Another Day Older and Deeper in Debt …

The question of debt is often absent from media coverage of the progress, or not, of the world economy. But a troubling problem is that debts have continued to rise since the 2007-08 crisis. Compared to the size of the economy, the total outstanding debt of the non-financial sector rose from just over 200% of GDP at the end of 2008 to over 244% at the end of 2017, with a 10 percentage point jump in 2017 alone.[1] Given that world economic growth remains weak, this is not likely to be a sign that optimism about future prospects has led to more borrowing for investment and consumption. Some recovery was likely once the banking system had been stabilised, but the latest numbers are the highest on record.

High debt is a dull, but debilitating burden for corporations, consumers and governments who have built up their borrowing. But this liability is also an asset for those who have lent their money or bought the debt securities. The latter include not only banks, but directly or indirectly, many corporations and consumers, especially the rich and those whose pensions and other income relies on interest and debt repayments. So the debt cannot just be wished away with no consequence. For example, even if banks wrote off the debts owed to them, this would damage their finances and risk insolvency, with further repercussions throughout the financial system, as became clear in the wake of the 2007-08 crisis.

Data details

The latest data from the Bank for International Settlements show a worse picture for global debt than indicated in a note I made on this blog a few months ago (see also the article with country details two years ago). As remarked before, the burden of debt will increase not only with its level – indicating how much has to be repaid eventually – but also with any extra funding cost that comes from higher interest rates.

On the latest data, both the ‘advanced’ countries and the ‘emerging market’ countries as a group showed a rise of debt compared to GDP in recent years. The rise in emerging market debt was from a much lower base, but much more rapid. Pictures for different countries are mixed, however.

Among the advanced countries, debt ratios stabilised in the US, though they have remained at a high 250% of GDP. They have fallen in Germany to around 175%, down from near 200% in 2010. In France, debt ratios have now risen to just over 300% of GDP; Japan remains the basket case, with a rate rising to 373%.

In emerging market countries, for many the debt ratio has stabilised in the past year or two. China’s rose strongly in the previous decade to just over 250% of GDP, but may have now flattened out. Similarly for South Korea, which now has a debt ratio of around 230%. Brazil’s debt ratio is lower and has steadied at around 150%. India’s is lower still, and has been flat at close to 125% of GDP.

Tony Norfield, 29 August 2018

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[1] The figures are for the more than 45 areas reporting to the Bank for International Settlements, a group that includes all the major ‘G10’ countries and also the principal ‘emerging market’ countries such as China, Brazil, India, Russia, Korea, Indonesia, Philippines and Turkey.

Trends in World Debt

The reality of a global economy is shown by close connections in trade and investment, and is reflected in similar trends that affect many key countries. One of these trends is the rise in debt held by governments, households and corporations, as borrowing grew to provide the funds to maintain economic activity. After the acute phase of the economic setbacks in 2007-08, the world is now in the chronic phase of stagnant growth. Occasional blips higher look good, and the patient goes for a walk, but the economy is never far from stumbling back into a ditch.

There are individual deviations from the average picture, but each country's details express the evolution of a world economy. Even though one country may be impacted less, or more, that deviation usually reflects its position in the hierarchy of world economic power. Higher debt levels, or ratios of debt to GDP, are common among the richer countries, especially those that have a privileged position in world finance. After all, they can raise funds from the world market fairly easily since they are the guys in charge and, in the market's 'wisdom', are likely to remain so. Poorer countries have what is called a 'less developed' financial system and tend to hold less debt, at least in relation to the size of their economies. This general point is borne out by the data on debt/GDP for those the Bank for International Settlements considers the 'advanced' versus the 'emerging' countries, as shown in the next chart for the period 2000-2015:

Two features of the previous chart stand out: first, the much higher debt ratios for rich countries, but, second, the faster rate of growth of debt in the poorer countries in recent years. This reflects how much more the poorer countries attempted, from a lower base, to keep their economies ticking over in the wake of the acute phase of the crisis by accumulating more debt.

Country details bring out some other points. First, here is the chart of the total financial sector debt for some key emerging market countries, to add to that already given in a blog post a few days ago for the major advanced countries:

Clearly, China and South Korea have had the biggest growth of debt in the past 15 years, and have the highest ratios of the main 'emerging market' countries. China's rise in debt has been most dramatic after 2008, but, as a later chart will show, this has principally been on the back of the extra debt burden taken on by non-financial corporations (both private and state-owned).

