Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Trade Page 12 of 13

Why Nations Can’t Resist Austerity

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On April 25, 2014

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Free trade, as practiced, is designed to destroy local autonomy by making nations dependent on foreign goods, and by removing decision making from democratically elected bodies and pushing them to transnational tribunals, secret courts and laws which cannot be changed without opting out from treaties, something most countries are reluctant to do, because they need the trade once they are enmeshed.

Keynes believed that most production of basics should be local: you should manufacture most of what your country needs, in your country.  You should also, ideally, be able to feed your own population.

If you can’t make what you need or what your people (and more importantly, elites) really want, then you’re screwed.  In the modern world you need hydrocarbons, you need food, and you need the machinery which turns hydrocarbons into the industrialized lifestyle.

Your prosperous citizens probably want food your country doesn’t produce: summer vegetables in winter, possibly meat you can’t provide in large enough quantities, and so on.  They want electronic goods like smartphones that due to patents are quite expensive, and which you probably can’t make domestically.

Your elites want a vacation in Paris, a home in London, a German car, a French mistress, a New York Apartment, and a variety of luxuries that their own country doesn’t make.

If you want or need these things; if you do not have a taste for what your country can produce, in terms of basics and luxuries; if you do not ensure your country can feed itself, generate electricity and make cars or other forms of transit, you MUST do what those who control the trade regime want you to, or you will find yourself cut off from all these things.

Distributed production of necessities (which includes basic lifestyle goods and luxuries and machine goods) is anti-democratic and anti-national control in a world where the primary decision making units which are amenable to pressure from the commons, whether democratic or not, is exerted almost entirely on national and local units.

If you want to not do austerity when the Troika demands it, you must be in a position to tell the Troika to go stuff itself. If you have made yourself vulnerable, by losing your ability to feed yourself; by not developing local industry or exporting it; by your citizens acquiring a a perceived or real need for foreign goods; or by your local elites wanting to be “transnational elites” who want foreign luxuries and who feel as at home in Paris, New York and London as in their own country, then you cannot refuse to do what those who control the trade and international monetary regime tell you to do.

This is always the devil’s bargain offered in international regimes: “you can get all the stuff we have if only you open up”.  It’s true, and for many countries it works for a while.  The less you had, the shorter period it works for (countries who only have to be convinced to give up their ability to feed themselves by switching to cash crops and forcing subsistence farmers get a few years), but once you’ve given away your autonomy, the deal will, at some point, always turn bad.  Those with the whip hand, will always eventually drive you down unless you have as much power over them as they have over you.

And knowing that your elites are no longer yours, but theirs, they will always find someone to do it for them, because your elites will be eager to sell you out for the flat in New York, the vacations in the south of France, the German automobile, the French mistress, the Swiss boarding school for their children, and for the fine luxury goods their own country cannot make.

If you get yourself into this position, you must overthrow your elites, and you must figure out how to become independent again.  You must make deals with other blocs: the Russians and the Chinese, for the transition period, and figure out how to move your production of what matters back to local, and if you no longer can, how to feed yourself. You must inculcate in your elites and peoples a desire for what you make locally – local lovers, the food of your nation, the luxuries you can produce.

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Mandela’s NeoLiberal Compromise

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On December 10, 2013

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South Africa may no longer have apartheid, but the majority of the population still lives in poverty, the heights of the economy are controlled largely by whites, and rich blacks are concentrated in the upper ranks of the ANC and their families.  The rape rate is possibly the highest in the world, with a quarter of men admitting to having committed a rape and a quarter of women to having been raped, while murder is rampant.

The ANC had originally intended to purse socialist policies, including taking away the wealth of the richest whites.  Nelson Mandela decided not to do that.  There are varying accounts of why, from outright bribery to being convinced, but let’s go with convinced.  The story is that once Mandela was released from prison, as he traveled the world, it was explained to him that if white flight occurred, his country would mimic Zimbabwe’s fate, and taking away the wealth of the richest whites and distributing it would cause that white flight.

So most of the redistributive part of the ANC’s program was jettisoned.  Blacks were to have political freedom, but whites would control the economy.  (Though you certainly don’t want to be a poor white in S. Africa.)  Tax rates in S. Africa are typical: low for individuals, lower for corporations.

Bear in mind that when Mandela made this decision the prices of commodities, S. Africa’s main exports, were substantially depressed.

Mandela was in a bind, take that advice as ‘warnings’ and you probably read it better: “if you do this, we will disapprove. We cannot allow such redistribution to work, so it won’t.”

Mandela chose to take what was on the table, political freedom absent redistributive justice.

Was it the right decision?

