the leadership of Taiwan Province can afford to disobey pressure from the US and therefore they can be forced to pay more to the US. Indeed, Trump’s rhetoric during his election campaign, denouncing US ‘allies’ for failing to pay sufficient for US military protection, was clearly aimed at extracting larger resources from Japan, South Korea and the leadership of Taiwan Province of China.

But useful as extra resources from South Korea and Taiwan Province would be for the US, even added to the resources from Japan these are insufficient for US financing requirements, The only countries with really big financial resources are Germany and China, and it is therefore relations with Germany and China which forms the economic core of the foreign policy choices facing Trump.

Germany

Analysing first Germany, Germany’s extremely large balance of payment surplus arise from its historically powerful economy, which continued during the post-World War II period, but this was reinforced after 1990 by two extremely powerful interrelated factors:

• In 1990 Germany reunified, significantly increasing the size of its economy,
• In 1992, largely in response to Germany reunification, the Treaty of Maastricht established the Euro.

In turn, the Euro produced two powerful competitive advantages for Germany:

• The Euro prevented countries within the Eurozone (France, Italy, Spain etc) from carrying out competitive devaluations against Germany.
• As other Eurozone countries were less internationally competitive than Germany, the Euro’s exchange rate was lower than would have been the old German Deutsche Mark – thereby aiding Germany’s competitiveness outside the Eurozone.

The result was that while German reunification created certain short term economic difficulties overall it greatly strengthened Germany’s economic position including in comparison to the US. This is demonstrated clearly in Figure 14 which shows Germany’s balance of payments surplus as a percentage of the US balance of payments deficit. As already noted by 2016 Germany’s balance of payments surplus reached $301 billion, or equivalent to 64% of the US deficit.

Figure 14

 

This relation with Germany is therefore the first key international economic/foreign policy issue for Trump. To serve the interests of Trump’s economic policies Germany must either, or both:

• be persuaded voluntarily to pursue an economic policy which more aids the US, or,
• be weakened so as to allow the US to become stronger relative to Germany so that the US can extract greater resources from Germany or other countries in the EU.

Most effective for the US in pursuing such a course would undoubtedly be a ‘carrot and stick’ approach to try to get Germany to change economic course is a way more favourable to the US. But, as already analysed, the US now has such large needs for financing from abroad that it has few significant economic carrots to offer Germany. Therefore, only the ‘stick’ is available – to attempt to intimidate Germany to change economic course and adopt policies which would make it weaker and the US stronger. This stick is precisely the threat to weaken Germany by encouraging other countries to leave the EU and/or Eurozone. This is why Trump has reversed the US’s historic policy of support for the EU and instead is attempt to weaken or disintegrate it. This explains the strong public attacks made on Germany by Trump and leading members of his administration.

A few other US allies fall in the same category as Germany, i.e. countries for which carrots are not available so the stick must be used. Australia, for example, does not have remotely the same financial resources as Germany but even a few billions squeezed out of it over a period of time could be useful for the US – therefore the Australian prime minister is insulted to make sure that he understands his subordinate place and he must be prepared to give greater resources to the US. Trump’s telephone rants against the Australian prime minister were not ‘irrational’ or ‘bizarre’ – they were part of a policy of attempting to intimidate ‘allies’ to transfer greater resources to the US.

However, among US allies it is above all Germany which has large economic resources but which is not fully under US economic control, unlike Japan or the Middle Eastern states. Therefore, Trump must seek to intimidate Germany. Equally for Germany maintenance of the Eurozone & EU against Trump’s attacks has become a decisive foreign policy and economic issue.

The political danger for the US in this clash is that opposition to Trump among Europe’s population will sharply increase – as well as in smaller countries such as Australia. Indeed, such a process is clearly already occurring.

China

In policy to China, Trump bringing into the core of his administration some of the hardest line anti-China US forces, symbolised by National Trade Council director Peter Navarro, author of Death by China, leaves no doubt as to the Trump administration’s hostility to China. This also easily explains such actions as the phone call with Tsai, the rapid commitment to deployment of THAAD, Trump’s initial post-election threats to overturn the One China policy etc.

But Trump simultaneously faces a dilemma. Australia’s prime minister can be insulted, South Korea can be ordered around militarily, Japan is a semi-colony of the US etc. But Germany and China are two of the world’s strongest economies. While Germany relies on the US militarily, giving Trump leverage, Germany’s position within the very large EU/Eurozone area means Germany cannot be seriously economically intimidated by the US while China cannot be ordered around by the US.

It would, therefore, be a considerable risk for the US to launch simultaneously an economic/political struggle against both Germany and China - two of the world’s most powerful countries. As Trump regards China as a more powerful rival to the US than Germany, a less risky strategy would be to delay a full-scale confrontation with China until after (hopefully) Germany had been forced into line with US demands. Such a success by Trump would certainly mean an economic weakening of Germany, and would therefore be expected to meet resistance in that country, but in the 1990s Japan literally wrecked its own economy to meet US demands. Perhaps Germany can also therefore be intimidated into carrying out policies which are against its own interests but in the interests of the US?