This China development is similar to the results for many EM countries. It contrasts with the picture for advanced countries, where the extra debt has been mainly held by the government sector. This reflects the ability of the major states to borrow and alleviate the burden of the crisis in the corporate and household sectors via government liabilities (debt), while the emerging market countries and their governments, with less access to world markets, are far less able to do so. The breakdown of EM debt in BIS data only goes back a few years, compared to the longer time series for advanced countries, but the next two (different) charts below indicate what has happened:

While advanced countries have seen the debt burden (debt/GDP ratios) of the household and corporate sectors decline in recent years, emerging market country debt ratios have increased sharply, especially for the corporate sector. Government debt ratios have not changed much for emerging market countries.

Now to some country pictures for the breakdown of debt, starting with the major powers. Every picture tells a story, so my comments will be brief. Take care to note the y-axis scale in each chart. A taller bar in one chart compared to another chart does not necessarily mean that the debt ratio is higher.

The US: total debt has stabilised around 250% of GDP. Government debt has doubled to 100% of GDP, but household and corporate debt ratios have declined. As mentioned in an earlier blog post, these data ignore the US Federal Reserve's 'assets' in the form of mortgage securities that they have bought. Also, the data only cover 'non-financial' sector debt, so exclude many other liabilities of the financial sector, not least pension funds.

The UK: similarly, the UK has seen household and corporate debt shrink somewhat, while government debt ratios have also doubled to around 100%. Total non-financial sector debt in 2015 was a touch lower than in 2012, at 266% compared to 277% of GDP, but again, this ignores the many extra liabilities of the Bank of England apart from other obligations.

France: this country is in a worse debt position than the UK. The increase in government debt has been similar, but household debt, and especially corporate debt has risen further in recent years, rather than declining. The total debt ratio in 2014-15 was 290%. In the past five years, annual economic growth in France has been below 1% and often close to zero. This picture gives the backdrop for worries about French banks.

Italy: traditionally having a relatively high government debt ratio compared to other major countries, that debt grew still further after 2007. Total debt stabilised at close to 275% of GDP in 2014-15. Economic growth has been lower even than in France.

Spain: there has been a sharp rise in total debt since 2000, but some recent reduction. Corporate and household debt ratios have fallen in recent years, largely offset by a rise in government debt. In 2015, total debt was 283% of GDP.

Germany: this is the outlier country, with a steady reduction of the total debt ratio in recent years, hitting 184% of GDP in 2015, and with the ratio staying below 200% even in the acute phase of the crisis. German annual economic growth has been weak, at less than 1% in recent years, but Germany's government debt ratios increased by much less than in most other major countries. This may be related to the liability that Germany takes on for the eurosystem via the Bundesbank, and this is not counted in the data here.

Emerging Market Countries

Interesting emerging market countries from a debt perspective are China, South Korea and Brazil. The total debt picture for these was given in the second chart above.

China: historical details for China's debt data are patchy, so for 2000-2006 the following chart only gives the total and the government number (with the black bar indicating the difference). After being fairly stable from 2000 to 2008, China's total debt rose sharply, principally through the rapid debt accumulation of non-financial corporations, both state and private. Household debt has also risen, but not by much. In 2015, the total debt ratio was 255% of GDP, with corporate debt at 171%, up from 99% in 2008. This rapid debt accumulation has led to worries about bad loans, but against this one has to take into account some important mitigating factors. While corporate debt has risen rapidly, the average leverage of corporations is low. Furthermore, the government has an ability to allocate funds between different sectors in the case of emergency, apart from still holding more than $3 trillion in foreign exchange reserves.

South Korea: there has been a steady rise in debt ratios for all three non-financial sectors from 2000 to 2015. In 2015, total debt was 235% of GDP, which nevertheless remains well below the figure for most of the major countries shown above.

Brazil: the debt picture for Brazil would seem to belie the crisis the country faces. Total debt rose from close to 100% of GDP in the early 2000s to 149% in 2015, but not by much in the scheme of things, and to a level that remained below all the other countries shown, even below Germany's debt ratio. As in China, Brazil's debt ratio only started rising after 2008. This indicates that the debt ratio is far from giving a full summary of economic conditions. Brazil's economy has been in decline for several years, hit by weaker commodity prices and a slowing of world trade. Government debt started at a relatively high level, but has hardly changed. The increases in household and non-financial corporate debt has accounted for the rise in the total.