Yes.  Not because it isn’t theoretically possible to do redistribution and make it work, but because at the time it was harder, and because the ANC wasn’t up to the job.  Given how they have botched far simpler policy areas, like HIV, given their rampant corruption, the idea that redistribution could be managed by them in a fair way, while maintaining economic growth and avoiding being crushed by the outside reaction is not credible.  These are not competent people, they are noticeably incompetent.

S. Africa has significant advantages in its mineral wealth (though that can also be a curse).  Resources that the rest of the world must have give you leverage to do what you want, and tell everyone else to take a hike (see Saudi Arabia).  But pulling that off requires finesse and it is harder to do if you have a redistributionist ideology, because international elites are happy to tolerate regressive regimes but do not want fair regimes to succeed, lest they show other countries that inequality and unfair trade deals are not inevitable.

Venezuela, though good has been done, is botching their experiment; so is Argentina.  S. Africa could never have pulled it off.

Much of this is probably also down to Mandela’s age: he was in his late seventies when he was President.  He did not have ten good years left to finesse through this sort of change, he did not have competent heirs or time to create them; instead he had the ANC, whose leaders were corrupt at best.

When the attempt is made at real redistributive justice, as it must be, it will be easiest done if a number of countries do it at about the same time, supporting each other, and acting as a bloc. If key resource nations like Canada, Russia, much of South America and S. Africa were to get together, it would be very difficult to bully them, because they control key resources which cannot be substituted away from except at great cost, and in some cases, at all.

Trade is key in the sense that countries must be able to buy certain key things they can’t make.  If producers work together, in solidarity, they can gain policy independence internally.  But this can only be done as a group, or great costs will be inflicted by the oligarchical forces of the developed world who do not want to, ever, see 90% tax rates create good economies ever again.

 

On Bangladesh’s Textile Disasters

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On May 12, 2013

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My father worked in Bangladesh for 8 years in the 80s, and in East Pakistan (what Bangladesh was called pre-independence) in the 50s.  I have relatives who live in India, and I spent my summers and many Christmas vacations in Bangladesh.  My mother spoke fluent Hindi (though that isn’t the language spoken in Bangladesh) as she grew up in Darjeeling and Calcutta.

Let’s run through the points.

The first is the simplest: I find it interesting that there is so much textile manufacture in Bangladesh. There was none to speak of in the 80s.  Let me put it crudely, Bangladesh is way down the chain, there are very few poorer, more corrupt countries in the world outside of Africa.  The textile industry is running out of cheap places to make clothes if they’re in Bangladesh.

The second is this: Bangladesh’s government will never enforce safety regulations in the textile industry. It is impossible, it will not happen.  Nothing happens, nothing gets done in Bangladesh without baksheesh—bribes.  Bribes are the actual salary of government employees, they are not paid enough to live decently on without them.  Textile factories will be throwing off so much money, in Bangladeshi terms, that virtually anyone can be bought, and with so much money at stake, anyone who can’t be bought will be otherwise dealt with.

Which means that if textile manufacturing jobs are to made safer it must be done by the companies buying the textiles, like Joe Fresh.  Only they can do it, because they control the money spigot. If unsafe work circumstances will cost the people running the factories money, they will fix it, assuming that the audits are thorough and rigorous, by incorruptible people.  Those people will have to be outsiders (outsiders aren’t necessarily incorruptible, but locals can be gotten to too easily) though they will need local fixers on staff.

My prediction is that some nominal steps will be taken, but only nominal ones. You don’t do textile manufacture in a country like Bangladesh because you want safe, you do it because you want cheap.  Really, really cheap.  Bet on the big headline disasters being only the tip of the iceberg, with routine maimings and horrible work conditions being part of the daily life of the workers.

All that said, if you live in Bangladesh, odds are you have no options.  These jobs may be horrible but they are jobs, and pay better than most of your other options.  That’s why the textile companies are there, no one who has other options would work in their hellhole sweatshops.

Ultimately that comes back to us and our corporate leaders.  We want cheap clothes, they want outsize profits (they don’t pass most of the “cost savings” on.)  If you aren’t dirt poor yourself, I suggest you look at the label, and if it’s made in a third world country (including China), don’t buy it.  It’s not much, but it’s about as much as you can do.  And, generally speaking the quality of clothes will be better.

If you really want to do something about this, tie work safety to allowing clothes made in such countries to be imported to developed nations, and have the inspectors be government employees of the country where the clothes will be exported.  That goes against everything our current government and corporate leaders are willing to do, however, and also offends the sensibilities of many on the left  so just get used to the fact that a lot of blood stains your clothes, just like lots of blood is mixed in to your oil and is used to fertilize your food.

The Reagan Play

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On December 10, 2012

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The Reagan play, in the last period of high oil prices was this: crush the economy and bring new sources of hydrocarbons online.

