Is US Growth ´Immiserizing'?

 

Is US Growth Immiserizing? Some Neoclassical Thoughts

The United States command a strong lead over their peers in the group of advanced economies in terms of current and projected GDP growth. The latest IMF WEO 2024 projects the US real GDP to grow by 2.7 pc in 2024, compared to 0.2 pc in Germany and 0.8 pc in the Euro area. Four years after the COVID peak at 15 pc, the US unemployment rate is down to historic levels below 4 pc. For investors, the country is shining bright: direct foreign investment and portfolio investment flow in massively.

Fast growth and full employment are the main ingredients for a government to win re-election. Not so in the US. Trump is ante portas (again) to become US President, while Biden risks to lose the Presidential elections despite his economic record. There is a lot of guessing why that is so; this blogpost adds to those guesses, not more nor less.

To be sure, US growth is highly unequal and unbalanced in many ways - ethnical, regional, etc. The Human Development Index (HDI), a summary measure of average achievement in key dimensions of human development such as longevity, health and standards of living, notes that the US score topped in 2019 ahead of the Covid pandemic. The country ranks only at #20 on latest count (March 2024); the HDI ranking is topped by Switzerland. Three decades of GNP growth superior to other advanced countries have done fairly little to lengthen life expectancy at birth and schooling scores. For a third of the US population, US growth has been immiserizing.[1] Deaton: “In the US, life expectancy fell for three years in a row before the pandemic. For people without a four-year college degree, life expectancy had been falling since 2010… I get quite upset when people say: Well, the American economy is doing so much better than the German economy or the British economy. If you look at GDP growth, that might be correct. But that’s not the complete story, and life and death are more important than money.”

My hunch is different and much narrower: the USA suffers from ´immiserizing growth´, a term first proposed by Jagdish Bhagwati in the 1950s.[2]

US Terms of Trade (2000=100)

Source: US Bureau of Economic Analysis

Factor accumulation and the resulting output growth can make a large country worse off, or ‘immiserize’ it. The higher output potential leads to excess supply of exportables and to excess demand for importables. This will tend to worsen the terms of trade if the country is large enough – as is the US - to be able to influence its terms of trade. In extremis, the worsened terms of trade can weigh so much as to outweigh the rise in output and leave the country worse off than before.

´Immiserizing growth´ does not necessarily the large-country assumption. It cannot be ruled out when the simultaneous expansion of subsidized supply, such as of semiconductors or solar panels, is considered. If industrial policy in many small countries raises the output of ´fancy´ exportables simultaneously, it can likewise affect terms of trade and cause ´immiserizing´ growth.

Technical progress increases potential output per head, but it also shifts resources towards the industry in which progress occurs. Silicon Valley comes to mind, where internet platforms are created and make billionnaires. The social value of such hi-tech output is mainly privatized, while the export industries from which resources are withdrawn can cluster in rust belts, with social costs socialized.

Brecher and Diaz-Alejandro [3] have shown that ´immiserization´ is almost inevitable (when the profits of foreign investors are not taxed) when foreign capital is attracted into protected industries. Foreign investors capture the rents created by protection, growth induced by foreign capital is, once again, immiserizing.

 [1] A. Deaton, "Life and Death Are More Important than Money", DIE ZEIT 14/2024 (Interview M. Schieritz)

[2] J. Bhagwati, „Immiserizing growth: a geometrical note”, Review of Economic Studies, 25, 201-25.

[3] R. Brecher & C. Diaz-Alejandro, „Tariffs, foreign capital, and immiserizing growth”, Journal of International Economics, 14, 317-22.

Rogue Forces and Shifting Wealth

 

Jörg Lau (a foreign affairs correspondent for DIE ZEIT) has a much-admired article in Internationale Politik[i], which claims: “Like Russia's attack on Ukraine, the escalation in the Middle East is part of a global geopolitical transformation for which there is not yet a term.” Well, at the OECD Development Centre that transformation has been documented under the term Shifting Wealth in a periodic OECD publication called Perspectives on Global Development.[ii] A German translation of the term was established before, also in Internationale Politik [iii] Weltneuvermessung. [iv]

To be sure, the Shifting Wealth narrative, with hindsight, was politically naïve. We liked to ignore warnings that the BRICS group was more than about economic convergence of the poorer Southern nations. But then, we were not alone. Famously, Francis Fukuyama had proclaimed the End of History in 1989. The fall of the Soviet Union and of the Berlin Wall suggested liberal democracy to be a fundamentally better system, ethically, politically and economically, than any of the alternatives[v]. Table 1 suggests that it turned out very differently.