Debt and Interest Rates

If you were wondering why interest rates remain at very low levels, with central bank rates negative in Japan and in many European countries, the debt burden is the clearest answer. Huge debts have been accumulated in most key countries in response to the crisis. Now they stand as a mountain of liabilities, payments on which can only be serviced - and defaults avoided - if interest rates remain low. Higher levels of interest rates would threaten to collapse the edifice that has been erected to shore up the world economy.


Tony Norfield, 8 September 2016

Origins of the UK Welfare State

The golden age of the British Labour Party was the 1945-51 Labour government. So it is worth noting some little known aspects of its policies to cast some light on the political background to the modern day resurgence of ‘Corbynism’. Highlights of this administration in British popular consciousness are the introduction of the welfare state, establishing the NHS and a pension system. While there were economic problems in spending on welfare, since the UK was essentially bankrupt in 1945, the Labour government rose to the challenge. How did they do this? By using British imperial power!

One of the 1945-51 Labour government’s priorities was to maintain Britain’s imperial role. For good measure, this also included re-establishing French and Dutch colonial power in Asia, as a sign that the status quo ante could be revived in Burma, Malaya, Vietnam, Indonesia, etc. Using colonial Indian troops and Japanese troops to bring this about highlighted British politicians’ pragmatism and flair. Who else would have come up with the idea of defeating anti-colonial nationalists with soldiers both from a colony and from a recently defeated imperialist power? A stroke of imperial genius![1]

Although these events might seem to be an unfortunate foreign policy to liberal souls, having nothing to do with progressive social policies at home, in fact the two things were closely linked. Just look at how the new welfare state was financed.

Britain’s finances in 1945 depended upon foreign loans in 1945 amounting to £2,100m, or a massive 20% of GDP (note that £1 used to be worth something in those days). Of this sum, £1,100m was from the US. It was not exactly enthusiastic about Labour’s spending plans, but it was happy that the Brits were playing a necessary role worldwide in suppressing ‘communism’. For example, apart from the colonial efforts, think of Britain’s role in the defeat of Greek radicals and establishing a military dictatorship after 1945. So, history will record that the US played a role in funding the setting up of the UK welfare state! Another £250m was from Canada, which was both politically close to the UK and had done well out of the Second World War. Significantly, Britain’s colonies ‘lent’ £750m through the financial mechanism of the Sterling Area that gave them no choice but to do so. These were borrowings by Britain whose international value was reduced when sterling’s exchange rate against the US dollar fell in later years.[2]

After 1945, the welfare system quickly became unaffordable on the basis of Britain’s economy, especially when Labour increased defence spending during the Korean War. Apart from charges for prescriptions of medicines, something that led to ructions in Labour’s ranks and the resignation from government of Labour saint Aneurin Bevan in 1951, it also led to several years of rationing goods even more stringently than during the war. Above all, it prompted ever more nefarious plans to milk the colonies for economic resources in addition to the previous Sterling Area financial rip offs. Details on the former are set out in my article on this blog, 'Labour's Colonial Policy', 7 December 2014.

That is some of the historical background to typical Labour ‘progressive, alternative’ policies. It is based on using Britain’s privileged position in the world economy to deliver benefits to the British populace, completely consistent with Britain’s imperial role and nothing that could be described as a socialist view of policy in the world economy, far less anything that is anti-capitalist.

Jeremy Corbyn may know the history, in which case being a longstanding, proud member of the Labour Party raises a few questions. If he does not know the history, then it would reflect the more widespread arrogance, all appearances to the contrary in his case, of assuming that the rest of the world owes the Brits a living.

Tony Norfield, 8 October 2015

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[1] I am not making this up. See Christopher Bayley and Tim Harper’s book, Forgotten Wars: the End of Britain’s Asian Empire, Allen Lane, London, 2007.

[2] There are few studies of these embarrassing (for Labour loyalists) events. One accessible source, written from a pro-capitalist market, although strikingly critical, perspective, is Edmund Dell, A Strange Eventful History: Democratic Socialism in Britain, Harper Collins, London, 1999, especially Chapter 7.

How Much Do Santa's Helpers Get Paid?

