A Level Economics Essay 10: Development Policies

Consider how effective the interventionist policies of import substitution and export-led industrialisation are likely to be in raising the levels of economic growth and development in LEDCs. 

Import substitution and export-led industrialization are two interventionist policies that countries can adopt to promote economic growth and development. Let's consider how effective these policies are likely to be in raising the levels of economic growth and development in LEDCs (Less Economically Developed Countries).

1. Import Substitution: Import substitution is a policy strategy where a country aims to reduce its dependence on imported goods by promoting domestic production of those goods. The idea is to protect domestic industries from foreign competition and foster self-sufficiency. LEDCs adopting import substitution policies typically impose high tariffs and trade barriers on imported goods, making them more expensive and less competitive compared to domestically produced goods.

The infant industry argument comes into play in import substitution policies. According to this argument, emerging industries in LEDCs may initially face disadvantages compared to established industries in developed countries. They may lack economies of scale, experience higher production costs, and face technological and managerial challenges. To overcome these obstacles and enable the growth of these industries, protectionist measures are implemented.

However, import substitution policies have shown mixed results in raising economic growth and development. While they may initially protect domestic industries and promote industrialization, there are several drawbacks:

a) Lack of competitiveness: Import substitution policies often lead to the development of industries that are not internationally competitive. Due to limited exposure to global competition, these industries may struggle to innovate, achieve economies of scale, and produce high-quality goods at competitive prices.

b) Limited market size: LEDCs generally have smaller domestic markets compared to developed countries. Relying solely on domestic demand can limit the growth potential of industries. Without access to international markets, firms may face challenges in achieving economies of scale and attracting investment.

c) Dependency on inefficient industries: Import substitution policies may lead to the development of industries that are protected from competition but are inefficient and less productive. This can result in a misallocation of resources and hinder overall economic growth.

Example: During the mid-20th century, many LEDCs, including India and some Latin American countries, implemented import substitution policies. While they initially aimed to reduce dependency on imports and develop domestic industries, the results varied. Some industries thrived, but others became inefficient and uncompetitive. Over time, many countries shifted towards more market-oriented policies to promote economic growth.

2. Export-Led Industrialization: Export-led industrialization is a policy approach where a country focuses on developing industries that can compete in international markets and promotes exports as a driver of economic growth. This strategy involves implementing policies such as export incentives, infrastructure development, investment in human capital, and market-oriented reforms to attract foreign investment and boost exports.

Export-led industrialization has been relatively more successful in promoting economic growth and development compared to import substitution policies. Some reasons include:

a) Access to larger markets: By focusing on exports, LEDCs can tap into larger international markets, allowing their industries to achieve economies of scale and expand production. Export-oriented industries are driven by international demand, which can provide sustained growth opportunities.

b) Technological spillovers: Engaging in global trade can expose LEDCs to advanced technologies and knowledge from developed countries. This transfer of technology can contribute to productivity improvements and innovation, benefiting the overall economy.

c) Foreign direct investment (FDI): Export-led industrialization policies often attract foreign investment, which brings in capital, technology, and managerial expertise. FDI can help boost industrialization, create employment opportunities, and enhance productivity in LEDCs.

Example: China and Japan are notable examples of countries that successfully implemented export-led industrialization policies. China, through its policy reforms and export-oriented approach, has become a global manufacturing powerhouse, exporting a wide range of goods to countries around the world. Japan also pursued export-led industrialization after World War II and transformed into a major exporter of automobiles, electronics, and machinery.

In conclusion, while both import substitution and export-led industrialization have been employed by LEDCs, export-led industrialization has generally proven more effective in raising economic growth and development. By focusing on exports, LEDCs can access larger markets, benefit from technological spillovers, and attract foreign investment. However, each country's specific circumstances and policy implementation play a crucial role in determining the success of these strategies. The infant industry argument provides a theoretical justification for protectionist measures under import substitution policies, acknowledging the initial disadvantages faced by emerging industries. However, striking a balance between protection and competitiveness is essential to avoid long-term inefficiencies and promote sustainable development.

The Rupee's Exchange Rate and Declining Dollar Reserves

 

Bangladesh goes to IMF. How deep is its crisis, comparison with Sri Lanka, Pakistan & India?

 

Confidence Tricks: Pakistan

Abdul Moiz Jaferi in The Dawn

By 2050, Pakistan will become the third most populous country in the world with 380 million mostly poor people. The Pakistanis working towards making those future millions a reality, are doing so today fuelled by largely imported foodstuff. Before you start screaming at the fromagers and the chocolatiers, they are not really to blame. Our daal is from abroad, and so is the oil it is cooked in. Our broiler chicken is fed foreign produce and even our naan dough is supplemented with imports.

We are already a food-insecure country, even though agriculture is supposed to be our backbone. Our once formidable cotton produce struggles to keep up with the region. Without investment in seed quality and technology, our cotton crop is now only fit to make coarse materials. Farmers have no incentive from the state to support essential crops, so they plant fields upon fields of water-hungry sugarcane, producing a crop which goes into a regressively controlled and speculative sugar industry and comes out as per the whims of billionaires with private planes. 

Pakistan earns about eight thousand billion rupees a year in tax and non-tax revenue. Let’s try and approximate this as a single naan. About half of that naan is put together with sales tax and customs duties — indirect and retrogressive taxation which extracts without discriminating between the poor buyer and the rich. An eighth of the naan is income tax, which is paid in large part by a million-odd poor souls caught in the net of ‘deductions at source’, who are either too weak or too caught in the net to get away with tax theft. These poor souls do silly things, such as subscribe to English-language print dailies like this one, whilst their trader neighbours rely on WhatsApp videos for their news stories, drive flashier vehicles, and write odes to their fictional poverty for the taxman and get away with it. A quarter of the naan is non-tax revenue; a final eighth is put on the table by federal excise duties and miscellaneous levies such as those on petroleum. 

