Category Archive: Analysis

  1. Trade and Growth

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    According to a survey on free trade from the University of Chicago, economists overwhelmingly agree that the net effects of free trade are good. A recent article by several  IMF economists affirms that, “perhaps more than on any other issue, there is agreement among economists that international trade should be free.” Free trade is said to enhance efficiency in all participating countries, which can lead to higher productivity and higher rates of economic growth. These higher growth rates can, in turn, raise living standards and therefore represent a desirable policy target—particularly for developing countries.

    Since the emergence of classical development literature, the benefits of free trade have been contested by a small but persistent group of scholars. Among them, Raul Prebisch and Gunnar Myrdal argued that free trade leads countries in the Global South to specialize in low-tech products, while rich countries in the Global North specialize in high-tech ones, thereby reducing the former’s productivity and rates of growth. This is in contrast to the mainstream of the profession, which has theorized that the South might benefit from high-tech sectors in the North through cheaper intermediate inputs and access to better technologies, which can in turn encourage productivity. From the perspective of economic theory alone, then, the question of free trade’s impact on growth is ambiguous.

    But policymakers, particularly since the 1980s, have acted in accordance with the positive assessment. Since the creation of the World Trade Organization in 1995, free trade has been embraced by almost every country in the world, following the promise of higher growth rates and higher living standards.

    Thirty years on, we can ask: Did the extensive trade liberalization of the 1990s lead to higher economic growth rates? On this question, the answer is less ambiguous: it did not.

    My most recent research shows that there is no positive relationship between trade liberalization and economic growth during the Great Liberalization of the 1990s. I reach this conclusion after critically revising the statistical analysis in an earlier paper by Antoni Estevadeordal and Alan M. Taylor, which found that trade liberalization led to higher growth rates. In my study, I show that their findings are not robust; the positive relationship disappears with simple modifications to their research design, and so we cannot ascertain that the trade liberalization of the 1990s impacted growth rates. More precisely, Estevadeordal and Taylor’s original results depend on several flaws: outlier countries, among them China; inconsistent tariff data for specific countries; inappropriate treatment year; and the specific growth data used in the analysis. Once we address these four aspects of their study, the result disappears.

    The role of outliers and growth data are particularly important. The impact of China on observing trade effects is crucial, because China’s economic development in recent decades is a historical exception. Market reforms are undoubtedly a part of the story, but the role of the state is unique, as the agent of a process Isabella Weber has called “experimental gradualism.” In pure statistical terms, trade liberalization occurred in China during the 1990s, and it coincided with an acceleration of economic growth. But the assertion that this accelerated growth was caused by trade liberalization is a shaky one. (Many other exceptional processes were at work within China, such as the extensive use of industrial policy, economic planning, strict requirements of technology transfer and local content to FDI, among others—most of which are difficult if not impossible to capture in quantitative variables for regression analysis.) As soon as we remove outliers like China, identified using established methods in regression analysis, the positive relationship between free trade in the 1990s and economic growth vanishes.

    Even more importantly, the positive relationship between free trade and growth disappears when we use alternate growth data. The authors of the original paper performed their analysis with data from the World Bank using GDP per capita in Purchasing Power Parity (PPP) terms. In my replication, I performed the very same statistical analysis, with the same assumptions, but using growth data from the Penn World Table (both in PPP  terms and in constant national prices) and from the World Bank (in constant national prices). In both cases, the positive relationship disappears. Put simply, the positive relationship only exists if we use the specific growth data the authors used.

    Why is that the case? PPP data from the World Bank is built on certain assumptions and is constantly being revised; the specific growth data used by the authors is not publicly available anymore, meaning the assumptions in its calculation were probably revised. While the authors didn’t have this information when doing their paper, the fact that using three other data sources causes the results to disappear makes a strong enough claim against their findings—and for the disappointment of free trade.

    It is therefore not possible to assert that free trade in the 1990s accelerated economic growth worldwide. The supposed benefits that free trade was going to bring in terms of economic growth didn’t materialize. Nevertheless, my results should not be taken as suggesting there is no impact of free trade on economic growth; rather, the answer depends on specific historical, institutional, and economic conditions. The results should be taken as an invitation to introduce nuance to the mantra on free trade, to revive theories that emphasize the contingent effects of tariffs on growth, and to promote historical analyses that can uncover the details about specific episodes of tariff changes.

    We can look, for example, to the work of David DeJong and Marla Ripoll, which is very much in the spirit of early theory by Prebisch and Myrdal, and finds that the effect of free trade on growth is different for developed countries (positive) and developing ones (negative). Taking up this kind of analysis, where effects are not assumed to be uniform, and complementing our analyses with good case studies and historical context, is where I hope research on trade and development moves in the near future. Trade matters, and we have good reason to believe that effects exist—but not necessarily in the way we have been told.

  2. The Wall Street Consensus at COP26

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    Wednesday, November 3, was private finance day at COP26. For those who follow central banks closely, the event was a chance to gauge whether their recent turn to climate-conscious policy making would translate into ambitious decarbonization announcements. After all, private finance is essential to the survival and profitability of the fossil-dependent economy—it creates dirty credit at prices that ignore climate effects. Such a pervasive market failure, central bankers now routinely argue, is significant enough to generate financial stability risks and to justify new climate policies within independence-centered mandates.    

    Mandatory decarbonization – central banks missing in action 

    If central banks were ambitious about shrinking private lending to carbon activities, the COP26 press release would have announced plans to explicitly penalize dirty lending in both monetary policy and regulatory frameworks, and specified an ambitious timeline for doing so. These plans would upgrade the Bank of England’s “carrots first, sticks later” approach to decarbonizing its corporate bond purchases (which first rewards, and only later envisages penalizing) to a carrots and sticks approach better aligned with the climate urgency. By rapidly ending the historical carbon bias hardwired into collateral frameworks and unconventional corporate bond purchases, as they have repeatedly promised to do, central banks would ensure that the cost of capital for high carbon activities increases significantly, redirecting financial flows to green activities.  

    To minimize dirty arbitrage (fossil assets shifting across private portfolios), the central banks might announce the inclusion of private equity and other shadow banks within the scope of the new “carrots and sticks” regime. To further reduce transition risks and preserve an orderly transition, they could recommend new accounting rules for stranded assets (suspending mark to market) in systemic institutional portfolios. 

    Central banks would also address the structural shortage of green assets by calling on fiscal authorities to collectively develop new regimes of green macro-coordination. The accelerated issuance of green sovereign bonds could absorb the flow of capital leaving dirty activities, and finance nationally-developed green public investment plans and green industrial policies. This might come alongside increased taxation of conspicuous luxury consumption and avoid carbon shock therapy by carefully deploying carbon prices without allowing them to dictate the pace and direction of decarbonization.  

    Finally, mandatory decarbonization would also accelerate the energy transition in the Global South. By correcting the market mispricing of dirty credit, central banks would redirect the trillions of Global North institutional capital towards renewable energy and green transport infrastructure there. 

    But this was not the Finance Day press release at COP26. Instead, the Network for Greening the Financial System—the 100-plus central banks working together to design new climate frameworks—made disclosure of climate risks and stress test scenarios the centerpieces of their climate press release. So very 2019 voluntary decarbonization. 

    The return to the 2019 baseline of voluntary decarbonization—generally remarkable given the ambitious rhetoric of the June 2021 Green Swan conference organized by central banks—is even more puzzling for the Bank of England.  Its governor, Andrew Bailey, outlined three “pivot points” of “climate ambition” in a speech at COP26: micropudential tools (green capital requirements), scenario analysis, and disclosure of climate risks. This was a strangely framed ambition, since it sets the only central bank with an explicit environmental climate mandate back to 2019—before it started the work of greening its corporate bond purchases within a “mandatory decarbonisation” framework. 

    The central bankers’ rhetoric on Finance Day at COP26 was closely aligned to the preferences of financial capital. It represents a win-win attitude to attacking the climate crisis—one that does not feature a robust role for public investment, nor a commitment to swift decarbonization. 

    GFANZ and the Wall Street Consensus 

    The macrofinancial politics of COP26 should be understood as status-quo financial capitalism now entering its green age. Day three of the Conference of the Parties was Finance Day, rather than green public investment day, because of the growing political consensus in the Global North that decarbonization must be finance-led. In a 2021 paper, I termed this the Wall Street Consensus. If the Washington Consensus had its most articulate ambassador in economist John Williamson, the Wall Street Consensus has Mark Carney, the head of the Glasgow Financial Alliance for Net Zero (GFANZ), the UN Special Envoy for Climate Finance, and the intellectual author of the green turn in central banking.

    GFANZ gave COP26 its big decarbonization number:  USD 130 trillion “relentlessly, ruthlessly focused on net zero.”  To put that number in perspective, at COP26 rich countries failed again to honor their pledge for USD 100 billion per year in climate finance for poor countries. There was greenwashing even in the headline number, since USD 130 trillion was not the estimated credit flow about to inundate green sectors, but rather the combined assets under management of GFANZ members, many issued to finance dirty activities. 

    But those USD 130 trillion would not find their way into climate-friendly activities, GFANZ members like BlackRock’s Larry Fink argued, without a little help. Of course, Larry Fink was not calling for mandatory decarbonization, but for public policy and private firms to work together on climate in the same way that they worked together on vaccines.  John Kerry, the US Special Presidential Envoy for Climate, translated such calls for public-private partnerships into Wall Street Consensus lingo: “Blend the finance, de-risk the investment, and create the capacity to have bankable deals. That’s doable for water, it’s doable for electricity, it’s doable for transportation.” 

    This is the Wall Street Consensus mantra: the state and development aid, including multilateral development banks, should escort the trillions managed by private finance into climate or the Sustainable Development Goals asset classes. The state derisks or “blends” by using public resources (official aid or local fiscal revenues) to align the risk-return profile of those assets (“bankable projects”) with investor preferences or mandates. Transforming climate or nature into asset classes necessitates the commodification and financialization of public goods and social infrastructure, beyond water, electricity and transportation, and including housing, education, healthcare; these have to generate cash flows that pay institutional investors. The consensus understands the state as a derisking agent: its fiscal arm enters public-private partnerships to render them bankable by transferring some of the risks to the balance sheet of the sovereign, while its monetary arm protects investors from liquidity and exchange rate risk. 

    Indeed, the five catalytic initiatives that GFANZ announced at COP26 all follow the logic of “new asset classes for us, new risks for the state.” Together they make up an alphabet soup of Wall Street Consensus initiatives. Finance to Accelerate the Sustainable Transition-Infrastructure (FAST-infra) targets labelling of sustainable infrastructure assets, an extension of the G20 Infrastructure asset class. In the same vein, Mobilising Institutional Capital Through Listed Product Structures (MOBILIST) promotes securitization products (yes, shadow banking) for SDG financing. The Innovative Finance for the Amazon, Cerrado and Chaco (IFACC) initiative boldly attributes deforestation and ecosystem destruction to the absence of adequate financial instruments for farmers. The Climate Finance Leadership Initiative (CFLI) identifies India as a pilot country for concerted efforts to mobilise private finance around new models for funding sustainable infrastructure and building public-private partnerships, including with the national government and multilateral organizations. The Global Energy Alliance for People and Planet aims to accelerate the energy transition by raising 100 billion in private and public capital. 

    Beneath these eye-catching promises lies the cruel reality of voluntary decarbonization: asset managers, most notably BlackRock, overseeing 57 of the USD 130 trillion announced by GFANZ, only committed to decarbonizing 20 percent of emissions by 2030—significantly less than the 50 percent scientists believe necessary to stay within 1.5 Celsius warming. Even more illustrative, just one week after COP26, the US auctioned new oil and gas drilling leases in the Gulf of Mexico, on the back of buoyant demand from fossil capitalists supported by around USD 1 trillion in funding from banks and pension funds. 

    The big takeaway from COP26 is therefore not that private finance will go to great lengths to portray its systemic greenwashing as climate activism. This is rather predictable. The more worrying development is that the state is not only prepared to let finance get away with it, but is willing to subsidize the climate destruction guaranteed by this path. 

    Big green state?

    Perhaps the central bank alignment with the voluntary decarbonization preferences of private finance demonstrates the limits of pinning climate hopes on deeply conservative technocratic institutions. Just as well, critical left voices might argue: Wouldn’t the metamorphosis of central banks into muscular machines of the Big Green State amount to corporate welfare projects that rescue capitalists from ecological disaster, a win-win for capital and the state that leaves current accumulation patterns intact?

    In a 2019 essay, Thea Riofrancos persuasively responded to such critiques by outlining a cautiously optimistic case for state-led green macrofinancial regimes, be these called Green New Deal or Big Green State approaches, albeit with the political challenges of any project of deep structural transformation. But there is something additional at stake. Busy setting up straw men (too vague, too top down, too social-democratic, too concerned with growth), the critics have stopped paying attention to the evolving strategies of financial capital. 

    The dystopias conjured by left skeptics to dismiss the Big Green State are already here—courtesy of the hegemonic Wall Street Consensus. An understanding of how the state-finance relationship and should be the starting point for discussions of how to move from voluntary, patchwork decarbonization, to mandatory, immediate decarbonization. 

  3. Growth Towns

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    The ongoing crisis for Chinese property developer Evergrande has made the giant company the focal point of global concern. Creditors, investors, contractors, customers, and employees of Evergrande within and outside China have watched anxiously to see whether the Chinese government would decide that Evergrande was too big to fail. If Evergrande were to collapse, the repercussions for both the financial system and construction supply chains are impossible to predict. Reportedly, the central government in Beijing has issued a warning to local governments to brace for the possible social and political fallout. 

    Even if Evergrande were salvaged through government intervention, the Chinese state would continue to face new dilemmas. Evergrande is just one of many troubled property development firms that face potential default. As housing prices in China fall, the crisis has already spread to other property developers, such as Kaisa. The US Federal Reserve explicitly warned that China’s housing crisis could spill over to the US and global economy.   

    The crisis of Evergrande and China’s large property sector is a manifestation of the crisis of China’s growth model. The limits of that model can be seen in ghost towns across the country; China’s empty apartments are estimated to be able to house the entire population of France, Germany, Italy, the UK, or Canada. How could such development sustain high-speed growth for so long, and why has it failed now? To understand the ongoing crisis, we need to understand how property—and fixed investment more broadly—is connected to other moving parts of the Chinese and global economies.

    The end of the China Boom

    From the mid-1990s until 2008, China’s export sector emerged as a mighty engine of dynamism and profitability. Fueled by global demand and dominated by private and foreign enterprises, the export sector piled up mammoth foreign exchange reserves, which became the monetary foundation for a generous expansion of credit by the CCP-controlled financial system. The growth of foreign exchange reserves allowed Chinese state banks to expand local currency liquidity without the risk of devaluation and capital flight that had plagued expansionary experiments in other developing countries. Most of the new loans flowed to politically well-connected enterprises, which tended to invest in fixed assets like infrastructure, real estate, steel mills, and coal plants. 

    As Keynes once said, two railways covering the same route are not twice as good as one. Much of China’s debt-financed fixed investment has been redundant and profitless. Since the late 1990s, leaders within the CCP have sounded the alarm about indebtedness and overcapacity. One of their proposed solutions was financial liberalization: If liquidity were allowed to circulate in search of high interest rates, inefficient enterprises would find themselves cut off from the cheap credit that kept them afloat. But other factions of the party-state elite saw the profitless and overextended sectors as potential cash cows and quasi-fiefdoms. Reforms never gained traction. 

    The first blow to China’s long export-led boom came with the global financial crisis of 2008–2009. In response to the collapse of global demand, the Chinese government unleashed an aggressive—and successful—monetary stimulus. Driven by the greatest wave yet of debt-financed investment in fixed assets, the economy rebounded strongly from the crisis. But with the export engine stalled, this redoubled expansion of state-bank credit for investment was no longer matched by the expansion of foreign exchange reserves. The result was an enormous debt bubble. Between 2008 and late 2017, outstanding debt in China soared from 148 percent of GDP to over 250 percent. The 2020 pandemic brought a new surge of loans, which pushed the debt-GDP ratio to more than 330 percent, according to one estimate. Following well-worn grooves, most of this debt went to finance new apartments, coal plants, steel mills, and infrastructure projects. With few to consume their eventual output, the new investments merely generated further unprofitable excess capacity. After the 2009–10 rebound, the profitability of enterprises continued to fall across the board in both private and state sectors, as shown in Figure 1 below.