A large proportion of the world's industrial employment is in poorer countries. In 2012, the International Labour Organisation estimates that total world employment was some 715 million, but only 106 million jobs were in developed economies and the European Union. The biggest number of industrial jobs among the richer countries was in the US, with 26 million, but this figure fell from 31 million in 1991. The striking contrast is with the poorer countries. China employed 234 million in 2012, up from around 135 million in 1991. India's industrial employment more than doubled over the same period to 113 million, and similar developments have occurred elsewhere. Indonesia now employs 24 million and Brazil 21 million industrial workers. As many people are aware, the growth of the industrial labour force in poor countries and the shrinkage in rich countries has been a factor in so-called globalisation. The economics behind this shift of employment, and production, is the relative cost of hiring workers. While there may be other factors impacting business decisions, from tax breaks to sources of cheap energy, labour costs are the main influence over the location of production.

The next chart gives the latest picture for the hourly 'labour compensation' in different countries for the year 2013. Compensation refers to the sum of both wages paid and various benefits available to the worker. In general, the amount of non-wage compensation is very low in poor countries. These data are taken from the US Conference Board's publication a few days ago.

I have included both China and India in the chart, although the Conference Board lists their data separately because their labour cost numbers are not seen as being comparable with the data for other countries. In addition, the Conference Board data is for 2011 (India) and 2012 (China), so I have made adjustments to produce a figure for 2013 based on reported wage increases and on the moves of India's and China's currency exchange rates against the US dollar.

Each country in the chart is indicated by its two-letter ISO code (CH is Switzerland, CN is China, BR is Brazil, IN is India, PH is the Philippines, etc). The chart also mainly shows richer countries. Partly I have to do this because there is no comparable data available for some of the poorest countries, eg none for Bangladesh or Indonesia. Also, I do this to make a point: in the current 'festive season' for the richer countries, many of the presents Santa Claus will bring have been produced by workers enduring oppressive conditions and earning a wage (and not much else adding to 'compensation') that is a small fraction of the wages available to workers in countries receiving the presents.

Hourly Compensation Costs in Manufacturing, 2013
(Index based on US = 100, for a cost of US$ 36.34)

Notably, although the US is the base country for the compensation index shown, the US figure is well below that seen for several European countries and also Australia. Switzerland, Belgium and Sweden stand out here, with numbers more than 40% higher than in the US. South Korea (SK) is at 61% of the US figure, then there is a big drop down to the compensation number for Brazil (BR) at 29%, then Taiwan, Poland and Mexico. China, the Philippines and India come last, with the Conference Board data (and my estimates) putting China's workers at an average of just below 10% of the US number, and India at just below 5%.

A final comment on the statistics: how far do the wonders of the global market work to lessen wage inequalities over time? Surely, if workers are expensive in the richer countries, there will be a shift of production to countries where workers are cheaper, and eventually this will reduce the wage gaps. The Conference Board's data show something like this in the case of China. But the hourly compensation costs in China rose from a minuscule 2.2% of the US number in 2002 to just 8.6% in 2012. These data are for a 10-year period long after the influx of foreign capital and the expansion of Chinese production began and the result remains that Chinese workers are on less than 10% of US worker compensation. The most significant example of catching up is seen in South Korea, where the ratio rose from 40% to 60% between 1997 and 2013. Other Conference Board data comparing 1997 with 2013 show far less catching up with the US: the Philippines ratio rose from just 5% to 6%. In Brazil, the ratio fell from 31% to 29%; in Taiwan from 31% to 26%. This is a neat indication of the way in which the stratification of the imperialist world economy is not overcome by market forces.

Tony Norfield, 20 December 2014

Robots and the Organic Composition of Capital

This week, London's Financial Times has decided to get back to what it is good at and report on some interesting economic developments: robots. The articles in this series promise to have much more value for those analysing the world than the FT's editorial line on Ukraine, Russia, Syria, Iran and other issues; opinions that simply reflect the discomfiture of the Anglo-American elite about things that are moving outside their control.