When it comes to spending this money, Pakistan gives just under half the naan away to its provinces, who have many more responsibilities after the 18th Amendment but have not expanded their own revenue portfolios, nor devolved power or funding to local government. We then give away three-eighths to debt servicing. Those adept at math will guess that we have about an eighth left. Most of that goes to the military. We then borrow some more to run the actual government and pay pensions.

From the first day of work, we are in fresh debt, eating borrowed naan. Our economy is propped up by the sustenance sent home by unskilled labour, who toil to make foreign deserts green in conditions of modern-day slavery.

Countries break from such fatal cycles through improvement in their people — education and inclusion. Our basic public education system has been reduced to the worst possible state while our higher education system produces unnecessary degrees instead of focusing on skill-based diplomas. Our doctoral circuit is best known for being an elaborate diploma mill, where dummy publications print you onwards to hollow PhD glory.

If you consider the threat of violent force to be a commodity, it is our major produce and international bargaining chip. We bring to the table our possible nuisance value and take back whatever the world is willing to give us if we promise to keep it in check. At the head of the institutions which regulate our use of force are people who realise that their own powerful hand spins the roulette wheel which determines many fates, including their own.

Meanwhile, the pinnacle of the established order in our country enjoys millions of dollars’ worth of retirement packages and is bestowed with state land as service gifts and depreciated duty-free luxury vehicles as buy-offs. Golf clubs are carved out of mountains for their subsidised leisure; lakeside vistas become their sailing clubs.

Our country’s largest corporate players are owned and run by the military. I would say our country’s largest political player is also the military, but then this paper might not print it and, as penance, I might have to go to a seminar at Lums, where, a satirical publication noted, a management scientist recently turned up to speak for the whole day.

When you throw a no-confidence motion against a prime minister into this mix, it seems minor in scale. A sleight of hand compared to the larger circus that is the running of our country. When you factor in that the process through which he is being removed is itself riddled with the same interference from unelected quarters which had drawn condemnation from across the aisle when he was first brought in, the farce is highlighted further.

The opposition, previously being unable to remove the Sadiq Sanjrani pony from the merry-go-round that is our political arena, has now realised where the ticket booth is. Everyone is now jumping the queue to exchange their lofty slogans for a ticket on the ride, while the ringmaster promises larger and larger horses as long as the circus stays in town.

If I was part of the management science team which ran Pakistan’s circus, I would encourage my colleagues to wake up and smell the urgency in the air: the poverty which encircles the circus’s manicured boundaries. It is not long before the only solution to all evils will once again present itself as a gross permutation of religion and violence. Unlike last time, when we went after the Russians with it whilst taking American money (which ended up in Swiss banks), this time it threatens to burn without direction or order, and without a care for how much of the forest will remain when the flames are finally doused.

Is India a colony of China? The answer is rude, looking at trade data

 

Labour's spending plans aren't especially unusual – just look at Sweden

The US favours small government and low taxes, but many developed countries thrive on the opposite writes Larry Elliot in The Guardian 

 

The gap between the richest and poorest in Sweden is far smaller than in the US. Photograph: Kevincho_Photography/Getty Images/iStockphoto


Labour’s plans for Britain involve a big increase in the size of the state. Government spending as a share of national output would rise to 45%. And apart from brief spikes in the mid-1970s and during the more recent financial crash, it has not reached those levels since the second world war.

To which the mature response should be: so what? A glance around the world shows that there are rich developed countries where the state is relatively small and there are rich developed countries where the state is large. In democracies, voters get the right to choose between the competing models.

Take Sweden and the US as examples of the contrasting approaches. The Scandinavian country, population just over 10 million, has a state that spends 50% of gross domestic product. The United States, population 329 million, operates with a much smaller state that accounts for 38% of national output. 

The received wisdom, particularly among free-market economists, is that a small state means economic dynamism while a big state means the opposite: a sclerosis caused by governments burdening their populations with levels of taxation that stifle enterprise.

So how do the US and Sweden stack up against each other?

In terms of growth rates, there’s not been a lot to choose between the two in recent years, with both averaging around 2.5% a year in the half-decade up to 2018. If anything, Sweden’s growth rate was a tad higher.

The US has a slight edge when it comes to living standards. The average American had an income of $59,928 (£46,700) in 2017 while Sweden’s per capita income was $51,405. But the Swedes, as tends to be the way in Europe, are prepared to sacrifice income for leisure time. They work 1,621 hours a year on average compared to 1,781 hours for the average American.

What’s more, the focus on GDP per capita is a bit misleading since it says nothing about the way in which national income is divided up. In some countries, there is a wide gulf in incomes between those at the top and those at the bottom; in others there is a more even split. The US falls into the former category, Sweden into the latter.
One way of assessing income inequality is through the Gini coefficient. If income was distributed evenly in a country it would have a Gini coefficient of zero If, on the other hand, one person had all the income its coefficent would be 1. Obviously, every country is bunched around the middle of this range, but Sweden is closer to the bottom than the US. It has a Gini coefficient of 0.27 while the US’s is 0.41.

Big-state Sweden has a higher unemployment rate than the US – 6.3% against 3.9% – in 2018, but its employment rate is also higher. According to figures from the Paris-based Organisation for Economic Cooperation and Development dating back to 2016, 69.4% of Americans aged 15 to 64 are in work, compared to 76.2% of Swedes.

The two countries have very similar inflation rates of around 2%, but there is no evidence that high levels of public spending have impaired Sweden’s export performance. A current account surplus of 1.7% of GDP in 2018 was in contrast to the US’s 2.4% of GDP deficit.

The big economic numbers – income per head, unemployment, inflation and the current account – do not provide a complete picture of how successful a country is. Sweden has a much lower murder rate than the US – 1.1 per 100,000 inhabitants against 5.3 – and has a much lower incarceration rate – 59 per 100,000 people as opposed to 655 per 100,000 in the US. Swedes live more than four years longer than Americans on average.

When it comes to Nobel prize winners, the countries have similar records once their differing populations are taken into account – 383 for the US and 32 for Sweden. Here, though, the US has the edge. Only three of Sweden’s laureates have come since the turn of the millennium while 130 Americans have been awarded during the same period.

