Venezuela's trade confronted with the international financial crisis

The following article appeared on the blog The Venezuelan Economy.

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An earlier article on this blog looked at Latin America's trade on the eve of the present international financial crisis and at the implications of this trade pattern for policy to confront this crisis. The present article, within that overall context, looks at the specific situation of Venezuela’s trade.
However the issue of trade cannot be considered separately from other aspects of the unfolding international financial crisis in formulating an adequate policy response. It is therefore worth quoting the general points made regarding Latin America in the earlier article as these apply equally to Venezuela:
'First, and most fundamental, is that in the international recession private investment will sharply decline or collapse. This is the most important mechanism that will drive the economy deep into recession. Therefore the most fundamental aspect of confronting the economic crisis is that a programme of state investment must be undertaken in order to maintain the overall level of investment in the economy. Such state investment programmes should have both an immediate counter-cyclical objective of preventing a decline in demand in the economy, that is a directly Keynesian aspect, and a strategic one of improving the efficiency of the economy. For this reason, in many cases, the most fruitful forms of investment are in infrastructure.
'Second, the core of the present international economic crisis is within the financial system. In most countries in the world, including in the US, a programme of nationalisation of banks and financial institutions is therefore being carried out - Citigroup, AIG, Fannie Mae and Freddie Mac, Royal Bank of Scotland, Northern Rock, Bradford and Bingley etc.
'Third, due to the financial crisis, private funding to large enterprises will be squeezed - as seen in the bail out of the US and other countries car industries. Governments are intervening to either take large shareholdings in, or fully nationalise, such companies in return for the financial assistance necessary to sustain them during the downturn.
'Fourth, due to the financial crisis, private banks will drastically reduce or cease to lend to small and medium enterprises. Therefore new mechanisms, frequently bypassing private banks, must be developed in order to sustain lending to small and medium businesses.
'Fifth, due to the financial crisis, mortgage lending for housing will severely contract or dry up - in the UK, for example, new mortgage lending has fallen by 80 per cent and a similar process is taking place in the US. This in turn will create a crisis in the house building industry. New mechanisms of lending for housing must be created and strong state intervention in the housing construction industry must be undertaken.
'Sixth, while such programmes of state investment are geared up it is vital to prevent a decline in demand in the economy by maintaining the living standards and purchasing powers of the population. This should be done, in order to protect the strained position of companies’ finances during the recession, without placing an extra wage costs on enterprises - this may be achieved by measures such as reduction in sales tax or increase in state benefits.
'Seventh, despite these measures unemployment, particularly due to the situation in the private sector, will rise. Measures of job creation and protection of the unemployed must be reinforced or put in place.
'Eighth, the international recession has already led to a decline in commodity prices, including oil, which will create decreases in revenues to state budgets. However under conditions of recession all countries are expanding their budget deficits in a Keynesian fashion and therefore there must not be equivalent cuts in state spending to any decline in revenue.
'It is evident from this list of key measures to deal with the international economic crisis that the policies of the Venezuelan opposition would be catastrophic, and are completely out of line with those being pursued in all other countries, as the opposition seeks to weaken, rather than strengthen, the role of the state in the economy. In all countries in the world a great expansion of the role of the state in the economy is taking place in order to confront the international financial crisis. The policies of the Venezuelan opposition would, therefore, greatly worsen the problems of Venezuela in meeting current international economic problems.
'Within the overall context outlined above a very important place is occupied by the question of international trade. One of the most important factors leading to the deep economic depression after 1929 was the collapse of international trade. A decline in world trade would also further severely depress the price of commodity exports, including oil, which would greatly increase the budgetary problems of Venezuela. Venezuela, and Latin America as a whole, therefore have a great interest in maintaining international trade during this international economic crisis.'
This article examines overall parameters and objective possibilities of Venezuela's trade within that overall context of the unfolding of the international economic crisis.
The overall features of Venezuela's trade may be succinctly summarised. Concerning exports, Venezuela continues to be heavily dependent on exports to industrialised countries and to the US in particular. There has only been, if at all, some marginal shift away from this and the change remains extremely limited. This is the weak point in Venezuela’s trade both strategically and immediately in confronting the international financial crisis. It is impossible in the very short period of time, which is measured in months, available to confront the economic crisis to diversify Venezuela’s export structure sufficiently to compensate for the decline in the value of demand for Venezuelan exports that will come from the US – i.e. no alternative markets for exports can be found quickly enough to compensate for the decrease in US demand. It therefore follows that a programme to counter the economic crisis, in terms of demand, must centre on boosting Venezuela’s domestic economy.
In the field of imports the situation is much more satisfactory. The policy pursued by president Chavez regarding Venezuela’s imports is both in line with the main trends of the development of the world economy in the last period, which is for an increasing share of world trade to come from developing countries, and with the goal of Latin American integration. Trends in the structure of Venezuela’s imports are, therefore, positive both from the strategic point of view and from the more immediate one of confronting the international economic crisis.
Taking exports and imports together the structure of Venezuela’s trade has, therefore, improved during the last ten years. Ten years ago Venezuela was essentially exporting its oil to the US and importing goods from the US. That is, in essence, Venezuela was exchanging oil for US goods.
Such a non-diverse trade structure was both unhealthy in itself and left Venezuela dangerously exposed to developments in the US economy – a danger clearly revealed in the present situation as the centre of the current world economic crisis is in the US. Today, on the contrary, Venezuela is essentially exporting its oil to the US but importing goods from Latin America and the Caribbean and Asia. Therefore in the new trade structure Venezuela is essentially exchanging its oil for goods from Latin America and the Caribbean and from developing Asian economies - the fact that this exchange, in terms of monetary flows, goes via the US should not obscure the essential reality of Venezuela’s new, healthier, trade pattern.
Venezuela’s trade has therefore both developed in line with the main trends in the world economy and is much better structure than it was ten years ago – the key remaining weakness, which will play a negative role in the financial crisis as noted, is the continuing dependence on exports to the US which will take a substantial time to correct.
These trends will now be considered in greater detail.
Considering first the structure of Venezuela’s imports, as is shown in Figure 1 there has been a long term trend for an increasing share of Venezuela’s imports to come from developing countries. This trend started well before President Chavez came to power. Under President Chavez the existing trend has somewhat speeded up but it was not created under his administration.