Robotisation of manufacturing processes has been under way for many years, but it seems to have accelerated recently. In the case of Foxconn, already reported on this blog, one pressure for robot innovation was the rise in wages among assembly line workers. However, in an effort to cut costs a number of production processes require not only a speed and accuracy that manual labour cannot achieve, but also a physical scale of operations that only robots can manage. Try carrying a 2.5 metre glass panel used for producing LCD displays that is only 0.5mm thick without breaking it. Or try to measure to an accuracy of 0.05mm. There is also a development in lightweight 'collaborative' robots that are used more directly by workers, and that are less likely to crush their human counterparts.

Here are some key points:

• South Korea had the largest number of robots per manufacturing employee in 2012: 396 per 10,000. Japan's figure was 332, Germany's 273 and China's only 23.
• Japan has the most industrial robots in total with more than 310,000 in 2012. The US had 168,000; Germany, 162,000; South Korea, 139,000; China, 96,000; Canada, 18,000; UK 15,000; India, 7,800; Brazil, 7,600.
• China is growing fastest, however, with robot sales increasing at an average annual rate of 36% from 2008 to 2013.
• The automotive industry accounted for some 70,000 of the overall 179,000 robot sales in 2013, followed by the electronics industry (35,000) and food (6,200).
• Lightweight robots cost around $35,000 each; the big guys cost more like $100,000 or above.
• Robotics companies from Japan, Switzerland and Germany dominate the market, with some important companies also based in the US, UK and Denmark.

One implication of these developments is an increase in manufacturing productivity. Another is the increase in what Marx called the 'organic composition of capital': where there is not only a rise in the mass of machinery and raw materials compared to labour power employed, but also a rise in the value of such machinery and raw materials compared to the value of that labour power. The result in recent years has been evident for South Korea, as shown in the following chart, taken from a McKinsey Global Institute report.

From 1995-2010, Korean output grew dramatically, at more than 7% per annum, but productivity grew still faster, at more than 9%, so that employment actually fell. Korean companies, like others, also shifted their operations overseas to take advantage of lower wages elsewhere.

Tony Norfield, 3 June 2014

Sitting on the Dock of the Bay

(This is a guest article)

That millions of workers in Asia on minimal wages produce a huge amount of consumer goods for the West is such a well-established and undisputed fact that it does not require much further comment. These goods are often so cheap that their price astonishes us. Of course, once we consider the economics of the lives of the people who produce these goods, there is no mystery in this. Yet we rarely ponder such issues for long, because the inevitable conclusion can only be that living standards in the West are supported by the toil and sweat of millions of others.

But the systematic exploitation of what used to be called the ‘Third World’ - and is now fast becoming the First World in terms of industrial organisation and manufacturing competence - is not restricted to production. Every aspect of this production and trade is parasitical and hugely exploitative. Consider, for example, maritime shipping - the main way these goods get from the hands of distant toiling masses into the hands of consumers in the rich countries.

Almost all goods produced in Asia for the West are transported in large container ships. Airfreight accounts for less than 7% of the total. Despite the West’s clear technical superiority, not a single developed western nation builds container ships. They are all built in Asia, mainly in South Korea. So, it is not only the goods, but also the ships they travel in that are produced in Asia. What little shipbuilding of any kind remains in the West survives only because of the most stringent protective barriers or due to social policy protecting employment (the disparity in wages is so great that a global free market in shipbuilding would wipe out what is left of this protected industry).

The exploitative and parasitical nature of Western consumption even determines the design of container ships because of the unequal loading on the forward and return journeys. Ships stacked up with containers on the outward East-West journey can be the equivalent of a 10-storey building above the water line. A ship is stable when a proportion of it is below the water line, but a ship built to handle such huge capacities would be unstable in rough seas when unladen. Because we give Asia practically no goods in return, container ships have to return empty. So, to maintain stability the ships have to be built with huge ballast tanks to take on seawater. The ships are designed on the assumption that the West takes but does not give and that this will continue to be the case throughout the working life of the vessel!

A large container ship has a crew of around 30. The captain is almost always a very-well-paid European. The crew is invariably staffed by ratings from extremely poor countries that command extremely poor wages (mostly from the Philippines, Bangladesh and Malaysia). Were merchant seamen paid decent wages these would be reflected in a higher price for the goods transported.

