World Power

Few countries can exert much power in the rest of the world. There are just five permanent members of the United Nations Security Council, the ones who can cast vetoes on important UN decisions. Or take the G7, a US-led political forum of rich countries that has, well, seven members. The concentration of global power is extreme, and it rests upon the different ways a country can have influence over how the world works.

Some of these ways are obvious, for example, using military power to force another country to submit. Many are not, especially those that are linked into the system that envelops the world economy. Five dimensions of international power can be used to gauge the status of countries.[1] These show not only how the US is far more prominent in the hierarchy than suggested by a simple measure of economic size, such as GDP. They also map the relative importance of other countries and throw new light on a major geopolitical issue today: the rise of China.

China rising

China was once seen mainly as an important supplier of cheap goods and a valuable dynamo for the world economy. Now the US looks upon China as the biggest threat to its global interests. Every year, many hundreds of pages on this topic are published for the US Congress, adding to a steady stream of material directed at US policymakers from think tanks and lobby groups.[2]

In 1990, China accounted for just 2% of the world's GDP. Since then, that share has doubled every decade and China will likely account for 18% in 2021.[3] This has worried the small group of countries that dominates the world’s key institutions, because quantitative changes can also bring about qualitative shifts. Will they be able to stay in charge as they had done, now that a country from outside the rich club has risen to the fore? That question is posed especially for the US. All those institutions – the United Nations, the IMF, the World Bank, the World Trade Organisation and others – have been shaped by it.[4] The first three also have headquarters in Washington DC or in New York.

Russia – formerly, the Soviet Union – is the traditional US political enemy. Yet, it is principally a military obstacle, notwithstanding the more recent US belief that it can influence Presidential elections through buying Facebook advertisements. China, by contrast, presents a much wider challenge to how the US sets the rules for the world, as seen when it ignores US-inspired sanctions against countries such as Iran. US political rhetoric and economic measures against China picked up with President Trump, and they have continued unabated with the new Biden administration. All the international meetings held by Biden and his officials since the start of the 2021 – at the G7, at NATO, in Europe and in Asia – have had a strong anti-China theme.

Measuring power

Power has many dimensions. Here are five aspects of economic and political power that are relevant for a country’s international influence.

Economic size is one measure of a country’s weight in the world, usually measured by its GDP. That GDP number is broadly related to the size of its domestic market, how many big corporations it has, and how important it is in international trade. The US is the world’s biggest economy, accounting for roughly 24% of world GDP. G7 countries – the US, Japan, Germany, the UK, France, Italy and Canada – together account for 45% of world GDP, despite having only 10% of the world’s population. GDP counts for more than people when it comes to power and influence.[5]

 

By 2020, China’s GDP was just under three-quarters of that for the US. Japan’s GDP was roughly a quarter the size of the US, Germany was at nearly a fifth, and the UK and France were each at roughly one-eighth. All countries have been affected by the Covid-19 pandemic, and it has had little effect on their relative positions. However, US sanctions will have curbed China’s growth to some extent in recent years.

A country’s foreign assets are another important measure of power. Such assets include the ownership of companies operating in other countries, together with holdings of financial securities, such as equities and bonds, and ownership of real estate.[6] These indicate how much control it has over resources in other countries, and the size of the assets is related to the potential revenues it can gain from them.[7]

At the end of 2020, the US had by far the highest stock of foreign assets, at roughly $22.7 trillion. Germany was next in line, but well below that with ‘only’ $6.3 trillion, and the Netherlands, the UK and France followed. China and Hong Kong’s foreign assets amounted to just under $5 trillion.

These asset ownership numbers, as much other published information, do not allow for the flows of finance between major countries and tax havens. Tax havens are registered as the owners of significant foreign assets in official data, yet most of their funds originally come from major country investors.[8] This should not have much effect on the top level calculations used here.[9]

International lending and borrowing by banks is a third measure. These data show how much a country is involved in channelling funds around the world, and are also linked to how far that country is a finance hub that can profit from international dealing. London is the largest centre for international banks. While it may be a surprise that London is bigger than Wall Street on this measure, that is because much US banking business is oriented towards the domestic US economy, not so much internationally.

Nevertheless, Brexit has had some impact on UK international banking. With the UK outside the single market for financial services in the EU, some banks have shifted their operations from the UK and into EU centres. France has gained most ground because of this, and jumped into second place just behind the UK by the end of 2020, moving ahead of the US, which was in third place (see the next chart).

How much a country’s currency is used in foreign exchange (FX) deals for trade and investment is another aspect of its economic status in the world. Directly or indirectly, this also adds to its global power. This is most evident for the US with the dollar, which is involved in 88% of all currency deals.

Most commodities and important industrial goods, including oil, metals, grains, technology, pharmaceutical and aerospace products, are priced for trade in terms of US dollars. The same is true for many investment and financial deals, helped by the US having the world’s largest stock and bond markets, with international private and official funds buying those securities. Even the China-led Asian Infrastructure Investment Bank conducts its business mainly in US dollars.

US power in this FX dimension relies on the fact that nearly all deals involving US dollars must be settled through the domestic US banking system. Images of drug dealers and criminals crossing borders with bags of cash may be good for the cinema, but they do not represent what really happens to international transfers of funds.

This means that if the US government doesn’t like you – whether you are an individual, a company or a country – then it can try to prevent you from doing currency deals, even if you are not based in the US. If a bank nevertheless does deal with you in dollars, or even in another currency, then the US can fine that bank and threaten to shut it out of the huge US market. The US government’s Treasury Department has a special agency for this purpose, appropriately named the Office of Foreign Assets Control.