Table 1: Political Freedom & Civil Liberties in Selected Emerging Countries, 2013-22

Country	2013	2022	Trend
Brazil*	81	72	↘
China*	17	09	↘
Egypt	41	18	↓
India*	76	66	↓
Indonesia	65	58	↘
Nigeria	46	43	→
Russia*	27	16	↓
Turkey	61	32	↓
South Africa*	81	79	→
* = original BRICS
Memo: USA	93	83	↘

Source: https://freedomhouse.org/reports/freedom-world/freedom-world-research-methodology

The BRICS are a convenient label for authoritarian regimes that turned rogue, notably China and Russia. It was held together by the desire of their leaders to end US hegemony, to revise global governance and to strictly respect noninterference in internal affairs. What could go wrong with a “multipolar world”, which would replace a not so benevolent US hegemon?

Well, the recent massacers of Russia in Ukraine and of Iran-sponsored Hamas in Israel have desillusioned brutally our multipolar dreams. These massacers have been encouraged by an internal and external weakening of the United States, as exemplified by the Trump trauma and threat, by unresoved budget issues and by the US leaving Afghanistan, with former support staff cynically exposed to the Taliban. The erosion of Western dominance in the international economic and norm-setting sphere and the absence of a “Western policeman” (Lau, op.cit.) has emboldened the most radical actors to take greater risks across the world. USSR-Ukraine; Iran-Hamas-Israel; China-Taiwan; Azerbaijan-Armenia; the list is getting longer, and it includes the Sahel zone, too. Note in passing that conflict-induced migration seems to weaken the Western polity, too, as it turns voters toward the Hard Right, as in France, Germany or Italy. Many observers assume Putin´s mastermind behind mass immigration.

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[i] English version: “The Israel-Hamas War and the New World Order”; German version: “Am Nullpunkt”, November/December 2023.

[ii] The first, entitled Shifting Wealth, was published in June 2010: https://www.oecd-ilibrary.org/development/perspectives-on-global-development-2010_9789264084728-en

[iii] Helmut Reisen, „Die Neuvermessung der Welt“, Internationale Politik, July 2008.

[iv] That term has given rise to a blog, now entertained by Thomas Bonschab and Robert Kappel: https://weltneuvermessung.wordpress.com/

[v] Ben Zissimos (2022), “The End of the End of History: A Political-Economy Perspective”, Intereconomics.

The West & South in a Dark Age of System Rivalry

 

Shortly after Putin´s Russia had invaded Ukraine, I observed that global governance was disintegrating into an American-dominated bloc and a Chinese-dominated bloc, with Russia and the EU countries as junior partners. The link between geopolitical and economic division would not only be calibrated by sanctions, to the extent they are effective. China containment, protectionism, and friend-shoring next to sanctions are offsetting development friendly Shifting  Wealth, as defined by the OECD Development Centre in 2010[1]. To be sure, the concept of Shifting Wealth has entirely ignored that the rise of the BRICS has been shaping the world to suit autocracy. True, the multipolar world has been leveraged by totalitarians, whence the notion of system rivalry. Yet, I will argue here that it is the West that will shoulder most of the economic cost of a dark age of “systemic rivalry”.

The BRICS and much of the “Global South”, a risk first overlooked (and denied) by Western observers, might opt for the China-dominated bloc. With a prolonged division between the west and a bloc centred on China and Russia, economic divisions will deepen. As lucidly summed up by Pascal Lamy (ex WTO): “Putin pushes us into the arms of the Americans and we push Putin into the arms of the Chinese. This world benefits Beijing, Moscow and even Washington, but can it satisfy us the EU?”[2]. Former UK Foreign Secretary David Miliband notes “Few governments endorse the brazen Russian invasion, yet many remain unpersuaded by the West’s insistence that the struggle for freedom and democracy in Ukraine is also theirs. …The concerted Western response to the Russian invasion of Ukraine has thrown into sharp relief the occasions when the West violated its own rules or when it was conspicuously missing in action in tackling global problems”[3].