The comparison between these two quite different countries helps to illuminate the debate in the UK. Apparently, the size of the state has no bearing on whether a country is successful or not. At a guess, not many Swedes would want to see their country transformed into small-state America.

This is the right time to have just such a debate about the size of the state because there are factors in Britain that are systemically putting upward pressure on spending. Demographic changes mean all parties need to address the rising costs of an ageing population; the bills for the state pension, the NHS and social care are all going to increase. The climate emergency will require hefty state investment to make the transition to a zero-carbon economy.

But a word of warning. Sweden has evolved its model gradually whereas Labour’s plans involve abrupt change. The price for a big state is high levels of taxation – and it is a price the Swedes are prepared to pay. Overall, government revenues are 49.5% of GDP and taxes on the average Swedish citizen are substantially higher than they are in the UK. The Conservative party is going into the election promising both lower taxes and higher spending. The Labour party says a big state can be paid for by rich individuals and the corporate sector with everybody else tucking into a free lunch.

There are politicians who want Britain to be more like the US and some who favour the Swedish approach. Both are possible. What’s not possible is to have Swedish levels of public spending with American levels of tax.

Worse than plastic waste: the burning tyres choking India

The British government is already flouting its own rules, allowing scrap tyres to be sent abroad for burning – what will happen post-Brexit asks George Monbiot in The Guardian?

 

‘Every month, thousands of tonnes of used tyres leave our ports on a passage to India.’ Illustration: Sébastien Thibault/The Guardian


What we see is not the economy. What we see is the tiny fragment of economic life we are supposed to see: the products and services we buy. The rest – the mines, plantations, factories and dumps required to deliver and remove them – are kept as far from our minds as possible. Given the scale of global extraction and waste disposal, it is a remarkable feat of perception management. 

The recent enthusiasm for plastic porn – footage of the disgusting waste pouring into the sea – is a rare reminder that we are still living in a material world. But it has had no meaningful effect on government policy. When China banned imports of plastic waste a year ago, you might have hoped that the UK government would invest heavily in waste reduction and domestic recycling. Instead, it has sought new outlets for our filth. Among the lucky recipients are Malaysia, Thailand and Vietnam, none of which have adequate disposal systems – as I write, our plastic is doubtless flooding into their seas. There’s a term for this practice: waste colonialism.

Our plastic exports are bad enough. But something even worse is happening that we don’t see at all. Every month, thousands of tonnes of used tyres leave our ports on a passage to India. There they are baked in pyrolysis plants, to make a dirty industrial fuel. While some of these plants meet Indian regulations, hundreds – perhaps thousands – are pouring toxins into the air, as officials look the other way. When tyre pyrolysis is done badly, it can produce a hideous mix: heavy metals, benzene, dioxins, furans and other persistent organic chemicals, some of which are highly carcinogenic. Videos of tyre pyrolysis in India show black smoke leaking from the baking chamber, and workers in T-shirts, without masks or other protective equipment, cleaning tarry residues out of the pipes and flasks. I can only imagine what their life expectancy might be. 

India suffers one of the world’s worst pollution crises, which causes massive rates of disease and early death. There is no data on the contribution made by tyre pyrolysis plants, but it is doubtless significant. Nor do we know whether British tyres are being burned in plants that are illegal, as our government has failed to investigate this. It seems prepared to break its own rules on behalf of the companies exporting our waste. And this is before Brexit.

Unlike plastic waste, there is a ready market for used tyres within the UK. They are – or were – compressed into tight blocks to make road foundations, embankments and drainage beds. It’s not the closed-loop recycling that should be applied to everything we consume, let alone the radical reduction in the use of materials required to prevent environmental breakdown. But it’s much better than what’s happening to our discarded tyres now. The companies that made these blocks have either collapsed or are in danger of going that way, as they can no longer buy scrap tyres: Indian pyrolysis plants pay more.

I was contacted by a leading tyre block broker, David L Reid. He was halfway through a major order from a local authority when his supplies dried up. The contract was lost, and the local authority had to switch to stone, costing it a further £200,000. He has other interests, so is able to weather this disruption, but his company, like others, has had to cease trading. With some of his former competitors, he has been frantically trying to discover what the government is playing at, so far with little success.

Government guidelines seem clear enough: exporters must be able to demonstrate that the final destination of the waste they send to other countries “operates to human health and environmental protection standards that are broadly equivalent to the standards within the EU”. But when one tyre block company tested the UK Environment Agency’s willingness to enforce this rule, by asking whether it could send tyres to pyrolysis plants in Africa that “will not meet UK and EU pollution controls”, the agency told him “your suggested business plan is acceptable as long as the relevant procedures and documents are completed correctly”. 

The UK government’s due diligence consists of asking tyre exporters which companies they intend to sell to, then asking the Indian government whether those companies are legit. It has made no efforts to discover whether the firms receiving these tyres are their final destination, or whether the Indian government is properly regulating them. It has no figures for UK tyre exports to India. Arguing that they are classed as “green waste”, it washes its hands of them as soon as they leave our shores.

To become a tyre trader, all you need to do is fill in a “U2 environmental exemption” form. Then you can buy used tyres from garages, ostensibly for bundling into construction blocks. But there appears to be nothing in British law (or at least in its implementation) to prevent you from using this licence to put them in a shipping container and send them to India.

I put questions to the government about these issues but, despite repeated requests, it failed to send me a response on time. Reid has approached the environment secretary, Michael Gove, his Labour shadow, Sue Hayman, Liam Fox and other MPs and officials, all without answers. Does anyone care? Are the lives of people in India worth nothing to politicians in this country?

It appears that among the first people to export used tyres to India, in 2009, was Richard Cook. He is the former Conservative parliamentary candidate for East Renfrewshire who channelled £435,000 (the origins of which remain mysterious) through Northern Ireland and into the leave campaign in England and Scotland. Investigations by openDemocracy and BBC Northern Ireland alleged that his shipment was classified as illegal by both the Indian government and UK regulators. Indian law at the time forbade used tyre imports. Cook denied the allegations. After I tried to speak to him, his solicitor rang to say “we have intimated a claim for damages against the BBC for defamation” and would not be making any further comment.