Figure 1

In 1980 86.4 per cent of Venezuela’s imports came from already industrialised countries and only 13.5 per cent from developing countries. By 2007 56.0 per cent of Venezuela’s imports came from developing countries compared to 43.0 per cent from already industrialised countries. Imports from developing countries overtook those from already industrialised countries for the first time in 2006.
Turning to more detailed trends for Venezuela’s imports by area, these are shown in Figure 2. Imports from Latin America and the Caribbean as a whole have overtaken imports from the US – although the US remains Venezuela’s single largest source of imports from a single country. In 2007 26.6 per cent of Venezuela’s imports were from the US compared to 42.8 per cent from other countries in Latin America and the Caribbean.

Figure 2

Turning to imports from individual countries, in 2007 26.6 per cent of Venezuela’s imports come from the US. The largest country sources of Venezuela’s imports, after the US, are shown in Figure 3. The largest sources of Venezuela’s imports after the US are from Colombia – 13.5 per cent, Brazil – 9.6 per cent, China – 6.7 per cent, and Mexico – 3.1 per cent.
In addition to imports from Latin America and the Caribbean, Venezuela’s imports from developing Asian countries were also rising relatively strongly and by 2007 represented 11.4 per cent of Venezuela’s total imports.

Figure 3

Imports from the European Union have declined from 30.3 per cent of Venezuela’s imports in 1989 to 11.7 per cent in 2007. Imports from other areas are very small.
The overall trend of Venezuela’s imports is therefore clear. The most important source of Venezuela’s imports has now become Latin America and the Caribbean, supplemented by an important increasing trade with developing Asian countries. This is in line with general world trends and is economically normal and healthy - as well as being in line with the goal of Latin American and Caribbean integration.
Turning to exports, analysis is complicated by a long term trend, which predated President Chavez’s election, for an increasing proportion of Venezuela’s exports to be categorised as for ‘non-specific destinations’ – the proportion so categorised increasing from 0.1 per cent of Venezuela’s exports in 1985 to 23.8 per cent in 2007. Statistically this produces a tendency for the reported share of Venezuela’s exports to all specified areas to reduce. To deal with this statistical distortion figures have been calculated both for percentages of Venezuela’s total exports (i.e. the total including exports to ‘non-specific’ destinations) and for the percentage of exports to specified destinations. As will be seen, the detailed export figures differ depending which measure is taken but the fundamental trends to do not alter.
As may be seen from Figure 4, whether total exports are taken, or exports to specified destinations, there is no trend for an increasing share of Venezuela’s exports to go to developing countries in the way that there is one for its imports to come increasingly from developing countries. The share of Venezuela’s exports going to countries that are already industrialised has therefore not fallen.