    Falling profits add an urgent twist to the problem of indebted overcapacity. Profits provide firms with the cash flow to service their debts and pay back their loans. In China, the declining returns created a debt time-bomb: What would happen when the defaults started? CCP economic managers had run out of room for debt-financed investment stimulus. Meanwhile, the growth of the export sector remained below pre-2008 levels. In search of a new engine of expansion, Beijing called for a shift away from fixed investment and toward private domestic consumption. The volume of private consumption did climb rapidly after China’s accession to the WTO in 2001, but it never grew fast enough to catch up with the expansion in investment (see Figure 2 below). The disappointing growth of the consumption share was the result of escalating inequality. Throughout the long export boom, average household income grew much more slowly than the economy at large. This meant that most of the new income generated by the economy went to the government and other enterprises, instead of being paid out to employees as wages and salaries. Instead of increasing consumption, the surplus was ploughed back into more investment and further excess capacity.

    Proposals for rebalancing had been heard even before 2008. A rising share of consumption in the economy would mean new sources of final demand that could soak up excess capacity and provide firms with increased sales. Yet reaching the income distribution necessary for such private-consumption-boosting rebalancing is easier said than done, thanks to the monopoly of power by the party-state elite.  

    These stubborn problems underpinned the next stage in China’s trajectory. In 2015–16, a stock market meltdown and capital flight forced a sharp devaluation of the Chinese currency. By 2016, the economy had stabilized, but only after renewed tightening of capital controls. The banking system also injected rounds of new credit into the economy to keep it moving. One sign of widespread financial fragility was that many of the loans were needed to roll over existing debt, rather than to finance new production or consumption. 

    This impasse of the Chinese economy is illustrated by the stagnation of manufacturing, as revealed by the manufacturing Purchasing Manager Index (PMI), a lead indicator of manufacturing activities. On the PMI, a value above 50 indicates expansion and a value below 50 indicates contraction. In Figure 3 (below), the right-hand axis shows that PMI has hovered around 50 (the stagnation level) for a decade. The left-hand axis shows the volume of new loans. Comparing the new loan data with the manufacturing index, we can see the diminishing effectiveness of loan stimulus. Ever since the 2009–10 rebound, it has taken ever-larger loan injections just to keep the economy turning over. As recurrent and ever-larger credit surges brought further buildup of indebtedness in the economy without adding new dynamism, enterprises became loan-addicted zombies.  

    Two capitals

    Since the late 1990s, various solutions have been offered to the problem of indebted overcapacity, including liberalization of financial markets and raising private consumption. But over the last decade of stagnation, a different kind of rebalancing has come to define the Chinese political economy: “the state advances, the private sector retreats” (guojin mintui). Though the idea is sometimes analyzed in terms of shifting party ideology or individual leadership styles, the state-led squeeze of the private sector and foreign enterprises largely reflects broader economic conditions. In a low growth environment, state-connected firms must pursue growth at the expense of other sectors. Their alliances with party leaders gives them the capacity to follow through on this strategy.

    The state sector’s ability to maneuver rests on China’s unique form of property ownership—specifically, the fact that the state remains the universal landlord. During the 1950s, the CCP abolished private property and established the party-state, a self-assigned representative of the people, as the single owner of all property. Despite sweeping economic reforms since 1978, the party-state has never changed the state ownership of land or its status as the most significant form of property. The state facilitated the rise of a private economy by granting time-limited use rights of landed property to individual entrepreneurs. Such use rights have expiration dates, and the state retains the power to set the terms of renewal or to cancel the use right at any time. This is how rural market reform took off in the late 1970s, when the state instituted the user-responsibility system (leasing land use rights to peasant households while the state continued to own the land). A similar marketization of land use rights under state ownership began in the cities in the mid-1980s, beginning with Shanghai’s land-use reform. These reforms, which culminated in the 1990s, created the conditions for the rise of Evergrande-style property development without subverting state ownership of land property. 

    In addition to land, Beijing never let go of state-owned companies’ domination in key sectors. The state-owned enterprises’ reform over the 1990s was not exactly a “privatization.” Many state-owned giants were restructured on the model of profit-oriented Western transnational corporations and shed nearly all of their social functions, such as providing housing and healthcare to their employees. But many of the largest ones remained under the control of local or central governments through direct state ownership or state shareholding of public companies. Chinese companies in the Global Fortune 500 list grew from 10 in 2000 to 124 in 2020. Of the 124, 91 are state-owned enterprises. State-owned industrial assets total twice as much as private industrial assets in the whole economy, with state-owned assets occupying a predominant role in sectors such as finance, energy, automobile, telecommunication, and mining.  

    Thus, throughout the long export boom, China’s political economy was driven by profit-driven market exchanges grounded in the temporary ownership of property by entrepreneurs and individuals. Over time, many investors came to see the state ownership of property as a formality, and expected that renewal of use rights would be routine and ritualistic. As long as the growing Chinese economy offered a high return on investment, enterprising individuals were happy to keep their wealth and property in China and repress any concerns about the ultimate security of their property. But as growth rates and profits fell, investors renewed their attention to the transient nature of their property, given the continuing relevance of the Chinese Constitution’s Article 6 (“the State upholds the basic economic system in which public ownership is dominant”) and Article 7 (“the State-owned economy … is the leading force in the national economy. The State ensures the consolidation and growth of the State-owned economy”).

    The squeeze on private and foreign business became increasingly clear after 2008. As the world recession froze economic growth, a new anti-monopoly law promulgated by Hu Jintao was applied much more energetically against private and foreign enterprises than state-owned ones. To be sure, many individual party bosses of state enterprises have been purged in intra-elite conflict in the name of “anti-corruption.” But the privileges of state enterprises were rarely touched by the anti-monopoly law, even though the state sector is home to key monopolies such as telecommunications and energy. Conversely, confiscation of individual wealth in the name of the anti-corruption campaign became normal. The combination of increasing insecurity of the wealthy and entrepreneurial, the falling profitability in a slowing economy, and the expectation of long-run devaluation of the RMB triggered a wave of capital flight that culminated in the financial tumult in the summer of 2015, discussed above. Though the renewed strengthening of capital control has contained such flight, enterprises and wealthy individuals in China have become ever more eager to shift their wealth out of China into jurisdictions with greater legal protection of private property. 

    When Xi Jinping came to power in 2012, many observers expected him to pursue economic liberalization. During the early days of Xi’s reign, state media promoted this message with discussions of financial deregulation and “supply-side structural reform,” which, as the New York Times put it in 2016, “sounds less like Marx and Mao than Reagan and Thatcher.” But hopes that Xi would be a Deng Xiaoping–style pro-market strongman were soon punctured. The strength of vested interest groups within the party-state left Xi little choice but to support the continuous expansion of state-owned or state-connected companies at the expense of private and foreign ones. 

    While the statist turn predated Xi, he has overseen a significant acceleration of the process. Just this year, Xi introduced the program of “common prosperity.” The slogan went hand in hand with a crackdown on private enterprises. Repressive measures have included tblocking, last-minute, an overseas IPO by Ant Group (Alibaba’s fintech arm); imposing a hefty anti-monopoly fine on Alibaba; placing heavy restrictions on technology firms’ ability to collect data and provide services; banning for-profit school tutoring firms; and allowing state firms to take over key assets of private tech firms—to name just a few. 

    Evergrande and the Future of Chinese Capitalism

    In 2016, a state-owned publishing house in Beijing put out a simplified Chinese version of my book The China Boom. In this edition, all my references to “capitalism in China” were translated as “market socialism with Chinese characteristics.” This is the strict official self-description of the Chinese party-state, whose official publications never use “capitalism” or “Chinese capitalism” to characterize the nation’s economic system. Some Western leftists, such as David Harvey, have begun to speculate that Xi is steering China back onto the socialist road abandoned after Mao’s death. The idea of a Maoist, anti-capitalist turn can also be found in outlets such as The Wall Street Journal and The Washington Post. 

    Though increasingly widespread, the idea that China is moving away from capitalism is inaccurate. After four decades of reform, the Chinese economy has still not evolved into the textbook neoliberal capitalist model predicted (and advocated) by the literature on “market transitions.” But the Chinese system—characterized by the full commodification of the means of livelihoods, prevalence of the profit imperative in all economic activities, state ownership of all land property plus weak protection of other forms of private property, and dominance of state enterprises—is probably best understood as state capitalist or party-state capitalist. Putin’s Russia provides Xi with an example of how an autocratic regime can weather economic downturns once all oligarchs with independent power bases have been rounded up, contained, or exterminated. What Beijing wants is to restrain the accumulation of private capital to make more room for the accumulation of state capital. This project also involves cracking down on grassroots resistance to accumulation, as demonstrated by the recent arrest of labor activists, labor-rights researchers, and Marxist intellectuals

    Along with online retailing and social media, real estate is one of the most important areas where private capital has been dominant. What might the panic at Evergrande mean for the transformation of this pivotal sector, which generates about 25 percent of China’s output and supports an asset bubble valued at four times the country’s GDP? It may be an opportunity for the Chinese party-state’s ongoing promotion of the state sector against its rivals. The Evergrande crisis was triggered by the state’s attempt to crack down on private property developers by restricting their access to state bank financing. It was hoped that this would force heavily indebted enterprises to deleverage. It has been reported that the Chinese government was pondering whether to break down and restructure Evergrande into a set of state-owned enterprises. The Evergrande crisis could turn out to be an opportunity for the party-state to nationalize one of the largest property developers in the economy, thereby reasserting the state’s substantive ownership of land property. This development is consistent with the state’s recent attack on giant private enterprises, with the possible endgame of making these companies state-owned or state-controlled. By breaking up companies like Evergrande, the state could separate the more profitable activities (such as the unit that manages existing housing) and wind down whatever is unsalvageable. If these assets were nationalized, they would be transferred to state-owned developers, which remain profit-oriented.

    As in earlier moments of crisis, Beijing has made some gestures toward the need for a new growth model. Under the rubric of “common prosperity” and the call for wealth redistribution, Xi has tied Beijing’s private sector crackdown to the need to address inequality and even increase domestic consumption. Thus far, there is little evidence that this new round of redistribution is anything more than a redistribution of resources and power from the private sector to the less profitable but still profit-oriented state enterprises. Those who hope that Xi would bring socialism—a political-economic system in which people’s livelihoods are put before profit, investment, and growth—back to life are poised to be disappointed.

  4. Titans

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    In mid October 2021, when BlackRock revealed its third quarter results, the asset management behemoth announced it was just shy of $10 trillion in assets under management. It’s a vast sum, “roughly equivalent to the entire global hedge fund, private equity and venture capital industries combined,” and a nearly ten-fold increase in only a handful of years for a firm that first broke the $1 trillion mark as recently as 2009. Since the 2008 Financial Crisis, we’ve witnessed in BlackRock the rise of an undisputed shareholder superpower, but the firm, while exceptional, is not alone. Alongside its closest rival Vanguard, these two firms control nearly $20 trillion in assets and a combined market share of more than 50 percent in the booming market for exchange-traded funds (ETFs). And they’re not just big—they’re “universal,” controlling major stakes in every firm, asset class, industry, and geography of the global economy. It’s an unprecedented conjuncture of concentration and distribution, one which has prompted fierce debate over what this new era of common, universal, and increasingly passively allocated ownership means. For some, the new regime contains the seeds of a socialist-utopian economic vision; for others, it’s an anticompetitive, “worse than Marxism” nightmare. 

    At the heart of the debate is the theory of universal ownership, which contends that because today’s asset management giants are universal owners with fully diversified portfolios, they should be structurally motivated to internalize the negative externalities that arise from the conduct of individual corporations or sectors. Whether social inequality or the climate crisis, proponents of universal ownership contend that the enormous externalities of corporate capitalism will, eventually, diminish shareholder returns, and therefore universal owners should and will act to minimize them. It’s an elegant theory, but is it true? Ultimately, the answer to this question hinges on how we understand ownership. 

    In their definitive book on corporate governance, Robert Monks and Nell Minow, the originators of “universal ownership theory” wrote: “It is virtually inconceivable that something would be in the interest of pensioners that is not in the interest of society at large.”

    However, there are several factors which undermine the promise of universal ownership. Chief among these is the fact that, unlike Monks and Minow’s pension funds, asset managers are for-profit financial intermediaries, investing on behalf of others while retaining the corporate governance rights that derive from share ownership. As the work of legal scholar Lynn Stout has shown, corporations are not, in fact, “owned” by shareholders, who instead own rights to income and governance. But even the ownership of shares themselves has become difficult to pinpoint. Should ownership be attributed to households, the ultimate beneficiaries of most financial wealth? To the pension funds in which much of this financial wealth is held? Or to the asset managers to whom these pension funds delegate, and who dominate today’s shareholder structure?

    The answer is not a simple one; indeed, the lengthening of the equity investment chain has widened the separation of ownership and control, generating the “separation of ownership from ownership.” This separation has significant implications for how we understand the implications of the ascent of today’s asset management titans. By fixating on only one facet of this new landscape—that of universal ownership—we risk overlooking vital aspects of the broader configuration that we call asset manager capitalism.

    A regime change

    Generations of business students have absorbed the lessons of agency theory, according to which shareholders, apparently in contrast with managers or workers, are uniquely focused on the long-term performance of a corporation. From this perspective, what follows is a structure of corporate governance centered on protecting comparatively vulnerable minority shareholders against “expropriation” by insiders—namely majority shareholders, managers, and workers. As structurally weak stakeholders with skin in the game, the theory has it, shareholders need strong legal and regulatory protection, as well as extraordinary privilege with respect to the corporation’s governance and profits. The legacy of agency theory has been the orientation of Anglo-American business and regulation toward a corporation-dominated economy whose only efficient governance regime is, by extension, one geared towards maximizing shareholder value. 

    In the decades since the shareholder value regime took hold of corporate governance, inequality has soared, investment and growth have stagnated, 70 percent of wildlife has vanished, and a steady course has been set for a catastrophic 3 degrees of warming. Indeed, to state that shareholder value has failed—even on its own, efficiency-centered terms—is to state the obvious. But it may now also be to state the irrelevant. In the US and the UK in particular, asset manager capitalism is already firmly in place as a distinct corporate governance regime.

    Reflecting the periods in which their frameworks were conceived, the shareholders that inspired Adolf Berle and Gardiner Means’ Great Depression-era analysis of the separation of ownership and control in the corporation were individual savers; Michael Jensen and William Meckling’s 1970s agency theory expanded this circle to include institutional investors like pension funds and university endowments. These were not-for-profit shareholders with a direct economic interest in the performance of their portfolio companies, which they actively selected, placing bets on individual companies in pursuit of maximum return. This “Berle-Means-Jensen-Meckling ontology” has been taken for granted by cheerleaders, students, and critics of the shareholder value regime alike. It was at the heart of Margaret Thatcher’s “shareholder democracy;” of Peter Drucker’s warnings of “pension fund socialism;” and of Peter Hall and David Soskice’s theory of corporate governance in liberal market economies being dominated by “impatient” institutional investors pursuing short-term returns.

    The evolution of the shareholder structure in the United States did not, however, stop with the rise of pension funds. As shown in Figure 1, over the past three decades, the key drivers of the re-concentration of share ownership has been the growth of mutual funds, and especially of ETFs. Today, the largest shareholders are US-based asset management firms—and they bear little relation to the shareholders of the Berle-Means-Jensen-Meckling world. Foremost, they are vast. BlackRock and Vanguard alone manage enough in assets to own every corporation in the UK, three times over. As a result of their growth, the dispersed shareholder structure in liberal market economies—a foundational component of theories of corporate governance and varieties of capitalism—has given way to a reconcentrated shareholder structure. BlackRock and Vanguard now collectively hold 10 percent of the total market capitalization of the FTSE 350 and, together with State Street, more than 20 percent of the average S&P 500 company. Due to their size, these stakes are fundamentally illiquid, effectively eliminating “exit”—selling shares—as a source of shareholder power and discipline for the largest asset managers. Moreover, the index-tracking funds that make up such a large portion of these giants’ offering cannot (or will not) exit individual firms at will, regardless of the size of the stakes—much to the chagrin of pro-divestment groups.