In principle, the government could be held to account on this issue by European law. But if this is the way it is prepared to operate before Brexit – flouting its own rules on behalf of British exporters – imagine what it might do after we have left the EU. Every child is taught a basic environmental principle: you clear up your own mess. Our government seems happy to dump it on other people.

Australia bet the house on never-ending Chinese growth. It might not end well

Lindsay Davis in The Guardian

Assumptions about coal and iron ore exports helped build Australian prosperity. But with China’s economy threatening to unravel, a less rosy picture is emerging

 

Chinese tourists in Sydney. The two countries have prospered through their close economic ties but there could also be a downside. Photograph: David Gray/REUTERS


Over the last couple of decades, China has undergone profound change and is often cited as an economic growth miracle. Day by day, however, the evidence becomes increasingly clear the probability of a severe economic and financial downturn in China is on the cards. This is not good news at all for Australia. The country is heavily exposed, as China comprises Australia’s top export market, at 33%, more than double the second (Japan at 15%).

Is 2016 the year when the world tumbles back into economic crisis?



A considerable proportion of Australia’s current and future economic prospects depend heavily on China’s current strategy of building its way out of poverty while sustaining strong real GDP growth. To date, China has successfully pulled hundreds of millions of its people out of poverty and into the middle class through mass provision of infrastructure and expansion of housing markets, alongside a powerful export operation which the global economy has relied upon since the 1990s for cheap imports.

Though last week’s volatile falls on the Chinese stock markets alongside a weakening yuan sent shockwaves through the global markets, Australia’s exposure lies much deeper within the Chinese economy. The miracle is starting to look more and more fallible as it slumps under heavy corporate debts and an over-construction spree which shall never again be replicated in our lifetimes or that of our children.

As of the second quarter of 2015, China’s household sector debt was a moderate 38% of GDP but its booming private non-financial business sector debt was 163%.Added together, it gives a total of 201% and its climbing rapidly. This may well be a conservative figure, given it is widely acknowledged the central government has overstated GDP growth.

Australia, though it frequently features high on lists of the world’s most desirable locations, currently has the world’s second most indebted household sector, at 122% of GDP, soon to overtake Denmark in first place. Combined with private non-financial business sector debt, Australia has a staggering total of 203%, vastly larger than public debts at all levels of government.

Australia’s long-term bet on China was and still is conceptually simple – an incredibly flawed assumption that the country would never cease to consume increasingly more iron ore.

The assumption ran right to the top. Back during the Labor (Rudd/Gillard/Rudd) administrations of 2007-13, the bureaucrats at the Reserve Bank and the treasury, alongside the then treasurer Wayne Swan, forecast that China would import so much iron ore up to 2029 that the only way so much steel could be consumed was if they built more houses than there were people. There would also be infrastructure projects like airports, highways, exhibition centres and sports stadiums.

This was just the base forecast. The best-case scenario manufactured by Australian bureaucrats would liken parts of China to resemble the planet Coruscant from the Star Wars movies (the political centre of the galaxy, whose surface is covered by an entire city). With incredible complacency, politicians from both sides of parliament basked in the glory and reacted smugly when the US and the eurozone hit a brick wall.

So what did Australia do with this rosy outlook? Like a letter of guarantee, the financial services industry used it to convince the international wholesale lending community that the Australian economy was as safe as houses. Lenders around the world were facing an indefinite period of zero interest rates and were desperate for better yield. Australia must have seemed a good place to put their money.

For a time, the Australian bet looked good. The banking and financial system collected all the debt they could source from overseas wholesale lenders, underpinning increasingly greater expansion into Australia’s already grossly overvalued residential housing market.

Like most other nations in the Asia-Pacific region, the problem for Australia now is that riding on the back of China’s economic growth is no longer a “letter of guarantee” but a statement of significant overexposure to a bad bet and risky mortgage debt. The current downturn in China is smashing the Australian mining industry via lower demand for commodities amid increased global supply, especially in iron ore.

As well as hitting Australia hard, the mining export-driven states and territories (Western Australia, Queensland and the Northern Territory) will suffer the most.Population growth rates are falling in these regions, growth is softening and underutilization (unemployment and underemployment) is steadily rising. Spillover effects into the other states are likely, which could impact the country’s largest and most leveraged asset class: the housing market.

This may leave little desire for international wholesale lenders to provide credit to the banking and financial system in the future as Australia’s economic prospects deteriorate. It is becoming obvious both domestically and internationally that the country is beset with a massive housing bubble, driven by debt-financed speculation. Without Australia’s lenders importing an ever increasing sum of credit, the overleveraged and overvalued housing market will run into trouble.

Government and industry have managed over the last decade and a half to instill severe complacency in Australia, hoping policymakers’ two big bets on the finance, property and mining sectors would continue to pay dividends far into the future. While these bets paid off in the short-term, genuine productivity-enhancing policies which would diminish the incredible and mostly unearned wealth millionaires and billionaires have siphoned off could then be ignored.

With the Chinese economy beginning to falter, the fear is Australians must now figure out where their economic future lies for the next generation who have been brainwashed into believing that digging up rocks and flipping houses by accumulating a gargantuan mountain of private debt is how a modern western country builds its future. The results will not be pretty.

The global economy is slowing down. But is it recession – or protectionism?

Heather Stewart and Fergus Ryan in The Guardian

For one Chinese company that depends on global trade, fears over the worldwide economy have come to pass already. “The global economy is pretty bleak at the moment,” says Luo Dong, the owner of Doyoung, a Beijing-based exporter of frozen seafood and fruit. “This is having a big effect on us. Our clients’ sales are a lot slower than they used to be, and as purchasing power overseas drops, our exports are taking a hit.”

Luo’s observations were echoed on a wider stage last week, when the Paris-based Organisation for Economic Co-operation and Development voiced the fear gripping many economists: that the drop-off in trade, driven by China, may be a harbinger of something more worrying – a global recession.