This is also Obama’s play: fracking and  other unconventional hydrocarbon sources are being ramped up massively, while austerity crushes resource demand.  China is  buying a lot less resources.

I called for falling oil prices before and was wrong about when it would happen, but I remain convinced it will happen.  The hardest thing to do is to predict not what, but when.

This does not mean that hydrocarbon prices in the long run are going to drop, they aren’t.  But in the mid terms, for a few years, they will.

This won’t do much good for ordinary Americans, because they won’t see almost any of the gains, their lords and masters will take most of it.

This crash will lead to challenges for many countries, most interestingly South American countries like Venezuela and Argentina which have been riding the resource boom and engaging in resource socialism.  They need to diversify their economies.  I doubt Venezuela will manage it, Argentina may, if the people running Argentina learn some humility.  This will also hurt the oil patch up here in Canada (primarily Alberta) and upset the political calculations of our Conservative party.  Russia, various Middle Eastern countries and so on will also have their problems.

All resource booms end.  All of them.  The question is only when.  The widespread slowdown, and especially the Chinese slowdown (which is hitting S. America hard), indicates we are likely close to the end of this boom period.

Yes, Canada has Dutch Disease

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On June 1, 2012

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Or at least, the Bank of Canada thinks so, though they’ll never call it by that name:

Nonetheless, Canada’s current account was in surplus for many years before the crisis, and is now expected to remain in deficit indefinitely.

The main reason? A currency at parity with the U.S. dollar means Canadian exports are at a disadvantage and will be for some time. Indeed, until companies do more to improve their efficiency to offset the effects of the higher loonie, they’ll remain at a competitive disadvantage. Bank of Canada Governor Mark Carney has highlighted this point for more than a year.

No, really, the oil sector is killing non-oil jobs.  And the Conservatives are bringing in foreign guest-workers to do oil jobs.

This is how the prosperity of a country can be destroyed.

Core CPI is exactly the wrong thing to watch

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On April 16, 2011

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Our lords and masters (h/t Americablog):

Those trends came as real income dropped 0.5 percent for the month.

The Labor Department said its Consumer Price Index increased 0.5 percent after rising by the same margin in February. That was in line with economists expectations.

Core CPI is vindication for officials at the Federal Reserve who have viewed the recent energy price spike as having a temporary effect on inflation.

Food and gasoline rose 0.8 percent, the largest gain since July 2008, after increasing 0.6 percent in February.

When thinking about inflation, think of individual’s (or companies) surplus income, that is, how much income do they have left to spend after their necessities.  Necessities include food, housing, heating and transportation.  To a lesser extent, clothes, though most people don’t need to buy clothes every month.

Goods inflation, that is to say, core inflation, is mostly in items that you don’t have to buy. Sure, you might want to, but you don’t have to have a new toaster, or TV, or computer.  Food, on the other hand, you have to have.  If you live off rapid transit, and most Americans do, then fuel for your car is something you have to have otherwise you can’t get to your job: you must buy it, at whatever price it is selling for.  Heating oil is something you have to have, freezing to death is bad.

If you earn $2k a month and your fixed bills come to $1,600, your expendable income each month is $400.  If oil and food rise enough that you have to spend an extra $50 you’ve lost 12.5% of your income.  If they rise enough to cost you $100 a month, 25%.  That margin is what matters to most people.  And for people close to the line, the extra money they must spend may kick them from surplus into a personal deficit, at which point they have to start borrowing money, usually at usurious credit card rates of over 20%.

The day laboring class is particularly vulnerable to this.  A bit of drying up of work, an increase in the price of food, and they can reach the point where they can’t afford to eat enough every day.  When that happens you either get a revolution, or you get famines.  This was particularly a factor, by the way, in Egypt.

Inflation in what people must have is what matters to most of the population.  But it isn’t what matters to your lords and masters.  Food costs and fuel costs, are, for them, roundoff errors.  If  you’re really rich, spending $1,000/day on food doesn’t even show on the scale.  So, by and large, goods inflation is what matters to them, personally, though they may have business concerns about fuel inflation (and note that inflation in oil leads to food inflation very directly.  Modern agriculture is how we turn oil into food, essentially.)

So when someone talks about core inflation being the most important form of inflation, check your wallet, it’s likely lighter than it used to be.

An update on the effect of the price of shipping oil and tax on exports

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On April 12, 2011

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From Skuppers, in comments:

In February, the Fuel Surcharge (FSC) on shipments was 26%. It is now 31%. It keeps climbing with no end in sight. It’s not always a straight formula though, as I saw an invoice from the steam line the other day, where the customer’s freight rate is $1400, but the added FSC was about $1800. Adding a margin? Lol. But really what I want to add here could be best captured by this title: Cynical, naive, or just dumb?