Considering that 80% of world trade is from ‘East to West’, and that all container ships are built in the Far East, it would not be unreasonable to expect Far Eastern operators to dominate world maritime business. Not a bit of it. For 120 years very powerful Western companies, backed by monopoly practices of linked banks and insurance companies, and supported by port authority regulations, ensure that a whopping 90% of world shipping is controlled by a dozen Western cartels. Only 8% of shipping is in the hands of Far Eastern operators, the people who build the ships, who sail them, who make the goods transported in them, and who dispose of the ships at the end of their working life. Cartel shipping fees represent another transfer of income from Asia to the West.

A container ship has a working life of around 20 years. The cost of disposal is also a cost that must be reflected in the price of goods transported. Ship breaking is a very labour intensive and extremely dangerous activity. There are no breaker’s yards catering for large ships in the West. They are all located in countries where wages are extremely low (Bangladesh, Pakistan), where health and safety legislation is non-existent or not enforced, and where the compensation for death and injury at work is a pittance. Another sign of how cheap goods are bought on the exploitation of others.

O Redding, 13 December 2013

Stubborn Facts

Lenin was fond of the English saying: ‘Facts are stubborn things’. The accuracy of many so-called facts may be disputable, but it can be instructive to report on the facts published by official institutions of imperialism, ones that nevertheless throw a not very flattering light on today’s realities. This article is a complement to the ‘Imperialism by Numbers’ article I published on this blog on 1 May. It is also an update to, and an extension of, some data I reported in ‘What the “China Price” Really Means’, published on 4 June last year.

The first set of facts is shown in Chart 1. These are data that cover average hourly compensation costs, where ‘compensation’ means not only wages paid, but also the additional employer payments for social benefits such as unemployment insurance, medical insurance, and old-age pensions. The source is the US Bureau of Labor Statistics (BLS), which carried out this analysis to calculate for US corporations the total costs of employing workers in a range of different countries. The details show that it is not only wages paid that are higher in the richer countries; employee benefit costs are much higher too. Chart 1 gives index numbers based on 100 equalling $34.74, the BLS figure for the average hourly compensation paid to US manufacturing workers in 2010. Countries’ labour costs are shown as bigger or smaller bars, with the height of each bar proportional to the 100 level compensation cost in the US.

For China, average hourly compensation costs are estimated at $1.65. This was less than 5% of the costs of US manufacturing employees in the same year! Several years earlier, China’s figure was closer to 2% of US costs, but recent sharp wage rises in China have narrowed the gap a little. India and Sri Lanka have a still smaller ratio of US compensation costs, near 4% and 2%, respectively. Labour compensation costs are higher in the Philippines and Mexico, but Poland is the first country from the low end of the chart that has compensation costs that are more than 20% of the US level.

By contrast, the US, Canada, Japan and the rich Europeans tower above all the other countries shown in the chart. This group includes the so-called G7 countries, the major powers still running the world economy. Switzerland, Belgium, Germany and France have compensation levels more than 20% higher than in the US. One factor influencing the country ranking is the value of a national currency in the international market. However, the gap between the top ranked countries and the bottom ranked ones is so large that this currency factor has little influence on the overall distribution.

Surprisingly, the BLS’s data do not include any African country. Perhaps this is a problem of getting comparable statistics. For example, this is the reason that the BLS does not include figures for China and India in its standard country comparison reports, though it gives some information separately. However, Africa has also been a less important continent for US economic expansion overseas than elsewhere, and the BLS data focus far more on Europe, Asia and Latin America.

Chart 1:          Relative International Labour Costs in Manufacturing, 2010

                        (Hourly costs, US = 100 is $34.74, including non-wage compensation)

Sources and notes: US BLS. 2010 estimates based on 2007-08 BLS data are made by the author for China, India and Sri Lanka. Note that 2-letter ISO codes are used as country identifiers, and that CH refers to Switzerland, not China (which is CN).

Even the relatively minuscule labour costs for the poorer countries exaggerate the actual earnings of millions of workers. The Indian data are boosted by including only the so-called ‘formal sector’, that is the sector made up of generally larger, more organised companies that have some form of regulation and government supervision – including being included in statistical surveys! By contrast, the ‘informal sector’ is unorganised, on a much smaller scale and may include a family ‘business’ that consists of the parents, children and dependent relatives. This sector is not included in most data surveys, but it accounts for a large share of employment at much lower wages than in the formal sector. The BLS reports that 80% of India’s manufacturing employment is in the informal sector.