Days later, Rolls-Royce became the latest British exporter to face what it called “headwinds” from China, joining a slew of others, from carmaker Jaguar Land Rover to luxury brand Burberry. Meanwhile, commodities including platinum and crude oil resumed their decline in value as investors continued to fret about sliding demand for the raw materials of global commerce. Beijing has cut interest rates six times in less than a year and let the yuan slide against the dollar, underlining the sense of alarm about slowing growth.

Official figures show GDP expanding at around 6.9% in the world’s second-largest economy, conveniently in line with the government’s official target of “around 7%”; but outside analysts believe it may be much weaker. “We find these numbers pretty implausible,” says Andrew Brigden of City consultancy Fathom. “China is slowing a lot more markedly than the official figures show.” Fathom’s calculations, based on alternative indicators such as electricity use, suggest GDP growth of 3% or even less.

However, inside China it feels as though sluggish demand from the eurozone, rather than a homegrown problem, is to blame for the deterioration in the economic weather.

Luo, whose company exports to the US, Europe, Middle East and Africa, says exports have roughly halved since last year. “The worst market has been Europe, largely due to exchange rate fluctuations,” he says.

The European Central Bank has deliberately driven down the value of the single currency by implementing quantitative easing. “The other major factor has been labour costs here, which have gone up about a third,” Luo adds.

For the UK, so far, the impact of global trade headwinds has been relatively mild, notwithstanding the tone of alarm from exporters. Lee Hopley, chief economist at the UK manufacturers’ association EEF, says: “It’s something that’s certainly on our members’ radar, and it’s a source of concern.”

FacebookTwitterPinterest Angel Gurría of the OECD: ‘Global trade, which was already growing slowly over the past few years, appears to have stagnated.’ Photograph: Evaristo Sa/AFP/Getty Images

But for a string of other countries, especially those heavily dependent on commodities exports, the result has been economic chaos – and the OECD fears worse may be to come. After the great financial crisis hit in 2008, reports that demand for exports had “fallen off a cliff”, as it was often put at the time, were among the first signals that a deep downturn was under way.

“Global trade, which was already growing slowly over the past few years, appears to have stagnated,” said Angel Gurría, the OECD’s secretary general, presenting its latest economic forecasts and predicting trade growth of around 2% this year. “What happened in the past 50 years whenever there was such a slowdown in trade growth, it was a harbinger of a very sharp turn of the economy for the worse.”

Gurría explained that the recent slowdown in emerging market economies, led by China, had been particularly damaging because it had come at a time when the advanced economies, in particular the eurozone and Japan, were not yet growing at a robust enough pace to drive global growth.

“A further sharp slowdown in emerging market economies is weighing down on activity and trade. At the same time, subdued investment and productivity growth are checking the momentum of the recovery in advanced economies. It’s a double whammy,” Gurría said.

The OECD’s prescription for this malaise is a collective effort by the advanced economies to ramp up investment – helping to boost demand, improve productivity and generate stronger growth. A similar approach was set out by President Barack Obama on Friday, and he is likely to press for more action to prop up domestic demand at this weekend’s G20 meeting in Turkey.

But with Germany and the UK still enthusiastically espousing austerity, any commitment to new investment seems highly unlikely; so economists have been left trying to count the costs of China’s transition from high-speed, export-led growth to a new economic model at a time when demand in other markets is far from booming.

Economist and China-watcher George Magnus reckons the world will avoid recession, but the damage will be severe for economies that have hitched themselves to the Chinese bandwagon in recent years.

“In Africa, exports to China are 12% of total exports, but three-quarters of the exposure is concentrated among five countries: Angola, South Africa, Democratic Republic of Congo, Republic of Congo and Equatorial Guinea,” he said in a recent blogpost. “In Australia, exports to China are a third of total exports. In Latin America, exports to China are about 2% of regional GDP.”

Most of these countries are exporters of coal, oil and minerals, and their struggles coincide with the end of what became known as the “commodities supercycle” – a decade or so in which prices were held aloft by the belief that demand for raw materials would continue rising, as developing economies became the engines of global growth.

FacebookTwitterPinterest Protests in Brazil, which is now in recession. Photograph: Imago/Barcroft Media

Goldman Sachs’s decision to close down its loss-making Bric fund was a symbolic reminder that the days are gone when the economic rise of Brazil, Russia, India and China (the four countries from which the fund drew its name) seemed guaranteed. Indeed, Brazil and Russia are both in recession.

The US Federal Reserve’s plans to raise interest rates from near zero, which many experts now expect to happen next month, could deepen the agony of countries already struggling with plunging currencies and rising borrowing costs. The International Monetary Fund has warned of a flurry of bankruptcies in emerging economies as rates rise.

“A lot of these countries haven’t been helping themselves: Taiwan, Korea; they’ve all been cranking up their own credit growth,” says Russell Jones of Llewellyn Consulting, an economics advisory firm. But he too believes the world should escape a general slump. “I don’t think we’re on the cusp of a major downturn — probably more of the same.”

Simon Evenett of St Gallen University in Switzerland, who collates detailed data for the thinktank Global Trade Alert, offers an alternative explanation for the recent slide in trade volumes. He calculates that about half of the fall, since exports peaked in September last year, has been caused by the commodity price rout; but the rest, rather than evidence of sickly global demand, has resulted from a creeping rise in protectionism.

His analysis suggests the declines have overwhelmingly taken place in just 28 categories of product. “That’s very concentrated; that makes me doubt that it’s a global downturn.” Eight of these categories are commodities; but the rest map closely on to areas where countries have taken protectionist measures.

In the wake of the financial crisis, policymakers from the G20 countries pledged not to resort to the tit-for-tat protectionism that led to collapsing trade volumes in the wake of the Great Crash of 1929, and was ultimately seen as a contributor to the Great Depression. Since then, there has been little sign of anything with the scope of America’s Smoot-Hawley Act of 1930, which slapped import tariffs on more than 800 products.

