6. Fates of Nations—International Inequality, both national and global – Inequality Book Reviews–scroll to index for reviews

30. The Shock Doctrine (disastrous switch to free markets in Russia, E. Europe, and S. America)

heggef — Sat, 21 Aug 2021 01:50:55 +0000

The Shock Doctrine. Naomi Klein

The author strikes at the heart of market fundamentalists’ claim that freedom and democracy are the hallmarks of deregulated capitalism. Instead, she presents market fundamentalism as a far reaching ideology that has some surprising similarities to Twentieth Century communism. These include a strategy for world-wide dissemination, implementation by extensive coercive violence in much of the world, and marked indifference to suffering imposed undemocratically on the masses. But unlike communism, market fundamentalism is presented as a cynical war by the rich against the middle class and poor that inevitably leads to extreme concentration of riches in the hands of the few who can then capture government to perpetuate their dominance.

The rise of the modern version of market fundamentalism began in the 1950s with Milton Friedman and others at the Chicago School of Economics. This was a counterrevolution to the successful Keynesian mixed economies of the time that relied on markets for growth but employed government regulation and taxation to counter market excesses, failures, and inequalities. The Chicago School regarded these government actions as distortions of the purity of markets according to their closed-loop thinking that relied on mathematical equations and models but very little real-world evidence.

Friedman laid out the neoconservative economic agenda in 1962 in Capitalism and Freedom: First, governments must remove all rules and regulations standing in the way of the accumulation of profits. Second, they should sell off any assets they own that corporations could be running at a profit. And third, they should dramatically cut back funding of social programs. This became the well-known formula of deregulation, privatization, and cutbacks. The many specifics included low taxes for the rich, no worker protections like unions and minimum wage laws, no regulation of business, and elimination of government support for health care, pensions, and education.

Implementation of this agenda in western democracies was difficult for the obvious reason that it required the majority to vote against its own interests to favor the rich. For equally obvious reasons, there was no shortage of plutocrats who provided overwhelming financial support for this agenda by extensive funding of lobbying, political campaigns, numerous think tanks, and media propaganda, particularly in the US. Consequently, gradual change was achieved, particularly beginning with Reagan and Thatcher, so that since the 1980s inequality has increased markedly in the US as nearly all economic gains from rising productivity have gone to the rich. Nevertheless, this transformation has been regarded as too slow, messy, and incomplete.

In countries outside of the western democracies, many much swifter transformations to deregulated markets have been achieved by the strategy the author calls the shock doctrine, usually with disastrous consequences. In 1962, Friedman observed that “only a crisis—actual or perceived—produces real change.” He added that it was vital to keep his agenda alive and ready for rapid and irreversible implementation after political or natural disasters when populations were still too stunned to resist the “bitter medicine” that was to follow. He coined the phrase economic “shock treatment” for this painful tactic. The author reports three distinct phases of that shock treatment that follow in rapid succession: (1) the shock of the coup itself, (2) the shock of severe recessions with massive unemployment, falling wages, lost savings, and lost social insurance, and (3) the shock of imprisonment, torture (often featuring electric shock), and death for many tens of thousands who resisted.

The mechanism to get Friedman’s agenda in place began with the Chile Project launched in 1956. This project brought 100 Chilean students to graduate school at the University of Chicago from 1957 to 1970. In 1965, the program was expanded to include students from across Latin America. As a result, hundreds of Chicago School economists along with some from other institutions were ready and waiting throughout Latin America and eventually throughout the world to administer shock treatment when opportunities arose. This program was greatly amplified by the International Monetary Fund (IMF) and World Bank in 1989 by adoption of the Washington Consensus for a similar market fundamentalist reform package for developing nations.

From 1964 to 1985, numerous government crises, many of them after US-sponsored military coups, provided the opportunities for shock treatment throughout Latin America in Brazil, Chile, Argentina, Uruguay, and Bolivia, as well as in Indonesia. In 1989, the fall of the Soviet Union brought the opportunity for shock therapists to manage the sudden transition to market economies in Poland, other Soviet satellites, and finally Russia itself in 1991. Eventually other crises were exploited elsewhere, such as in South Africa during the change from apartheid, Thailand, South Korea, the Philippines, and Indonesia (again) after the 1997-1998 Asian financial crisis, war-torn Iraq immediately after the US invasion, Sri Lanka after the catastrophic 2004 Asian tsunami, and in New Orleans after Hurricane Katrina.