Therefore, whether Trump should proceed immediately to confront China, or whether his administration should adopt a more delaying tactic to China until it has (hopefully) intimidated Germany into submission is therefore a key tactical issue for Trump and undoubtedly explains some of the contradictory signals coming from his administration. The decision to finally declare support for the One China policy in Trump’s phone call with Xi Jinping, therefore, certainly reflects China’s own strength, and its refusal to compromise on this issue, but also involves calculations by the Trump administration that a simultaneous confrontation with Germany and China may be too risky.

This international situation therefore undoubtedly has consequences for China. China has strong ties with South East Asia. China has built very good relations with Africa. China is strengthening relations with Latin America. The One Belt, One Road (OBOR) initiative can further strengthen China’s relations with Central Asia, Russia, and countries such as Iran. But Trump’s new attack on Germany means that Europe, particularly Germany, has now become a key area of direct concern for China.

Germany will attempt to defend its own economic interests for its own sake not China’s, but nevertheless Germany’s defence of its own interests, and of the EU/Eurozone against Trump’s attacks, is directly in China’s interests.

Conclusion

To summarise, this article shows that actions by Trump, both those directly related to China and those which are sometimes portrayed as ‘bizarre’, such as offensive behaviour to US allies, are connected once the real economic choices confronting Trump are understood. The chief parameters are:

• It is a myth that the US economy is undergoing rapid innovation driven growth. The US economy has been slowing for over half a century and in 2016 its economic growth was even lower than other major economic centres. While US growth in 2016 was so slow it is likely that in 2017 there will be some acceleration purely for statistical reasons, this by itself is purely short term and would not represent any long term strengthening of US growth. Indeed, the reality is it was popular discontent created by slow US growth which explains why Trump was elected.
• While various measures could be taken which would increase US growth in purely the short term (increase in overall demand, increase in consumption etc) to accelerate US growth over the medium/long term Trump would have to increase the level of US net investment. Without such an increase in the level of capital accumulation claims by Trump he will accelerate the US rate of growth are merely ‘hot air’.
• Trump’s policies, such as increased military expenditure, tax cuts for the rich, combined with the political risks to his support that would be involved if he attempted to cut the share of working class consumption in US GDP, means that it is unlikely the US savings rate will rise. Therefore, an increase in the investment level in the US could not be financed from US resources and would have to be financed from abroad.
• Unlike US Presidents from Reagan to Obama, who could fundamentally finance the needs of US investment from countries entirely subservient to the US (Japan, Middle East oil exporters) Trump can only extract moderate resources from countries similarly subservient to the US (Japan, South Korea, Taiwan Province of China) while the Middle East oil exporters are no long able to provide major resources to fund the US. Smaller US allies, such as Australia, can be intimidated to provide extra resources for the US but their economies are too small to supply resources to the US on the scale it requires. The only two economies with sufficiently large resources to meet US international financing needs are Germany and China.
• As the US has no economic ‘carrots’ to offer Germany therefore the US must use ‘sticks’ in order to attempt to intimidate Germany to pursue policies more favourable to the US even at the expense of Germany weakening its own economy. This ‘stick’ is the attempt to break up the Eurozone/EU.
• The presence of hardened anti-China forces in the core of the Trump administration makes clear its anti-China orientation. However, it would be a risky policy for Trump to attempt simultaneously to have a severe confrontation with both Germany and China. Therefore, the Trump administration has to balance those who favour an immediate confrontation with China with those who believe the US must first to force Germany into line before confronting China. The result is some hesitations and confusions in Trump policy. But for the present the latter group appears dominant – as signalled in Trump’s announcement of support for One China. However, this does not mean that the anti-China wishes of the Trump administration have been ended, merely that it believes it must first secure other goals before moving to full scale confrontation with China – notably Germany must be forced into giving greater support to the US even if this weakens Germany’s own economic position.
• This international situation means for China that in addition to its existing good relations with South East Asia, Africa, Latin America, and Russia and Central Asia and the Middle East in OBOR, China’s relations with Europe, in particular Germany, will acquire a greater significance. While Germany will undertake defence of its economy, and therefore of the EU/Eurozone, for its own interests nevertheless these interests objectively coincide with those of China.

As always therefore policy must be based on reality not misunderstandings. Trump is not ‘bizarre’ or ‘irrational’ – no one who is would achieve such a powerful position as US President. His actions only appear ‘irrational’ if the real economic situation facing the US, and the way this determines US foreign policy, is not understood. Once the real situation of the US is analysed the integration of Trump’s foreign policy with his economic goals is entirely clear.

It follows that an accurate understanding of Trump, and the policy to take to him, must break with myths regarding the US and instead ‘seek truth from facts.’

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This article was originally published in Chinese on 22 February 2017 at Guancha.cn.