Other countries with important currencies could try to exert power in the same way, but their currencies have far less international significance. For example, the euro’s share of world FX markets is just 32%,[10] with the Japanese yen half of that in third place and the UK’s pound sterling in fourth.[11] So far, China’s renminbi currency has remained very minor in terms of global trading, at around 4%.[12] This is based upon the relatively late inclusion of China in financial markets, together with many more government controls on the flow of capital than is the case for other major countries.

The amount of military spending is a simple gauge of how far a country can use force against another, or threaten to use it, and is the fifth measure of power used. The US is once again in the top rank here, and it also has military bases in over 50 countries. By contrast, China has bases in just three other countries (Djibouti, Myanmar and Tajikistan).

Even if much US military spending is, in reality, more of an indirect subsidy to the domestic US economy and corporations, or is on equipment with inflated prices, its total spending of a huge $778bn in 2020 still gave the US plenty of scope to project power. This sum was more than three times bigger than China’s and twelve times bigger than Russia’s. The US lead over other major countries in military spending has increased in the past two years.

Power outcomes

Each of the five factors has some limitations regarding its accuracy or coverage. But together they give a good summary of power and are available for a large number of countries. This measurement of global power is endorsed by how the results for the top 20 countries include the five permanent members of the UN Security Council, all of the G7, and most of the G20 countries.

A country may have a high score on one component and very little on another, but all except a few countries in the world have a negligible score on all of them. The US has an index score of 93.2, with China well below in second position at 37.7. Only six other countries have an index score above 10.0. More than 150 countries score less than 1.0. This picture of the extreme hierarchy of power is a challenge to anyone who uses the term ‘international community’!

 

Sources & notes: See the first chart for details.

This calculation of power depends upon individual country values and does not consider the effect of alliances between countries, or factors that are not as easy to quantify, such as cultural influence. If included, these would only add to the power of the US and generate a more towering image. Consider NATO, for example, which accepted that the ‘North Atlantic’ security region extended into Afghanistan, the first US target after September 2001. Or consider how US social media companies dominate the Internet, how the world’s youth wear baseball caps, like, backwards, and how even India’s massive film industry calls itself ‘Bollywood’.

What next?

The US is worried about the rise of China’s economy, although US power extends much further than a simple economic measure would suggest. A look at the power index for the major countries over the past two decades shows how China has also built some non-GDP dimensions of power, notably in military spending, international banking and the ownership of foreign investment assets.

 

Sources & notes: See the first chart for details.

In recent years, China dislodged the UK in number two spot on this ranking of world power. The UK is the world’s fifth largest economy, but has its status boosted by its role in international banking. That reflects its position in world finance, although the form that this takes is also changing with the rise of China and other Asian countries, and the relative decline of European economies.[13] The more that international business grows outside of the traditionally dominant group of countries, the less important are the rules that they impose for how the world economy must work.

The US sees the rise of China not just as unwelcome competition, especially in the technology sphere, but also as a serious future threat to its hegemonic status, one that must be dealt with today. Other countries closely linked to the US, and especially other Anglo members of the ‘5 Eyes’ spying network (UK, Australia, Canada, New Zealand) are in a similar position, because they have been an integral part of a system that has dominated the world since 1945. That is why the rise of China inevitably becomes a geopolitical issue.

Some countries in Europe, particularly Germany, have a different perspective. Politically they are pro-US, and they are also economically cautious about China. But they would also like to have an alternative to relying solely upon the US, or US permission, whether that is for technology, for energy, or for other vital supplies. They are right to be concerned that the US is inclined to unilateral policy moves that can go against European interests. That remains true under Biden, although his administration stepped back from its former hard stance against the completion of the Nord Stream 2 gas pipeline from Russia.

Not surprisingly, China has responded to the US policies over the past decade, and the risk that as a result of these policies it could be pushed to the edges of a world economy controlled by hostile countries.[14] A key part of its response has been to press ahead with the massive trade and investment programme begun in 2013: the ‘Belt and Road Initiative’. This involves more than 130 countries, mainly in Asia, Europe and Africa, but also extending into Latin America. Faced with US sanctions and political manoeuvres, China is building up a network over which the US and its allied powers have far less control.

These developments will foment divisions in the world that every country will have to deal with. In the next few years, we will live in interesting times as the established powers led by the US fight to maintain their domination.

 

Tony Norfield, 14 September 2021

  

APPENDIX

 

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[1] This article updates my analysis of September 2019, where I showed that the Index of Power had put China in #2 position. See here.  The Index calculation here adds a country’s foreign portfolio assets to its direct investment assets, to get a better measure of its total foreign assets. (Previously, I only counted FDI, but I have since found good data on portfolio assets.) It also makes some adjustments to eliminate possible double counting of intra-China relations between China and Hong Kong, which are treated as separate countries in all official data. See the Appendix to the article for more details.

[2] For example, the US-China Economic and Security Review Commission has issued annual reports since 2000. Its December 2020 report was nearly 600 pages: https://www.uscc.gov/annual-report/2020-annual-report-congress

[3] Sources for GDP and other data used are given in the Appendix to this article. The US share of the world economy has fallen from 30% in 1990 to 24% in 2021.

[4] The former institutions, or its predecessor, the GATT for the WTO, emerged from the post-1945 political realignment led by the US. The President of the World Bank is almost always a US citizen, while the Managing Director of the IMF is always a European. The WTO has had a more diverse list of Directors General. Decisions by each institution are rarely passed if the US disagrees, a result helped in the case of the IMF by a voting allocation that always enables the US to block any IMF action.