In July 2010, the government instituted a tax incentive to businesses to get exports moving. I would guess their motivation was to encourage exports to increase profits to get companies to hire more workers. You know, work on that unemployment thing. So they give a tax break to exporters, and reduce their tax on profits from 35% to 15%.

My customer in Australia imports a lot of pork. They are owned by a U.S. company that supplies about 60% of their product. They got their product delivered FAS Long Beach, meaning free along side. The supplier paid for all expenses up to the side of the ship; rail to long beach, transloading, and delivery to the ship. My customer paid for everything from that point on – I acted as their agent, and so I was “technically” the exporter. Starting in August, the supplier wanted to sell the product, in order to take advantage of the tax incentive, DES – delivered ex-ship. Meaning they paid for all expenses up to the point that the ship tossed the container overboard at the foreign port. The supplier was now the exporter, in name, where they hadn’t been so before.

Was there any increase in exports? No; same business being done as before. Did the supplier hire new staff to handle the “new business?” No, in fact they let staff go; I’m still managing the shipments and getting my same ‘cut.’ So on paper, it looks like the supplier increased business by about 700 containers a year, and get a reduction of 20 points in those profits, but they haven’t really increased business, they just get the tax break.

This is just ONE business in the U.S. How many others are doing the same thing? So is the administration cynical, naive, or just dumb? Didn’t they do their homework on this? It took me about 5 minutes to figure this scheme out. How come the geniuses at Department of Commerce didn’t see this coming? Or did they? Is this just another way to get around the repatriation of foreign earned profits taxes by ‘reimbursing’ them at home (after all, money is fungible isn’t it?)?

A bit more on the oil trap

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On February 27, 2011

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People will not ship or produce if the cost to produce+ship is higher than what they can recoup.  There is a bottom on prices despite what the idiotic supply and demand curves in textbooks show.  Contrary to what they tell you in economics 101 supply and demand is not a law, there are significant exceptions.

In fact, if the price of shipping increases enough to make production uneconomic, then people will be laid off.  When this is occurring throughout the world, you get a ripple effect.  It’s not self-reinforcing in the sense that it increases the price of oil (in fact, it decreases it), it is self-reinforcing in the sense that it does make the economy worse, because it reduces demand for a wide variety of goods, whether shipped or not.

What happens then is what we’ve seen before, the price of oil drops and you get a “recovery”, which is to say a pendulum from shitty economy to sucky economy and back again.  The current economic juggling act is about making sure the economy stays sucky, and doesn’t get to shitty, and you do that by keeping the price of oil from exploding.  When it does, you lose.

There can be no good global economy right now. There is not enough oil in the world to do it under current economic models.  Cannot be done.  You may be able to have a few places doing well, but only a few.  The solution to this is to GET OFF OIL, but no one is willing to allow that to happen, because old money wants to control the new economy and isn’t sure they can do that with current technologies.  That’s why you have idiots talking about shale oil, or using natural gas, or anything else which keeps an economy where a small group of people provide the energy for everyone else, and make a killing doing so.

So instead you have revolutions, you have unions being crushed and so on.  At its base this is all related to the price of oil.  Oil in Saudi Arabia costs about $7/barrel to produce.  Think about what that means in terms of profit, especially in a country where those profits stick to the hands of a few people.  Think about the fact that with all that money they could buy anything, unless the US has rich as rich as Saudi Princes and companies which are so large in terms of market capitalization that they can’t be bought.  (Well, or they could do ownership controls, but strangely, they prefer to be stinking rich.)

The rich MUST be kept rich.  If they aren’t, the oilarchies buy up everything.  That’s not exactly true, but it is true enough because that’s the way the people at the top think.  They know that they either stay so big they can’t be bought, or they’re bought.

Of course there’s more to this.  We could discuss regulatory and environmental (and labor, but labor is the smallest part of it) arbitrage to China (who refuse to allow outsiders to buy anything that matters, period.)  We could talk about the structure of the suburban economy, which is both profoundly unproductive and based on oil, so that any nation which embraces suburbanism can’t boom without driving up oil prices and, at this point, causing oil price spikes.  We could talk about financialization, but financialization is just a side-effect of needing lots of rich people and having less and less to sell to the world, which is about suburbanization, which is what the rich bribed the middle class with – you can have your little castle and your unearned unwarranted wealth increase in your unproductive suburb away from brown and black people, in exchange we get to be really, really rich.  Like all deals with the devil, of course, most people get cheated, but then when you decide you deserve money you didn’t earn and that being away from black people is important to you, you’ve already sold your soul.  The rich will find this out as well.

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