What China achieving 'moderate prosperity' means for China and the world

China's recently concluded "two sessions," the National People's Congress and the Chinese People's Political Consultative Conference, reaffirmed China's strategic medium term goal to create a "moderately prosperous society in all respects" by 2020. But "moderately prosperous" is a specifically Chinese term. To give a clearer idea internationally of what achieving this would mean, it is enlightening to give a global comparison for China's goal of "moderate prosperity."

The result is extremely striking. If China successfully attains "moderate prosperity" by 2020, then at current exchange rates:

• Only 19 percent of the world's population will be in countries with a higher per capita GDP than China,
• 62 percent of the world's population will be in countries with a lower per capita GDP than China.

China will have overtaken almost every developing country. Its level of economic development will have become higher than several countries in Eastern Europe. A country's level of economic development, its per capita GDP, is an overwhelming determinant of improvement in overall living and social standards. Internationally almost three quarters of life expectancy, the single most sensitive all round indicator of human conditions, is explained by per capita GDP. The difference in life expectancy between a low-income economy and a high income one by international standards is twenty years - 61 compared to 81.

Pre-1978

It is necessary to note that in 1949, when the People's Republic of China was created, China was almost the world's poorest country - in 1950 only 10 countries out of 141 for which data can be calculated had lower per capita GDPs. In 1949 China's life expectancy was 35 - only 73 percent of the world average.

From 1949 to 1978 China achieved a "social miracle" without precedent in world history. From 1949 until Mao Zedong's death in 1976, China's life expectancy rose by 29 years - from 35 to 64, increasing by more than one year for each chronological year, or from 73 percent of the world average to 105 percent. There has never been such a sustained rapid increase in life expectancy in any other major country in human history.

But if in 1949-78 China's social achievements were historically unprecedented, its economic growth was only approximately in line with the world average.

Trends after 1978

After the 1978 "reform and opening up," as is well known, China's economic growth became the world's highest. Taking World Bank data:

• Between 1978-2015 China's annual average growth rate was 9.6 percent compared to a world average of 2.9 percent - China's growth rate was more than three times the world average.
• As China's population growth was relatively slow, China's global growth lead in per capita GDP was even greater. In 1978-2015 China's annual average per capita GDP growth was 8.6 percent compared to a world average of 1.4 percent - China's per capita GDP growth rate was more than six times the world average.

The result was the dramatic continuing rise in China's relative position in terms of world economic development. The relevant data, showing the proportion of the world's population living in countries with higher and lower per capita GDPs than China, is set out at current exchange rates, China's preferred measure, in Figure 1. In internationally comparable prices (purchasing power parities - PPPs), the measure preferred by international economic institutions, the data is shown in Figure 2.

For clarity it should be noted that the sharp oscillations in China's relative global position measured at current exchange rates during the 1980s do not reflect shifts in China's productive economy but merely exchange rate shifts between China and India. Taking first the starting point:

• In 1980, measured in PPPs, only 2 percent of the world's population lived in countries with a lower per capita GDP than China, while 75 percent were in countries with a higher per capita GDP.
• Measuring in current exchange rate is more complex, due to the changes in exchange rates in 1981-82. But if an average is made of 1981-82, then at that date 14 percent of the world's population was in countries with a lower per capita GDP than China and 64 percent higher than China.

By either measure, of course, China's relative position in the world at the beginning of "reform and opening up" was low.

The situation in 2016

By 2016, due to rapid economic development, China's situation was entirely transformed.

• In PPPs, only 26 percent of the world's population lived in countries with a higher per capita GDP than China, while China had a per capita GDP higher than 55 percent of the world's population.
• At current exchange rates 26 percent of the world's population lived in countries with a higher per capita GDP than China and 55 percent in countries with a lower per capita GDP than China.

In summary, by 2016 approximately only one quarter of the world's population lived in countries with a higher per capita GDP than China, while the majority of the world's population lived in countries with lower per capita GDPs than China - a total transformation of China's situation.

Figure 1

Figure 2

 

2017-2020

From 2017-2020, the final period during which China projects "relative prosperity" to be achieved, economic projections must be made. Those used for calculations here are from the IMF's October 2016 World Economic Outlook. These are chosen as they are conservative - exaggeration is of no use in analysing serious matters. The IMF data assume lower growth rates than China's targets - an average 6.0 percent growth in 2017-2020, compared to the 2017 target of 6.5 percent and those for the 13th five-year plan (2016-2020). By 2020 on this data:

• At market exchange rates only 19 percent of the world's population in 2020 will be in countries with a higher per capita GDP than China and 62 percent in countries with a lower per capita GDP.
• Measured in PPPs, 24 percent of the world's population will be in countries with a higher per capita GDP than China and 58 percent in countries with a lower per capita GDP.

China has already overtaken in per capita GDP or in PPP all of the world's other largest developing economies - India, Indonesia and Brazil. By 2020 China's per capita GDP will be higher than several Eastern European countries.