But Evenett says there has been a flurry of more subtle manoeuvres: restricting public procurement to domestic firms, for example, or quietly tightening regulations to raise the bar against imports. “I think the China story is adding spice to it, but I think there’s more going on here,” he says.

He is concerned that unless action is taken, politicians will continue to throw sand in the wheels of the international trading system. If he’s right, the downturn seen so far may not be sending a warning signal about global demand; instead, it would be best read as a measure of the fragility of globalisation.

Currency wars in emerging markets hammer global stocks

 Ben Chu in The Independent

Developing world devaluations have sent global stock markets into a funk and stoked fears of an intensifying global currency war.

In response to China’s surprise devaluation of the yuan last week, several emerging market economies have slashed the value of their own currencies to retain their competitiveness.

Kazakhstan’s tenge lost 24 per cent of its value against the dollar after the country’s central bank announced that it would allow the currency to float freely. Meanwhile, South Africa’s rand slid to its weakest level against the dollar in 14 years and Malaysia’s ringgit fell to its lowest level against the greenback in 17 years. Turkey’s lira and the Russian rouble also dropped.

This followed the decision by Vietnam on Wednesday to cut the value of the dong against the dollar by 1 per cent, the country’s third devaluation of the year. Since Beijing’s yuan devaluation last week, an index of 20 developing-nation exchange rates has been falling fast.

The ructions depressed the FTSE100, pushing the index down into technical “correction” territory, more than 10 per cent below its April peak. Year-to-date, the benchmark index of UK-listed shares, is down 2.9 per cent. The S&P 500 also quickly fell 1.2 per cent after trading opened in America, wiping out all of the US index’s gains made this year.

Last week, the People’s Bank of China caught markets napping by allowing the yuan to fall in value against the dollar by 4 per cent in two days. The perception that the world’s single biggest customer for raw materials is in economic difficulties has stoked fear over the prospects of big commodity producing economies like Kazakhstan, Russia, Brazil, South Africa and Malaysia. The slumping global oil price has also hammered investor confidence in the prospects of the big energy exporters.


“The appearance of China weakening its exchange rate to boost growth has added urgency for policymakers elsewhere to do what they can to grab more export revenue” said Koon Chow, of Union Bancaire Privée.

Many analysts expect further global devaluations if the US Federal Reserve, as expected, increases interest rates for the first time since the financial crisis later this year. “Emerging market currencies, in general, still have high devaluation risks” said analysts at CrossBorder Capital. Analysts predicted the likes of Egypt and Nigeria could be next to devalue their currencies.

Per Hammarlund, of Sweden’s SEB, said Kyrgyzstan, Turkmenistan and Tajikistan could allow their currencies to depreciate by between 10 and 20 per cent. “They simply don’t have much of a choice but to follow Russia and emerging markets more generally,” he said.

Capital has been flowing out of emerging markets at a rapid rate this year, as fears rise of a sharp slowdown in the former stars of the global economy. Over the past 13 months $1 trillion is estimated to have flowed out of the 19 largest emerging countries.
The International Monetary Fund expects global growth among emerging markets and developing economies to be just 4.2 per cent this year, the weakest output growth since 2009.

Nariman Behravesh, of IHS Global Insight, said emerging markets are arguably facing “the toughest environment since the Asia Crisis of the late 1990s” and predicted that they will drag on global growth into next year.

Chemical export licences for Syria – just another UK deal with a dictator

Britain is in no position to lecture on human rights when Vince Cable's authorisation follows a long history of arms sales

• 
• • Nick Dearden
  • theguardian.com, Monday 2 September 2013 15.30 BST

Defence Systems and Equipment International arms fair at the Excel Centre, Docklands, London. Photograph: Rex Features

The latest revelations about the authorisation of chemical exports to Syria proves that British ministers should avoid two things – lecturing the public on personal morality and lecturing the world on human rights. Both will come back to bite them. While Nick Clegg commented on the pages of the Guardian earlier this year that the UK was a "beacon for human rights", his business secretary was authorising companies to sell chemicals capable of being used to make nerve gas to a country in the middle of a civil war.

Clegg almost certainly knew nothing about the potential sales, and indeed the sales themselves might have been quite innocent, but our history should tell us that precaution is the best principle. If the companies had got their act together to ship the goods to Syria, they would probably have received government support through a unit of Cable's Department for Business, Innovation and Skills, called UK Export Finance. This unit has sold weapons to some of the worst dictators of the past 40 years – and had a role to play in the most serious chemical weapons abuses since the Vietnam war.

Jubilee Debt Campaign has released new information which confirms that the British government effectively armed both sides during the Iran-Iraq war – one of the Middle East's most bloody conflicts.

Britain had been happily selling weapons to Saddam Hussein, our ally during his war against the new Islamic Republic, in the early 1980s. The UK government also allowed the sale of the goods needed to make a chemical plant which the US later claimed was essential to Saddam's chemical weapons arsenal, with the full knowledge that the plant was likely to be used to produce nerve gas. Saddam used chemical weapons against Iranian soldiers and against civilians within his own country in 1988, killing tens of thousands.

This is old news, but we now also know that until the fall of the Shah in 1979, Britain also sold Rapier missiles and Chieftain tanks to Iran's autocratic regime – weapons that were undoubtedly also used in the Iran-Iraq war.

Both sets of arms were effectively paid for by the British taxpayer, as both Iraq and Iran defaulted on the loans given by Britain, and they became part of Iraq and Iran's debt. Though Iran still "owes" £28m to Britain, plus an undisclosed amount of interest, this didn't stop Britain guaranteeing £178m of loans to Iran to buy British exports for gas and oil developments in the mid 2000s, thus breaking its own rules.

This new information adds to a litany of such cases – supporting arms sales to the brutal General Suharto of Indonesia, both Sadat and Mubarak in Egypt and military juntas in Ecuador and Argentina, the latter using its British weapons to invade the Falkland Islands.