For China, the BLS calculations of hourly compensation do include estimates for the ‘informal sector’. In Chinese statistics this is listed under the heading of ‘town and village enterprises’ (TVEs), whereas the larger, more regulated, sector is under the heading of ‘urban enterprises’. The TVEs accounted for 70% of the total workforce, with 79.1 million workers employed in 2006; the urban enterprises sector employed the other 30%, or 33.5 million workers. Not surprisingly, in 2008 the average hourly compensation was just 82 cents in the TVEs compared to $2.38 in the urban companies.[1]

American and other foreign corporations will tend to set up in the formal sector, and will likely be paying the ‘higher’ wages. But they will still benefit from the mass of even cheaper labour from poor families who work for them indirectly, either by providing services for the larger companies, or by being what Marx called the ‘reserve army of labour’ for the formal sector. The divergence in labour costs for countries other than China, India and Sri Lanka may be less extreme. For example, South Korean costs are just below half the US figure. But there is still a very big gap.

If we look at the broader economy, rather than just manufacturing, the same picture of relative incomes holds. In fact, there is a 95% positive correlation between the figures for manufacturing compensation and for a country’s per capita GDP.[2]

Chart 2 gives a snapshot of global income inequality, based on a rough estimate of the Lorenz curve for 183 countries comprising 6.7 billion people.[3] World Bank average GDP per capita data for each country are used as the input. This method may understate global income inequality, because it assumes that everyone in country A gets the average per capita income for country A. Nevertheless, it has the advantage for our purposes of putting the different countries in focus.

Global average GDP per capita in 2011 was $9200. Of the 183 countries included in the data, 124 countries with a population of 5.0 billion (75% of the world total) had an average income below this, while 104 countries with a population of 4.8 billion had an average income below $5000 in that year.

Chart 2:          The Global Lorenz Curve, 2011 (based on GDP per capita)

Source and notes: World Bank. Data for average GDP per capita in 2011 for 183 countries is used as the basis for calculating the cumulative income distribution curve, the Lorenz curve.

If we take a common measure of inequality, the Gini coefficient, and calculate this from the data in Chart 2, the figure shows the expected high level of inequality: close to 66%. It would be more like 70% if the inequality of component country distributions were also allowed for. In that case, this measure of income inequality on a global scale is on the same level as that in the most unequal of countries for which Gini coefficient data are available: Namibia.

To give specific examples, in 2011 the GDP per capita of Switzerland was put at just over $70,000, while the US number was around $47,000, Germany was $43,000 and the UK was $39,000. Compared to these figures, China was close to $4000 and India to $1300. The data from the World Bank, the IMF, the CIA and other organisations have some differences, and the figures get revised, but the rankings and the income gaps are very similar from all sources.

The basic, and not surprising, fact is that the world economy is very unequal. When we look at the mechanisms that underpin this fact, we find that the inequality has much less to do with differences in labour productivity than with the way that some countries get privileges in the world economy at the expense of others.

Tony Norfield, 22 May 2012

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[1] See BLS Monthly Labor Review, April 2009. The data noted here are for 2006.

[2] Using the full set of BLS data for 34 countries’ compensation costs in 2010, I found there to be a 0.951 correlation coefficient with the respective countries’ per capita GDP in 2011 as reported by the IMF. This shows that the manufacturing wage/compensation is closely related to the broader economic income of the country. This is a sign that the richer, and usually imperialist, countries can afford to pay their production workers more. As the ‘China price’ article indicated, this has more to do with imperial power than being based on higher productivity.

[3] The Lorenz curve is closely associated with the ‘Gini coefficient’ of inequality mentioned later. It is a common, summary graphical measure of inequality. The 45-degree line indicates where 10% of the population gets 10% of the total income, 20% gets 20% of the total, etc. As such, it represents a line of equality of income in the population. The divergence of the Lorenz curve from this 45-degree line shows the extent of inequality. Wikipedia has a general explanation of this statistical measure and its relationship to the Gini coefficient.

Value of labour-power & wage differentials

On 6 June, Dave Z put a comment at the end of my article on “What the ‘China price’ really means”.

This note addresses the two main points raised by Dave Z (in blue – if you want to see the full comment, refer to the original article) and answers them. His focus was on the “parts of your theory dealing with the lower wages of the industrializing countries.”

1) “Firstly, I think your argument about productivity is inadequate. There is surely a significant productivity gap between capitalist regions that explain a significant part of the wage gap.”