[5] GDP numbers can be calculated in various ways. Here, the nominal value of GDP in a single currency is used to compare countries.

[6] In standard official statistics, ownership of 10% or more of a company in another country is considered foreign direct investment. Ownership of less than 10% of the company’s equity is considered a foreign portfolio investment, as are holdings of foreign debt securities. These are all added together here to give the measure of a country’s total foreign assets.

[7] Large corporations, usually from rich countries, can also profit from their commercial domination of producers in other countries via so-called supply chains, for example, Apple’s relationship with its suppliers, or western fashion companies getting their products made in Asian countries. However, these relationships are difficult, if not impossible, to measure.

[8] One study shows, for example, how a nationality-based measure could greatly increase the registered US and other major country holdings of bonds and equities in particular countries. These holdings are under-estimated by the usual residency-based measures in official data, as the residency can also be a tax haven. See pages 44 and 48, especially, of: https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_2019118_Revised.pdf

[9] This is because the data I use measure total outflows from a country, which should include the funds first sent to tax havens before being resent elsewhere. However, the ‘round tripping’ of funds to escape tax would not be counted properly. For example, if US investors sent funds to a company registered in the Cayman Islands for the purpose of investing back in US assets, that first flow would appear as a foreign asset of the US when it is not.

[10] The euro’s share of global FX markets is divided up among the 19 euro country members according to their relative GDPs. Germany has the biggest share of that, followed by France, Italy and Spain.

[11] Note that the total shares of all currencies add to 200% because there are two currencies in each foreign exchange deal.

[12] Less surprisingly, the separate Chinese currency of Hong Kong also has only a small role in world FX trading. Its currency value is tied very tightly to the US dollar’s.

[13] See Tony Norfield, The City: London and the Global Power of Finance, Chapter 9 and the Afterword to the paperback edition, Verso, 2017.

[14] For a discussion of these topics, see my articles ‘Racism & Imperial Anxiety: US vs Huawei’, 16 April 2019, here, and ‘China and US Power’, 14 July 2020, here, each one on EconomicsofImperialism.blogspot.com.

Politics & the Imperialist Grinding Machine

On 5 April in London, I gave a talk for the ‘Great Moving Left Show’ on the world economy and political responses to how it works. The projector was not working, so I had to conjure up some images verbally. One was of an imperialist grinding machine. Readers will have to excuse my less than expert ability to create exciting graphics, but this is shown below in the first image. It highlights how dominant global economic and political structures – the grinding machine – stop the world’s resources from benefiting humanity. Below that are copies of several slides giving the background to key features of contemporary politics.

The British Labour Party was one topic in this talk.[1] Like many other parties that (sometimes) give the impression of wanting to change things, Labour just ends up oiling the imperial machine or tinkering with it. But if you don’t want to end up in the machine’s output tube, you have to get rid of it. Destroy the power of the machine and you are more likely to get closer to achieving the output society needs from the inputs that are available.

It is difficult to capture the principal aspects of imperialism today in one simple image, or even in several. Among other things to include are the hierarchy of power, the economic and political forms of that power, and the social and political structures that legitimise the system and keep it ticking over.

The image I most often use is my own Index of Power chart, derived from data for around 200 countries and usually given showing the top 20 or so. However, although it is implicit that the big guys will have a much bigger say in running the system as a whole, it does little to map out the connections between countries.

As one way of showing connections, I made a separate table of international trade relationships for the top 20 countries. But this does not directly indicate which ones write the rules for those relationships.

Political dimensions are even trickier to summarise. It is not only that political influence reaches beyond an individual country. Also within a country there must be an allowance for the political deal between the ruling elite and the mass of people. Unless there is sustained state repression, something like a ‘deal’ has to exist in order to make the economic and social structure legitimate, or at least tolerable and able to work without continued political turmoil.

All such things change over time, but the stains of history can remain evident in contemporary life even when the circumstances that brought them about might have disappeared. For this reason, assessing the historical backdrop is critical. This is particularly so in a time when people in the richer countries react to unwelcome changes. They are informed by their political heritage. When this rests on what they think is a deserved privilege in dealing with the rest of the world, they react by demanding that their state restores the status quo ante, rather than seeing that the game is up and putting the legitimacy of the capitalist/imperialist system in question.

The imperialist grinding machine

 

Politics today

 

 

 

 

 

Tony Norfield, 8 April 2019

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[1] I have published a number of articles on this blog about British Labour Party politics, for example here. Use the search option on the right hand side of the page and look for Labour Party, Corbyn, welfare state, colonialism, Zionism, immigration, etc.

Economic Analysis & Imperialism Today

Last Saturday, 30 March, I gave a presentation at a Rethinking Economics conference, Greenwich University, London, on the topic of 'Economic Analysis & Imperialism Today'. The slides for this are reproduced here. Note that it was only a brief 20 minute introduction, so a number of issues could not be dealt with in any detail.

Interesting questions were raised in the Q&A and later discussion. One misunderstood what I meant when I said 'The state is your enemy', and took it to imply I was against any welfare spending by the state. The context of my comment was instead to oppose the usual stance of radical economists who argue for alternative policies that the capitalist state should implement. I will write more on this topic another time.