UN General Assembly resolution that demands #Russia leave #Ukraine, 23.2.2023.

Source: UNGA. https://news.un.org/en/story/2023/02/1133847

 

The claim that much of the Global South is on Ukraine’s side became first questionable at the United Nations General Assembly in March 2022, with BRIC members abstaining a vote for Russia to leave Ukraine. A year later, the 136 countries of the Global South embraced a range of positions. By number of countries, almost 62% of Southern countries were classified by Nicolas Vernon at Bruegel as pro-Ukraine. However, with abstentions by both China and India, the pro-Ukraine share shrinks to a third by aggregate population[4]. Much will depend on Brazil´s and India´s soft power where the Global South will stand in international diplomacy.

The cost of rival blocks might now be higher for the West than for the South. The rise in South-South linkages has led to a new world less dependent on the West. From the perspective of poor countries, the most important consequence of China and India’s entry into the global economy operated through both global and direct linkages The second phase of shifting wealth from 2000 to the 2008 great financial crisis GFC (after the first of initial opening during the 1980-2000 period), saw pervasive convergence of poor countries largely due to increasingly China-centric growth[5]. Since the GFC, Chinese imports have been the driving force for South-South trade. The percentage share of China’s imports in world imports has surged since China’s WTO accession in 2001. A new geography of South-South development finance allowed governments to tap a bigger pool of transformative infrastructure finance and to choose from more financing options[6]. The China’s Belt and Road Initiative (BRI) deepened South-South integration in the postGFC period.

 In 1979 already (after the 2^nd oil price shock), Arthus Lewis imagined the new world in his Nobel lecture. He hoped that sustained Southern growth would become fired by South-South trade and less constrained by balance of payment problems and by slower Western growth[7]: “If a sufficient number of LDCs has reached self-sustaining growth we are into a new world. For this means that instead of trade determining the rate of growth of LDC production, it will be the growth of LDC production thatdetermines LDC trade, and internal forces that will determine the rate of growth of production.”

 

FX Turnover by Major Currencies 

Source: John Authers, Bloomberg

 

In 2009, I had raised the question whether the US dollar empire was falling. I ventured the Chinese yuan would soon overtake the US dollar. If history of the last switch in reserve currency (from pound sterling to the US dollar) was any guide, the yuan could be expected to replace the US dollar as a reserve currency by around 2050. But I cautioned that the renminbi wasn´t ready for reserve currency status. China that does not respect property rights nor other democratic freedoms such as full currency convertibility. Thus, the yuan sits on shallow capital markets and frightens as a mousetrap currency (a term coined by Wilhelm Röpke). If anything, the perspectives for the yuan to serve as reserve currency have worsened under Xi´s increasingly dictatorial rule. So it was premature to talk about the greenback’s demise, as was rightly pointed out by  John Authers at Bloomberg. BIS triennial surveys of foreign-exchange markets show that the dollar is not yet losing market share, unlike the euro, until 2022.

In 2025 however, those numbers may reflect the fallout of Russia’s invasion, with the Yuan share rising. Economic sanctions imposed on Russia and other countries by the United States put the dollar’s dominance at risk as targeted nations seek out an alternative, US Treasury Secretary Janet Yellen has warned. Already, China and Brazil are working on a deal to settle trades in their own currencies rather than dollars. Quite recently, as the US’ rivalry with China and Russia intensified in an increasingly polarized world, Saudi Arabia and other Middle Eastern nations were choosing to diversify their global partnerships, removing important oil resources from Western control. Oil transactions between Saudi Arabia and China could be denominated in the Chinese yuan, a significant development in the evolving international economic and geopolitical landscape. If this move happens, it could have far-reaching implications for the US dollar’s status as the dominant global currency, as well as for US-Saudi relations and broader regional dynamics in the Middle East[8].