I agree that there is likely to be a large productivity gap between capitalist countries at very different levels of development. After all, that is an important part of what being a developed economy means – to have high(er) productivity. Where I do not agree is on whether that difference in productivity ‘explains’ most of the wage gap (in the article a gap of 10x, 20x or 30x was noted!), and on how big the relevant productivity gap is (see point 2 below).

A key point is that the level of wages depends on the reproduction costs of labour-power, or what capitalists need to pay the worker to get them to be able to show up for work (not just individually, but also to allow for family costs, etc). This, in turn, depends on subsistence costs as a minimum, plus what Marx called a ‘historical and moral element’. This latter element is based on the social conditions prevailing, including the success or otherwise of working class struggle for higher wages, benefits, etc.

There is not necessarily a direct relationship of wages to productivity. It is true that higher productivity can allow the capitalist to make some concessions on wages and benefits while still making a profit. Equally, low productivity means the capitalist will have to impose harsh conditions in order to survive in competition. However, there is no one-to-one relationship. It depends on the political and social situation. A defeat of the working class can lead to high levels of exploitation and high productivity but low wages. This was true for the west German ‘economic miracle’ in the 1950s, for example, where exploitation of the working class was comparable to that under Hitler.

In periods of crisis-free growth, it is likely that wages will rise, but commonly we find that nominal wages grow less than productivity. The degree to which that happens is not predetermined. Rising productivity is usually an indication of a rise in the rate of exploitation, despite what may be improved living standards (higher real wages) for workers. However, one message in my article on the ‘China price’ was that this mechanism does not work in the same way for workers in the dominating, imperialist countries and for those in a more subordinate position.

In the imperialist countries, the capitalist class may attack living standards, but it has far less freedom to do so than in the dominated countries. In the latter, it is also starting from a lower level of living standards from which to begin exploitation. In this case, the ‘historical and moral elements’ work in capital’s interests. Especially for countries that are newer entrants to the global economy, the more traditional social relationships can substitute for higher wages paid by the capitalist (eg growing some of your own food). Wages are likely to be very much lower than in the major countries, even if productivity in the factory is not that much lower than in the more developed economies.

2) “Secondly, it does not follow that differentials in rates of return on capital invested between regions A and B are the result of higher rates of exploitation in the latter. In fact, we have shown that the differentials are invariant to such distributional differences ….”

I use a lot of statistics in my analysis, but try to treat them with the relevant degree of scepticism. I have not seen your analysis, so I don’t know for sure, but I suspect that there may be several issues invalidating your results, or at least your interpretation of what I am arguing.

a) I agree, differences in rates of exploitation may not be the reason or the only reason for the different measured rates of profit. Tax concessions for foreign capital, or other concessionary deals to attract foreign capital can also be important. One important factor is buying up local productive capacity at knock-down prices (as happened after the 1997-98 Asian crisis in South Korea, for example, with the sale of parts of Daewoo). These issues were not raised in my article, which focused on wages.

b) Measuring productivity is another issue. The national average productivity level may be low, but my argument is that foreign companies invest in, or are supplied by, companies with levels of productivity that are not materially different from those in the major countries. This then highlights the massive gap between wage levels paid in China, India, etc, and the wage levels paid at home. When I say ‘not materially different’, I mean not 3, 5 or 10 times lower than in the major countries. For the same reason, national measures of investment as a share of profit or the growth rate of the total national workforce are not valid factors to explain the rate of profit measured by foreign capital’s activities.

The scarcity of good statistics means that sometimes we have to rely on a good journalist report (as I did for the Bangladeshi textiles example), or a study that may only give a snapshot of developments and which is also limited by its own assumptions (eg the BLS studies of China and India that I cited). In my professional experience, the worse the exploitation, the less you are likely to find consistent, detailed timeseries. No surprise there, really.

The BLS study of Chinese data implies (on my reading) that US corporations invest in the upper level urban companies, and pay the higher-level wages and benefits ($1.47 per hour versus the $0.53 for the TVEs). However, this ‘higher’ wage is a trivial hike in labour costs for a US corporation used to paying more like $30 per hour at home. I find it completely implausible to argue, as you seem to be doing, that the rate of profit on investment in China has little relationship to this fact, and instead is a mix of a range of other factors.

Tony Norfield, 7 June 2011