For further elaboration of some other economics-related points in the presentation, I will of course promote my book, The City: London and the Global Power of Finance. However, I have written blog articles that explain more fully my views on financialisation and on neoliberalism. My coverage of other topics can be found using the search option on the right-hand side of this blog page.

The presentation slides follow ...

Tony Norfield, 1 April 2019

 

Finance, Power & Brexit

Here is an interview I did recently with Esteban Mercatante for the Argentine-based Spanish language journal Ideas de Izquierda and which I believe will also be published in the near future at leftvoice.org. His questions centred on my book, The City. My answers give some background to the analysis and comments on recent developments, including Brexit.

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Q1       You show in your book that the City of London is the pre-eminent international financial centre for the world economy, despite the fact that the UK's own currency, sterling, is not so important on a global scale as it used to be before WWII. What are the main global transformations in the flows of capital that London could take advantage of to maintain its international status? And in what way has it been favored by geopolitical processes?

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A1       The financial business of the City of London was damaged by WWII and the disruption to international trading and investment in the immediate years afterwards, in addition to the weaker economic position of the UK. However, the City had many established international links, arguably more than New York, despite the very powerful position of the US in the world economy. These links evolved in the 1950s to use the US dollar rather than sterling as a financing mechanism, and this was helped by the restrictions the US government placed on the domestic US financial system at the time.

Big corporations demanded access to funds on a scale that was not easily available in the domestic banking markets, and by the end of the 1950s a ‘eurodollar’ market had evolved to supply this new form of credit. It was mainly located in London, but it could draw upon US dollar funds from around the world. A ‘eurobond’ market was also established in the early 1960s. Both types of euromarket grew very rapidly and the City of London benefited most from this. So the business of the City changed from the pre-war forms of dealing and it also became less directly dependent upon dealing with the British Empire/Commonwealth countries. Britain’s close political links with the US undoubtedly helped this process, limiting the risk that there would be any constraint on US companies and banks dealing in the London euromarkets.

By the early 1970s, the operation of global financial markets was in turmoil, as international imbalances and the changing positions of the major powers were no longer compatible with the previous Bretton Woods exchange rate system. The City of London’s position benefited further from these disruptions and from the later removal of nearly all restrictions on international financial dealing.

Q2       You have elaborated a power index that includes five measures to define the relative status of each country (GDP, FDI, Banks, FX, Military). As expected, US is at the top of the list, followed among others by Germany, China, and Japan. But it is surprising to see Great Britain in second place. To what extent does this index reflect the effective global power of the UK today?

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A2       My Index of Power is a summary measure that brings out significant features of the distribution of power in the world economy. It is a very simple tool based upon publicly available data. While it cannot capture everything, especially the relationships between countries, it throws an interesting light on where each country stands in the global system. I was also a little surprised to see that the UK ended up in second position, and you will have to take my word that the index was not planned to give this result! The UK’s position reflects the international investment, trade and finance components of the Index, but these are also very important in the world system. I think it is also an endorsement of the value of the Index that the highest ranking countries benefit from other aspects of international power that are not directly measured. For example, the UK is a key political partner of the US and is also a permanent member of the UN Security Council.

Relative positions in the Index of Power have changed over time and will change further, for example with the rise of China. The UK remains in a prominent position now, but its status will be damaged by Brexit. Brexit’s impact is likely show up in at least one of the Index components, that for the volume of international banking conducted from the UK base.

Q3       In your book you criticize the notion of ‘finance capital’ as developed by Hilferding because it misrepresents how the rule of capital is expressed. What are the risks you see in this notion that the banks are in control of the whole national capital as it was assumed in Finance Capital?

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A3       While Hilferding’s Finance Capital was an important work, ironically, it showed a poor understanding of the relationship of finance to the power of capital. It discussed new forms of finance in the capitalist economy, and was far ahead of other Marxist work in this respect. Yet when Hilferding examined aspects of the financial system, especially the role of banks in Germany, he drew the conclusion that these could be taken over – by a progressive government, of course – for the benefit of the mass of people. In this respect, Hilferding’s ideas continue to have resonance today, when we see some leftists call for banks to be nationalised, or for there to be a ‘radical’ national economic policy that would take more control of the credit system and investment.

There are several big problems with these views. First, they all operate in the framework of national capitalism and pay little attention to how the international system works. Second, they assume that controlling banks is the same as controlling finance, when actually the banks play only a limited role. Third, they ignore how the financial system necessarily pervades all capitalist market relationships. The financial system is not something external to ‘good’ capitalist production or a mechanism that could be managed by a progressive government to produce better economic results.

It is true that capitalist policy makes mistakes and there have been many stupidities. However, it is not the job of socialists to offer less stupid capitalist policies. Those who get into this game end up betraying the people they claim to represent and endorsing capitalist solutions.

Q4       You say that Marx’s analysis in Capital described interest-bearing capital as being parasitic, while other aspects related to the financial sector (like money-dealing) are not. However, your argument is that “All forms of financial operation can potentially assist in the transfer of surplus value from one country to another and so contribute to increasing the power of the dominant countries”, and are then a form of parasitism. Which are today the main mechanisms of this parasitism and how do they benefit London and other financial centers of the world?

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A4         My discussion of parasitism in The City showed the different ways in which this term was used by Marx and Lenin and related this to the forms of finance that we have today. I would not see ‘finance’ as being something narrowly defined and to include only banks or other financial institutions. I think that it is best to understand finance as an important aspect of what Marx called the ‘form of value’ and to analyse how it has evolved. To understand the forms of capitalism today, one has to go well beyond the notions of commodity production, buying and selling. For example, many large corporations use their equity as a means of payment when they take over other companies in a ‘share swap’. They do not necessarily use a bank loan or pay in cash, and they may not even use a financial institution to broker the deal.