The severe recessions that followed in many countries had drastic consequences for the general public. These included loss of fragile local industries and massive bankruptcy of farming after withdrawal of protection, rising unemployment up to 30% or more, falling wages by as much as 40%, increases by tens of millions for people living in poverty, and enhancement of this suffering from simultaneous withdrawal of social programs. Once the harsh impact of these policies became apparent, they became extremely unpopular and had to be implemented by force.

Particularly in Latin America, military juntas engaged in book burning, closure of newspapers and magazines, occupation of universities, imposition of curfews, banning strikes and political meetings, raiding union halls, jailing community workers and union leaders, and deployment of tanks against demonstrators. The worst countries resorted to widespread torture and targeted extrajudicial killing, such as with the 300 torture camps and 30,000 “disappeared” individuals in Argentina. These brutal measures were always presented to international outsiders as part of the fight against communism. In reality, the majority of the people swept up were not terrorists, but rather those identified as posing the most serious barriers to the juntas’ economic programs. In 1976, 80% of Chile’s political prisoners were workers and peasants.

Despite all of this, market fundamentalists claimed these outcomes as economic miracles, particularly for Chile. Unfortunately, the collaboration of Friedman and his Chicago boys with the brutal Pinochet dictatorship after the 1973 CIA-led coup was hardly an economic triumph, except for foreign companies and financiers. The first year of shock therapy resulted in a 15% contraction of the economy and increased unemployment from 3% to 20%. The economy crashed again in 1982 with exploding debt, recurrent hyperinflation, and unemployment of 30%. By 1988, when rapid growth returned, 45% of the population had fallen below the poverty line. Even in 2007, Chile remained one of the most unequal countries in the world, ranking 116 out of 123. All of this came about at the cost of 3,200 people disappeared or executed, 80,000 imprisoned, and 200,000 fleeing the country for political reasons.

Shock therapy in Russia in 1991 was particularly catastrophic. Gorbachev reportedly sought to move the Soviet Union in the direction of the Nordic social democracies (whose combined growth and equality lead the developed world). However, Yeltsin wrested control of Russia and brought in Harvard economist Jeffrey Sachs to administer shock therapy for the transition from communism. What followed was the worst depression in modern history. In Russia, 80% of farms went bankrupt; 70,000 state factories closed; people living in poverty increased from 2 million to 74 million, suicide doubled, alcohol consumption doubled, violent crime quadrupled, life expectancy and population fell, and state property was turned over to corrupt oligarchs. When the people and parliament objected, Yeltsin illegally dissolved parliament, sent forces that killed 100 demonstrators, and attacked parliament with tanks and troops with 500 additional deaths. These events facilitated the rise of Vladimir Putin, the oligarchs, and the political climate we are stuck with today.

In general, everywhere the Chicago School crusade has triumphed, it has created a permanent underclass of between 25% and 60% of the population. According to Grinspun, Keynesianism sought to mobilize support and share the burden through a negotiated process involving key stakeholders—government, employers, farmers, unions, and so on—when stabilization measures were implemented. In sharp contrast the market fundamentalist approach was to shift all the social cost onto the poor through shock therapy. Thus, in disseminating his ideology, Friedman can be seen as a Lenin-like figure who managed to create misery for large numbers of people throughout the world, purportedly for their own good.

Although I liked the book, I do have some criticisms. The author does a reasonably persuasive job of reporting the ideology, pervasiveness, implementation, and consequences of shock therapy. However, in my view, she sometimes extends her discussion too far, such as to the 1989 Tiananmen Square massacre and to the killing of 500,000 to 1,000,000 Indonesians after the 1965 CIA-backed coup. In addition, serious problems before initiation of shock therapy, such as hyperinflation, are sometimes underemphasized. These diversions needlessly create opportunities for criticism from her ideological opponents to distract from the core of what she is reporting. I also disliked the way statistical fragments and examples are scattered throughout the text. I would have preferred a more chronologic account and even tables listing changes in GDP, unemployment, inequality, and so on. I found the index to be nearly worthless when trying to retrieve statistics for use in this review.