    Figure 1: The structure of US corporate equity ownership, 1945–2021.
    Data: Federal Reserve, financial accounts of the United States. Note: All corporate equity is shown, including equity issued by US-listed foreign corporations (21% of the total) and closely held equity (15% of the remaining domestic equity).

    Though the combined 20 percent stake controlled by the “Big Three” may not, at face value, seem all that immense, it implies an extraordinary influence at corporate annual general meetings (AGMs), during which shareholders vote on resolutions pertaining to everything from director remuneration and retention to emissions targets. Moreover, their actual influence is typically measurably higher than this; while asset management firms are required to vote by the SEC in the US, for example, many smaller investors simply lack the resources or will to participate, edging the share monopolized by a small handful of firms even higher. In contrast to the weak shareholders of the agency theory imaginary, today’s titanic investment firms are very strong indeed. 

    Second, as a result of both their sheer size and the ever-increasing prominence of index-tracking investment strategies, the largest asset managers are fully diversified shareholders. There isn’t a firm in the FTSE 350 or S&P 500 in which BlackRock and Vanguard are not among the largest shareholders, and this diversification extends well beyond publicly listed equities, from sovereign debt to real estate and private equity.

    Together, these two hallmarks of asset manager capitalism amount to an alluring promise. As strong and universal shareholders, asset managers are structurally incentivized to internalize the negative externalities that were part and parcel of the profit-maximizing calculus of smaller, selectively invested shareholders. Rather than seeking to establish the dominance of a particular firm or industry in which an investor has placed her bets, universal owners strive for consistent and stable long-term growth—making them uniquely attendant to systemic risks like climate breakdown, to which they are universally exposed. Moreover, as comparatively strong shareholders, larger firms should be capable of and perhaps even entrusted to wield power as forceful stewards of the economy, shepherding it toward optimal long-term outcomes. BlackRock CEO Larry Fink has emerged as the most vocal cheerleader of this promise. The $10 trillion question: Should we believe him? 

    To fully gauge the implications of asset manager capitalism, we need to consider its third hallmark. Asset managers, unlike the pension funds and foundations that dominated before them—are for-profit intermediaries. They are not investing for the sake of returns, either short or long term, as these pass through them to their ultimate beneficiaries. What motivates the asset manager is the scale of fees they accrue from their clients. Thus, the trouble with the rise of the asset manager is not that these investors are particularly short-termist; rather, it’s that there is an agency problem. While beneficiaries seek a maximized return, asset managers seek higher fee incomes, and their corollary: greater assets under management. This agency problem creates a stumbling block for the alluring promise of universal ownership in various ways.

    The business model of the asset manager is to manage as much of other people’s money as possible, for a fee; and to invest it at as low cost as possible, often using index-tracking vehicles. Subpar investment returns impact Vanguard’s economic interests only indirectly, if clients move money out of its funds and into alternatives run by BlackRock or State Street. In this respect—that is, in the terms that have justified the income and governance rights bestowed upon shareholders—asset managers have little “skin in the game” of corporations’ actions. 

    There is, however, one channel through which investment returns directly affect asset managers’ profits: their impact on asset prices. This is because asset managers operate by earning a fee on every dollar they manage. The crux of the arrangement is that assets under management are marked to the market—all things being equal, a 20 percent increase of the S&P 500 brings a 20 percent increase in fee income made from S&P 500-indexed funds. In 2020, a stunning increase of asset valuations contributed a $29 billion gross revenue increase to the asset management industry, compared to a modest $5 billion from net inflows of new money. For asset managers, rising asset prices are the golden goose. Crucially, however, this is an aggregate preference. Unlike a small investor riding the rollercoaster of Tesla’s share valuation with plenty to lose depending on the outcome, BlackRock is comparatively unperturbed by Elon Musk’s errant social media behavior, provided that equity prices, in aggregate, continue to soar. What matters is the performance of the S&P 500 as a whole, rather than any of its individual components.

    Asset price inflation is not, of course, just a game asset managers play. In a sense, it is the master game of a form of capitalism characterized by what Ben Ansell has called “asset dominance”—a world in which household incomes and political outcomes depend more on trends in real estate and securities markets than on labor market and wage trends. Recent scholarship has shed light on the politics of asset price inflation in areas such as housing and financial regulation and crisis management. We still know relatively little, however, about the role of the managers of the assets whose value is being inflated.

    The politics of asset manager capitalism

    What’s good for asset prices is good for asset managers. It is this overriding preference that explains BlackRock’s remarkable dedication to engaging on monetary policy. While Larry Fink’s ambition to sit at the helm of the US Treasury has to date been unsuccessful, he has had considerably more success gaining access to and influence over monetary policy, including BlackRock’s mandate for allocating the Federal Reserve’s pandemic-response asset purchase program, scooping up several of its own ETFs in the process. While the opportunity was welcomed by BlackRock, the main prize is the world’s single most important driver of asset valuations—the Fed’s monetary policy stance. 

    What do a former chairman of the Swiss National Bank, a former deputy governor of the Bank of Canada, and a former vice-chairman of the Fed have in common? All were hired by BlackRock. In August 2019, this trio managed to secure an invitation to the inner sanctum of the central banking world, where they, together with BlackRock Investment Initiative colleague Elga Bartsch, presented a paper titled “Dealing with the next downturn” at the Fed’s annual Jackson Hole symposium. Should there be another crisis, the authors argued, central banks should respond with audacious monetary easing. A few months later, when the Covid-19 pandemic hit, the Fed responded with maximum audacity.

    What’s wrong with BlackRock lobbying for expansionary monetary policy? The core problem, in contrast to the Monks and Minow, is that everybody is not a shareholder. To the contrary, as shown in Figure 2, half of all directly held stocks and mutual fund shares are held by the richest 1 percent of US households. The bottom half of households has virtually no equity investments at all, whether direct or via retirement plans. In this sense, a preference for asset price inflation is hardly a departure from the politics of the deflationary coalition, sustained as it is by a “cohort of powerful voters whose financial position depends on the continual appreciation of capital assets at the expense of wages.” To be sure, tightening labor markets and worker militancy may yet vindicate advocates of asset purchases. For the moment, however, pandemic response–induced asset price inflation has made the rich richer, and BlackRock’s assets and influence even greater.

    Equity and mutual fund holdings and holdings of retirement assets (a large share of which is corporate equity) by wealth group, 1989-2021.
    Figure 2: Equity and mutual fund holdings and holdings of retirement assets (a large share of which is corporate equity) by wealth group, 1989–2021. Data: Federal Reserve, distributional financial accounts of the United States.

    Indeed, BlackRock alumni feature in significant roles in the Biden administration. Brian Deese, formerly senior advisor to President Obama before becoming Global Head of Sustainable Investing at BlackRock, is now chairman of Biden’s National Economic Council. Mike Pyle, former BlackRock chief investment strategist, has been appointed chief economic advisor to Vice President Harris. BlackRock was also invited to advise on the drafting of the European Union’s sustainable finance regulations, which would govern BlackRock’s own investments in the region. 

    These appointments have significance both in real terms, impacting how policy is drafted, as well as for understanding the motivations of asset managers more broadly. The shape of the Bipartisan Infrastructure Bill—after a period of heated contestation—provides a clear distillation of the politics of asset manager capitalism. As Larry Fink stated in his letter to investors, “climate risk is investment risk.” BlackRock has been quick to act on this insight. Approaching the crisis both as a universally exposed investor and an institution subject to financial regulation, BlackRock has fought hard to ensure that the contested terrain of decarbonization suits their interests.

    Though unprecedented in its scale of climate-related investment, the bill nonetheless offers a wholly inadequate commitment of public funds to climate and other infrastructural investment, instead explicitly leaning on a climate-tailored implementation of Daniela Gabor’s “Wall Street Consensus”—shepherding in private capital, on favorable terms, backstopped by implicit and explicit government support. It’s an archetypal “socialize risk, privatize reward” model for policy, handed to eagerly awaiting asset management giants. The asset management titans know that ours is not a world where capital is scarce; investment opportunities are. And for the long-term investor, nothing could be more appealing than publicly supported infrastructure investments, ideally geared toward resilience to a deteriorating climate. In an economy that must rapidly transform if we are to have any chance of stabilizing the climate, ESG as a framework enables investors to bet on the shape of the future economy while marketing themselves as best equipped to mitigate climate risk and, in the case of the largest firms, to directly participate in legally designating what is and isn’t “ESG.” It has the added benefit of enabling vast firms to distill the votes at thousands of AGMs into tidy, manageable decision items.

    These are not the motivations of the alpha-seeking, exit-prone, yet ultimately “weak” minority investors that populated the Jensen-Meckling imaginary. Under asset manager capitalism, finance capital is back. The dominant shareholders are vast entities that combine full diversification with significant control. They are in it for the long haul, with little liquidity, and a fundamental need for aggregate asset price inflation. Staring down the barrel of climate risk, they have undertaken a concerted effort to minimize their exposure to that risk while ensuring global efforts to tackle the crisis suit their interests—and the interests of those whose wealth they manage. Could it be that those private interests coincide with the (global) public interest? While a world may exist in which they do, the odds seem low that we live in it.

    What we do know is that we no longer live in a Berle-Means-Jensen-Meckling world. Beyond having failed (on its own and other terms), the corporate governance regime of shareholder value has had its justifying assumptions utterly upended. The rise of BlackRock, Vanguard, and their competitors has ushered in a new regime—a combination of concentration, control, diversification and “disinterestedness” that is without historical precedent. The era of asset manager capitalism constitutes a new corporate governance regime whose implications for power and control in the wider economy we are only beginning to understand.

  5. Negotiations

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    When the new German government is formed next month, at a critical moment for the European and global economy, it will be called upon to draw up a new economic and political strategy not only for Germany but also for the EU/Eurozone. The outcome will be the result of formal negotiations between the Social Democratic Party (SPD), the Green Party, and the liberal Free Democratic Party (FDP). But there’s one more partner who, though less widely discussed, will be crucial to the negotiations: the Federation of German Industries (BDI).

    The BDI—“the voice of German industry”—is the most powerful and influential employers’ association in Europe, and represents the globally competitive automotive, chemical, and electronics industries. Given the importance of industry and exports for the German economy, its positions will be particularly important in shaping the new government’s agenda. Throughout the election period, the BDI has been meticulous in examining the programs of the four parties and comparing them with its own positions

    Beyond its role in Germany’s domestic economy, the Federation is deeply invested in the industrial policy of the EU as it comprises the most transnationalized sectors of the German economy. It holds that “only Europe is able to compete on an equal footing with the other world powers… as each of the European states—including Germany—is too small to do so.” The BDI’s positions on key policy questions—the Stability and Growth Pact (SGP), industrial policy, and questions of defense and security— are therefore relevant not only for understanding how powerful manufacturing firms have adapted to a financialized global economy, but the positioning of major European economic actors in an increasingly multipolar world. 

    The BDI directly criticizes the position of the Christian Democrats (CDU/CSU), who have called for a quick post-pandemic return to the SGP, a set of rules designed to ensure that countries in the European Union pursue sound public finances and correct excessive budget deficits or excessive public debt burdens. During the Eurozone crisis, the rules of SGP became even stricter, raising criticisms around distribution and accountability. A BDI publication from July 2021 states that “a return to the status quo ante is not recommended. The rules need to be more flexible and less pro-cyclical.” The Federation further criticizes FDP calls for a rapid reduction of public debt to below 60 percent of GDP after the pandemic to comply with the SGP threshold. Reducing the public debt, BDI members believe, would lead to “either an increase in taxation or a reduction in government spending” which would have a negative effect “on demand and the recovery of the economy.” On these issues, the BDI seems to be closer to the agenda of the Greens, which promotes a revision of the SGP, and, in part, the more moderate agenda of the SPD. 

    The BDI also argues that investment in Research and Innovation should be increased to 3.5 percent of GDP. In a joint statement with the powerful metalworking trade union (IG Metall) on 15 October 2021, they called for a massive ten-year plan for public investment and modernization of German infrastructure to enable an environmental and digital transition. While it has positioned itself squarely against a European Sustainable Investment Fund, the BDI is in favor of public funding for “key technologies that will strengthen Germany’s digital and technological sovereignty and its exports.” Evidently, German industrialists worry about the country’s lack of digital infrastructure, which puts it at a disadvantage in global competition for the development of new technologies and reduces the incentives for private investment in these areas. As Bruegel reports, significant declines in real investment have been associated with the spread of “shareholder value” and financialization of the largest, transnationally-oriented non-financial German firms. 

    In recent decades, a gradual dissolution of the “Deutschland AG” model (the dense network of German firms, banks and directors) is underway, characterized by the increasing ownership stakes of foreign and institutional investors. Despite these shifts, Germany’s transnationally oriented capital still retains its national embeddedness. The BDI’s positions demonstrate the realization on the part of industry representatives that in order for Germany to cope with economic and geopolitical competition, strong state support for industry and a strong Europe are needed. On this issue, BDI partially deviates from the ordoliberal paradigm of “rule-governed politics” promoting a discretionary state intervention.

    German industrialists join Western leaders in voicing concerns regarding increasing competition with China, particularly over medium- and high-tech products. In a 2019 policy paper, BDI authors wrote “with the help of state investments in future technologies, direct and indirect and often non-transparent subsidies for companies, forced technology transfer and strategic takeovers of foreign high-tech companies, China is rapidly developing into a technologically leading nation.” A similar shift has also taken place—not without friction—on the governmental level with the publication of the German industrial strategy 2030 by the Federal Minister for Economic Affairs and Energy in 2019.  

    But despite deviating from typical liberal industrial policy, the BDI holds deeply overlapping interests with global financial markets. In addition to state intervention, it advocates a reduction in the capital tax to 25 percent (from an average of 31 percent) and, in order to fill the gap between investment and tax cuts, supports the relaxation of fiscal rules to facilitate the increased borrowing on financial markets.  In contrast to the big firms that increasingly use international markets to obtain finance, the German SMEs (Mittelstand) continue to rely on bank finance. The SMEs, represented by the Family Companies Association, have a much more “frugal” stance regarding Germany’s and EU’s fiscal policy, as they have concerns that if Germany loses its nimbus of fiscal stability, the interest rates of the private sector will eventually increase.

    Due to the strategic upgrading of Russia and China, and the shift of NATO’s interest from the Atlantic to the Pacific, the German and European bloc has the opportunity to assume a greater geopolitical role. The BDI thus recommends that “Germany should take on a greater share in European security through concrete actions.” Of interest here is the proposal to increase European funding for innovative military industrial projects and to link them as much as possible with the rest of the production chain (spill-over effect). This is in accordance with the views of all four political parties. But there are differences of opinion on BDI’s proposal to increase German military expenditure to 2 percent of GDP, with the SPD and the Greens openly opposing the measure, while the CDU/CSU and the FDP agree. 

    Crucially, neither a favorable reorientation towards state intervention nor a relaxation of the SGP on their own represent a hegemonic economic agenda for Germany and Europe. The BDI makes no mention of wage increases, nor of cancelling the unsustainable debt of the southern member states, making permanent the redistribution of resources from the core Eurozone countries to the South, or the issue of “Social Europe.” Rather, the BDI seeks to mobilize the support of the most powerful economic (manufacturing and banking) sectors of the European South. Its agenda does not include the majority of the popular strata and broader layers of wage earners. This “limited hegemony” suggests that post-pandemic policies will likely fail to resolve the primary issues of the Eurozone: uneven development and unsustainable public debt. Consequently, despite its reorientation towards public investment, the BDI agenda opens the way for a new round of austerity in the years to come.

  6. Manufacturing Stagnation

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    $5.3 trillion of US federal government stimulus and relief spending have returned the economy to its pre-Covid growth trajectory. But that growth trajectory was hardly robust—either before or after the 2008 financial crisis. Nor was the slow decay of GDP growth rates unique to America. In the aggregate, the seven largest rich economies—the G7, composed of the US, Japan, Germany, France, Britain, Italy and Canada—saw growth in real per capita gross domestic product (GDP) slip by more than half from the 1980s to the 2010s.