 

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[1] OECD, Perspectives on Global Development 2010: Shifting Wealth, OECD 2010.

[2] Pascal Lamy, “L’Union européenne est-elle toujours pertinente?, Le Grand Continent, 12. April 2023

[3] David Miliband, “The World Beyond Ukraine: The Survival of the West and the Demands of the Rest”, Foreign Affairs, May/June 2023.

[4] Nicolas Vernon, Much of the Global South is on Ukraine´s side, Bruegel, 13. March 2023.

[5] OECD, Perspectives on Global Development 2019: Rethinking Development Strategies, OECD 2019.

[6] A vivid account of China´s footprint in Africa has been given by Deborah Brautigam, The Dragon´s Gift: The Real Story of China in Africa, OUP 2009.

[7] Arthur Lewis, The Slowing Down of the Engine of Growth, https://www.nobelprize.org/prizes/economic-sciences/1979/lewis/lecture/, 1979.

[8] Habib al-Badawi, “Can Saudi Arabia switch from the US dollar to the Chinese yuan?”, SpecialEurasia, 13. April 2023.

Greed, Grievance & Putin´s War

 From Putin´s abstruse historical perspective, Russia´s military invasion of Ukraine is more akin to civil war than to a war between two sovereign nations. Putin´s war has been explained by either his greed or by Russia´s grievance as NATO has expanded East closer to Russia´s border over the past decades. “No grand theory can explain the Ukraine crisis”?[1] Take a little one then[2], the seminal Collier-Hoeffler Model, a model well known in conflict and development research[3]. It suggests to emphasize Putin´s greed and to act accordingly through aiming at his wealth via targeting his oligarch trustees.

Using a rich dataset of wars (mostly for Africa) during 1960–99, Paul Collier & Anke Hoeffler found political and social variables that are most obviously related to grievances had less explanatory power than economic variables. For the current Ukraine context, it means that we should give little credence to views that look at NATO´s enlargement as a root cause for Russia´s military invasion(s). Rather, we should emphasize economic motives for Putin´s war and identify targeted economic instruments to stop him, beyond and above rapid military equipment of Ukraine to withstand brutal Russian assault.

Putin has excelled at manipulating the psychology of grievance. For years, he cultivated a narrative of humiliation by the West. That narrative supported Russia´s occupation of Crimea in 2014, when Putin´s popularity levels shot up to their highest ever levels. Again, Putin's approval rating seems to have soared since he sent troops into Ukraine late February 2022. Economic sanctions by the West hit the population, not Putin, and are adding to Putin´s popularity.

Large-group psychology and social conflict have been investigated by psychiatrist Vamik Volkan who conducted fieldwork in regions of war and unrest. Volkan found that if societies don’t work through their sense of loss (of power, status, or prestige) through a process of mourning, it can become central to group identity – which in turn makes them vulnerable to manipulation by destructive leaders who play on old wounds. Apart from Putin, Serbia´s Milosevic and Trump (MAGA) are similar cases[4].

No doubt, Putin is greedy (and very wealthy).^[5] According to financier Bill Browder,  since “Khodorkovsky's conviction (in 2003), Russian oligarchs went to Putin and asked him what they needed to do to avoid sitting in the same cage as Khodorkovsky. From what followed, it appeared that Putin's answer was, "50%" He wasn't saying 50% for the Russian government or the presidential administration of Russia, but 50% for Vladimir Putin personally."

In Ukraine, Putin´s greed can be satisfied by the extortion of the victim´s natural resources (cereals, oilseeds, gas) because annexation would make Russia a world leading supplier of fossile energy and staple food. A recent Information Note published by FAO (Food and Agriculture Organization of the UN) has highlighted the critical role that Russia and Ukraine play in global agriculture. In 2021, both countries combined held major percentage shares of global exports in wheat, barley and sunflowerseed oil (between 30 and 60%). The annexation of Ukraine would give Putin a huge extortion potential as a quasi monopolist over staple food items, most crucially important in poor Africa and Asia.

The annexation of Ukraine would also consolidate Russia´s de facto monopoly of gas exports to Europe as it would capture the all important pipeline North Stream 1 run by Ukraine´s Naftogaz. Russia has been also denying Central Asian countries access to its own gas transport network, and consequently depriving them of access to Ukrainian transport towards Europe.