31. The Rise and Fall of Nations (national policies that lead to economic failure)

heggef — Sat, 21 Aug 2021 01:48:56 +0000

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World. Ruchir Sharma. 2016.

Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, spent 25 years traveling to analyze the economies of the world for investment. As an unsentimental businessman, he presents ten rules, each with its own chapter, to use in identifying the next big winners and losers in the global economy.

1. People Matter: Is the talent pool growing? The portion of working age people (15-65) who drive the economy is decreasing, while the portion of nonproductive older people is increasing. Births per woman have decreased globally from 4.9 to 2.5, even in India and Mexico. The fertility rate is actually less than the replacement rate of 2.1 in 83 countries. Immigration has partly offset this problem in some developed countries. Automation may actually be important to counter workforce shortages, although it is viewed as a threat to jobs (47% at risk in the US in one to two decades).

2. The Circle of Life: Particularly in developing countries, bold new leaders often have early successes from reform followed by staleness and corruption. Many examples of this pattern are reviewed, such as Putin in Russia, Erdogan in Turkey, Suharto in Indonesia, and Mohamad in Malaysia. Vladimir Putin’s election to the presidency in 2000 led to reforms that increased average Russian annual salaries from $2,000 to $12,000, but by 2008, increasing demagoguery and corruption initiated falling average income to $8,000, negative growth, 16% inflation, and billionaire oligarchs. Even worse, populists without reform arise in some countries, such as Chavez in Venezuela and Kirchner in Argentina.

3. Good Billionaires, Bad Billionaires: “Low levels of inequality fuel long runs of strong economic growth, and….high or rapidly rising inequality can prematurely snuff out growth.” Inequality is presently very high and getting higher. In 2014, the top 1% had 48% of global wealth. The number of billionaires has doubled in the last 5 years and tripled in the last 10. Good billionaires make positive contributions to productivity and have fewer corrupt ties to government. Bad billionaires in rent seeking industries like construction, real estate, gambling, mining, metals, oil, and gas compete for access to national wealth and may be tied to government corruption. Russia has by far the largest portion of bad billionaires at 70%.

4. Perils of the State: The checklist for governments includes the following: 1) the level of government spending, 2) misuse of state companies and banks, 3) activities that are either choking or encouraging private business. For spending in developed nations, France tops the list with 57%, followed by Sweden, Finland, Belgium, Denmark, and Italy with around 50%. For spending in developing nations, Russia probably tops the list at close to 50% (official figures claim only 36%), followed by Brazil, Argentina, Poland, Saudi Arabia, and Turkey with 41-35%. Too much spending may include lavish subsidies, wasteful state corporations, and other inefficiencies. Too little spending may include inadequately funded law enforcement, large black markets, and civil war. Reportedly, China’s recent stimulus to maintain unrealistically high growth targets has generated $6.8 trillion in wasted investment, including a great deal of empty real-estate.

5. The Geographic Sweet Spot: Nations that qualify as geographic sweet spots combine the pure luck of an advantageous location for trade with the good sense to make the most of it. For the largest emerging nations, combined import and export trade account for 70% of GDP. Profitability from proximity has occurred between Dubai and Iran, Hong Kong and China, Eastern Europe and Western Europe, Southeast Asia and the US, and Mexico and the US. To benefit from their locations, countries must open their borders to trade with their neighbors, the wider world, and their own provinces and second cities.

6. Factories First: Is investment rising or falling as a share of the economy? For emerging countries, investments are optimal at 25-35% of GDP and weak at 20% or less. For developed countries, investments average only about 20% of GDP. Investment becomes increasingly nonproductive above about 35% and results in slower economic growth. This is particularly concerning for China, where investments have grown to 47% of GDP to maintain unrealistic growth targets. It is becoming tougher for developing nations to get into manufacturing due to shrinkage from 24% to 18% of global GDP since 1980 and other structural reasons. Also, for developing countries, the rise of service industries has been insufficient to drive mass modernization, even for India’s IT services, which employ less than 1% of the workforce.