    Economists have called this slowdown “secular stagnation.” Secular stagnation is a seemingly permanent era of slower growth in productivity, investment, and output, and therefore also in per capita income. The Great Depression of the 1930s provoked the first debate about secular stagnation, which pitted John Maynard Keynes and Michał Kalecki against Joseph Schumpeter. The former saw idle workers and idle industrial capacity and called for aggressive fiscal policy and state-directed investment to restore growth. The latter saw idle capacity as evidence of over-investment and too high wages and called for liquidation of struggling firms and cuts in nominal wages.

    Keynes and Kalecki saw income inequality as the source of stagnation. Rich people have a lower marginal propensity to consume, which reduces aggregate demand. Counter-intuitively, their efforts to save more do not stimulate more productive investment. Instead, firms confronted with weaker consumption demand shy away from new investment. They fear being saddled with even more excess and thus unprofitable capacity. Schumpeter, by contrast, located stagnation on the supply side. Great leaps in productivity and thus growth could only occur when entrepreneurs used promises of monopoly profits to mobilize enough credit to make revolutionary investments in new transportation systems, energy sources, and production processes. To do so, they needed to see monopoly profits.

    These analyses are fundamentally macroeconomic, in that they assume that firms are relatively homogeneous. But what if firms differed in their strategies and the resulting industrial structures? This question was the terrain of Thorstein Veblen, who modified both Keynes and Schumpeter by showing how mesoeconomic factors—industrial structure—affected macro-economic outcomes. Veblen argued that firms sought monopoly not, contra Schumpeter, to make great leaps, but rather to shut down competition and make great and easy profits. What Veblen observed in the early 1900s was the beginning of the “Fordist” form of industrial organization: a two-tier economy composed of, on the one hand, highly profitable oligopolies or monopolies who could throttle output to raise prices, and, on the other, barely profitable firms with no such ability.

    What explains the current slowdown, and does it differ from that of the 1930s? Consistent with Keynes and Kalecki, the financial sector usually gets the blame for lower aggregate demand because it is a great engine of income inequality and drains investment funds from non-financial firms. Less scrutinized are a small set of firms with monopolies created through their control over intellectual property rights (IPRs: patent, copyright, trademark, and brand). A Veblenian framework which accounts for changes in corporate strategy and structure—how firms plan to capture profit, and how they organize production and management to realize this goal—sheds light on how shifting the distribution of profits towards IPR-rich firms that have a low marginal propensity to invest hinders growth.

    Strategic eras

    I refer to the present moment, which is characterized by this shift, as the “Franchise” era.  Its most distinctive features are the concentration of profits into IPR-rich firms with small labor headcounts, a low marginal propensity to invest, and relatively easy tax avoidance. These qualities have slowed growth in consumption, investment, and government spending—the three conventional measures of GDP for G7 countries. Higher-income employees of IPR-rich firms typically spend less out of each additional dollar of income, thereby slowing consumption growth. The monopoly firms that capture profit via IPRs don’t need to invest as much to expand production or maintain their market dominance; they can weaponize their IPRs to deter competitive entry with lawsuits. And IPR-rich firms can easily locate the legal ownership of their intellectual property (IP) in low- or no-tax countries, hindering the expansion of government spending.

    This mode of profit making differs significantly from that of the Fordist era. From the end of World War II until the 1980s, firms acquired oligopoly profits using vertically integrated production structures that controlled asset-specific physical capital—that is, machinery that could not easily or profitably be redeployed to other uses. This specialized equipment was extraordinarily productive relative to more generic machinery, enabling huge economies of scale and thus potentially high profit volumes. High productivity and the cost of this machinery deterred potential competitors from entering the market. Incumbent firms could easily ramp up production and lower prices, leaving potential rivals saddled with expensive machines and limited profits. This asset-specific physical capital required uninterrupted production at near full capacity to be profitable. Firms with expensive equipment sitting idle would suffer dis-economies of scale.

    The need for uninterrupted production had three important consequences. Firms expanded their employee headcount through vertical integration, bringing production of intermediate      components in-house to assure a continuous and timely flow of required parts. In-house production of components, and even more so the need to run assembly lines continuously, gave those workers a credible threat to firms’ profitability: strikes interrupted production. After considerable conflict, firms agreed to share oligopoly profits with direct employees if workers ceded control over production to management. These big capital investments and big unionized workforces had positive macroeconomic consequences.

    Fordist firms’ big labor headcounts combined with unionization to flatten the income distribution, boosting aggregate demand as workers consumed more each year. Their strategic use of large, fixed investments to create barriers to entry generated continuous investment. This had strong multiplier effects, again bolstering aggregate demand. Finally, firms’ desire for stable inputs and demand in largely national markets oriented their political behavior towards seeking macroeconomic stability and predictability.

    Not all firms succeeded in creating an oligopoly or inserting themselves into the public or corporate planning routines charted by John Kenneth Galbraith. Fordist-era firms thus tended to polarize into two groups: larger, more profitable firms with stable markets, and smaller, less profitable firms in unstable or marginal markets. Mirroring this division was that between workers: largely male, white workers tended to have stable, higher wage employment in large firms, while largely minority, immigrant, and female workers were grouped into unstable, lower wage employment in smaller, less profitable firms.

    The 1960s and 70s saw a wave of resistance to this model. The young and black workers replacing the older generation of white males in the big factories rejected mindless production routines and constant assembly line speed-up by engaging in wildcat strikes. Women rejected confinement to marginal labor markets and marriage. African-Americans and other minorities rejected exclusion from normal American civil and economic life. Firms responded to worker militancy by breaking up concentrated production and shedding legal responsibility for their workers. They de-merged, moved production offshore, contracted out, dispersed production geographically, and shed big physical capital footprints. Where possible, firms shifted risk onto someone else—creditors, workers, other firms—while retaining control over IPRs.

    The new “Franchise”  profit strategy sought monopoly profit via control over IPRs. It replaced the Fordist two-tier structure with a three-tier structure composed of (1) human-capital-intensive, low-headcount firms whose high profitability stems from robust IPRs; (2) physical-capital-intensive firms whose moderate profitability stems from investment barriers to entry or tacit production knowledge; and (3) labor-intensive, high-headcount firms producing undifferentiated services and commodities with low volumes of profit. Naturally, some firms blend characteristics of each tier. Intel, for example, blends IP ownership with a massive physical capital footprint in its semiconductor fabs; McDonalds blends brands with real estate ownership.

    “Tech” is the obvious epicenter of the Franchise economy. But many firms outside of tech also pursued an IPR-based strategy. Restaurant or hotel chains are the most obvious “low tech” examples, with a high-profit brand owner franchising the use of its brand and production methods to smaller, lower-profit owner-operators in the bottom tier. For example, Hilton Worldwide owns roughly 5,900 registered trademarks and 16 carefully gradated and curated hotel brands, but owns barely 1 percent of the buildings carrying those brands.1 In both high- and low-tech industries, the general pattern is vertical disintegration and the segregation of IP ownership into a small number of legally distinct and highly profitable firms. This largely involves a rearrangement of legal boundaries, not production as such. This three-tier structure has made IPR-rich firms at the top astoundingly profitable—vide Apple. As a result, it skews the distribution of income upward, reducing demand and weakening the state’s fiscal base. This is because more profitable firms within the same industry tend to pay higher wages for the same job description. In other words, it’s not what you do but who you work for that determines your wages—inter-firm rather than intra-firm disparities largely drive wage inequality. As profits are concentrated into a smaller number of firms with low headcounts, more and more workers pile up in low profit, bottom-tier firms that deliver commodity services or perform simple manufacturing tasks. From 1961 to 1965, sixty-one of the biggest US employers were also among the top hundred firms by cumulative profit, accounting for 41.1 percent of total profits and 38 percent of total employment.2 From 2013 to 2017, only fifty-three of the biggest employers were also among the top one hundred firms by cumulative profit, accounting for 32.6 percent of total profits but only 27.6 percent of total employment.

    Profits and investment

    The Franchise structure also channels profits to firms with a low marginal propensity to invest, while starving firms with a high marginal propensity to invest. Though the top one hundred US listed firms by cumulative profit captured nearly 45 percent of profits in the period from 1950 to 1980, and almost the same 44 percent 1992 to 2017, the sectors in which these profits have accumulated have fundamentally altered.

    Figure 1 below shows the shift in profits from the vertically integrated Fordist manufacturing and oil sectors toward the disintegrated Franchise IPR-based sectors, using the top 100 firms by cumulative profit. The top 100 firms are macroeconomically significant, as they account for 40.5 percent and 34 percent, respectively, of all capital expenditures in each era. Tech, bio-pharma, and finance sectors have replaced telecoms, oil related industries, and manufacturing as the sectors with the highest profit shares. In itself, this would not be problematic if these sectors invested at the same rate. But they don’t.

    Figure 1: Top 100 US firms’ share of all gross profits by sector, 1950-1980 versus 1992-2017, as percentage.
Source: Author calculation from WRDS Compustat.
    Figure 1: Top 100 US firms’ share of all gross profits by sector, 1950-1980 versus 1992-2017, (%)
    Source: Author calculation from WRDS Compustat

     IRP-rich firms have less need and face less pressure to invest in new productive capacity. By definition monopoly means they face limited competition. While their “investment” does include things like massive server farms and sometimes even production equipment, most of their capital formation is simply paying salaries to people doing R&D. Neither brand management nor software development is particularly physical-capital intensive. Virtually no capital investment is needed to expand production; the marginal cost of an extra copy of Word, iOS or Thor: Ragnorak is essentially zero. Like high income households, high-profit and IPR-rich firms have a low marginal propensity to invest in new productive capacity.

    Obviously, IPR-derived profits must flow somewhere (although the tech and bio-pharmaceutical firms hold enormous volumes of cash). But the top ten percent of US households typically save about half of every additional dollar they earn. Meanwhile, physical-capital-intensive firms that might do new productive investment with high Keynesian multipliers hesitate to borrow to fund investment. They quite rationally fear creating excess capacity in a context of slow growth. Most developed country markets in the 2000s were growing at about the rate of population growth, roughly 1 percent per year, and even formerly dynamic sectors like smartphones slowed markedly after 2016. The big manufacturing firms in the top hundred or two hundred firms can generate about 2 to 3 percent productivity growth each year simply through process engineering, so the incentive to invest in new capacity is low. Replace depreciated capital to retain market share? Yes. Create new—potentially excess—capacity? No.

    Below, Figure 2 compares capital expenditure as a percentage of profits (defined as gross operating income) in 1961-65 versus 2013-18 (‘peak’ Fordism and Franchise, respectively) for the top 100 firms by cumulative profit. Even in the context of a general decline in capital expenditure as a percent of gross profit, current high-profit sectors tend to transform much less of their gross profit into capital expenditure.

    Figure 2: Capital expenditure as a percentage of gross profit for the top 100 US firms by indicated sectors, %, 1961-65 versus 2014-18 (ranked by share of gross profits, 1961-65)
Source: Author construction from WRDS Compustat Data.
    Figure 2: Capital expenditure as a percentage of gross profit for the top 100 US firms by indicated sectors, %, 1961-65 versus 2014-18 (ranked by share of gross profits, 1961-65)
    Source: Author construction from WRDS Compustat Data.

    Focusing on the shift from Fordist to Franchise economy strategies and structures complements and in some ways supersedes the usual but narrower focus on financialization. Analyses of financialization correctly note the sharp rise in the financial sector’s profits after the 1980s. But if the problem is that the scale of those profits and their concentration into a handful of firms inhibits investment, then the IPR sectors must also matter. As Figure 3 shows, the IPR sectors captured more cumulative profit among listed US firms in each of the last three decades than the financial sectors, and that profit was similarly concentrated in a handful of firms. While the IPR sectors tend to make capital expenditures at a higher rate than the financial sectors, they are still well below average (Figure 2). Moreover, the financial sector profit share fell slightly in the past decade, while the IPR sectors’ share has grown.

    Figure 3: Cumulative profit share for listed US firms, three eras, (%).
    Source: Author construction from WRDS Compustat data. (‘Fordist sectors’ = Mass production manufacturing and Oil.)

    Finance and tech are also similar in their use of patents to defend profits and in their production processes.3 The financial sector exhibits the same three layer structure as other IPR sectors, with profits highly concentrated at the top. The Gini index (a measure of inequality where 0 is low and 1 is high) for financial sector cumulative profits is .95 for both gross and net income, 1992 to 2017. Those top firms capture the bulk of profits by selling bespoke derivatives and managing IPOs and investment funds. Small teams with high human capital and an ICT and software heavy production process generate those derivatives, much as in software and biotech. Second, generic, easily copied derivatives make little money. But subsequent to a 1998 federal court decision permitting patenting of mathematical and business algorithms, investment banks increasingly rely on Class 705 business process patents to protect new derivatives and processes. In 2014, for example, Bank of America filed roughly the same number of successful US patents as Novartis, Rolls Royce, or MIT, and JP Morgan as many as Genentech or Siemens.

    Accurately conceptualizing the Franchise era opens up arenas for policy reforms distinct from those dealing with financialization. The core public policy problem is the pervasive use of state-created monopolies based on IPRs and state-tolerated monopolies elsewhere in the economy to concentrate profits into a handful of firms with low marginal propensity to invest in new productive capacity. A more robust antitrust policy, tighter regulation of derivatives, and an easier pathway to collective bargaining would go a long way towards rebalancing income away from highly concentrated profits and towards wages for the bulk of the population.

  7. The Diverging Gap

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    On June 11, leaders at the G7 summit signed the Build Back Better World (B3W) Partnership, an agreement which commits signatories to meet the infrastructure needs of low- and middle-income countries. The deal is an explicit response to China’s Belt and Road Initiative (BRI), which, since 2013, has gained the support of more than 60 countries and dedicated over $500 billion of funding to thousands of projects. These range from construction of a fiber-optic connection in Pakistan to the Mombasa-Nairobi Railway in Kenya, and the still-unmaterialized port development in Italy. Amidst mounting criticisms around debt obligations, labor sourcing, contract transparency, and environmental standards, the BRI continues to address a trillion-dollar annual “global infrastructure gap.”

    The G7’s B3W, on the other hand, follows a long trajectory of US-backed commitments to infrastructure investments that, at least in part, fail to materialize. What happened to Western infrastructure investment and why, up to this point, has the US failed to deliver on its promises? Where did the infrastructure gap—which reflects a gap in the international development paradigm, and which China is aptly filling—arise?

    A great decline

    In general, physical infrastructure—from roads and ports to power plants and cell towers—constitutes a public good: supporting economic activity and raising living standards of local communities. But it’s risky, slow to deliver returns, and difficult to profit from. Following World War II, infrastructure projects became a central feature of development strategy, associated with the “big push” theory of industrialization and economic development. The US government was famously involved in infrastructure-related initiatives, including the Marshall Plan and the Pan-American Highway. In 1961, the “Decade of Development” began with the founding of the US Agency for International Development (USAID). US officials and academics believed that resource transfer from rich countries to poor ones (many of them newly independent) in the form of capital-intensive projects was necessary for their economic and political development. For the US, this investment was a Cold War imperative to counter Soviet influence in the Global South.

    In the 1970s, however, the US government ceased to directly fund overseas infrastructure; political, economic and ideological shifts tempered the ambitions of the previous decade. In light of insufficient growth rates, the development community began to favor “trickle-up” approaches, as the international environment deteriorated with the oil price shock. Congress, concerned about facilities in disrepair, opportunities for corruption, and the policies’ distributional impacts, advocated increased multilateral lending, and greater responsibility from recipient countries.

    The Vietnam War played no small part in these changing attitudes. South Vietnam was USAID’s greatest beneficiary between 1962 and 1975, accounting for more than a quarter of its global budget in 1967. Support included construction of highways, civilian hospitals, and power plants, but also social programs, security assistance, and propaganda campaigns.