Sanctions are unlikely to be the best way to stop Putin. Bill Browder (the largest foreign investor in Russia until 2005, and now a leading campaigner to expose Russia's corruption and human rights abuses), likens broad economic sanctions to nearly killing the patient to target the cancer. Instead, he has suggested to sanction Putin´s oligarch trustees, probably along international adoption of the US Magnitzky Act ((named after his murdered Russian lawyer, Sergei Magnitsky).

Since Russia's aggression against Ukraine, Europeans have already frozen billions in assets belonging to oligarchs. Recently, the EU Commission drew up an initial balance sheet: By April 8, assets of oligarchs and companies worth a total of 30 billion euros had been frozen in the member states. According to the Commission, these include ships, helicopters, real estate and works of art worth almost 6.7 billion euros. In addition, transactions worth around 200 billion euros had been blocked.

Some countries are obviously further along than Germany in tracking Putin´s Mafia. Italy has long recognized that fighting anti-money laundering is a prerequisite for successfully combating the Mafia. Germany, by contrast, is a notorious bad performer in reviews by the experts of the Financial Action Task Force (FATF)[6]. Experience in the fight against organized crime also helps Italy freeze the assets of Russian oligarchs, with the powerful Guardia di Finanza having far-reaching rights.

So apart from military resistance and secret service sabotage against Putin: Make Putin Poor Again!

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[1] Janan Ganesh (2022), “No grand theory can explain the Ukraine crisis”, Financial Times, 12. April.

[2] Paul Collier & Anke Hoeffler (2004), “Greed and grievance in civil war”, Oxford Economic Papers 56, 563–595.

[3] A seminal paper on violent civil wars, has been the focus of much of the greed-grievance debate. The model argues that certain natural resources such as oil are tied to increased likelihood of conflict onset. The links between natural resources and conflict were confirmed by the data, apart from the level of per capita income and the rate of economic growth. Primary commodity dependence raises the risk of civil war exponentially until it peaks with exports at around 30 percent of gross domestic product (GDP).

[4] Alex Evans (2022), “Putin and the psychology of grievance”, The Article, 1^st April.

[5] https://fortune.com/2022/03/02/vladimir-putin-net-worth-2022/

[6] The FATF is affiliated with the Organization for Economic Cooperation and Development (OECD) in Paris and is considered an important international body for combating money laundering and terrorist financing.

After Putin´s War Crimes in Ukraine: Rupture and Sanctions after Shifting Wealth

 

Russia is now as totalitarian as is China. On 24th February, Putin´s Russia has invaded Ukraine, resorting to murderous shelling while Ukraine was fighting for its freedom. This followed upon Russia´s invasion of Crimea and the seizure of Ukrine´s Eastern Donetsk and Luhansk regions in 2014.

For at least a decade, Putin has built his country´s food self-sufficiency by doubling its grain production since 2012. The two inputs you need to sustain a long war are grains and energy - of which Russia has plenty. The current account balance was switched from negative to positive during that period, resulting in a built-up of a war chest at Russia´s Central Bank, with foreign exchange held in China (12%) and gold reserves (22%) vaulted at home; just 6.5% of Russia´s FX reserves were recently held in the US.

Xi Jinping has been the paramount leader of China since 2012; he has hardened his grip ever since. He has suppressed democracy movements in Hong Kong, threatened Taiwan and other neighbours. Last not least, he forced internments, mass sterilisations, forced assimilation, "re-education", and coercion of detained Uyghurs to work in factories.

In 2022, geopolitical rupture looms. Global governance is disintegrating into an American-dominated bloc and a Chinese-dominated bloc, with Russia and the EU countries as junior partners. Such hypothesis was pronounced by Clemens Fuest (IFO Munich) and by Martin Wolf (FT)[1]. Will economic divisions follow? The link between geopolitical and economic division will be calibrated by sanctions, to the extent they are effective.

