Merkel's Money

Don’t take the rally in Europe’s financial markets as a sign that the euro crisis is over. The 4.3% jump in Germany’s Dax index today and the rise in the euro’s exchange rate are more a reaction to hopes for further flows of ‘free money’ and relief at a crisis postponed once more. The surprise was genuine enough, after German chancellor Merkel’s former hard line on the need for austerity and ‘reform’ among indebted euro countries Spain and Italy, and in the context of widespread German political opposition to further bailouts.

A report on Merkel’s rationale for dropping the position Germany had before the latest Euro meeting, and making big concessions to Spain and Italy (hence, also to France, given French banks’ massive exposure to these countries!), highlights the following issues.

Merkel seems to think that high interest rate on Spanish and Italian debt are the problem, not the mess those countries are in which is leading to the high interest rates! Plus she thinks (or at least said in her statement to the Bundestag) that the EU Commission monitoring of their economic policies is still 'tough', so they did not need any additional terms applied to extra loans.

The end result is that there is a further extension of a 'euro country' general bail out for Spain and Italy, via the European Stability Mechanism, one of the newly invented funds. Merkel did not mention Germany's dominant share in paying for these, nor being liable for these, nor was she impolite enough to note the limited prospects for 'reform' in either country.

She won the Bundestag vote. But there will be further political trouble for her in Germany, and also many more disputes over terms and conditions of the new loans between Germany and other countries, when eventually they are due to be paid out.

Partly, this episode reflects the intractable debt situation in Europe and a desire to postpone confronting problems that cannot be solved. Partly, it is one of the wonders of the credit markets that you can always appear to have more money than you really have, if you only pay attention to the interest payments and not to the accumulation of debt. This is especially when it seems possible to drive the interest rate on borrowing down through state-credit backed bond purchases!

That neat solution of using someone else's money and credit rating to extend further debt begins to unravel when their credit rating is called into question. This is probably still some way off for Germany, which recently has had very low bond yields (even negative yields for 1-2 year bonds!). However, the first sign that the game is up will be when Germany loses its triple-A rating.

In the meantime, this episode also highlights the nonsense that it is German imperialism that is strangling Europe's economy. Yes, Germany is an imperialist power, but it is desperately trying to keep together a system – at growing cost to itself – that has guaranteed both its economic privileges and those that accrue to other members of the euro group. As a policy, this is like delaying an amputation until the last minute, just in case something else, less drastic, comes up. While these matters fester, just consider: how many tens, or hundreds, of billions in cheap credits have been extended to those outside the rich club?

Tony Norfield, 29 June 2012

Finance, the Rate of Profit and Imperialism

In recent months, I have been working on a tricky topic for Marxist analysis: how to understand the role of finance in contemporary imperialism. Most coverage of this topic in Marxist and other radical literature gives more or less journalistic details of creditor-debtor rip offs and financial crises. There has been little serious attempt to develop Marx’s law of value in a way that can explain the underlying role of the financial system for the two major financial powers: the US and the UK.

I believe that I have made good progress in explaining this, and I will present some results of my latest analysis at a conference of the AHE/FAPE//IIPPE in Paris on Saturday 7 July - THE TIME HAS NOW BEEN CHANGED TO 11.30 - 1.30pm, Room C1306.

The full conference is scheduled from 5 to 7 July. If you are going too (it is a big conference, so this is not as ridiculous a question as it may seem!), then I look forward to discussing with and meeting some of the readers of this blog.

Tony Norfield, 26 June 2012

The Geometry of Imperialism

I have a globe on my desk. One of the tell-tale signs on such maps of the world is not the pink colour of colonies of the British Empire. That is so passé, and these maps are no longer published. Instead, the significant feature is the number of lengthy straight lines on the parts of the global map covering Africa and the Middle East. While there are straight lines elsewhere, these are the ones that stand out, the ones relating most clearly to the division of colonies in this region by the main European imperial powers.[1]

The straight lines are the product of colonial power that divided areas of influence, irrespective of the different ethnic and social groups that lived in them. The ruling groups in Arab countries were then determined by their relationship with the influential imperialist powers; Israel was, in a more complex way, established as a tool of imperialism to overlook the potentially less obedient Arabs. This means that political issues in these regions cannot be solved within the ‘countries’ concerned. A stable political deal between the different groups has not been established by agreement between them; rather the ascendancy of a particular group has been supported by imperialist influence. This is the basis for civil war, especially when the interests of imperialism change and the formerly leading group no longer has its previous power and support. Then a fragile peace, or a just-acceptable degree of terror or oppression, is no longer sustainable.