If a country has an internationally important financial centre, then it can get revenues from dealing with capitalists from all over the world, not just in its national sphere. It can provide all capitalists with short-term or long-term funding, or with a market for their financial securities (bonds, equities). These may often look like specialist financial operations, but they are also closely tied in with the commercial and productive power of big companies, as reflected in trade relationships, investment deals, control of intellectual property and patents, and so forth. 

New York has the world’s biggest bond and equity market, but much of it is US-based. London has the world’s most internationally-linked financial centre. These and other centres generate big revenues for the country concerned – through dealing profits, high paying jobs, government tax revenues, etc. However, it is difficult to pin down where this money originally comes from! A French bank in London might gain commissions from dealing with a German company. But the German company’s transaction might be related to revenues from goods supplied by factories in Asia and sold in North America.

Q5       In March 2019 Brexit is supposed to conclude. But the negotiations with EU are at a deadpoint and May's government is in crisis. What perspective do you see for the process?

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A5        The Brexit process has been a complete mess, and I have been astonished at how stupid the British ruling class has been. It is amazing how the current political establishment does not seem to understand the EU political mechanisms, ones that British advisers had played such a big part in developing over the previous 45 years.

What makes this an unresolvable problem is also what makes it interesting politically, although it can be tedious to follow all the details. Brexit is clearly bad from the point of view of British business and it is also damaging for the UK’s political status. That should have made it avoidable, but the Conservative government made an unusual mistake and put a major decision of foreign policy up for a popular vote in the 2016 referendum. A narrow majority Leave vote resulted. This was made up of many working people who blamed the EU for their economic problems, especially those who were against the immigration of workers from other EU countries. Leave voters also included the more traditional anti-European British nationalists, and some misguided leftists who thought that reactionary popular sentiment could somehow be given a positive, anti-capitalist gloss.

Both major political parties in the UK, the Conservatives and Labour, probably have a majority of Members of Parliament who think Brexit is a mistake. But they cannot easily turn their back on the referendum result and snub the electorate without risking a big drop in support at the next election. It would even be difficult for them to try and organise another referendum to get the result overturned, by arguing that the circumstances have changed since 2016 and there is now a clearer idea of what Brexit will actually entail.

There is a different problem for big business. Despite growing signs of concern now that there will be trouble if the UK’s access to the EU single market is not maintained, companies had been reluctant to get involved in the political debate much earlier. They have now probably left it too late to have much influence. Previously, the British business elites were confident that their interests would be secured by the major parties, and they could keep aside from taking any public positions and just have a quiet word with the relevant minister. That view has now been shattered, but it is not clear what they can do about it.

Britain’s political idiocy is shown by those pro-Brexit UK politicians who imagine a marvellous world outside the EU, one that will more than make up for the losses borne by having less access to the European market. Political leaders in Europe and elsewhere cannot believe they are witnessing this unprecedented act of self-harm from what had previously been considered as the most sophisticated ruling class in the world!

Q6       So far, has the Brexit vote had any impact on the business of the City of London?

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A6      There has been little impact on the City of London so far, but many banks and other financial institutions have made plans for relocating some of their business operations to elsewhere in the EU. I cover this question in the Afterword to the paperback edition of my book, The City. Apart from Brexit, the City’s business has in any case been impacted by a general downturn in European financial dealing over recent years, a result of the broader economic crisis. Brexit will make this worse, especially if British-based banks do not get a ‘passport’ to deal with other banks in the EU. However, the City of London has a range of skills that is not easy to replicate elsewhere, at least not for some years. There are also less visible items, such as the English commercial law that underpins many financial contracts, which make leaving the City of London more complicated than it might at first seem.

In the pre-Brexit years, London had rivals elsewhere in Europe, and some were bigger in certain areas of finance, such as Luxembourg in fund management. But London has been the biggest, or one of the biggest, in a very wide range of operations, from banking, to venture capital funds, to financial derivatives and foreign exchange dealing. If, post-Brexit, London’s position is greatly reduced, then no one centre elsewhere in Europe really stands out as a likely winner to take on London’s former role. Paris and Frankfurt each have some advantages, but so do Dublin and Amsterdam.

Q7       Besides Brexit, what are the most important challenges for the preeminent position of London and how is British imperialism responding to them? In your book you consider Islamic finance and China as the most important avenues of parasitism to pursue. Are there any others worth mentioning?

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A7       There has been little new of significance reported on the City and Islamic finance in the past year, but developments continue. In early September this year, there was an ‘Islamic Finance Week’ held in the City, while in late September the Lord Mayor of London visited Istanbul to boost Turkey’s business links with the City, in particular on Islamic finance. Regarding China, City foreign exchange dealing in the renminbi has grown by some 30% in the year to September and it remains the biggest hub outside Asia, while there are plans to develop links between the London Stock Exchange and Shanghai. I am not aware of anything important outside of these developments.

Q8       In your book you point out that the development of financial assets and derivatives is closely related to what happens in profitability. Ten years after Lehman's bankruptcy, we can observe that global debt is much higher than it was in 2008, and there are several stress factors (rising rates by Fed, the trade war instigated by Trump). What do you consider is the outlook for world economy? May we be heading another global slump?