7. The Price of Onions: Is inflation high or low? In the postwar era, low inflation has been a hallmark of every long run of strong economic growth. South Korea, Taiwan, Singapore, and China had booms lasting three decades or more and rarely saw inflation at greater than the emerging-world average. After 1933, rising inflation peaked at 15% in 1974 then fell to 2% since 1991 for developed countries and peaked at a staggering 87% in 1994 then fell to 6% since 2002 for developing countries. Inflation was tamed largely by the rise of politically independent central banks that enforce inflation targets of around 2%. Bad extensive deflation has been rare after World War II, with exceptions in Hong Kong and Japan. Deflation may be good, such as in the English industrial revolution when prices fell by half and output rose sevenfold and in the digital revolution when prices plummeted as quality skyrocketed.

8. Cheap is Good: Does the country feel cheap or expensive? An overpriced currency will encourage locals and foreigners to move money out of a country and sap its economic growth. A currency that feels cheap will draw money into a country and boost its economic growth. The critical category to watch is the current account, which captures how much a nation is producing compared to how much it is consuming. This consists of the trade balance (exports minus imports) plus other currency flows. A country with a current account deficit of 5% for five years is highly likely to have a significant slowdown and some kind of crisis. To predict changes, watch whether the locals are moving money into or out of the country, including by illicit channels. China is the leading exporter of illicit capital at $125 billion per year until 2013, increasing to an annual rate of $320 billion at the beginning of 2015—an alarming sign. Overpriced currency may lead to collapse, crisis, and contagion to other emerging countries.

9. The Kiss of Debt: Is debt growing faster or slower than the economy? Economic slowdowns and financial crises are most often preceded by excessive growth of private debt (companies and individuals) not government debt. Eventually, some financial accident occurs, typically after the central bank is forced to raise interest rates, and the bubble bursts. Subsequently government debt increases due to decreased tax revenues, increased public safety net spending, and shifting of bad debt to government books. The magic number for spotting coming trouble is a five year increase in private credit of 40% as a share of GDP (or 20% per year). The most alarming credit binge is in China, with a record 80% five-year increase of private debt by 2013 with associated real-estate and stock market bubbles. Failure to reverse course could result in an outcome like that of Japan, where growth was stagnant for two decades and total debt increased from 250% of GDP in 1990 to 400% today.

10. The Hype Watch: How is the country portrayed by global opinion makers? The basic rule: the global media’s love is a bad sign, and its indifference is a good one. Studies of the covers Time and other publications show that economic growth is more likely to slow when the story is upbeat and more likely to rise when it is downbeat. Trends are often near the ends of their runs by the time they come to the attention of the media. Mainstream opinion tends to extrapolate recent trends into the unknowable future. Rapid “catch-up” growth of poor economies is likely to slow when per capita GDP reaches 75% of that of the US.

11. The Good, the Average, and the Ugly—Summary. For three decades before 2008, global economic annual growth was 3.5%. However, the future potential growth rate is estimated to be limited to 2.5% due to structural changes of depopulation, deglobalization, and the need for deleveraging. Although the post 2008 recovery has been weak, recovery in the US has been stronger than in most developing nations and needs to be judged by the new standards. The “kiss of debt” rule of growth of debt by over 40% of GDP in five years is the single most reliable indicator of a coming major economic slowdown. China’s economic growth prospects now rank among the ugliest in the emerging world. Selected countries are listed below according to the author’s view of their economic prospects:

32. Why Nations Fail (from extraction economics to benefit colonialists and oligarchs)

heggef — Sat, 21 Aug 2021 01:47:06 +0000

Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Daron Acemoglu and James A. Robinson. 2012.

The authors begin by comparing life in Nogales, Arizona with life in Nogales, Sonora, which is only a few feet away across the Mexican border. Residents north of the border are healthier, live longer, have three times more household income, and enjoy much better government services, including law and order, with much less corruption than residents south of the border. Due to the proximity and shared background of the two cities, these striking differences cannot be explained by the usual references to geography, culture, ignorance, or the protestant work ethic. Instead, the cause is major differences of political and economic institutions between the US and Mexico. These differences have evolved because of the way the societies were formed in the early colonial period.