In this context, I recommend that you read the linked article/interview that gives an excellent account of the current situation in Syria. This shows, although implicitly, how solutions to the problems in a particular country cannot be resolved within that country, especially when these affect the balance of forces in the region and the interests of the imperialist powers.

Tony Norfield, 13 June 2012

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[1] Just look on Wikipedia for the histories of the formation of African and Middle Eastern states. Britain and France are the main players, with a small role played by Italy, though many decisions on the continent were taken to limit German influence before World War 1. A topic not covered in these otherwise useful details is the way in which Britain’s colonial policy exacerbated ethnic and religious tensions, often with the classic policy of backing the minority faction in a country because they would be more dependent on the external power for support. One would not expect Wikipedia to be able to give a decent account of the role of Israel as a tool of imperialism.

Bankiarupt

The Financial Times reports the latest financial trick to emerge from the euro crisis. The Spanish government, which cannot sell its bonds at less than disastrous yields, has decided to bail out one of its major banks, Bankia, by directly giving it Spanish government debt securities that it would then exchange with the European Central Bank (ECB) for much-needed euro cash. This will help the Spanish state find the funds – reported as €19bn – to manage the overall bank bail out. Apparently, Cyprus will follow suit.

My view has been that the euro project is such a longstanding and important construct for the major European powers – Germany and France – that they will move heaven and earth to defend it. Earlier plans attempted to create a firewall around Greece, though still to keep it within the euro system. I admit to some reconsideration now.

It is not simply the possible rejection of austerity measures in Greece that creates for Germany and other creditor countries the prospect of unending, unproductive subsidies that they are likely to reject. The scale of the problems in Spain, and other countries too, means that the numbers have simply become too large. When it comes to hundreds of billions of euros, then Germany and other creditor countries in Europe will begin to ask questions: can this money be better spent than on bailing out recalcitrant bankrupts? Especially when their actions, as with Spain’s latest move, only add to the burgeoning liabilities of the ECB. Spain is essentially saying that ‘We cannot pay for the bail out, so we are passing the ball to Europe’ – ie the creditor countries who will back up the ECB.

This is such a big crisis that the resolution is not something to be sorted out over a policy weekend, as many previous weekends have shown. It is also more than facile to expect anything progressive from Hollande, who will simply act to protect France’s interests in the troubles ahead – essentially by making Germany pay more, if possible. A long, hot summer is ahead in Europe.

Tony Norfield, 27 May 2012

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.

Imperialism by Numbers

There are close to 7 billion people in the world, in some 200 countries. However, a very small minority of rich, powerful countries - or rather, the rich and powerful in these countries - run the world economy. The way in which this happens is the focus of my research and the subject of many articles on this blog. In this article, I present some statistics to highlight the stratification of the world economy between the small number of imperialist powers and the rest. I welcome any comments on this analysis.

Five features *

Lenin outlined five features of imperialism, from the decisive role of capitalist monopolies, to the development of ‘finance capital’ and the export of capital, to the territorial division of the world between the biggest capitalist powers.[1] Although the form of territorial division has changed, with the end of colonial empires, these features continue to describe the world economy. Here I set out five complementary statistics for examining imperialism today from data for 180 different countries.

The first is nominal GDP. This measure of economic output is the most widely used in official statistics, though it has a number of drawbacks, not least that it is a measure of value appropriated rather than value created.[2] However, it is an easy number to obtain for the size of economic output in a particular country. The degree to which it is exaggerated by value appropriated from elsewhere will also be an advantage if we are to use it as a measure of global economic power.[3] Of course, countries with a large GDP are not necessarily rich – they might have a large population with a very low average income. Nevertheless, a high GDP ranking indicates that the country has weight, and presumably some influence, in the world economy.

The second measure is the size of military spending by each country. This spending might be for internal repression rather than for external power projection, but it is notable that the five biggest spenders in the world are also permanent members of the UN Security Council, each with a veto power on UN decisions. In general, it looks like a good measure to use as an indicator of imperial status.