The BRICS and much of the “Global South”, a risk overlooked by Western observers, might opt for the China-dominated bloc. With a deep and prolonged division between the west and a bloc centred on China and Russia, economic divisions will follow. Lack of mutual trust and humanitarian concerns call for disintegration of the world economy after four decades of intense globalisation. Military buildup will shrink the peace dividend for the world; just as it did in Putin´s Russia except for the super rich oligarchs over the past two decades.

Both China and Russia are important drivers of the BRICS (official website)[2], joint with Brazil, India and South Africa. The BRICS, except South Africa, lead the list of countries with the highest foreign exchange (FX) reserves, ahead of Germany. Combined, they have built up official FX reserves worth round $ 6 trn, mostly over the last two decades. Approved at the 2014 BRIC summit in Brazil, the BRICS Contingent Reserve Arrangement (CRA) provides protection against global liquidity pressures. Since the 2015 BRICS summit in Russia, a BRICS payment system conceived as an alternative to the SWIFT system has been established and largely backed by China: Cross-Border Interbank Payment System (CIPS).

Despite a growing membership, the OECD share in world GDP expressed in Purchasing Power Parities (PPPs) stabilised around 50% between 2011 and 2017 (latest benchmark year), according to the International Comparison Program (ICP). Similarly, the share of large emerging economies (China, Brazil, India, Indonesia, the Russian Federation and South Africa) also stabilised at around 30% of world GDP[3].

Political scientist Rachel S. Salzman (SAIS, Johns Hopkins U) has documented in a fascinating study Russia´s leadership in establishing the BRICS group[4]. The desire to end US hegemony, rewrite rules and build new institutions is a shared commitment of the group. In a time of alienation from the Euro-Atlantic world, BRICS provides both China and Russia with international support.

Sanctions will drive geopolitical rupture and economic division on a global scale. To which extent is less certain than our own propaganda wants us to believe.  Notably the exclusion of Russian banks from SWIFT was hailed by banner-waving economists and politicians as the ´nuclear´ sanction to bring Putin quickly down. However, Alistair Milne, Professor of Financial Economics at Loughborough University (UK) has convincingly explained that throwing Russia out of SWIFT will be quite ineffective, unlike freezing the reserve ssets of the Central Bank of Russia that include gold reserves held at home[5].

The UN General Assembly Resolution against Russia on 2nd March was an eye opener for many. To be sure, the “world wants an end to the tremendous human suffering in Ukraine” (UN SG Antonio Guterres). Only 141 of the total 198 UN member states of the UN General Assembly adopted a resolution demanding that Russia immediately end its military operations in Ukraine. Five countries - Belarus, North Korea, Eritrea, Russia and Syria - voted against it, while 35 abstained. Africa´s voting behaviour must be a special downer for DAC donors. Half of the (too) many African countries did not condemm Russia´s attack on Ukraine. They rather preferred to abstain, go to be absent, and Eritra was one of the very few countries to vote against the UN resolution.

The West may have thought that the atrocities commited in Ukraine might entirely isolate Russia. However, it may have overlooked to what extent non-Western countries have intensified economic links aside from the West and how that may have created political ties, supported by new institutions not ruled by the US. In short, the West has ignored Shifting Wealth[6].

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[1] Clemens Fuest (2022), “Economic Consequences of the Russian Invasion of Ukraine”, ifo Viewpoint 234, 4^th March: Martin Wolf (2022), “Putin has reignited the conflict between tyranny and liberal democracy”, FT, 1^st March.

[2] The official website by mid March prominently displayed ´breaking news´ such as “Russian Banks Turn to Chinese Payment Solution in Wake of Sanctions”, or “Dr Reddy's (Indian pharmaceutical major) Plans 'Business Continuity' in Russia”.

[3] https://www.oecd.org/sdd/prices-ppp/oecd-share-in-world-gdp-stable-at-around-50-per-cent-in-ppp-terms-in-2017.htm

[4] Rachel S. Salzman (2019), Russia, BRICS, and the Disruption of Global Order, Georgetown University Press.

[5] https://www.france24.com/en/tv-shows/people-profit/20220303-fortress-russia-has-putin-built-a-sanctions-proof-economy

[6] OECD, Perspectives on Global Development 2010: Shifting Wealth, OECD Development Centre.