In opposition, Cable railed against the use of taxpayer money to support such sales, and his party promised to audit and cancel these debts and stop the sales. In power, he behaves the same way as his predecessors. While regularly claiming such deals are a "thing of the past", Cable has signed off £2bn of loans to the dictatorship in Oman to buy British Typhoon fighter aircraft, the sale of a hovercraft to the highly indebted Pakistan navy and an iron ore mine in Sierra Leone which has not even been assessed for its human rights impact.

Cable has ripped up Liberal Democrat policy to keep on supporting the sale of dangerous goods. He continues to insist on the repayment of debts run up by the UK selling weapons to now deposed dictators. Far from being a beacon for human rights, the UK has little legitimacy around the world when it comes to taking sides in wars – a fact that parliament recognised in its welcome vote last Thursday.

Next week, Britain's true role in the world will be on show in Docklands – when the world's "leading" military sales event meets in London. As war and the aftermath of war still rage across the Middle East, one way we as citizens improve our country's damaged reputation is to protest against such an appalling expression of Britain's role in the world. Authorising the export of chemicals to Syria is simply part of a long trend of support for dangerous technology which undermines this country's legitimacy when it comes to speaking about human rights.

What if Britain left the EU?

Eurosceptics want a vote on the ultimate question – and the PM does not seem entirely opposed. Ben Chu in The Independent examines the consequences of saying bye bye to Brussels

Exports

The European Union is easily Britain's biggest single export market, with 53 per cent of our goods purchased by our fellow European nations in 2011. This sector of our economy, directly and indirectly, supports three million jobs, according to Sir Iain Begg, a professorial research fellow at the European Institute of the London School of Economics. Without export growth last year, we would have fallen back into recession much earlier. If we were to leave the EU, we would almost certainly still be allowed to sell goods into the single market. Norway, Iceland and Switzerland already do so through a free-trade agreement. The difference would be that the UK would not be able to set the rules that govern the European single market. It would, of course, have to implement those rules to keep selling into those markets though. The argument sometimes deployed by those who want out of the EU is that leaving would, somehow, encourage British manufacturers to concentrate on exporting to the likes of China, Brazil and India.

Imports

Britain also imports a great deal from other nations in the EU – more than it exports, in fact. In 2011, we exported £159bn of goods to the EU and imported goods worth £202bn – an annual trade deficit of £42bn. Some argue that this deficit gives us leverage to demand more opt-outs and budget rebates from our European partners. The argument is: "They need us more than we need them." The problem is that we import a lot of European goods, not because we are doing the Europeans a favour, but because our people want to buy things that cannot be produced at home – think of all those German cars and French luxury goods. If Britain were to leave the EU, the Government might decide to impose large tariffs on European imports, but this probably wouldn't prove very popular. The likelihood is we would still run a trade deficit with the EU, but, as with imports, we would have no say over the rules governing the single market.

Growth

Would foreign capital still want to invest in the UK if it were not part of the EU bloc? Some economists say overseas investors would be put off. The National Institute of Economic and Social Research, for example, estimates that foreign direct investment would fall. And, mainly for this reason, it argues that our GDP would permanently be 2.25 per cent lower if we left the EU. However, Capital Economics argued last month that, because of the eurozone crisis, levels of foreign investment in the UK could actually go up if we left the EU, because we would seem like a safe haven.

Immigration

If Britain left the EU, the Government would not be required to permit the free movement of all citizens of the 27 nations of the union into Britain, nor their right to work here. About EU 165,000 citizens migrated to the UK in the year to September 2011, after 182,000 arrived in the 12 months to September 2010. Proponents of withdrawal argue that stopping such flows would improve quality of life because there would be less strain on public services and infrastructure. Opponents argue that immigrants are an economic benefit for Britain, filling holes in our labour market and boosting overall productivity. But the free movement of people is two-way. An estimated 748,010 Britons live or work in the European Union. Many have holiday homes in France and Spain. If we decided to restrict inflows of EU citizens to Britain, the European Union would be likely to respond in kind.

Budget

The UK makes an annual gross contribution to the EU budget of £15bn and it gets a rebate of €6bn in various subsidies – mainly agricultural. This makes an annual net contribution of €9bn. Ending those payments by leaving the EU would help to reduce the UK deficit, but these are not transformative sums. Our EU contributions are equivalent to 0.6 cent of GDP. We presently have a deficit of 8.3 per cent of GDP. Plus, one has to consider the benefits of those contributions. Structural funds – as payments into the common EU budget are known – are used to develop post-Soviet bloc countries in Europe, building up their infrastructure and making them bigger potential markets for British goods and services.

Business

A study by the British Chambers of Commerce has estimated that the annual cost to the UK of EU regulation is £7.4bn, but costs must be set against benefits. The EU has forced the mobile phone networks to stop ripping of customers when they use their handsets abroad. It has tackled Microsoft and airlines about over-charging. Britain outside the EU would have to rely on British competition authorities alone to protect customers from the malfeasance of corporations.

Banking

This is a complex relationship. The UK actually wants to impose higher capital requirements on its domestic banks than the rest of Europe does. Yet Britain is also fighting a Financial Taxation Tax, something that much of the rest of Europe

supports. British bankers, for their part, are generally in favour of staying in the EU. They fear that their access to lucrative European capital markets could be impeded if Britain left the bloc. And both banks and businesses calculate that Britain's EU membership is in their interests because the EU can help to open foreign markets such as China up to them more effectively than the UK acting alone.

Agriculture

The EU's Common Agricultural Policy is almost universally considered a wasteful mechanism that encourages over-production and undermines African farmers. Between 2007 and 2013, the UK will contribute £33.7bn to the Common Agricultural Policy (CAP) and get back £26.6bn, according to the Open Europe think-tank. That works out as a net contribution of £7.1bn. If the UK left the EU, our Government could scrap these subsidies at home and save the money. But it already has discretion at home about what to do with the payments – enabling ministers to channel the money to conservation, rather than production. And, within the EU, it can push for badly-needed reform of the CAP. Outside the EU, it would have no influence.