For the third measure, I use figures for the stock of foreign direct investment (FDI) owned by each country. These figures will not fully reflect a country’s external economic power. For example, they exclude privileges and benefits that may come from commercial and trading relationships that may have little to do with owning companies and property in other countries. Neither will the FDI numbers reflect the power, influence and revenues that come from owning foreign portfolio assets (equities and bonds). However, the FDI data can be used as one guide to how far a country is able to exploit workers in other countries.

The final measures are used to reflect the financial power of different countries. One is a country’s ownership of the top 50 international banks; the other is the importance of a country’s currency in central bank foreign exchange reserves. These measures are far from comprehensive, but they should give an indication of how far a country’s banks are important on the world stage and how far its currency is accepted internationally.[4] Probably the main dimension missing from these particular measures is how far a country is able to utilise the financial sector to appropriate value from the world economy when this does not necessarily come via its own banks, or from the use of its own currency.[5]

Each of the statistical measures I use for the index has problems, but they offer a simple way in which to sum up key features of a country’s economic and political position in the world. In order to standardise the data for comparison purposes, I have set the highest value under each heading at 100. This means that if, for example, one country has the highest GDP, then its value will be shown as 100. Other countries with smaller GDPs will be shown as a proportion of that number, as 30, for example.

The five measures used are given equal weights, and the total index is an average of the individual values. This summary index is a guide to a country’s status. Results for the different countries show dramatically different values, and there is a clear hierarchy between the small number of countries at the top and the remainder with index values far behind.

Table 1: The Imperialism Index

Notes and sources: Calculated from original IMF, SIPRI, UNCTAD data. GDP data were for 2011, military spending data for 2010, FDI stock for 2010, ‘top banks’ for 2009, central bank FX reserves for end-2011. Figures for China include Hong Kong. The total index is an unweighted average of the components.

Table 1 shows the results for the top 20 countries ranked by their total index value. The US stands out at the top of each component measure, with a total (average) score of 100. Next in line is the UK, at a mere 32 points. The UK ranks close to the US only in the significance of its banking sector, and it is a distant second in terms of FDI holdings. France is not far behind the UK, spending slightly more on the military and having a higher GDP, but it scores less on the other measures than the UK. Germany is ranked a bit lower than France. This latter relationship may be surprising, since the French economy is smaller than Germany’s and more central banks hold German securities than French. But France has a higher rank in terms of military spending, FDI and its international banking position. This correlates well with France (like the UK) being a more active promoter of war.

Japan ranks at a significant margin below Germany in these measures of imperial power, with an index value close to 23. While Japan is the second largest world economy in terms of nominal GDP, the prolonged stagnation in Japan’s economy has damaged its banks and reduced the scope for its corporations to invest abroad.

China is a significant member of the top group in this classification, ranking 6^th at just below 20 index points. Its GDP is half the size of that in the US, though ‘purchasing power parity’ measures put it much closer. Its military spending is the second largest in the world, though still less than 20% of that in the US. American strategists are nevertheless concerned because China can mobilise a lot of cheap manpower for the military, and the gap in hardware capability may not be as big as the sub-20% figure would suggest. The FDI figure for China mainly consists of investments from Hong Kong. These may also be invested in China, so this may incorrectly push the overall index value somewhat higher. However, the leverage that Hong Kong gives China in commerce and finance should not be underestimated. Even though China has a position neither in the measure of top banks, nor in that for central bank holdings of its currency, these factors are bound to change in the next few years. China is slowly developing its financial system, the CNY is being used more in international trade relationships and Chinese banks are bound to play a bigger role in international finance.

Below China, it is a significant drop before the next group of countries, each with index values of less than 12. These countries do not count for much individually on these measures, but they can gain some influence by being part of the European Union (or euro) group of countries, or by being a major banker and foreign investor (Switzerland), or by being politically close to the US (Canada and Australia).

Of the so-called BRIC countries, China has already been placed. Russia, Brazil and India each rank much lower, though each has its own particular advantages in the global system (Russia’s being military). Saudi Arabia is perhaps a surprising element in the top 20 countries, but that is how these numbers work out. The close links of the Saudi royal family with US imperialism mean that it is hard to see this country as an independent player. Its position in the table is due to its military spending that reflects the subsidies it offers to defence contractors in imperialist countries, though it has also played an active role undermining protests in the Middle East, especially in Bahrain.