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A8        Yes, debt levels are higher now than they were in 2008, not just in absolute terms but also as a share of GDP. This is the clearest sign of a continuing structural problem for the global economy that has not been overcome. Whereas 10 years ago the debt was very much concentrated in the major economies, now it is far more widespread, having risen sharply in ‘emerging’ economies too.

While this indicates a vulnerability of the world economy, for the major economies the outcome may be stagnation or slow growth rather than a dramatic slump. The banking system is less over-extended now and there is probably a smaller number of high-risk debtors, so that there is less chance of a wave of defaults causing a credit crunch. Debts in the major countries are more concentrated in the government sector, which means there is less risk of a series of defaults and the related panic, although this means there will be continued pressure to curb government spending.

For the emerging economies, there is far more risk of a serious economic setback, which is already occurring in several. The level of foreign currency-denominated debt can be a high proportion of GDP for some countries, notably Argentina, while the tightening of US monetary policy is both raising interest rate levels and boosting the value of the US dollar versus their domestic currencies. At the end of September, the US Federal Reserve raised the Fed funds rate to 2.00-2.25%, the first time it had been above US consumer price inflation for 10 years, and five-year US Treasury yields had also risen to just under 3% from less than 2% 18 months ago. These are low levels still, but they remain a big problem given the high level of debt.

Tony Norfield, 8 October 2018

World Beaters

With the close of the Rio Olympics, I was surprised to note a pretty close correlation between the ranking of countries who won gold medals in Brazil with ... the power ranking of the respective countries in the world economy! The data are taken from the official Olympic data and from an index that was updated for my new book, The City: London and the Global Power of Finance.

My book gives a chart derived from 2013-14 data for the top 20 countries for their GDP, FDI, global use of their currencies, their military spending and prominence in international banking. The rank is determined by the score that each country has under each of the five measures. It gives a score of 20 for each country in which it is top, and if one country is half the level of the top country, then it gets a score of 10, and so forth. Below is a cut down version of the chart showing the top 10 countries in the ranking:

Top 10 Power Index Ranking

Countries are listed by their two-letter ISO code, so that GB is the UK, CN is China and DE is Germany, for example. In recent years, China has risen in the rankings, based upon its GDP growth and other measures. The US, not surprisingly, is top overall, although it is second to the UK in terms of international banking. In the power chart, the order of the top three is: US, UK and China.

For the Top 10, this power ranking picture is very close to the Olympic gold medal results! To standardise the two pictures, I have made the US gold medal score (the highest at 46) equal 100, while the UK's at 27, in second position, is then equal to 59 (being 59% of 46), and so forth. The outcome for the top 10 gold medal-winning countries is below:

Top 10 Rio Olympic Gold Medal Ranking (Index, US = 100)

(Note, this was updated on 22 August to correct the US number from 45 to 46)

Compared to the power ranking, South Korea (SK) and Russia (RU) make it into the Top 10 for gold medals, while the Netherlands (NL) and Switzerland (CH) do not. But the top three are the same, and in the same order, in both rankings. Germany, France, Japan and Australia also make a showing in both Top 10 rankings. South Korea makes it into the gold medal ranking, but not the power ranking top rank.

It looks like having an ability to be first in an Olympic event has a close relationship to a country's position in the world economy, at least for the top countries in each ranking.

One aside on the UK is that there has been a ruthless 'medals mean money' approach to granting money to Olympic sports. In unashamed state planning, the UK's National Lottery has done much of the funding on this basis. This diverts money from the regular subscriptions of the masses betting each week, and their need for entertainment, into a national success story. As one might expect, this is principally enjoyed by the privileged classes, exemplified by the funds available for 'horse dancing', otherwise known as dressage.

Tony Norfield, 21 August 2016

Political Fundamentals and the UK Brexit Referendum

What explains the desperation of British capitalism and Conservative Party in the lead up to the Brexit referendum on 23 June? Opinion polls have shifted in favour of a Leave vote and, while the accuracy of the polls is always in doubt, a shift towards Leave seems evident from widespread vox pop views in the media, in the panic of the Remain camp and in the financial market setbacks for sterling’s exchange rate. Equity markets have also been hit, and not just in the UK. As a sign of desperation, the Remain camp has even called upon the Labour Party’s lumbering has-been, Gordon Brown, to add his weight to what looks like a failing balance. Her Majesty has so far been allowed to stay above the dispute, just about. One can imagine that if the polls get any worse for Remain, then Downing Street could try to prompt a Royal appeal to her loyal subjects to do the right thing. Where has this revolt of popular sentiment come from?

My previous coverage of the Brexit referendum has focused on the situation facing the British ruling class in a world where its economic and political interests are clearly bound up with Europe, but where there has been a minority view that an alternative is possible ‘outside’, especially in a context of European economic crisis. But the significant support for Leave shows that this has underestimated a key point. What might otherwise be considered simply as popular disgruntlement with political elites – ‘vote Leave to teach them a lesson’ – is better explained as a widespread view that these elites have broken their pact with the people. The ‘Leave’ support, however disruptive it might be to existing power structures, is based on an appeal to the British state to restore the status quo ante. To understand this point, it needs to be put in context, one that will also confirm that this is not a debate in which one can take sides.

The World System of Power

No country’s politics, still less its economics, can be understood outside its relationships with the rest of the world. Since at least the early 19th century, the world economy has increasingly shaped the position of all countries within it. The world system as we have known it in recent decades has been based upon three elements: American dominance and supervision of capitalism, the European Union project and the relationship between America and Britain. These elements may have come under some threat, for example with the growth of China and the crisis in Europe, but this pattern of world power remains intact.