Spain’s and Portugal’s conquests of Mexico, Central America, and South America were complete. Hence, they were able to replace the already exploitative institutions of the indigenous peoples with similar noninclusive, extractive institutions of their own. The new European aristocracy established a system of absolutist rule with forced labor to extract the wealth and resources of indigenous peoples for themselves, Spain, and Portugal. Once established, this system persisted for centuries, including within many new countries formed after independence from Spain and Portugal. Infighting of elites over the spoils led to political instability with an endless succession of coups and dysfunctional governments. Dispossession and political exclusion of the general population led to slow economic growth from lack of incentives for innovation and entrepreneurship and from inability to counter the excesses of elites.

English colonization of the New World did not begin until after the defeat of the Spanish Armada in 1588 and hence was limited to the then less desirable portion that remained in North America. The English intended to establish exactly the same kind of noninclusive, extractive colonies as the Spanish and Portuguese. However, due to differing circumstances, their initial colony at Jamestown failed to subjugate the indigenous peoples, then failed to confiscate sufficient output from their own colonists. Consequently, the English were forced to introduce economic incentives and increased political participation to develop and retain more productive colonists. These changes persisted and evolved into the institutions of the US today that are much more inclusive and much less extractive than those of Latin America. It is the cumulative effects of these extractive institutions designed to take incomes and wealth from one subset of society to benefit a different subset that explain the differences in prosperity between Nogales, Arizona, and Nogales, Sonora. The authors then report that similar institutional factors in other countries and eras provide the best explanation for most differences in national prosperity for the rest of the world.

Alternative possible primary sources for differences in prosperity are discussed and dismissed. For geography and culture, this is done by comparing many adjacent regions with differing outcomes, such as Nogales, North and South Korea, West and East Germany, and adjacent sides of the Kasai River in the Congo. For religion, it is noted that recent Asian successes occurred without benefit of the Protestant work ethic and that Middle Eastern dysfunction is much more strongly related to successive extractive colonization by the Ottoman Empire and European powers than to the Islamic religion. For ignorance, it is noted that the leaders of underperforming countries are well aware of the problems of their extractive policies but choose them on purpose since they benefit at the expense of everyone else. Also, it is noted that many economists seem to favor the ignorance hypothesis because it implies more value for the advice they provide.

For much of world history, economic growth has been slow due to mostly noninclusive and extractive political and economic institutions, although with some variability. In ancient Rome, expansion and some economic growth occurred during the years of the Republic (510-28 B.C.) due to somewhat more inclusive (though still restrictive) political and economic institutions. Toward the end of the Republic and during the years of the Empire (28 B.C.-476 A.D), increasingly absolutist political rule, increased economic extraction by elites, markedly increased inequality, and eventually extreme political instability with endless civil wars resulted in complete collapse. In Medieval times, the Venetian Republic flourished from its onset in 810 A.D. due to relatively inclusive institutions and a favorable location for Mediterranean trade. However, the adoption of noninclusive institutions beginning in the 14th Century led to its decline to be the museum it is today. Many more historic examples are discussed.

Although noninclusive societies sometimes manage to achieve limited growth, it is usually unsustainable. The classic Maya civilization of 400-1200 A.D. (after the earlier 500 B.C.-100 A.D. cities) initially expanded due to centralized government and occupational specialization, but then declined due to political instability from elites fighting over the spoils of extraction. From 1928 to 1960, the Soviet Union achieved 6% annual growth of income by reallocating resources from agriculture to industry, but then declined and collapsed when this reallocation was complete. Thus, growth in extractive societies is unsustainable because technologic progress does not occur when most people in the economy lack the necessary incentives and security for innovation and the necessary political participation to limit extraction by elites. Indeed, political and economic elites who benefit
from the status quo often resist conditions that favor growth because they fear the creative destruction of a healthy economy.

World inequality dramatically increased with the British Industrial Revolution because only some parts of the world had the necessary inclusive institutions to adopt the spectacular changes of its innovations and new technology. These changes started in Briton and soon spread to Europe, the British “Settler Colonies” (US, Canada, Australia, and New Zealand), and Japan, then to South Korea, Taiwan, and China after World War II. They failed to spread to Sub-Saharan Africa, much of Latin America, the Middle East, and much of Asia due to the absence of favorable institutions. This failure was the legacy of centuries of institutions with absolutist political repression and economic extraction (including the slave trade), mostly from colonization by European countries, then from new countries’ own elites after independence in the 20th Century.