    Amid growing criticism of US foreign policy and international aid efforts, President Nixon pledged to “help when it makes a real difference and is considered in our interest.” USAID responded to the changing winds by developing a narrower focus on food, health, and education—“basic human needs”—rather than broader development aims. With this shift, as House Rep. Charles W. Whalen, Jr. put it, a “regrettable prejudice in the Congress and the Executive Branch”1 against infrastructure spending was established. By 2013, infrastructure had gone from being USAID’s primary activity to less than 11 percent of its overseas funding.

    Developing countries continued to borrow heavily to fund infrastructure and other projects, only to be hit by the Volcker shock and debt crises in the 1980s. Combined with the loss of the Soviet Union as an aid sponsor and the collapse of communist systems, this crisis opened the path for renewed US investment. And an infrastructure gap was already evident. The 1990 UN World Economy and Social Survey dubbed the 1980s a “decade lost for development.” While the Washington Consensus envisioned a generalized retraction of the public sector, it maintained productive infrastructure as one of the few justifications for large budget deficits.

    But the US government had largely rejected the state—in the domestic and international contexts—as a significant tool for development. By the end of the Cold War, US policy promoted the private sector and macroeconomic management as the twin engines of investment. The Reagan administration’s 1987 National Security Strategy stated: “At a time when developing countries are striving to meet their debt-servicing obligations and the resources of our national budget are under pressure, the contribution of private-sector investment assumes increased importance.” For post-communist Central and Eastern Europe, West European leaders created (with the US government’s reluctant support) the European Bank for Reconstruction and Development (EBRD), the last of the Western multilateral development banks and the only one explicitly dedicated to promoting private enterprise. Although it was clear that public investment in infrastructure was crucial to the business environment, the US insisted on a 40 percent cap on public-sector lending to prevent, as an Overseas Development Institute briefing put it, an “almost bottomless pit of requests for public sector infrastructural projects.”

    It was not the first time that supply would not meet demand. The policy priorities of the US were elsewhere—the transition of post-Soviet states to market systems; competition with Japan and Germany; and the domestic politics of the budget deficit. In 1993, the George H. W. Bush administration recognized that past foreign assistance in infrastructure development had contributed to global security, but still argued that the “results of foreign aid have not been commensurate with the resources expended.” (Foreign aid in 1990 was $14 billion, or 1 percent of total federal spending.) The National Security Strategy suggested that if countries focused on building “pluralistic democratic institutions” with “free market principles,” investment would naturally follow.

    Pushing private capital

    With the security imperative receding into the background, exporters became the only domestic lobby for an active US role in global infrastructure development. In 1990, under pressure from businesses afraid of losing sales of equipment and services in international markets, Congress began to reevaluate its emphasis on basic human needs. “We have relied on our contributions to multilateral banks to support capital projects,” commented Senator Patrick Leahy in a hearing on foreign operations. “That is the opposite of our competitors… they use their bilateral programs to promote capital projects that benefit their domestic business…. Would we be better off doing what they do?”2 The Bush administration advanced a business development initiative within USAID that emphasized infrastructure, but the agency was hesitant to embrace export promotion at the expense of its human development focus. Congress mandated an Office of Capital Projects but, opposed to this “micromanagement” and constrained by competing priorities, USAID offered the minimum available funding, around $300 million.3

    Other institutions were better able to leverage small budgets. The Overseas Private Investment Corporation (OPIC), a US development agency created by Nixon to mobilize private capital, increased insurance coverage of power, telecommunications, and gas transmission from less than $100 million in 1990 to more than $3 billion in 1996, 18 percent of its insurance that year.4 Although its infrastructure footprint had diminished since the 1970s, the Export-Import Bank (EXIM), the other large overseas lender, noted in 1997 it was responding to “strong demand in developing countries seeking to build infrastructure without overly burdening their governments’ debt.” EXIM’s outstanding loans in power generation, telecoms, and other infrastructure rose to $2.5 billion, along with another $6 billion in guarantees for power generation, the second largest sector. Private companies soon displaced governments as its primary borrowers. Under these business models, if public money did not directly support investment, it insured against risks like expropriation and encouraged positive investor outcomes, matching the world’s expanding private capital with lagging development. In some cases, diplomatic clout helped, as foreign governments were more inclined to settle with investors when considering the relationship with the US. Importantly, such loan and insurance programs were “politically light”—they generally made profits and had little impact on the budget, but this still failed to shield them from attack.

    US efforts to “crowd in” private investments in developing country infrastructure were too small—global need was estimated at $200 billion per year. OPIC’s portfolio invested outside of infrastructure and was capped at less than $25 billion, and ran out of operating funds in June 1994. Enron, whose international arm developed energy projects, proposed reallocating aid funds to the finance agencies, which amounted to “a privatization of US development assistance.”5 But opponents of big government and big business ensured OPIC and EXIM were regularly reviewed for termination, leading to unambitious budgets. The order of the day was public-sector austerity, and developing countries presented potential drags on the federal budget. According to the Republican majority in Congress, debt relief for poor countries would, in the words of then-majority whip Tom DeLay, “rob the Social Security surplus to underwrite the national debt of Nepal.” The issue became “Ghana versus grandma.”

    The US sought to cede infrastructure lending to the World Bank and other multilateral institutions when the private sector was insufficient. But as the largest shareholder in the World Bank, the US cut support for their role as well. Public criticism of the Bank reached new heights in the 1980s after it infamously helped pave a highway into Brazil’s Amazon, displacing Indigenous communities and contributing to deforestation. International NGO campaigns reached Congress, and the 1989 Pelosi Amendment required US representatives at multilateral banks to abstain or vote against projects that did not report their environmental impact well in advance.

    But rich nations’ declining interest in a broad multilateral infrastructure program was not just aversion to environmental destruction and white elephants—their construction firms also stopped winning contracts. For the Clinton administration, the World Bank was a foreign-policy tool whose infrastructure efforts were most useful in strife-torn areas like Southeastern Europe. Bank management, meanwhile, argued that project quality and private participation were more important than its direct involvement in meeting infrastructure needs, and infrastructure lending fell 50 percent from 1993 to 2002. The organization transitioned into a “knowledge bank,” emphasizing its provision of development best practices rather than funds and project delivery.

    Middle-income countries valued the Bank’s participation and expertise, but the burden of compliance with its environmental and social safeguards led them to give up on borrowing. In China, for example, in 1991, the Bank recommended to Shanghai that the city abandon building a subway system in favor of buses. Local officials proceeded anyway, ultimately creating one of the world’s largest and busiest metro systems. The Bank was fitted uncomfortably in the gap between Northern shareholders and its clients in the Global South. In 2003, Chinese and Indian board members rebuked its approach, resulting in a partial win with a new strategy and budget for infrastructure. However, the Bank’s model project, an Exxon-built oil pipeline in Chad, illustrated the dangers of extractive infrastructure—Idriss Déby’s regime diverted revenues from poverty reduction to weapons.67 Although the Bank lent counter-cyclically following the Global Financial Crisis, by 2010, “the world’s largest infrastructure lending institution had largely exited the business of infrastructure lending.”

    For a time, it appeared private investment would supplant multilaterals. During the 1990s the public-private partnership (PPP) emerged as the model for investment, and private participation in developing countries’ infrastructure rose sevenfold from $18 billion in 1990 to nearly \$128 billion in 1997. The turn was not seamless. That sum fell to $57 billion after the Asian Financial Crisis, and drawing private foreign investment into infrastructure projects was often politically explosive. In Bolivia, efforts to privatize water systems in 2001 led to mass protests in a “water war” that ran US-based Bechtel Corporation out of the country. To the World Bank, only reformers who undertook structural adjustment would develop sustainable infrastructure; to the working class and rural communities, the rise in water bills was a perverse consequence of “leasing the rain.”

    Private investment eventually recovered, but at a reduced scale. Poland’s finance minister from 1994–97 commented, “The incorrect assumption that market forces can quickly substitute the government in its role towards new institutional set-up, investment in human capital, and development of infrastructure, have caused severe contraction and growing social stress.”8 Private investment remained highly sensitive to risk, with only $1.5 trillion raised over 2008-17, of which 98 percent went to middle-income countries. While private investors had the funds, they did not have ready, “bankable” projects and continued to worry about unpredictable democratic changes of government that could harm their investments. A BlackRock manager was frank about Wall Street’s inability to monetize one of the world’s most pressing needs: “There’s absolutely zero correlation between the scale of need for infrastructure and addressable opportunities for the private sector.”

    A sinking priority

    At the turn of the century, there was a lack of global consensus on what would remedy the developing world’s infrastructure issues. The UN’s Milennium Development Goals (MDGs), adopted in 2000, left industrialization and infrastructure out of its list of eight ambitious anti-poverty objectives for 2015.

    For the White House, 9/11 shifted development priorities. After linking global poverty with the attacks, President George W. Bush announced the creation of the Millennium Challenge Corporation (MCC), arguing that aid in countries with “good policy” would promote economic liberalization and political freedoms and serve US security interests by lifting people out of desperation, “conditions that terrorists can seize.” MCC did invest $4 billion in infrastructure through 2010, but infrastructure featured little in the Bush administration’s campaign against poverty. The administration’s National Security Strategies notably omitted it from priority areas, except where absolutely necessary, like its reconstruction in Iraq.

    The President’s Emergency Plan for AIDS Relief (PEPFAR) best reflected the aid-oriented US approach in Africa. The severity of AIDS required a robust response, but poor transportation and communications infrastructure had hindered continental development for decades. Congress continued to urge multilaterals to avoid corruption and inefficiency. Nonetheless, China’s investments emerged on US policymakers’ radar.

    In 2008, Joe Biden, then the chair of the Senate Foreign Relations Committee, stated, “The debate that surrounds this issue is whether or not the purpose of this investment is designed to undercut American influence deliberately… whether it’s Africa or in South Asia or in Latin America.” The administration emphasized the superior benefits of US aid programs. Deputy Secretary of State John Negroponte argued, “I think that the Chinese effort pales in comparison to the United States efforts in Africa. So, I guess I’m not overly concerned about it.” Foreign policy think tank scholars testified that “some of what the Chinese do on infrastructure… would also be welcome” and that “persistent disillusionment among Africans with Western commercial approaches has played to China’s advantage.”

    While low internal returns dissuaded private investors, and mitigating adverse impacts reduced multilateral institutions’ lending, the emerging Chinese approach demonstrated a “build it and they will come” mentality, according to Francis Fukuyama. In Jamaica’s Highway 2000 project, commercial banks funded the first phase in 2001 (later refinanced by multilateral institutions), but the French contractor declined to work on the second phase, calling it commercially unviable. By this stage, China had already begun to export its construction strengths. In 2012, China Development Bank and China Harbour Engineering Company stepped in with financing, gaining a 50-year concession and rights to develop the land around the highway. The traditional players supported stronger standards and standalone financial sustainability, but the project moved closer to completion only after the Chinese responded to its aspirations.

    The pendulum swings back

    Recognizing the importance of infrastructure to their own economies and to China’s rise, Western institutions attempted a pivot in the early 2010s back to “big” development. In emerging markets, American business was potentially losing out in the sector. In 2011, the chairman of EXIM gave one example: “Half the order was split between the United States and China for locomotives in South Africa.” Meanwhile, the disastrous wars in Iraq and Afghanistan suggested to policymakers that strictly military responses would not guarantee US security. A member of the Joint Chiefs of Staff told a House committee, “[I]t is not the Department of Defense that is going to put power grids in place or build roads. And it is that permanent infrastructure that allows a country to become stable.” To that effect, in the early 2010s, the US did provide considerable aid for infrastructure in some countries—Afghanistan, Egypt, Pakistan, and the West Bank/Gaza—places where investing in transport, power, and/or water were crucial to attaining military or diplomatic objectives.

    The longstanding US approach was most lacking in Africa. In its initial National Security Strategy, the Obama administration promised that African infrastructure priorities “remain high on our agenda,” and in 2013 it launched the Power Africa initiative. Rare bipartisanship seemed to coalesce around the long-unfulfilled energy needs of Sub-Saharan Africa. But the initiative remained encumbered by coordination problems, hamstringing a “whole-of-government” approach and hopes that the private sector would fulfill the lion’s share of financing needs. Congress appropriated no new funding, and Republicans attempted to gut OPIC and EXIM. USAID, a non-Cabinet-level agency, could not play a strong role as interagency coordinator. One of the most significant US infrastructure initiatives to date has brought online just under 5,000 of the 2030 target of 30,000 megawatts in new energy.

    With ambitious targets and resource constraints, multilaterals faced similar problems. In 2012, the World Bank announced a new infrastructure strategy with a heavy emphasis on private capital. The US was neither willing to contribute more capital to the development banks nor accept more from other members that would dilute its vote share. Shut out of greater influence in traditional multilateral institutions, Brazil, Russia, India, China, and South Africa established the New Development Bank (NDB) in 2014. China’s Asian Infrastructure Investment Bank (AIIB) followed soon afterwards. Adamant opposition to the AIIB did little to convince those in Asia that the US was truly concerned about infrastructure needs, and the warning that Chinese lending might come with strings attached—“debt trap” diplomacy—did not impress countries accustomed to World Bank loans conditioned on reform or geopolitics. Japan, the other opponent of the AIIB, could offer something of an alternative with its outward infrastructure policies, but a US alternative was not forthcoming.

    It was increased Chinese investment that precipitated a shift in US policy. The Trump administration’s National Security Strategy acknowledged that a desire for infrastructure investment in the Global South had created a geopolitical problem, and they sought to respond. In 2018-19, Congress upgraded OPIC to a development bank, the International Development Finance Corporation (DFC), doubling the portfolio cap to $60 billion; the Senate restored EXIM’s board; the State and Commerce departments coordinated to match US companies with opportunities; and the US, Japanese, and Australian governments established the Blue Dot Network, a standard-setting initiative for infrastructure projects. The funding for the implementing agencies remained relatively modest, leaving them to reconcile competing development priorities.9The World Bank and private investments for infrastructure, however, continued to lag, particularly in the poorest countries, where Chinese financing was most appealing.

    Since the 1970s, when the emphasis on infrastructure was abandoned, US development efforts have periodically confronted calls to address the infrastructure gap: to increase domestic exports, to bolster governance and security, and lastly to compete with China. The B3W initiative may be another such effort, which could, like previous commitments, be heavier on standards than financing, or break with the recent past—and introduce ambitious financing apart from the private sector. An approach considerate of corruption, climate change, and social impacts will be welcome to many in the developing world, but the market-oriented approach of encouraging private investment, which waxes and wanes, has led to continual disappointment. The US intends to show itself the better development partner, but it remains to be seen whether its efforts will displace China and fill the infrastructure gap.

    The views expressed by the author of this article do not necessarily represent the views of the Export-Import Bank or the United States government.

  8. Uneven Channels

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    This year’s Conference of the Parties (COP), opening October 31, is hosted by the United Kingdom, whose agenda-setting privilege as host has made private finance a central focus of the 2021 meeting. The UK ambition to center the City of London as a hub for a growing green finance industry dates back to at least 2010, when the “Capital Markets Climate Initiative” launched at the London Stock Exchange. Brexit has likely intensified this ambition: fear of a post-Brexit abandonment by the financial sector has spurred the government to position the City as a premier center for sustainable finance. The City of London Corporation’s 2021 pamphlet contains an extensive discussion of climate-related and sustainability metrics as part of its “competitive offering” to financial and professional services firms.

    Private finance and climate governance

    Several of the UK’s COP-hosting period goals focus on mobilizing climate finance, around the “billions to trillions” catchphrase—reflecting the gap between the amount of finance currently dedicated to decarbonization, and the far larger volumes the International Energy Agency and the Intergovernmental Panel on Climate Change estimate are necessary for the green transition. Deliverables identified by the COP26 office include aligning development finance with Paris climate goals; “supporting development of [a] pipeline of investment grade projects;” and “encouraging the development of new market structures and products.”