As China has 19 percent of the world's population, quite literally never in human history has anything approaching such a large proportion of the world's population had its conditions of life improved so rapidly. That will be the astonishing measure of China's success in achieving "moderate prosperity" - it is, without comparison, literally the greatest economic achievement in human history.

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This article originally appeared at China.org.cn.

The damaging blind alley of US protectionism

The following article deals with the costs to the US economy of protectionism. The specific case it deals with is protectionism in relation to China. However the arguments apply to all strategies based on protectionism.

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Steve Bannon, President Trump’s Chief Strategist, rightly identified the key importance of two speeches given by the Presidents of China and the US earlier this year. By counter posing the two Bannon himself intended to praise protectionist statements by President Trump against President Xi Jinping’s support of globalization: “I think it’d be good if people compare Xi’s speech at Davos and President Trump’s speech in his inaugural…. You’ll see two different world views.”

Unfortunately for Bannon most international commentators arrived at the opposite evaluation. Support for Xi Jinping’s policy approach came from groups well beyond those invariably sympathetic to China. Ian Bremmer, President of the Eurasia Group, the most influential Western ‘risk analysis’ company, for example noted: ‘Davos reaction to Xi speech: Success on all counts.’

But while support for Xi Jinping’s approach was perhaps to be anticipated internationally, because of its opposition to protectionism, what is not so generally understood is that China’s support for globalization is far more in the interests of the US population than Bannon’s protectionism. Explaining factually why is this article’s focus.

An example of the US tire industry

Starting with a case study, one of the most important recent examples of US protectionism was in September 2009 with imposition of a US tariff on import of Chinese tires. President Obama, in his 2012 State of the Union, address claimed over a thousand jobs had been preserved in the US tire industry by this. But this was a pure distortion of the overall effects on the US economy because the President did not mention far more jobs were lost in lost in the rest of the US economy due to this policy than were saved in US tire manufacturing while the cost to US consumers was quite extraordinarily high. It would have cost less than one twentieth of the price if instead the tire workers had been subsidized to the entire cost of their salaries rather than the tariff introduced.

The economic calculations are clear and readers are recommended to the study ‘US Tire Tariffs: Saving Few Jobs at High Cost’ by Hufbauer and Lowry of the Peterson Institute for details, of which the following are a summary.

US tariffs reduced tire imports from China by 67% - an intended goal. As it was a country specific tariff the great majority of Chinese tires were replaced by Mexican, Thai, Indonesian and other imports. Nevertheless, employment in the US tire industry rose by 1,200 – hence President Obama’s claim.

Nevertheless, tire imports from other countries were more expensive than China so the annual increase in the cost of tires to US customers rose by $1.1 billion. Consequently 1,200 US tire jobs were saved at a cost of $1.1 billion – over $900,000 each.

Furthermore, the average annual salary of US tire workers was $40,070. Therefore:

• It would have been far cheaper to subsidize the workers directly than impose the tariff.
• Less than 5% of the cost of the tariff went to tire workers, the rest was taken by tire manufactures and others – as shown by US tire prices rising almost 5% a year faster than the average producer price index following the tariff. US customers therefore had lower living standards due this higher inflation.

As Hufbauer and Lowry noted accurately: ‘Most of the money extracted by protection from household budgets goes to corporate coffers, at home or abroad, not paychecks of American workers. In the case of tire protection… fewer than 5 percent of the consumer costs per job saved reached the pockets of American workers ($48 million out of $1,112 million).

Indirect costs of protectionism

But these were only direct costs to the US economy and workers. The indirect negatives for US living standards and jobs were more severe. The $1.1 billion extra spent on tires could not be spent on other items, therefore other parts of the economy had lower sales and consequently suffered job losses. As ‘US Tire Tariffs: Saving Few Jobs at High Cost’ concluded: ‘By dividing the total number of workers employed in the retail services at the end of 2011 by annual sales… 3,507 retail sales jobs are created in the United States for every one billion dollars spent in the domestic retail market. The tire safeguards extracted an estimated $1,112 million annually from US consumers; at the same time, the safeguards put $48 million in the pockets of otherwise unemployed tire workers. The net effect was to reduce consumer spending on other retail goods by about $1,064 million, indicating that the safeguard tariffs probably cost around 3,731 jobs in the retail sector…. when the retail job loss figure is offset against… 1,200 manufacturing jobs saved, it appears that safeguards actually cost the American economy around 2,531 jobs.’

The actual effect of the tire tariffs was to cost US customers $1.1 billion and reduce the number of US jobs by 2,500!

There were possibly also other indirect losses. China raised tariffs on US chicken part imports soon after US tariffs were imposed on China’s tire exports - producing a 90% fall in US chicken part exports to China. China officially denied there was any connection between these actions but many economists point out that retaliation is an inevitable part of trade wars.