Absolutist rulers who feared economic change leading to political change actually blocked or delayed spread of the Industrial Revolution in the Ottoman Empire, Spain, Austria-Hungary, Russia, and China. Absolutism was not the only barrier to developing inclusive institutions. Some parts of the world, particularly in Africa, lacked a centralized state that could even provide the minimal law and order necessary for those institutions. European colonization even reversed some favorable institutional development, such as with the Portuguese and Dutch conquest of the Asian spice economy and with the expansion of the Atlantic slave trade for the sugar plantations and other colonies in the Americas.

The Industrial Revolution started and made its biggest strides in England because of her uniquely inclusive political and economic institutions. The emergence of constitutional rule and political pluralism made possible centralized government that could strengthen property rights, improve markets, undermine state-sanctioned monopolies, remove trade barriers, extend taxation to elites, and limit extraction by elites to increase incentives for innovators and entrepreneurs. Highlights in the evolution of this system included the Magna Carta of 1215, the Peasant’s Revolt of 1381, political centralization beginning after 1485 by the Tudors and continuing with the Glorious Revolution of 1688, the shift of authority from the monarch to Parliament after 1688, and subsequently numerous acts of Parliament that encouraged the countless innovations in textiles, other manufacturing, transportation, and trade occurring at the time.

Why did these inclusive changes vital to economic development occur first in England rather than somewhere else? According to the authors, the divergence of institutional characteristics between nations is largely the consequence of slow accumulation of small historical differences, the acts of individuals, or just random factors. This institutional drift is then amplified by critical junctures that lead to more rapid divergence, as in the following instances. The Black Death of 1346 led to labor shortages and land surpluses in Europe that ended feudalism in the West, where peasants had more bargaining power, but strengthened it in the East. The expansion of world trade after 1600 weakened the absolute rule of Elizabeth I of England who was unable to establish monopolies but strengthened it for the monarchs in France and Spain who were able to do so. The French Revolution led to inclusive institutions that converged with those of England in Western Europe but not in Eastern Europe.

Once established, these institutional differences are remarkably persistent due to virtuous and vicious cycles. They remain the core cause of inequality between and within nations today, although details vary from nation to nation. North Korea has one-party rule without elections, while Zimbabwe has one-party rule with the façade of elections. Argentina and Columbia have elections, but authority does not reach the periphery in Columbia. In Egypt and Uzbekistan elites took over extractive institutions of socialist governments and transformed them to crony capitalism. Centralized government is lacking in Somalia and Afghanistan because of failure to achieve it and in Haiti and Sierra Leone because of collapse of the state.

The solution to the economic and political failure of nations today is the difficult task of transforming extractive institutions toward inclusive ones. To do so, requires some degree of centralized order, some preexisting political inclusiveness, and transformative media, which are often attacked or captured by extractive regimes. Three examples of success are given. In Botswana, the chiefs seized the critical juncture of postcolonial independence to introduce inclusive institutions that achieved the highest per-capita income in sub-Saharan Africa at a level equal to that of Hungary. In the US South, replacement of the highly extractive institutions of slavery and Jim Crow in the 1960s contributed to the elimination of the 50% per-capita income gap between the South and the North. In China, the replacement by Deng Xiaoping of Mao’s extractive economic institutions in 1980 led to decades of rapid economic growth. However, questions remain about sustainability in China because this was said to be catch-up growth under noninclusive political institutions, rather than growth from innovation and creative destruction.

Multiple alternative solutions to reverse economic failures of nations are examined and rejected. The irresistible charm of authoritarian growth, such as in China, is rejected because China’s institutions are extractive, and its growth is said to be likely to end as soon as it reaches the level of a middle income country. The modernization theory that societies may pass through an authoritarian stage during rapid growth before becoming democratic as they mature is rejected because no authoritarian society has done so in the last one hundred years. The the prospect of engineering prosperity by providing the right advice is rejected because it fails to recognize the primary role of political institutions that undermine meaningful change. A primary role for foreign aid to extractive governments is rejected, since most of it is plundered and fails to reach its target.