The dominant European states wish that Britain would be more European, and that it would do more to curb the xenophobic, anti-European drift of British popular culture. But Britain’s relationship with the US is in their interests, because Britain’s mediating, intermediary role helps keeps the whole structure of Western dominance intact, with America at its apex and Europe benefiting from it. The Europeans are worried about an increasingly unstable world that sees the rise of China, a more assertive Russia, all sorts of threats around the Mediterranean and the Middle East, and in Africa. They are concerned that a Brexit vote would begin to unravel their security network, or at least begin to call into question who is allied with whom, and how committed they are to a joint project.

The dominant European imperialist states could easily accommodate Britain’s refusal to join the euro zone, a central plank of European policy. Britain’s role with respect to the European Union is not so much the product deeply ingrained cultural attitudes (although these do exist); it is more an expression of its important role within the pattern of power and the dynamics of its mediating role on the world stage. This role allows, and calls for, the British state to operate at the same time both outside and within the continental European political and economic set up. For example, the British-based financial system is a worldwide one, brokering the US dollar, and the political and economic interests of Britain do not support its membership of the euro zone. But the British state also needs to have a say in the development of European policy to sustain its position and the workings of the world financial system that it has helped to create and from which it benefits. The US also wants Britain in Europe because it is vital to US-European relationships. Every time Britain has shown itself truculent over European membership, and especially now, the US has reminded it, in a firm but friendly way, that it would prefer no change.

A new series of bilateral arrangements between Britain and other countries, as envisaged by the Brexit camp, cannot replace this system. The point is not only why on earth it would make sense for Britain, one of the major world powers, to tear up longstanding agreements that it has helped to produce and try to start again. It is also that a country stepping outside an established system of power would not have much leverage to devise another one. The pro-Brexit calculation can only convince those who ignore, or do not understand, the structure of Western dominance and Britain’s vital role within it. Britain’s business media has reminded the Leave advocates both that Britain alone is a small share of the EU market and that exiting the EU would put at risk all the other relationships that give British imperialism status in the world, from permanent membership of the UN Security Council downwards.

The Working Class Brexit Vote

Nevertheless, British opinion polls show that Brexit looms. A broad section of the population, especially the working class, is now liable to go against the establishment consensus and vote Leave as a way to complain, especially when it sees its troubles as resulting from global economic trends that the establishment has embraced. The focus of complaint is immigration. While the claimed economic benefits of the UK staying in the EU have been the main argument for ‘Remain’, this has been submerged by immigration as the dominant anti-EU point in the referendum debate. Many Brits, perhaps most, including those who themselves or whose families may have been relatively recent immigrants, support tighter immigration controls, as was already clear in the 2015 UK General Election.

Immigration plays such a role because it touches on a key point in British working class consciousness, one that reflects its material interests: a loyal commitment to the British state. This longstanding commitment has given the working class social protection as part of a deal not to cause too much trouble, a kind of ‘social contract’. Now, the immigration question helps to identify the national, British-based working class as the legitimate recipient of state assistance versus the immigrants (or even refugees) from other countries. In this pro-imperial outlook, the issue of inadequate housing, jobs and services delivered by capitalism becomes a moan about the supply of housing, jobs and services taken by migrants. In previous decades, the moan was about blacks and Asians; now it is more about white (East) Europeans.

This is not to say that such a view is held by all working class people, but the fact that it is so widely held should not really shock those who have read any history. For more than a century, despite occasional trade union militancy, the British working class has supported British imperialism and its war efforts. From the First World War, even earlier, the British state had made concessions to workers with welfare measures, ones that were developed further in the late 1930s and into the Second World War, when more ‘sacrifices for the nation’ had to be made. Introducing future plans for comprehensive welfare spending in March 1943, the arch-imperialist and violent opponent of the 1926 General Strike, Winston Churchill, declared himself in favour of ‘national compulsory insurance for all classes, for all purposes, from the cradle to the grave’ as part of his attempt to secure a solid national consensus of all classes.

It may surprise readers familiar with the story that the 1945 Labour Government invented the National Health Service, and broke the mould with state ownership of national assets, that Churchill also said in the same speech that ‘we must establish on broad and solid foundations a national health service’ and that there was ‘a broadening field for State ownership and enterprise, especially in relation to monopolies of all kind’. To underpin his endorsement of a national consensus, Churchill praised the Labour Party’s coalition government Minister for Labour and National Service, Ernest Bevin, for ‘the practical absence of strikes in this war compared to what happened in the last [ie in World War One]’. The rationale for Churchill’s support of welfare spending for the working class was that for Britain ‘to keep its high place in the leadership of the world and to survive as a great power that can hold its own against external pressure, our people must be encouraged by every means to have larger families’. Supporting more education spending, he added that the ‘future of the world is left to highly educated races who alone can handle the scientific apparatus necessary for pre-eminence in peace or survival in war’.[1]

Other articles on this blog have shown how, in the post-1945 period, Labour Governments continued in this pro-imperialist outlook, using exploitation of the colonies to help fund their national welfare spending to benefit the domestic working class.[2] But this perspective is not of only historical interest; in the same way that imperialism – a system of privilege and domination in the world economy – is not confined to the colonial period.

The Brexit debate shows that the British working class wants not so much a better deal within the existing system, but a return to the previous post-war consensus.[3] This perspective is not only far from being any challenge to capitalism; it supports Britain’s privileged position within the world system of power from which the working class had benefited. Brexit has risen in popularity because the domestic working class has faced the problem that British capitalists have benefited greatly from their increased links to the world economy, including an influx of cheap workers, less so from the more ‘home grown’ operations, so British workers have felt neglected. That is why Wetherspoons, a UK and Irish pub chain, very dependent upon local business links, is one of the few large UK companies to be pro-Brexit.