Therefore ‘US Tire Tariffs: Saving Few Jobs at High Cost’ concluded: ‘The big winners from the 2009 safeguard tariffs were alternative foreign exporters, primarily located in Asia and Mexico, selling low-end tires to the United States. Domestic tire producers were secondary beneficiaries. The members of the labor union that petitioned the ITC’s investigation received only a small share of the money extracted from the pockets of American households… Jobs created in the tire manufacturing industry were more than offset by the loss of jobs in the US retail sector. As an added consequence, US chicken firms lost export sales in the wake of Chinese retaliation.’

As alongside these losses in the US, Chinese tire makers lost this can entirely accurately be described as a ‘lose-lose’ outcome for both countries.

The overall costs of protectionism

It is important to be clear that the $900,000 costs per job ‘saved’ in the tire industry was not some extreme untypical example. Extraordinarily high costs for job ‘protection’ by tariffs are typical as findings have been repeatedly confirmed over a long time period. A 1986 survey of 31 industries found the cost to consumers per job ‘saved’ in industries with protectionism ranged, in 2016 prices, up to $2.2 million and averaged $516,000. A study in 1994 found that the average cost of protecting a job in the US by tariffs at that time was $275,000 in 2016 prices. The estimated cost of saving a job in the US steel industry in 2001 by tariffs was $490,000 at today’s prices.

So expensive are any jobs ‘saved’ in industries by protectionism that they cannot be used on a large scale -other factors affecting US jobs are far more powerful. As Nobel Prize winning US economist Paul Krugman noted: ‘the level of employment is a macroeconomic issue… with microeconomic policies like tariffs having little net effect.’ Indeed, as with tires, the microeconomic effects on jobs of tariffs are likely to be negative.

Consequences for US exporters

It should be noted that so far only negative effects within the US have been analysed. But increased costs in the US economy due to tariffs also raise the international cost base of US companies, thereby negatively affecting US exporters. Approximately one in eight US goods and service is exported, therefore the negative domestic effect of US tariffs extends into the international field depressing jobs and wages in US exporting companies. As Mark Perry, University of Michigan professor of finance and economics, noted in an analysis with the self-explanatory title ‘How Trump’s tactics for saving US jobs could kill them instead’: ‘Trump’s attempts to “bring jobs back to the US” or “keep jobs from leaving the US” will likely backfire and kill US jobs in the long run.’

Rick Newman in an article at Yahoo Finance analyzed the process whereby this occurred: ‘pressuring companies to accept higher production costs, which Trump is essentially doing, could easily backfire and destroy more jobs than if Trump were to do nothing.’ Specifically analyzing pressure put by President Trump on US air conditioner manufacturer Carrier Newman noted: ‘‘Carrier’s competitors include Trane and American Standard, both owned by Ingersoll-Rand, which is based in Dublin, Ireland; Rheem, headquartered in Atlanta; and Goodman, owned by Daikin, a Japanese conglomerate. Each has manufacturing operations all over the world. If any one company has higher costs than another—whether labor, components or anything else—its products will be more expensive than the competition and sales will most likely decline… compared with competitors able to undercut such firms on price… Businesses bear those higher costs as well, and they’ll have less money to hire people if other costs go up.’

It is equally a myth US tariffs will protect ‘high paying’, ‘middle class’ US jobs compared to ‘low paying’. As Tim Worstall at Forbes noted, analysing trends since the 1980s: ‘America has lost some 7 million manufacturing jobs and added some 53 million jobs in services. This is just what happens with advanced economies--it's easier to increase productivity in manufacturing than it is in services… Thus, over time, [just as] the proportion of the workforce engaged in agriculture falls, so too does the proportion in manufacturing…

‘Further, of those 53 million new jobs some 62% of them were in higher paying occupations than those "high paying good jobs" in manufacturing we lost. Yes, really, 33 million higher paying jobs came along to replace those 7 million lost.’

Such realities regarding tariffs, naturally, do not mean that the US population should not demand measures improve their wages and job prospects. It is simply that tariffs are not the method to achieve this. Instead measures such as job training, education and infrastructure investment are what is required. ‘US Tire Tariffs: Saving Few Jobs at High Cost’ put the real alternative to tariffs precisely: ‘tariffs extracted more than one billion dollars annually from American households, causing a net loss of jobs in the American economy, when job losses in the retail sector are off set against job gains in the manufacturing sector. Collecting a billion dollars in taxes or tolls, and spending the money on renewing dilapidated infrastructure, would create some 7,000 jobs in construction and many more in manufacturing, a far better outcome for the US economy.’

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This article was originally published at China.org.cn.

2016's economic data shows the claim of US 'strong economic recovery' was a myth

The publication of official US economic data for 2016, which shows only 1.6% US GDP growth for the year, and only 0.9% per capita GDP growth, clearly demonstrates two things:

• The major global economic development in 2016 was a sharp slowing of the US economy – as is shown below;
• Large parts of the financial media failed to analyse this reality of slow US growth and continued to repeat a myth of ‘strong US recovery.’