    These aims echo numerous initiatives that seek to link the multilateral Paris Agreement to pledges to cut emissions by “Non State Actors” (NSAs)—from municipal authorities to multinational corporations. Compared to other areas of international policy effort, such as security, trade, and finance (which tend to limit access and inclusion for entities that are not national governments), the UN’s climate diplomacy framework places significant emphasis on the role of these private actors. While this approach accelerated after the near-failure of the Copenhagen COP in 2009 as a way to harness support for climate action, the broader version of multilateralism predates both the Paris Agreement and the Copenhagen COP. Political scientist Steven Bernstein traces this “liberal environmentalism” to the 1992 Earth Summit in Rio. Bernstein writes:

    By 1992, a shift in norms of environmental governance had occurred, characterized by a general acceptance of liberalization in trade and finance as consistent with, and even necessary for, international environmental protection. These norms also promoted market and other economic mechanisms (tradeable pollution permits, privatization of the commons, and so on) over command and control methods (standards, bans, and quotas) as the preferred method of environmental management. The concept of sustainable development legitimated and masked this compromise at the heart of international environmental governance.1

    The market pricing framework was developed and advanced in the 1970s and 1980s by economic experts in the OECD’s environment committee. These officials, Bernstein writes, used cost-benefit analysis as their primary method of evaluating policies. An alumnus of the committee, Jim O’Neill, believed that an economically rational approach could correct the limited impact of earlier global environmental efforts such as the 1972 UN Conference on the Environment, held in Stockholm, which fit the now-familiar pattern of resolution without implementation. The approach also gained traction in the environmental movement as a way to overcome the zero sum “environment versus economy” binary. O’Neill advanced these ideas throughout the 1980s via platforms such as the Brundtland Commission, bringing environmental action in line with the emerging “liberal market consensus.” By the time multilateral climate action debuted at the UN Conference on Environment and Development in Rio in 1992, market-based ideas such as pricing pollution were well established in both environmental policy and multilateral initiatives.

    Building on these ideas, the Paris Agreement cemented a “hybrid” approach in which nonstate actors play a near-formal role in implementing commitments through initiatives like Non-State Actor Zone for Climate Action (NAZCA), the Global Climate Action Agenda, and the High-Level Climate Champions. Such programs are meant to reinforce top-down agreements from the bottom, relying on diplomatic influence to compensate for weak enforcement capacity. Among these is the “Race to Zero” campaign in which cities, business, and universities can commit to cutting their emissions in line with net zero by the middle of the century. Its affiliate schemes include alliances of asset managers and other investment institutes that are among the biggest managers of developing country debt. Across these initiatives, there is a common refrain of “moving,” “shifting,” or otherwise “unleashing” trillions in private financing to address climate change.

    Climate finance in the global financial architecture

    The emphasis on capital flows, particularly from the private sector, leaves the structural features of the global financial system largely unaddressed. The vast difference in financial terms available to peripheral versus core countries, and the rising proportion of debt owed to global capital markets in many developing countries, has been neglected by a framework which is primarily concerned with attracting private investment.

    Sustainable finance is a booming business in the global north, where allocations to “environmental, social and governance” themed funds are on track to become the default, and instruments like green bonds routinely break new issuance records. But in the global south, the availability, cost, and terms of finance to develop sustainably remain extraordinarily restrictive. While there are variations between individual countries, the weighted average costs of capital for low carbon technologies can be more than twice as high for African countries as for Australia or Canada, and almost three times that of the western EU countries.2 The divergence between core and periphery countries in the monetary and financial system curtails the ability of developing countries to decarbonize.

    The divergence is worsened by climate change itself. Climate-vulnerable countries pay an average of 117 basis points more to borrow, according to a 2018 analysis.3 Investors’ growing curiosity about how “climate risk” affects sovereign creditworthiness—it is the subject of numerous commercial offerings and a new UN initiative—may widen the spread even further. Countries suffering at the intersection of both climate change and global finance, such as the Climate Vulnerable Forum group, are increasingly seeking to highlight the interdependency of the two problems: susceptibility to the effects of climate change make it harder to obtain the financing that is needed to deal with those effects.

    Accounting for the global structure of power

    Just as the structure of the global financial system shapes the realities of financial flows, so the global structure of power mediates the realities of climate diplomacy. There is little space for diplomatic manoeuvring in the interactions of developing countries with international capital markets, where negotiations are mostly concealed from the public view that enables and incentivizes orchestration. Debtors must persuade creditors to participate in restructuring discussions and hope that they will not take advantage of contracts that allow for a minority to hold out. Sub-Saharan African countries rely on US dollar-denominated sovereign debt markets for about a third of their external finance. The low-for-long official interest rates in wealthy countries has helped to drive money towards the high coupons of emerging market debt. Financing that is readily available and has no policy conditions attached is attractive to low-income nations, even with steep costs, unfavourable conditions, and denomination in foreign currencies—usually US dollars—that enhance pro-cyclicality. External debt servicing, as a proportion of export revenue, rose from 5 percent to 14 percent in Sub-Saharan African countries in the decade before 2019, World Bank data show. In Latin American countries, it grew from 19 to 27 percent. Even before the pandemic, Ghana and Kenya were spending more on debt servicing than on healthcare. This leaves little for building out clean energy generation and other low carbon infrastructure in accordance with the Paris Agreement.

    In contrast to the abundant public-facing fora, diplomatic channels, and committees for all types of entities pursuing climate-related diplomacy, there is virtually no forum or mechanism that governs developing countries’ access to credit markets or even to creditors themselves. When events such as pandemics arise, or when climate-warmed hurricanes smash into small island states, no rules-based avenues are available for collective negotiations with creditors—and means to compel participation are limited. The “Paris Club” of creditor countries has performed this role in some situations, with recent treatments mostly for sub-Saharan African countries and small island states, but the Club’s membership does not include China, which is now a large lender to a number of developing countries, or commercial creditors such as bondholders. This means that there’s little prospect for organizing among debtor countries that may have suffered a common fate.

    More broadly, access to global capital markets for poorer countries is intermediated by a handful of US, British, Swiss and German investment banks. Three of these—Citigroup, Deutsche Bank, and JP Morgan—coordinated more than half of Sub-Saharan African bond issues in the past decade. Ownership is also not as diffuse as assumed, with a smaller number of larger asset managers now dominating the field. The holdings of peripheral country debt, while small relative to overall portfolios, are immensely profitable. For BlackRock, sovereign bonds of DSSI-eligible countries at \$2 billion is an almost negligible portion of its over $9 trillion assets under management; but interest payments from those bonds equates to almost a percentage point of BlackRock’s revenue, Munevar found. For Amundi, a big French asset manager active in sustainable investment circles, DSSI bond coupons are equivalent to more than 10 percent of its revenue.

    Many of the private and official finance actors that play key roles in the global financial architecture also happen to be prominent supporters of the nonstate actor climate diplomacy initiatives. BlackRock joined the Net Zero Asset Owners’ Alliance in March, and JP Morgan joined the Net Zero Banking Alliance just a few weeks ahead of COP26.

    Like all their peers, these institutions declined to grant any suspension of servicing of their debts from the world’s poorest countries in the midst of a pandemic that crushed lives, health systems, and livelihoods. Repeated exhortations in G20 communiques, and from the World Bank and IMF chiefs, have been ignored. Many of these financial institutions are members of the climate initiatives facilitated by the COP26 office and the UNFCCC, with their logos displayed on pages headed by United Nations crests. But these institutions are loath to address their own role in a system that compounds disadvantage for climate vulnerable countries and the possibility of a global decarbonization effort. While the hierarchies of the international financial and monetary systems remain beyond the scope of climate commitments, and nonstate actors can easily acquire quasi-diplomatic climate kudos, countries in the global south have limited means to advance the twin goals of climate protection and economic development.

    Possibilities and reforms

    Prospects for reform within the UNFCCC/COP architecture are limited. Among the tracks that seek to pursue redress for the systemic inequities, “loss and damage” and the notion of the “$100 billion” both take a capital flow approach. The former, established in 2013 through the Warsaw International Mechanism, is distinct from “mitigation” (cutting emissions), and “adaptation” (building resilience), and offers emergency response to and recovery from the actual harms caused by climate-related events such as droughts, floods and hurricanes. The latter emerged during the final stages of the 2009 annual climate conference in Denmark, which almost ended with no agreement to build on the Kyoto Protocol. Ultimately, countries agreed to the “Copenhagen Accord,” indicating the need to limit warming to 2 degrees celsius. The target was to be secured with the promise of transfers of $100 billion from wealthy to low income countries per year by 2020.

    Proposed by the rich countries, the famed $100 billion framework has become a far more central part of climate diplomacy than “loss and damage” (which is favored by developing countries and accordingly has an unclear status at the COP). But even the designation of \$100 billion in the Paris Agreement hasn’t guaranteed effective delivery. With global official development aid flows at about $150 billion per annum, $100 billion of dedicated “climate finance” would be significant, even if it is inadequate in the scale of the costs of both decarbonizing and building resilience to the effects of climate change. But the “$100 billion” suffers from a deep and persistent ambiguity, with its characteristics—concessional finance, mitigation versus adaptation—never specified. Consequently, measuring how much of the $100 billion has been reached is difficult in part due to the challenges of conclusively identifying flows dedicated to climate, but also because of the absence of a definition of climate spending in either the Paris or the Copenhagen accords. Wealthy countries tend to want to define their own contributions generously, but to date the amount hasn’t been reached by even expansive definitions.

    Another set of solutions focuses on more structural features of global finance. Campaigners with blunt topline demands of debt cancellation are echoed by some of the most establishment voices. The lack of a sovereign debt resolution mechanism, the jurisdiction of sovereign bond contracts in New York and London, and the lack of sovereign transparency on both official and commercial external debts are all lamented by legal experts, activists, and officials at international financial institutions. But solutions all seem to be undermined by the very structures of power they seek to overturn. When a sovereign debt resolution mechanism was advanced by then-IMF deputy director Anne Krueger in 2002, it was blocked at the UN by the US, UK, and Japan. In 2015, an attempt at a resolution for a non-court sovereign debt workout mechanism in the UNGA was opposed by Canada, Germany, Israel, Japan, US and UK.

    In the G20, the intersection of climate change and finance has been explicitly addressed through the lens of “sustainable finance.” A newly revived and elevated G20 sustainable finance working group is preoccupied with matters like reporting standards and regulatory measures such as climate risk disclosure rules, which have little bearing on the financial constraints on global south countries to mitigate and adapt to climate change. Such topics are addressed inadequately on a crowded agenda, and most states tend to be excluded, with limited agency in the international financial system without the support of the more powerful few.

    With the termination of its limited debt payment suspension programme, the DSSI, the G20 has proposed a new “Common Framework” which implicates private creditors in repayment delays if not actual writedowns. In practice, however, countries that have ventured to seek relief are liable to have their credit ratings downgraded, as Ethiopia found earlier this year, when it was downgraded by the three main credit ratings agencies. (Two of those three, Moody’s and Standard & Poor’s, joined a new initiative launched in September for financial service providers to commit to net zero emissions; it is aligned with the UN-backed Race to Zero.)

    Nevertheless, there is some hope for reform. In the wake of the COVID outbreak, powerful G7 members voted in favour of an allocation of Special Drawing Rights, the reserve asset issued by the IMF. Although the SDR distribution quotas means the poorest countries receive the least, it’s a progress of sorts, and the proposed new IMF facility that would provide finance to countries hit by pandemics or climate change could represent a further small advancement. And some wealthy countries have indicated they will donate a portion of their SDRs to developing countries.

    Finally, debt-for-nature swaps, which can be structured in a variety of ways, have delivered variable results in terms of both debt relief and environmental impact. The heyday for such swaps was the 1990s when large, official creditors sponsored debt restructurings with environmental measures thrown in. Belize has recently discussed such a swap with some of the owners of its only US-dollar denominated bond; a charity would help buy back the bond at a reduced rate provided some investments are made in the country’s reefs. Investors declared the “ESG” part of the proposal helped them to accept 55 cents on the dollar. It’s not clear if climate-vulnerable peripheral countries with less beautiful fauna and flora could similarly benefit from the vagaries of sustainable finance.

    But these and all other unconventional reforms inevitably come up against one of the oldest tensions between development and climate action: conditionality. What are the policy strings attached to money that’s provided? Who decides what is good development, or good climate policy? As they design paths forward, policymakers must negotiate these considerations; or at least win support of enough of the more powerful voting member countries to put them on the table. Days before COP26, the finance ministers of forty-eight climate-vulnerable countries signed a statement calling for large scale green debt swaps that would support a self-determined climate policy agenda.

    Leaders of many of the biggest banks, asset managers, and policy institutions will be in attendance at COP26. The conference will yield dozens of announcements about financial initiatives relating to climate change, ranging from official finance to aspirational “net zero” alliances. Some will be pragmatic attempts to compensate, if only in small ways, for a global financial system that is structurally blocking efforts to stabilize the climate and keep people safe. Most will barely acknowledge that this situation exists.

  9. Gas and Labor

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    The United Kingdom is in the midst of a protracted crisis in the supply of petrol. In the face of a plummeting sterling and severe disruptions to essential public services, military tanker drivers have been deployed to transport fuel to the country’s 8,380 petrol stations. The lack of truck drivers also led to containers piling up in the UKs most important port Felixstowe, and large shipping companies reroute part of the cargo to continental Europe. On October 1, German news outlet Der Spiegel reported on a “bizarre“ letter sent by the British government to German residents in the UK, asking them to consider work as a trucker. (German drivers licenses issued until 1999 allow drivers to conduct small trucks until 7.5 tons, even if they‘ve never driven a truck.) A similar letter was sent to one million potential truck drivers within the country.

    Reports of the petrol shortage tend to focus on the immediate impacts of Brexit—restrictions in trade, and a shortage of essential drivers due to the country’s harsh new immigration rules. By contrast, the Johnson government has continued to extoll the success of rising wages due to tightening labor markets. By centering Brexit, both narratives overlook the deeper causes of the crisis, and the need for extensive industrial reform to remedy them.

    Hauler associations had warned the government about shortages of truck drivers as early as 2014. Due to declining wages and standards of work, more truck drivers retire than enter the sector every year. Before the pandemic, 12,500 EU drivers had left the UK as a consequence of Brexit—a large number, but not sufficiently large to induce the current crisis. Due to the pandemic, the number of people who passed tests for lorry drivers fell by 25,000 in 2020. Additionally, the post-Brexit tax change known as IR35 prevented drivers from setting up limited companies to reduce their tax and national insurance contributions, making it more expensive for drivers to work in the UK. The falling pound and anticipated checks on goods at the UK border compounded this effect. But less discussed and more significant are the 50,000 UK based drivers who left the industry as a result of the pandemic and never came back. The flight of these drivers shines a light on the longstanding labor problems endemic in the UK transport industry.

    About half of respondents to a recent survey named pay rates and increased resignations as important reasons for the shortfall of drivers. While in 2010, truck drivers in the UK earned 51 percent more per hour than supermarket cashiers, the difference shrank to 27 percent in 2020. Between 2015 and 2021, the median hourly pay for UK truck drivers increased 10 percent, compared to 16 percent across all UK sectors. A 2016 survey similarly attributed resignations to poor wages, poor driver facilities and poor company treatment.

    Most drivers leave in their early thirties, since the job is not compatible with family life. While the working time for UK truckers is officially a maximum of ten hours a day (the previous ceiling of nine hours a day was bumped up due to the driver shortage), drivers are often out of the house for twelve to fifteen hours a day, driving to the next pickup location and home. With such long hours, they have only enough time to sleep after work. Added to this are unpredictable shift patterns and frequent weekend work. The low quality of facilities for drivers in the UK compared to many EU countries—dysfunctional showers, low food quality and high prices at highway restaurants—was another persistent issue. Lack of Covid-19 tests and harsh lockdown controls during the pandemic were the last straw which prompted drivers to leave. The resulting labour shortages increased the pressure on the remaining drivers to work longer hours, exacerbating the cycle.

    Ironically, by illuminating the reliance of industrial sectors on cheap migrant labour, Brexit and the pandemic have counteracted some of these trends. Supermarkets like Aldi, Tesco and Asda and cooperative retailer John Lewis have raised wages for truck drivers or begun to pay sign-on bonuses. UK Trade Union GMB negotiated a 20 percent pay rise for drivers with delivery company Yodel after 95 percent of union members had voted for industrial action. But while they may cause some drivers to change employers, these measures do not resolve the underlying problems, and consequently they are unlikely to bring drivers back into the market. Just this year, the wages of UK truck drivers rose 20 percent, but the number of truckers did not increase significantly.