From the perspective of the British working class, the call for Brexit is a call upon the British state to keep to its previous compact with the workers for what can be presented as a fair, national deal. (Incidentally, the British left has the same approach to economic and political problems) Widespread complaints such as this may work to some extent, shifting the balance of the government’s policy tactics. For example, the collapse of Tata Steel Europe’s UK operations in the lead up to this troublesome EU referendum led to some government measures to delay the inevitable. However, the game is up. Whether Britain leaves the EU or not, capitalist companies will not turn their back on the world market and the relevant calculations. Neither will the UK government pretend in its policies that there is no capitalist crisis to deal with.

Above all, the British working class cannot explain to itself why the British ruling class has broken its previous agreement to deliver national welfare, and why it has turned its back on its natural supporters in favour of seeking better profits in international market dealings. That is why its anger is real and solid, although its political economy remains crap because it cannot understand why what used to work before does not work now. Simply belonging to a rich, imperialist country does not mean that you necessarily get a decent share of the rich pickings.

Awkward Moments for UK Policy

Now take a step back and ask yourself why the Conservative Party, the unabashed defender of big capital and the super-rich, has got itself into this mess, which now witnesses senior ministers attacking the Prime Minister’s stance for ‘Remain’. The simplistic view is that there were Conservative Party divisions that had to be resolved by Cameron calling a vote on EU membership, or that Conservative votes were being threatened by the rise of UKIP. But, while true, this story hides a more telling, political problem suggested by what has already been explained.

If a political party is openly ruthless in enforcing capitalist market discipline on everyone, unfortunately for the ruling class that is no way to win the necessary popular support to get elected. Instead, a broad base of loyalists has to be built, one of the annoying features of universal suffrage. The need to have a broad base of support is the reason we still find many ‘one nation’ Tories, why successive Conservative governments did not reverse the post-1945 welfare state reforms and why Prime Minister Cameron still claims to defend the National Health Service. But this creates political difficulties when popular opinion in the UK turns against what is evidently the best policy for British imperialism, ie staying in the EU.

US President Obama, a wide range of other US and European politicians, together with the IMF, OECD, etc, etc, have declared that they favour the status quo, as do the majority of British corporations and the leaderships of the main UK political parties. The logic here is that the existing pattern of world power relationships would be upset, unpredictably and possibly dangerously, if any major country tried to strike out on its own.

At risk is the EU itself, which could well see other countries heading for the exit, undermining an economic and political project that has been decades in the making. Neither is this a good environment for other agencies of imperial rule that have been in place since the late 1940s, the UN and NATO. These could be faced with new questions on who is a key member and why, or who has voting rights on the UN Security Council.

A Referendum Dispute Between Loyalism and Imperialism

At first sight, a vote for Brexit might look to be the more progressive option, because it would help undermine the established structures of power in the world. Many UK voters disagree, noting that it would also give credence to a set of policies that would be driven by reactionary pundits and politicians. The problem with these views is that they do not understand how the debate is between a pro-imperialist populace and British imperialism. That is why the debate lacks any content and there are few substantial differences between the respective positions.

The ‘Leave’ side is not against developments in world capitalism. The bulk of its votes will come from a working class that has sided with imperialism and would like the British state to return the favour, backing up its privileges against others in the world economy, as in the good old days. The ‘Remain’ side too argues for no change to world capitalism, and will attract those who fear an upset to their current economic circumstances. The former expresses complaints against the status quo, wanting an exit in which they think changes could be implemented within the imperial system; the latter thinks the status quo is acceptable, although it might be amended somewhat within the imperial system.

How can complaints about capitalist market discipline be resolved in a crisis-ridden world economy, if the complainers want to keep the system that enforces that discipline, and especially the imperial privileges that accrue to one of the leading powers? If the complainers understood this problem, then progressive politics would be in with a chance. However, that is not the case in the UK, or in a number of other rich countries where the working class is loyal to its powerful state. Instead, the political logic is for pro-imperialist policies to win the day.

If you want to oppose the depredations of capitalism and imperialism, then please do so, but this is not what the Brexit debate is about. Above all, remember the classic revolutionary phrase: ‘the enemy is at home’.

Tony Norfield, 16 June 2016

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[1] To emphasise this point, note that Sir William Beveridge, the main early planner of the UK welfare state – not the UK unions or the Labour Party, or pressure from them – was a collaborator of Churchill’s and supported by him, even though Churchill had doubts on committing to spending when it was not clear it could be afforded. The most that could be said for the 1945-51 Labour Government is that it implemented a more generous welfare system than had been envisaged by Beveridge, although that was paid for by loans from the US and by exploiting the colonies! A transcript of Churchill’s BBC broadcast in March 1943 is available at http://www.ibiblio.org/pha/policy/1943/1943-03-21a.html.

[2] For example this article.

[3] I will not cover this point further here, but for further information I recommend a book on the history of the Labour Party by Edmund Dell, A Strange, Eventful History: Democratic Socialism in Britain, HarperCollins, London: 2000. A Labour right-winger, Dell also spells out, in ways one rarely finds from the left, the consistently pro-imperialist and state-‘socialist’ nature of the British Labour Party, something that was consistent with the political outlook of their electoral constituency.