Two questions follow from this reality:

• What is the real state of the main centres of the world economy – the US, the EU and China?
• Given that accurate analysis of the state of the US economy is extremely important both in itself and for economic policy, why did sections of the financial media continue to publish inaccurate material about the US economy?

Using the method of ‘seek truth from facts’ first the data on the growth of the main global economic centres will be given and then an analysis of this.

US economy

Official data for US GDP for 2016 was recently published. This confirms clearly the sharp slowdown in the US economy during 2016.

• US GDP growth fell from 2.6% in 2015 to only 1.6% in 2016 – that is during 2016 the US economy slowed down by almost 40% from its previous growth year’s rate.
• US per capita GDP growth fell from 1.9% in 2015 to only 0.9% in 2016 – US per capita GDP growth therefore declined to under half of its previous year’s growth rate, and fell to less than an annual 1% which is approaching stagnation.

This data is shown in Figure 1. This trends shows clearly that the claim of ‘strong recovery’ of the US economy during 2016 was entirely a myth. In fact, the US economy was slowing sharply.

Figure 1

 

Comparison to other major economic centres

This data on the slowdown of the US economy is even more striking when compared to the statistics for the other two major world economic centres – China and the EU. What this data shows is that far from the US undergoing ‘strong recovery’, the US was the slowest growing of the major world economic centres in 2016

Final data for 2016 for China and the US is already published. Final data for the EU is not yet available, but it is published up the 3^rd quarter of 2016, showing growth at 1.9%. The October 2016 IMF World Economic Outlook, based on the most up to date statistics, concludes this growth rate will continue until the end of the year. Given the closeness of this data to the end of the year it would be unlikely the final figure would differ greatly from this projection. Furthermore, Eurozone data already released shows growth in 2016 to be 1.8% and EU growth is normally slightly faster than Eurozone growth.

Given these trends GDP growth in 2016 would be:

• China – 6.7%
• EU – 1.9%
• US – 1.6%

Therefore, not merely did the US economic decelerate sharply in 2016 but the US was the slowest growing of the major economic centres.

Figure 2

Myths of Western media

It was, of course, perfectly possible during the last year to factually follow this sharp slowing of the US economy as it was taking place. Already in August 2016 I analysed this data. At that time, major sections of the Western media were already attempting to propagate the myth of a ‘hard landing’ in China and ‘strong recovery’ in the US. Bloomberg, in particular, was publishing articles with titles such as ‘Soros Says China Hard Landing Will Deepen the Rout in Stocks’. But in fact, China’s economy slowed only marginally in 2016, from 6.9% to 6.7%, whereas as shown above, the US underwent a sharp economic slowdown.

That is the actual trends in the world economy were the exact opposite of those being claimed in Bloomberg and other sections of the Western media.

Inaccuracy of sections of the media

In addition to the inherent importance of accurately analysing trends in the global economy for economic policy making and company strategy clear conclusions can be drawn from the contradiction between the facts of economic development in the last year and analysis in the media. In particular, these facts of economic development again confirm that large parts of the Western financial media is not primarily focussed on accurate economic analysis but on spreading unjustified claims regarding the economic success of the US and unjustified claims regarding ‘economic crisis’ in China.

Two clear conclusions therefore flow from these facts regarding global economic trends in the last year.

• First given the proven inaccuracy of the Western media the role of independent factual studies by Chinese think tanks and research organisations such as Chongyang Institute for Financial Studies is vital.
• Second, that the publication of research by Chinese media is crucial for getting accurate data and analysis into the hands of companies and policy makers.

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This is an edited version of an article which originally appeared in Chinese in New Finance.

Trump's consequences for the US economy explained in 3 charts

There has been much discussion on the likely effect of Trump on the US economy. But some of this discussion fails to distinguish clearly between short term and long term effects of Trump. This can lead to wrong interpretations of events and trends as they unfold. The aim of this article is therefore to set out the fundamental parameters of the US economic situation as it confronts Trump. This can be clearly shown in three charts showing the fundamental features of the US economy which are given below. These show:

• There should be a short-term acceleration of growth during the early period of the Trump presidency, for the simple statistical reason that in 2016 the US economy was growing significantly below its long-term average. A move of the US economy up towards its long-term average growth rate will therefore create the illusion that the US economy is improving during the early period of Trump’s administration – when it is in reality a predictable statistical effect.
• Trump, however, cannot accelerate the long-term US growth rate without fundamental changes in the US economy which are very unlikely for reasons analysed below. Therefore, over the long-term Trump will not accelerate US economic growth.

Analysing these most fundamental trends in the US economy also identifies which key US data must be watched carefully to assess the success or failure of Trump’s economic policy in both the short and long term.