Politics

Europe is more social democratic than the UK. Even countries with centre-right governments tend to tax more, spend more on welfare and are less laissez-faire when it comes to markets. Those on the left in Britain tend to be in favour of the UK's continued membership because they feel it will help to move the country in this direction. Those on the right tend to be opposed for similar reasons; they feel Europe is helping to undermine Britain's social and economic freedoms. Yet there are global politics to consider, too. The right wants to rely on Britain's "special relationship" with the US, but Washington prefers Britain to work in closer partnership with the EU. Rising Asian giants such as India and China also seem to regard Britain's membership of the EU as a good reason to build economic and diplomatic ties with us.

Germany once admired British workmanship – but that was a long time ago

Over the North Sea lies the richest country in Europe, its success built on the manufacturing industry that Britain has spurned

• 
• • Ian Jack
  • guardian.co.uk, Friday 6 January 2012 19.44 GMT
  • larger | smaller

'The war hadn't been over 10 years and somehow Germany was making model trains more convincing than our own'

We all want to be Germans now: to make, to sell and not to yield. We would like to earn some respect, not least self-respect, and have some idea of our national future. The UK will never replace Germany as the world's second largest exporter, but we can surely manage to manufacture a few more things and "rebalance the economy", as the saying goes, to shrink the influence of the City of London.

So many people have had this dream recently – Vince Cable, of course, and Lord Glasman, no doubt, but also George Osborne when he made his fatuous speech about the "march of the makers". And there over the North Sea is the richest country in Europe: exemplary Germany, with its technical schools and apprenticeships, its respect for engineers, and its layer of family businesses known as the Mittelstand that puts long-term reputation above short-term profit by making the specialised parts that industry everywhere needs. How foolish we were to imagine that national prosperity could be spun from figures on a computer screen, out of thin air. How silly to despise the making of three-dimensional objects as a lowly process that had quit the west for the east. And how wise it would be (so the dream goes) to take a leaf from Germany's book and make manufacturing a much larger slice of the economy, therefore returning Britain to an earlier and possibly more solid version of itself.
That self is a long time ago. I remember watching Edgar Reitz's long and haunting film Heimat in the mid 1980s. Through the life of one family, the history of Germany in the 20th century was related in all its difficulty. At one point in the second world war, two characters find part of an aircraft or a bomb (I can't recall which) in a field. "Look," says one to the other as he handles the object, "such fine English workmanship." There was no irony, though it seemed hardly credible that British engineering could have been prized in Germany only 40 years before, given that at that Thatcher moment the typical British workshop was being sold abroad as scrap.

Germany's technical superiority was plain to see by the 1960s, but my own enlightenment came rather earlier, when I was eight or nine and the recipient of German gifts at Christmas. These came from two sources. In 1945, my family had befriended a prisoner-of-war and stayed in touch with him when he went home to Hamburg. We sent parcels of coffee beans, while a small box of marzipan or a bottle of eau-de-cologne came in the other direction. But as the years passed, the German presents grew more sophisticated. For me, a toy fire engine with a working water pump; for my parents, topographical books of black and white photographs printed on cream paper that felt like velvet. Perhaps these luxuries could also be found in Britain, but we had never seen them.

These were portents. The epiphany – not that I thought of it like that at the time – arrived when my older brother came home on leave from national service in Germany. He was the second source of gifts, and once, from his kitbag, produced two model railway coaches, gauge 00 to match my Hornby set but made by the German toymakers, Marklin. Their detail was superb. My tinplate Hornby carriages relied on painting to produce an effect of windows and door handles, but on their Marklin equivalents the windows really were transparent and the pattern of rivets below them stood out in relief. The war hadn't been over 10 years, and somehow Germany was making things as inconsequential as model trains that were more convincing than our own. Suddenly "Made in England" no longer suggested a singularly high quality, not that in 1954 it was easy in Britain to find goods made anywhere else.

Fear and envy of German manufacturing prowess began a long time before, as any economic history will tell you. Together with the US, Germany began to displace Britain as the world's foremost industrial nation well before the close of the 19th century. Books and newspaper articles sounded the alarm ("American furniture in England – a further indictment of the trade unions," read a Daily Mail headline in 1900), but did little to prevent Britain falling further behind in the new industries that became so important in the 20th century. Germany established a clear lead in chemicals, electrical engineering, optics and instrument-making. At the outbreak of war in 1914, the British government found that every magnet in the country came from Stuttgart, while German chemical works supplied all the khaki dye for British military uniforms.

To a large extent, British decline was inevitable: other nations had learned how to make things and export markets would naturally shrink. But the particular contrast with Germany was instructive when it came to scientific education and the social position of manufacturers and engineers. According to Peter Mathias's classic economic history, The First Industrial Nation, only a dozen students were reading for a degree in natural sciences at Cambridge in 1872. Germany, meanwhile, had 11 entire universities devoted to science and technology. Its educational system embraced the idea of manufacturing, while England's public schools and ancient universities held it at arm's length.
Finance became the acceptable business profession for gentlemen. In the words of another historian, Martin Wiener, finance "involved the extraction of wealth by associating with people of one's own class in fashionable surroundings, not by dealing with … the working and lower-middle classes". In this way, the City became part of the elite and "could call upon government much more effectively than could industry to favour and support its interests".

This is a familiar and by now hardly controversial diagnosis of the British malaise, and every so often a government or a politician promises a fundamental reform in political attitudes, praising the country's long tradition of scientific discovery and technical invention. A few television programmes endorse the same point; Sir James Dyson appears with his vacuum cleaner. But, beyond that, nothing much happens. Look around the frontbenches on both sides of the Commons. Who there dares upset the City? Who there ever made anything three-dimensional, or even had a parent who did? Which of them would risk the chamber pot of failed hopes being emptied over their heads by calling for a national industrial strategy?

It would be lovely to emulate the industrial success of the Germans, but so much history is very hard to undo. The one cheerful note (or perhaps more a vengeful one) is that Marklin, which made my memorable little carriages, is now owned by a private equity company based in London.