    Pay rises in some sectors also fail to increase overall income: avoiding a wage-price spiral requires a commensurate increase in productivity. With no plans for industrial investment, no proposals to alter Britain’s brutal anti-union rules, and rigid anti-protest measures in the works, the country’s declining labor standards have the potential to induce future supply shortages in coming months, particularly with Black Friday and Christmas around the corner. At current rates, it will take two years to fill the gap in necessary truckers. In order for new drivers to remain in the sector, the conditions of their work will have to change.

  10. Developmentalisms

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    2021 marked the centenary of the creation of the Chinese Communist Party, born of the May Fourth Movement of 1919. History textbooks tend to claim that the Movement emerged out of a widespread realization that China’s rights as a victorious power during WWI had been sold out at the Paris Peace Conference by the European Powers. Students were angered by elite collusion with Japan and the corruption of the early Chinese Republic—also known as the “Beiyang Regime.” The activists found hope in the new Soviet model, and May Fourth is credited with bringing Bolshevism to China and beginning its socialist phase.

    In Japan, conversely, state-led economic development has often been attributed to a deliberate attempt to mimic the West industrially and militarily since the Meiji era. Japanese developmentalism is perceived, in contrast to the dramatic revolutionary politics in China, to be strategic and straightforward, enabled by the post-WWII foundation of free market capitalism.

    In fact, the state-driven economic development models found in both countries are the products of a long and intertwined ideological history. In the late nineteenth century, Chinese and Japanese economists drew inspiration from Hamiltonianism (also known as the “American School”) and German State Socialism to pursue social reformist aims while managing rebellions from below. Developmentalist ideas formulated in this era formed the foundation for later revolutionary programs and postwar capitalist states across the region. Accurately historicizing these models is crucial to understanding their role in contemporary East Asian politics.

    Friedrich List, the American School, and the birth of German State Socialism

    Modern era developmentalism, which seeks to promote growth using the fiscal and administrative power of the state, originated in the Federalist economic policies of Alexander Hamilton. Inspired by Louis XIV’s Mercantilism, and penned by Hamilton’s secretary Tench Coxe, the policies advocated in Hamilton’s Report on Manufactures and two reports on public credit included import-substitution industrialization, funded by a national bank and high protectionist tariffs, in order to secure the economic independence of the nascent United States. These ideas formed the basis of the “American School” of economics.

    Developmentalist ideas soon reached France through Henri de Saint-Simon, a French aristocrat who had fought in the American War of Independence and whose readers later included the Marquis de Lafayette, a member of Hamilton’s circle. (Saint-Simon and Hamilton had both taken part in the successful 1781 Siege of Yorktown.) After the Napoleonic Wars, Saint-Simon developed his vision of a society led by the productive industrial classes. In plans presented by Saint-Simon to the Viceroy of Mexico, and by his disciple Prosper Enfantin to Governor of Egypt Muhammad Ali, a global vision was developed—of huge infrastructural projects like the Panama and Suez Canals linking the countries of the world with a federalized Europe.

    Saint-Simon’s death would motivate two interpretations of this vision. On the right, figures like the Pereire brothers pioneered industrial investment banking for large projects like railways. On the left, economist Constantin Pecqueur developed the first coherent vision of a State Socialist planned economy—where France was envisaged as an enormous, democratically organized workshop in which property would be nationalized, and each province assigned production targets based on consumption trends. Although its direct effect on the region is scant, this latter interpretation of Saint-Simonianism contained the primary ingredients of East Asian developmentalism. But these ideas would only arrive in the region via Germany.

    Saint-Simon was not the only development theorist who was influenced by events in the United States. Towards the 1830s, the British began dumping goods in German markets, destroying Germany’s handicrafts industries. Surveying the situation was economist Friedrich List, who had lived in the US, been a protege of Lafayette’s and an associate of the Saint-Simonians, and who attributed the weak economic resistance of the German middle classes to their misguided faith in Adam Smith. The correct approach, he argued, was to mimic the “American System” by establishing a German Customs Union and developing domestic economic productivity. He also argued for the expansion of this union into what was later known as Mitteleuropa, to encompass central European states, eventually extending to the Middle East. List’s influence was extensive in both Germany and the US, forming the German Historical School and maintaining a guiding foundation on the American School. The former later gave rise to the Social Policy Association, a group of moderate academic social reformers.

    Key among the followers of both Listianism and the American School was Otto von Bismarck. In the wake of the economic crisis of the 1870s, the growing workers’ movement across Europe challenged the stability of the conservative German state. Drawing on the theories of Friedrich List and the US economist Henry Charles Carey, as well the advice of social democratic leader Ferdinand Lassalle and Social Policy Association leaders such as Gustav von Schmoller, Bismarck raised tariffs, nationalized Prussia’s railways, and introduced workers’ insurance and pension schemes. Under Bismarck, the state had subsumed the ideas of socialism to its own advantage.

    Bismarck was the first statesman to pursue such policies in a major country, and to also openly admit to their “socialistic” character. In a speech at the Reichstag in 1882, he declared “If you believe that you can frighten anyone or call up spectres with the word “Socialism,” you take a standpoint which I abandoned long ago, and the abandonment of which is absolutely necessary for our entire imperial legislation.”1 Bismarck was initially mocked by the social democrats whom he repressed: “State Socialism” was thus originally a derogatory term used to describe his approach. But when his policies began to prove successful, the term was proudly embraced by Bismarck’s followers, and it went global.

    Economic statism in Japan

    Listianism and the American School had reached Japan even before Bismarck’s reforms. In an 1874 memorandum, Meiji Restoration leader Ōkubo Toshimichi [大久保利通] argued that the state had a responsibility to “encourage and reward” industrial development; only once a strong industrial base had been formed would Japan possess the preconditions for free trade.2 This perspective, and the dirigiste decade that followed, was actively shaped by economists who followed Hamiltonian and Listian policies from the United States—the 1872 ten-year plan for Hokkaido, for example, was developed by ex-Commissioner of the US Department of Agriculture Horace Capron, who had been active in the Hamiltonian Whig Party circles. In 1881, finance bureaucrat Wakayama Norikazu [若山儀一] drew on List’s main work, National System of Political Economy, in his Memorandum on Protectionist Tariffs [保護稅說].3

    List’s book itself was however not translated into Japanese until 1889, by educator and government translator Ōshima Sadamasu [大島貞益], working with ex-President of Bank of Japan Tomita Tetsunosuke [富田鐵之助]. The debt and inflation that the Japanese government had accumulated at the end of the 1870s gave way to a decade of austerity and deflation. Anticipating the third world deflationary policies of the 1980s, Japan’s new Finance Minister and later Prime Minister Matsukata Masayoshi [松方正義] privatized many state-controlled industries, selling them off to leading conglomerates such as Mitsui. Matsukata systematically ostracized Listians from government—he purged the US policy-influenced Tomita Tetsunosuke, who had advocated the creation of a government industrial investment bank. Matsukata also undermined Maeda Masana [前田正名], a young French-educated bureaucrat in the Japanese Ministry of Agriculture and Commerce who sought state promotion of agricultural development.

    There was no alternative for the statists but to fight back. Tomita, Ōshima and finance bureaucrat Kōmuchi Tomotsune [神鞭知常] established in 1890 the National Association for Economics (NAE 國家經濟會) to champion Listianism and Bismarckian State Socialism. Their strategy worked, and would have a profound impact on Japan. In 1897, following the German example, Japanese academics set up the Association for Social Policy Studies. By 1906–7, Prime Minister Katsura Tarō [桂太郎—as head of a political party that had adopted many of the NAE’s policies and some of its members—nationalized Japan’s railways on Bismarck’s example. The Japanese state monopolized the post, telegraph, water, gas and steel industries, and began subsidizing shipping and banking. It managed to restore control over customs tariff rates after 1911, during treaty revisions following its war against Russia in 1904–5. At the time, Japan was referred to by the domestic press such as The Japan Times and western journalists such as Hamilton Holt, editor of The Independent in New York, as the most successful State Socialist country outside Europe, if not worldwide.4

    But Holt was careful to state that “Japan has gone into these ‘socialistic’ measures, however, not from any conversion to the tenets of Socialism, but because she has wanted to make money.” It was precisely because of this that State Socialism in East Asia was primarily concerned with state ownership of industries and direction of growth. The welfare aspects of Bismarck’s model had been deemed irrelevant to East Asian development by members of the elite establishment. But with economic growth came labour and agrarian struggles. By ignoring social reformism, early twentieth-century East Asian political leaders were sowing the seeds of the revolutions that would shake the region to its core.

    State Socialism goes to China

    In 1898, following the failed Hundred Days’ Reform in Peking, Liang Qichao [梁啟超], a leading thinker during China’s turn-of-the-century “enlightenment” and a constitutional monarchist, fled to Japan. There, Liang grew acquainted with western statist theories through Japanese literature, notably written by NAE member Shiba Shirō [柴四朗], who had studied business and finance in the US. Shiba’s novel had a title that masqueraded the intensely political nature of its contents—Strange Encounters with Beautiful Women.5In it, Shiba tells through the voice of Colleen, an “Irish beauty”, that not only has Ireland been annexed by Britain, but that the Ottoman empire and India “are independent in name only and not in fact. Their trade is in imbalance year after year and bullion flows out of their borders. Although they are not tributary states of Britain, their situation is no different from offering as tribute to Britain the lipids [read: riches] that have been squeezed out of their own citizenry.”

    After a tour of the US in 1903, Liang wrote in a travelogue that he had been converted to State Socialism, “an ideology that becomes sounder by the day”, which “uses an extremely autocratic method of organization to put into practice a spirit of extreme equality, which miraculously matches the nature of Chinese history.”6 Liang saw the nationalization of railways, mines, and factories as the policies of a future China. Elsewhere, he advocated the cartelization of industries on the American model, believing it to be a necessary reaction to nineteenth century laissez-faire. And, presaging the “State Monopoly Capitalism” of the postwar period, Liang argued that such cartels would have to come under government control. A “State Capitalist Trust” thus formed would secure government command of the economy through the private sector.

    Friedrich List’s developmentalism had also begun to find an audience among Chinese students. Sections of List’s work were published in Chinese as early as 1901 in a student journal in Tokyo whose editors included Cao Rulin [曹汝霖] and Zhang Zongxiang [章宗祥]–two Beiyang bureaucrats who would later be labelled pro-Japan collaborators by the May Fourth Movement. In 1908, the Japanese-educated student leader Yang Du [楊度] was invited to lecture Manchu nobles at the Summer Palace in Beijing on the topic of Japanese “economic militarism.” To his audience’s embarrassment, he argued for a constitutional monarchy, but not only that—he also proposed that the Empire be reformed into an enlightened industrializing regime prioritizing production if it was to avoid a socialist uprising. Since 1908, generations of Chinese politicians and activists have pursued variations of this regime. Indeed, by the 1930s, Yang Du had been converted to revolutionary socialism and became a member of the CCP.

    In 1906–7 the Chinese Revolutionaries and Constitutional Monarchists held a protracted discussion on State Socialism. Despite their differences, both sides agreed on key State Socialist principles. Among the revolutionary theorists, Feng Ziyou [馮自由] argued that a post-revolutionary military government should implement German and Japanese-styled State Socialism alongside land reforms. While the gentry-led Constitutional Monarchists opposed land reform, they agreed that industrial nationalization could be implemented under a constitutional empire under the auspices of “Social Reformism.” In 1908, Sheng Xuanhuai, [盛宣懷] head of China’s largest steelworks at Hanyang and soon to be Minister of Communications, visited Japan and had a long conversation with Prime Minister Katsura Tarō. Under Katsura’s influence he sought to implement a railway nationalization policy in 1911, which involved the forcible purchase of the shares of local railway companies, in which many members of the budding gentry-bourgeoisie had invested. The proposal ignited the widespread protests that culminated in a Republican revolution.

    But after the revolution, Sun Yat-sen, the Provisional President of the Chinese Republic, surprised the public by announcing that he would not reverse railway nationalization. He championed State Socialism against revolutionary socialism, arguing that limiting the growth of private capital would prevent class conflict at the foundations. Indeed, he announced that State Socialism was equivalent to the “Doctrine of Popular Livelihood,” one of the founding principles of the Chinese Republic alongside Nationalism and Democracy. China, he argued, should learn from Germany in this regard. It should embark on a vast railway construction program with a target of 100,000 kilometers; he expected optimistically that the railways’ revenue would adequately fund all public expenditure.

    Following Sun’s resignation, the new Republic came under the guidance of a group of ex-Imperial bureaucrats who had visited or studied in Japan. They were known as “Beiyang bureaucrats,” after the North Sea military establishment which modernized much of Northern China under Viceroy Yuan Shikai [袁世凱]. Yuan Shikai succeeded Sun Yat-sen as President of the Republic. His Finance Minister Zhou Xuexi [周學熙] had been the “industrial tsar” of Tianjin (Tientsin), where the empire’s light industries had been concentrated, and upon assuming office announced the enactment of State Socialism and the development of a dozen key industrial sectors. Minister of Agriculture and Commerce Zhang Jian [張謇] was credited with building Nantong [南通] as China’s first company town, with successful textile production predicated on adequate provisions for workers. Zhang, too, approved of State Socialism, and his “Cotton and Iron Doctrine” [棉鐵主義] promoted import-substitution and export orientation through cotton, iron, and wool production.

    The Corrective Revolution and the Beiyang Leap Forward

    Though the Beiyang Regime—the early Chinese Republic—has often been characterized as a “warlord regime,” throughout its existence it tried, ultimately unsuccessfully, to cling onto the appearance of a constitutional representative government. In summer 1917 the fractious Chinese Parliament was dissolved, and Puyi’s monarchy briefly restored before it was repressed by German-trained General Duan Qirui’s [段祺瑞] republican troops. Duan initially formed a cabinet with Liang Qichao and his Progressive Party. These men conceived of their coup d’état as something akin to what mid-twentieth-century Arab leaders would come to call a “Corrective Revolution,” in which traditionalist reaction, political pluralism and radicalism, and economic liberalism would be swiftly replaced by a centrist monolithic developmental regime that granted traditional elites a place in the new socioeconomic order.

    Duan and Liang fell out in late-1917, and Duan governed until August 1920 through the “Anfu Club” [安福俱樂部], a coalition of bureaucratic and parliamentary factions most of whose leaders were educated abroad. Electoral laws were rewritten to vastly increase the property requirements for voting and for candidacy. A bill was proposed which would have turned the Chinese Senate into a corporatist chamber complete with economic representatives. The gentry-literati empowered by these reforms were expected by Liang to develop into an industrial class that would form the future bedrock of the Republic. Duan’s industrial policy, formulated with help from Liang Qichao, was shaped by the war-induced global commodity boom and the economic successes of Japan. Through “Economic Investigation Committees” [經濟調查會] at both national and local levels, and by empowering technocrats in the Ministry of Agriculture and Commerce previously hired by Zhang Jian, Duan and Liang tried to assemble reliable statistics using large scale geological, industrial, and agricultural surveys.

    The economic plans of Duan’s Regime culminated in the rollout of “Nishihara Loans,” named after Nishihara Kamezō [西原龜三], secretary to the Japanese Prime Minister Terauchi Masatake [寺內正毅]. As a student of Kōmuchi Tomotsune, Nishihara was steeped in the NAE’s Listian tradition. Both the Prime Minister and his secretary opposed reckless military intervention in China, believing that it would only invite rivalry with the European powers in East Asia. In January 1918 Nishihara began to use economic intelligence available to the Prime Minister to compile a State Socialist reform manifesto, Strategy for Economic State-Building [經濟立國策]. In it, Nishihara argued that China’s rise was not to be feared; that its prosperity would form the basis of Japan’s future development, and consequently that Japan should treat China as a credible partner and assist its economic growth.