The long-term slowing of the US economy

To start with the most fundamental trend of US long term growth, Figure 1 shows US annual average GDP growth using a 20-year moving average to remove all purely short term fluctuations due to business cycles. This data shows clearly the most profound trend in US growth is a half century long economic slowing – the peaks of US growth progressively falling from 4.9% in 1969, to 4.1% in 1978, to 3.5% in 2003, to 2.3% by the latest data for the 3^rd quarter of 2016.

Figure 1

 

 The cyclical situation of the US economy

Turning to short term developments, the trend of US growth shown in Figure 1 is a long-term average. This necessarily means that short term economic growth is sometimes above and sometimes below this average. Figure 2 therefore shows the short-term trend in US growth, the economy’s year by year growth rate, compared to the long-term average.

It may be seen from Figure 2 that the US economic growth in the year to the 3^rd quarter of 2016 was only 1.7%. That is, the US economy in the recent period leading up to Trump’s election was growing at significantly below its long-term trend. For this reason, purely for statistical reasons, it is probable that the US economy may accelerate in the short term.

As this would coincide with the initial period of Trump’s presidency this would lead to the claim ‘Trump is improving the US economy’. But this is false, such acceleration would be expected purely for statistical reasons.

Figure 2

 

The determinants of US growth

Finally, if the reasons for the US long term economic slowdown are analysed these are simple. The most fundamental of all features of the US economy is that it is a capitalist economy. This means when there is a high rate of capital accumulation the US economy grows rapidly, when there is a low rate of capital accumulation the US grows slowly.

In terms of economic statistics net capital accumulation is equal to net savings. Figure 3 therefore shows the long-term trend in the US savings rate/capital accumulation rate since 1929. The curve of long term development of the US economy can be seen to be clear:

• During the crisis creating the beginning of the Great Depression in 1929-33 US capital accumulation was negative – that is the US economy was creating no capital. This necessarily produced a deep crisis of the US economy. After this the rate of US savings/capital creation rose, with a powerful acceleration during World War II, to reach a long-term peak as a percentage of the economy in 1965.
• After 1965 US net savings/capital creation steadily fell as a percentage of GDP until it once again became negative during the ‘Great Recession’ in 2008-2009. This declining trend of US capital creation of course explains the long-term growth slowdown that was shown in Figure 1.

This trend therefore shows the fundamental issue confronting Trump which he would have to overcome to accelerate the long-term growth of the US economy. He would have to increase the percentage of capital creation in the US economy. Without this, while a short-term speed up in the US economy is to be expected for the statistical reasons given earlier, no long term acceleration of US economic growth will take place. Without such a sharp increase in the level of capital accumulation claims by Trump that he will accelerate the US rate of growth are purely ‘hot air’.

Figure 3

 

Summary

It is clear that the first effect of Trump’s policies will not be to increase but to reduce US savings/capital accumulation. This is due to the fact that an economy’s savings are not only household savings but company savings plus household savings plus and government savings – government savings in most economies being negative because the government runs a budget deficit. Trump has announced policies that will clearly increase the US budget deficit – tax cuts focussed on the rich and increased military spending. This increased budget deficit will necessarily reduce the US savings level.

In the purely short term Trump could lessen the effect of low US savings/capital creation by borrowing from abroad. But historical experience shows that over the medium/long term in major economies it is domestic capital creation which is decisive. Therefore, Trump has so far announced no policies which will increase the long-term US growth rate. Therefore, in summary:

• A short-term speed up of the US economy is likely for the statistical reasons already given – but does not indicate any increase in long term economic growth.
• Trump has no put forward policies that will accelerate US long term economic growth.

Finally, these trends show which data must be closely watched to see success or failure in Trumps economic policies. The short term shifts in the growth rate must not be seen in themselves but compared to the long term trend of US growth: the key variable for judging long term US growth is whether the level of capital formation in the US economy is rising or falling.

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This article was originally published in Chinese by New Finance.

The world will be listening to Xi Jinping at Davos

Xi Jinping is the first Chinese president to speak at the Davos World Economic Forum. This visit has attracted even greater international media attention than the normally high levels of interest in a trip by China's leader. As the Financial Times chief foreign affairs columnist Gideon Rachman put it, "The big star of this year's forum is certain to be Xi Jinping."

The reason for this is well understood. China's unequivocal support for open economies and globalization is now clearly in contrast to the protectionism embraced by U.S. President-elect Trump and that was manifested on a smaller scale in the U.K. Brexit referendum.

In terms of declared positions on globalisation, a definitive turning point has already been made. Every U.S. president since World War II has at least verbally committed to free trade and globalisation. Trump explicitly broke with this historical U.S. position with threats to impose a 35 percent tariff on Mexico, a 45 percent tariff on China, to impose a U.S. "border tax", to renegotiate the North American Free Trade Agreement (NAFTA), by his pressure for U.S. companies not to invest in Mexico despite it being a NAFTA partner and by his clear overall policy statements. In parallel, while the reality of the Trans Pacific Partnership (TPP) was not a move for freer trade - being in reality an anti-China bloc - nevertheless its unilateral abandonment by Trump made the U.S. appear an unreliable negotiating partner.