The following chart shows the same data and illustrates clearly the imperial pecking order. The UK, France, Germany and Japan each has an index value of less than one-third that of the US, but they are each several times bigger than countries further down the scale. Remember that this chart only shows the ‘top 20’ countries. The 20^th member, South Korea, has an index value of just 2.1, a fiftieth of the US value and less than a tenth of any of the major European powers or Japan. But further down the list (not shown) are more than 100 countries with an index value of less than 0.1, ones that would be mistaken for the x axis in the chart!

Chart 1: The Imperial Pecking Order

Notes: The height of each bar is given by the country’s total index value, which is then broken down into the respective components. Countries are identified by their two-letter ISO code. Take care, because CH is Switzerland, not China (which is CN), and SA is Saudi Arabia, not South Africa (this country is not shown, as it was ranked number 26). The countries are listed in the same order as in Table 1.

(This chart has been corrected. When originally published, the ISO codes for Canada and Belgium were entered incorrectly)

 

Conclusion

The significance of the US in the world economy is not news to anybody; neither is the fact of inequalities in wealth, power and influence between different countries. However, these statistics highlight the divergence in a striking manner. Although the figures are for recent years, in most cases the leading imperialist countries have been in their positions for decades. This is certainly the case for the US and the UK. They did not win their leading role by winning a popularity contest, but by moulding the world in their own interests, using their economic power and the threat or use of violence.

One final point on the index of imperialism presented here. The position of an individual country can only properly be understood by looking at its relationship to the imperialist system as a whole, not simply by examining whether its index value is higher or lower than another’s. It would be foolish to say that a particular index number means a country is imperialist, while one that is a certain amount smaller shows that it is not. The index components summarise only particular dimensions of the system. Different measures would produce different results, and any index measure would have a problem grasping the dynamics of the system.

Tony Norfield, 1 May 2012

Note on 3 December 2018: I have made some amendments to this index calculation and also updated the results to account for new data. The most recent picture is shown here.

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[1] See Imperialism, the Highest Stage of Capitalism, Chapter 7 ‘Imperialism as a special stage of capitalism’. Available on http://www.marxists.org/archive/lenin/works/1916/imp-hsc/index.htm

[2] See John Smith’s analysis, noted in ‘Imperialism and the Law of Value’, on this blog, 3 December 2011.

[3] GNP would be a better number, since this also includes net property income from abroad. However, GNP data are less readily available.

[4] In the case of the euro, I have divided the latest figures for total central bank reserve holdings of euros into components reflecting the proportions of Deutsche marks, French francs, etc, held in 1998.

[5] I am thinking about Britain here! See ‘The Economics of British Imperialism’, 22 May 2011, on this blog.

The Commodities Business

I recommend reading this article in Foreign Policy on Glencore. While it is short on analysis and focuses instead on personalities, it offers a good summary of many practices in the commodities business, from bribery and corruption to gangsterism and sanctions busting. It is notable how having a secure base in the imperial heartlands (US, UK, Switzerland), with ready access to politicians, cash and markets can combine to make these guys billionaires with relative ease.

Glencore’s founder, Marc Rich, was indicted on tax evasion and other charges in the US in 1983, but he had managed to flee to Switzerland shortly before. In 2001, on his last day in office, President Clinton took time out from photo calls to pardon Rich. Former Israeli Prime Minister Ehud Barak was among those lobbying Clinton on Rich’s behalf.

Information from a recent prospectus showed that Glencore ‘controlled more than half the international tradable market in zinc and copper and about a third of the world's seaborne coal; was one of the world's largest grain exporters, with about 9 percent of the global market; and handled 3 percent of daily global oil consumption … It recently announced a $90 billion takeover of Xstrata, a global mining giant [another FTSE100 company] in which it already holds a 34 percent stake … Glencore already trades, manufactures, refines, ships, or stores at least 90 commodities in some three dozen countries’.

Glencore is interesting in that it straddles the industrial, commercial and financial dimensions of monopoly capitalism. As the Foreign Policy report indicates, its profitability has been boosted by its own form of predatory behaviour, using its close links with agents, particularly in Africa and Eastern Europe, who could secure lucrative local deals.

Tony Norfield, 24 April 2012