    Nishihara’s approach was a tremendous change to the bullying tactics of Terauchi’s predecessor, Prime Minister Ōkuma Shigenobu, who notoriously raised 21 demands against China after sending an army to occupy the German colony of Qingdao (Tsingtao). These demands would have reduced China to the status of a protectorate. Duan and Liang, delighted to see this change of attitude on the part of the Japanese, and desperate to participate in WWI in order to gain a place in the postwar peace conference and reclaim the right to raise the customs tariff rate, welcomed Nishihara’s loan package with open arms. Cao Rulin (a member of Anfu’s Club Council, its de facto Central Committee) and Zhang Zongxiang, the Beiyang bureaucrats who had published List’s writings in their student journal, became responsible for negotiating and handling the Japanese loans.

    Nishihara’s vision revolved around the formation of an “East Asian Economic League” [東亞經濟同盟], which included Marshall Plan-style Japanese investment in China, and the pegging of China’s currency to the gold-coupled Japanese yen. Nishihara also advocated the return of foreign railway concessions and the Boxer Indemnity, which would be used to fund industrial expansion and occupational education. The Chinese cabinet was to set up an “Industrialization Board” to coordinate the use of these funds.

    Building on Zhang Jian’s “Cotton and Iron Doctrine,” Nishihara based his plans on those of the European-trained Chinese technocrats Ding Wenjiang [丁文江] and Weng Wenhao [翁文灝] in the formulation of a “Great Leap Forward.” The plans were sweeping. In Pukou, on the opposite bank of the Yangtze to Nanking, a “National First Steelworks of the Republic of China” [中華民國國立第一製鐵廠] would be built and steel production would rise from 30,000 to 112,500 tons by 1921. Cotton production would rise to 907,500 tons by introducing American crops. Wool would be extensively produced in the northwest by importing new breeds of sheep. A vast new “Central Asian Transversal Railway” [中央亞細亞橫斷鐵道], based on Chinese plans, would link Qingdao on China’s eastern seaboard with the Mediterranean.7 This was to be an economically-based, globalizing Pan-Asianism with a farsightedness rarely matched until after WWII.

    The Japanese Army, which operated semi-independently of the government, resented Nishihara’s rapprochement. When he lent some 145 million yen to China’s Beiyang Regime through Japan’s state-owned banks (the bulk of Japan’s earnings from the wartime trade boom), officers like Vice Chief of Staff Tanaka Gi’ichi [田中義一] felt that Japan had placed all of its eggs in one basket. Tanaka’s men had long been funding insurgents against Yuan Shikai and later Duan Qirui. Sun Yat-sen set up his base in Guangzhou and launched a war to reconquer the north, accepting vast sums of money from Germany. Civilian and military factions of the Japanese government thus attempted to turn the Chinese civil war into a proxy war amongst themselves. Duan had no choice but to squander Nishihara’s funds on a protracted war with the south, although a substantial portion also went to repay foreign debt.

    Incidentally, the Central Asian Transversal Railway proposals led to a major crisis for Sino-Japanese relations and the Anfu Regime. The “Shandong Question,” concerning the right to build and manage the first section of the line, exploded at the Paris Peace Conference. This led to the May Fourth Movement in 1919. The Beiyang bureaucrats—who were more concerned with keeping industrial plans secret from China’s wartime enemies than with their propaganda value within China, or with the potential backlash of opinions against receiving Japanese loans—became targets of early rebellion. Cao Rulin’s mansion was burnt down and Zhang Zongxiang severely injured when he was beaten up by an angry mob of students. Nishihara’s “East Asian Economic League” collapsed, becoming a lost opportunity for the two countries to cooperate constructively; the inability for China to return any of the loans would in future prevent Japanese politicians sympathetic to China from making financial overtures to China, which left only military solutions to continental problems. From the late-1920s onwards, opponents of the Nishihara Loans such as the military strongman Tanaka Gi’ichi would come to have the upper hand in deciding China Policy, and this led directly to the military expansionism of the 1930s onwards. Nishihara remained adamantly opposed to the Japanese invasion of China in the 1930s-40s, writing in his autobiography that he regretted his inability to prevent Japan’s slide into war and fascism.8

    This was not the end of the Beiyang Regime’s engagement with State Socialism. On July 8th, two months after the student protests, the Anfu Club held a meeting for its parliamentarians. Its chief whip Wang Yitang insisted that socialism had become a dominant political force after the Great War, and that as the governing party, the Club was responsible for the nation’s livelihood. The Club’s party newspaper published reports on social reforms in Japan including workers’ housing in Osaka, and advanced gradual social policy against communism and anarchism. That month, the cabinet’s Postwar Economic Investigation Commission (PEIC) [戰後經濟調查會] passed a “Labour Protection Ordinance” [保護勞工條例]9 10 which made Sundays a holiday, ordered factory owners to set up night schools, banned unsanitary and unsafe factories from hiring workers, and made workers’ insurance and pensions compulsory. This overlooked ordinance could be seen as the first Chinese official statement on labour rights. That same year, in response to the Bolshevik threat, Duan also sent his ablest lieutenant, Xu Shuzheng [徐樹錚], to lead a Japanese-trained expeditionary army into Outer Mongolia where he proposed a Saint-Simonian package of railways, mines, and animal husbandry.

    In 1920, the PEIC reformed itself into the Economic Investigation Bureau [經濟調查局]. Massive industrialization, hydro-electrification and motorways were planned for the Peking region. The state began to openly advocate the cooperativization of the peasantry, handicraft artisans, and industrial laborers. President Xu Shichang, [徐世昌] also an ex-imperial bureaucrat, announced his wish to prevent “social class warfare.”[^classWarfare] Under this plan, “Peasant-Worker Banks” were established across the country to provide credit to farmers, allowing them to avoid usurers. In addition, a cartel of national and semi-national banks was also proposed, so as to reduce China’s dependence on foreign finance. This second wave of industrial proposals in 1920 was a substantial improvement on the first one from 1917, in its focus on domestic investment and preventative measures. All of this was to be aborted by the July 1920 civil war which toppled the Club Regime. The next year, in summer 1921, the Chinese Communist Party was formed, and the country would now follow a very different trajectory towards socialism.

    State Socialism and Modern East Asia

    During WWI, Walther Rathenau, head of the Raw Materials Section of the German War Ministry and son of the founder of AEG, created the first planned economy in modern history. Rathenau used punch card computers made by the German subsidiary of IBM to coordinate large amounts of data. He installed “War Corporations” that coordinated state demands with each sector. And he instituted a system of collective bargaining and argued for the breaking up of landed estates for collectivized agriculture. He also resurrected the proposals for a Mitteleuropa. Conceived and instituted during wartime, these efforts were key to his vision of a collectivist society.

    Nishihara Kamezō [西原龜三]

    The Japanese military translated Rathenau’s lectures and, along with other intelligence, they reached Nishihara. Having consulted the opinions of the professors who led the Association for Social Policy Studies, he began to write a manifesto for social reform. In his 1918 Strategy for Economic State-Building,11 he called for the establishment of a Controlled (i.e. Planned) Economy in Japan, as a precondition to setting up the “East Asian Economic League,” and to increase Japan’s per capita national income from 60 yen to 200. A single “Imperial Commodities Corporation” [帝國商品株式會社] would replace the whole retail sector with city-centre department stores, and this corporation would be linked to a collectivized agricultural and handicrafts sector. Land reform would distribute two hectares to each peasant family, and these would later be collectivized. Local administration would be run cooperatively, hydro-electric power stations and grids would be constructed throughout the country, and worker housing would be constructed in industrial zones using increased corporate taxes. China’s rapid industrial development, made possible by Japanese finance, was meant to be complementary to Japan’s own State Socialist transformation—it would have ushered in a new State Socialist era for all of East Asia. (To a certain degree, it was the failure to implement these reforms that cost Prime Minister Terauchi his power, when “rice riots” erupted across the country in summer 1918 due to inflation.)

    But an economic and social system based on Rathenau’s model would emerge first not in Japan, but in the Soviet Union. Amongst the admirers of List and Bismarck was Sergei Witte, the Tsarist Finance and Prime Minister credited for having laid the foundations of Russia’s heavy industries and later, Soviet economic power. Vladimir Lenin followed German developments closely and thought that Rathenau’s system of “State Monopoly Capitalism,” combined with proletarian soviet power, would provide all the necessary conditions for a transition to socialism.12 The Rathenau model and Witte’s industrial legacy thus became the basis of “War Communism” and later, Stalinist industrialization.

    Nishihara continued to advocate a Controlled Economy into the 1920s. With the onset of the Great Depression, the Stalinist model gained appeal, and Nishihara’s associates argued for a Five Year Plan which was nearly implemented in 1932 by Prime Minister Inukai Tsuyoshi [犬養毅], who himself had translated the works of Henry Charles Carey. Inukai was soon murdered by army officers for refusing to recognize the Japanese occupation of Manchuria (otherwise known as Manchukuo, the puppet state they had created). It was in Manchukuo however that Japan’s Soviet-inspired “reform bureaucrats” and many left-wing intellectuals fleeing from domestic repression found their chance to experiment with economic planning. Satō Daishirō [佐藤大四郎], an ex-member of the Japanese Communist Youth League, spearheaded a campaign to collectivize the Manchurian peasantry, until he too was arrested and killed for his activism. From 1936 onwards the leader of the reform bureaucrats (and a future Japanese Prime Minister), Kishi Nobusuke [岸信介], oversaw the implementation of two Five Year Plans aimed at rapid heavy industrialization, which ironically built up the necessary industrial might for the Chinese Communists to conquer the country in the late-1940s and to end in a draw with the US-led troops in Korea in 1953.

    During the 1930s Japan’s economy was gradually placed under government control and subject to Keynesian investment under the auspices of Maeda Masana’s erstwhile protege, the Finance Minister Takahashi Korekiyo, [高橋是清] who continued Inukai’s plan without calling it as such. In 1940 a “New Economic System” was proclaimed. Under a war economy, the government attempted to assume managerial powers of privately-owned firms. After 1945, many Japanese technocrats returned from Manchuria to head post-war Japan’s Liberal Democratic Party and the leading economic departments, including the Ministry of International Trade and Industry (MITI) and the Economic Planning Agency. The result was a highly-planned capitalist economy, which would come to influence both South Korea and China. Through a practice known as “amakudari,” retired MITI bureaucrats were even inserted into the board of directors of leading enterprises, thus ensuring government direction over private businesses. This came alongside labor strikes and student protests which grew into the 1970s, reflecting the pressure of ordinary life under State Monopoly Capitalism.

    Manchurian experiences also influenced both Koreas. North Korea developed the heavy industrial and hydro-electricity-based policies and the network of rural cooperatives established by the colonial government. These cooperatives had been established by Governor Ugaki Kazushige in 1932 on the advice of Nishihara and others, and had been a source of inspiration for Satō’s experimental collectives in Manchukuo. Japanese technicians who remained in North Korea after 1945 were amazed by the effect that Communist ideology had on the Korean workers’ performance compared to high-pressure colonial policies that had previously forced laborers to toil under brutal conditions. Some of the Japanese were even awarded “labor hero” medals.

    Under ex-Manchukuo bureaucrat Chong Hyon-chun [鄭顯準] and a group of US advisors, South Korea drew up a Five Year Plan for 1949-53 but the plan was aborted due to the Korean War in 1950. Syngman Rhee later unsuccessfully proposed a Seven Year Plan. Park Chung-hee, [朴正熙] who seized power in a 1961 military coup and became head of the junta, was a former Manchukuo officer. Under his aegis, the effectively single-party South Korean state began to implement the first of seven Five Year Plans, fueling a “forced-paced industrialization” of the nation aimed at realizing what Park called “Miracle on the Han River” and turning the country into one of the Four Asian Tigers. It has also been argued that the “New Village” or “Saemaeul” Movement of the 1970s, where Park Chung-hee invested in the reconstruction of a semi-collectivized rural economy, was in fact a continuation of the cooperative policy of the 1930s. Park was assassinated in 1979 amidst a wave of nationwide student and worker protests.

    Nishihara died in 1954. His influence permeated the post-war period through Ikeda Hayato [池田勇人], head of MITI and the Finance Ministry in the late 50s and Prime Minister by 1960. Under Ikeda, who wrote the calligraphy on Nishihara’s grave, Japan signed trade agreements with China and North Korea, and implemented a “National Income Doubling Plan”, realizing Nishihara’s “growthist” goals from 1918. Tsushima Juichi [津島壽一], in 1918 a young Finance Ministry bureaucrat who helped Nishihara write his State Socialist manifesto, survived to be President until 1962 of the Japanese Olympics Committee, which oversaw the 1964 Tokyo Games. His protégé was Ōhira Masayoshi, [大平正芳] who became Prime Minister in 1978-80 under the help of Liberal Democratic Party faction leader Maeo Shigesaburo [前尾繁三郎]. Maeo had hailed from Nishihara’s Kyoto region and had been under his immense influence during his youth, reading the original translation of List as done in 1889 by Oshima and Tomita, as well as other books on State Socialism. Maeo and Ōhira formulated a policy to provide developmental aid funding Deng Xiaoping’s open-door reforms. Indeed, Ōhira’s choice of foreign minister was the former lead planner of the Economic Planning Agency, Ōkita Saburō [大来佐武郎], who subsequently became advisor to the Chinese government. The Finance Ministry had also set up a group to re-examine the Nishihara Loans in the 1960s and came to favourable conclusions.

    Deng himself had been a product of the First World War, soon after which he was chosen to study and work in France, following the example of the Chinese laborers sent there during the hostilities. He returned from France as a radical, joining the CCP as well as the Kuomintang. In 1928 the Beiyang Regime fell to Kuomintang troops, which had received Soviet support. Despite a fall out in 1927 with the Communists and a decade-long purge of the left, the Stalinist model also came to inspire the Kuomintang single-party regime, which announced a Five Year Plan in 1930 and a Four Year Plan in 1932. Both came to nothing. Regional warlords such as Yan Xishan [閻錫山] started to propose plans for single provinces. China reclaimed the right to set its customs tariff rates in 1933. By 1934 the Kuomintang had decided on a Planned Economy, and started a “National Economic Construction Movement.” In 1935, ex-Beiyang technocrats Ding Wenjiang and Weng Wenhao were named leaders of the “National Resources Commission” (NRC 國民政府資源委員會) which was placed in control of most of the state-owned industries. With Nazi assistance they produced in 1936 a “Heavy Industrial Development Five Year Plan” which focused on defense industries and electricity, until it too was cut short by Japanese invasion.

    As early as 1946 Weng Wenhao announced that the work of the NRC was to build up state capital, conforming with international socialist tendencies. They had also inherited many of the Japanese staff, and the huge industrial complexes built by the Japanese authorities, in North China and Manchuria. The NRC thus became a left-wing bastion within the anti-Communist regime which fell in 1949. Around 90 percent of the NRC’s staff subsequently defected to the new Communist regime. Some remained on the frontlines of economic reform until the 1980s. One of them, Qian Changzhao [錢昌照] even helped plan special economic zones and write Hong Kong’s Basic Law. Others went to Taiwan, and although some of them were executed for their Communist sympathies, the island ultimately blossomed under what the Kuomintang termed a “Planned Free Economy” [計劃自由經濟], merging state-direction with market mechanisms.

    It has often been argued that China, since the reforms of the 1980s, has abandoned revolutionary socialism. There is consequently little consensus as to what China has now really embraced in its place. What the history of planning in the region suggests is that China’s model owes much to this older ideology of State Socialism. Even today, the legacy of State Socialism and the Saint-Simonian spirit can still be felt in the 14th Five Year Plan, now under execution in China, and its “Belt and Road Initiative,” which aims to link up the world with rapid infrastructural development. It is also instructive to note that Japan’s late-1980s economic bubble and the subsequent “lost decades” coincided with the dismantling of economic planning and controls, whilst South Korea after the 1997 financial crisis has strengthened economic controls.

    Yet the legacy of the East Asian variant of State Socialism, with its dedication to the cause of industrialization combined with near total neglect for social welfare, haunts the region. Worker protests continued to grow throughout the 1980s–90s. Recent decades have seen the institutionalization of comprehensive systems of medical insurance, and increased resources devoted to environmental protection. Understanding the origins of East Asian developmentalism allows us to effectively situate these efforts within a broader struggle for development, and to see how East Asia, often thought of as an exception, is but an integral part of the global evolution of economic policy.