Whatever happens in the future, there can never again be 100 percent certainty that the U.S. remains committed to globalisation. This fundamental pillar on which the post-World War II global order was built is no longer solid. It is widely understood that of the world's two largest economies, only China remains unequivocally committed to globalisation.

This directly and powerfully affects other countries in addition to China - hence the wide international interest in Xi Jinping's Davos visit. Other countries well understand, both factually and theoretically, the decisive importance of the international trade and globalisation.

Factually, numerous studies demonstrate the positive correlation of an economy's international openness and its development speed. Growing internationalisation by almost all countries was a decisive trend during the long period of relative global international economic stability and growth after World War II - a marked contrast to 1929-39 global economic fragmentation, marked by the infamous U.S. Smoot-Hawley protectionist tariff, which led to the greatest economic crisis in modern history.

Clear theoretical understanding of economic openness's advantages has existed for over two hundred years. The first sentence of the founding work of modern economics, Adam Smith's The Wealth of Nations, is, "The greatest improvement in the productive powers of labour… have been the effect of the division of labour." But division of labour in a modern economy has reached a point where it is necessarily international in scale. International supply chains, which alone ensure the cost efficiency of modern production, flow from the reality that different countries have different advantages in different parts of production. Attempts to create self-contained national economies necessarily make economies less efficient. Therefore, every strategy of "import substitution" or attempt to create an efficient national self-contained economy necessarily fails.

U.S. protectionism's negative effects, with its inevitable international reciprocal retaliation, would hit even the U.S., the world's largest economy - increasing prices of imported goods for consumers and costs for U.S. producers while restricting export markets. Even for the U.S., three quarters of the world market in economic terms and 95 percent of the world's customers in population terms lie outside its borders. A protectionist U.S. economy cannot match the advantages of orientation to a global economy.

But for Germany, 95 percent of its potential market is outside its borders, for Brazil 97 percent, for Australia 98 percent, for Thailand over 99 percent. Protectionism would be more damaging for them than the U.S. Such countries therefore applaud Xi Jinping's unequivocal defence of globalisation - not because of deference to China, but out of national self-interest because globalisation really is "win-win."

Sometimes in the media there is loose talk of a "rise of protectionism and populism." But this imprecise expression conceals a precise reality. In some European countries, there certainly is an increase in support for protectionist populist parties - for example, in France Marine Le Pen's National Front or the Alternative in Germany. But these are minority parties who are not in power and who in most cases have no realistic prospect whatsoever of forming governments. Only in the Anglo-Saxon economies have protectionist forces actually come to office or been able to determine government policy.

The overwhelming majority of countries, including traditionally firm U.S. allies such as Germany or Australia, have expressed opposition to Trump's protectionist policies. When Germany's Chancellor Merkel recently said, "We see protectionist tendencies," she was naturally discreet enough not to mention the U.S. But most people were well aware that the U.S. was included in the countries she was speaking of. A large majority of other countries listening will strongly agree either publicly or silently with Xi Jinping's clear statements in support of open economies and globalisation at Davos.

Maintaining an internationally open economy is vital not only for governments but for the world's population. Globalisation has brought immense benefits to the majority of the world's people, strongly confirming economic theory. Certainly, socialist countries were most able to take advantage of globalisation's benefits. The world's four fastest growing economies in the last 30 years have been socialist - China, Laos and Vietnam, together with a Cambodia whose economic policies are decisively influenced by China. China experienced the world's most rapid rise in living standards. Eighty-three percent of the people in the world lifted out of internationally defined poverty were in China, and a further 2 percent were in Vietnam - only 15 percent were in capitalist countries.

But while socialist countries made the most efficient use of globalisation, other countries also strongly benefitted. India under Modi has consciously moved closer to China's economic model, and India is now the world's other major rapidly growing economy. Several African countries, basing themselves on globalisation, have achieved growth rates of 6-8 percent a year.

Certainly the political crisis in the Anglo-Saxon countries, which has produced support for the protectionist dead ends, was created by a failure to improve their population's living standards. U.S. median household incomes are lower than 16 years ago, U.S. inequality has soared. In the U.K., real incomes in the last eight years experienced their most prolonged decline for a century. But this was not inherent in globalisation, as demonstrated by the dramatic improvements achieved by most countries, but a result of the specifically neo-liberal paths launched by Reagan and Thatcher. It is for this reason, not globalisation, that a protectionist political dead end has become strongest in the Anglo-Saxon economies.

China's support of globalisation, symbolised in Xi Jinping's Davos visit, corresponds to China's national self-interest. But it also corresponds to the national self-interest of other countries and peoples. Mutual self-interest is the firmest of all foundations for cooperation.
It is for this reason Xi Jinping's visit to Davos has attracted such intense international interest.

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This article originally appeared at China.org.cn.