Figure 4

Considering this in more detail, Figure 5 illustrates the well known fact that Venezuela remains highly dependent on exports to the US.

Figure 5

This trend is not quite as adverse for the overall trade situation as it may appear at first sight if the diversification of imports is taken into account. If monetary flows are ignored, and the actual exchange of commodities taking place is considered, in essence Venezuela is now exchanging its exports of oil for imports of goods from developing countries – although this exchange is taking place via the intermediary of the financial flow of the purchase of oil by the US. While this situation is not satisfactory it is a considerable improvement over the previous pattern whereby Venezuela depended for both exports and imports on trade with the US.
Nevertheless this situation of export dependency on the US is undoubtedly dangerous for Venezuela’s economy strategically – as it revealed clearly by its consequences in the current international economic crisis.
The centre of world financial crisis is in the United States, and the US economy is moving into severe recession. Under those circumstances there will be a very significant reduction in US demand for Venezuelan oil in terms of the value purchased and very probably also in physical volume. Its dependence on the US for oil exports therefore constitutes an undoubted considerable danger for Venezuela both strategically and within the immediate financial crisis. This justifies the stated goal of the Venezuelan government to move away from excessive reliance on exports to the US. But it is clear that this goal cannot be achieved quickly and certainly not in time to seriously mitigate its adverse consequences in an international economic crisis that has already begun.
Considering possibilities for diversification of exports the percentage of Venezuelan exports to individual industrialised countries and areas are shown in Figure 5. As may be seen, Venezuela’s exports to both the European Union and Japan have been persistently falling as a percentage of its total exports. The share of the European Union in Venezuela’s total exports fell from 18.9 per cent in 1980 to 7.7 per cent in 2007. The share of Japan in Venezuela’s total exports fell from 3.5 per cent in 1980 to 0.5 per cent in 2007. These long term trends confirm the dependence of Venezuela on oil exports to the US and also indicates that the European Union and Japan are cannot be serious alternative markets for diversification of Venezuela’s oil exports.
Turning to Venezuela’s exports to developing countries these are shown in Figure 7, for the percentage of exports going to specified destinations, and in Figure 8 for the percentage of total exports. Again the detailed figures will be seen to differ with the different classifications but the fundamental trends remain identical.

Figure 6

As may be seen, the percentage of Venezuela’s exports going to developing European countries, to the Middle East, and to developing countries in Eastern Europe is extremely small. The percentage of Venezuela’s exports going to other countries in Latin America and the Caribbean is significant but has been falling significantly – in 2007 40.4 per cent of Venezuela’s exports to specified destinations were to other countries in Latin America and the Caribbean whereas by 2007 this had fallen to 21.3 per cent. Venezuela’s exports to developing Asian countries has been rising but is still low – the percentage of Venezuela’s exports to specified destinations going to developing Asian countries rose from 0.6 per cent in 2000 to 5.1 per cent in 2007.

Figure 7

The only developing countries to which Venezuelan exports have significantly increased are Cuba, essentially in exchange for health and other services, and China – Cuba now accounts for 3.9 per cent of Venezuela’s exports to specified destinations and China for 4.1 per cent. Given its extremely large and rapidly growing economy, the second largest in the world in real terms, there is considerable potential in principle for Venezuela to increase exports to China - China is now the second largest individual country market for Venezuelan exports although exports to this market are still so far only one tenth of the size of the US one. The fact that Venezuela faces the Atlantic and not the Pacific is also a limiting factor on oil exports to China.It is therefore clear that while great progress has been made is a more satisfactory structure of imports great difficulties exist for Venezuela in diversifying exports and this will be a medium and long term process.
To summarise again while Venezuela’s trade situation is not satisfactory considerable progress has been made in improving its structure of Venezuela’s trade. However, while such progress is important strategically it is necessary to be extremely realistic when considering the possibilities flowing from trade in regard to the present international economic crisis. It will not be possible to diversify Venezuela’s exports in the short term sufficiently to compensate in the field of international trade for the severe recession that is developing in the US. The main emphasis in a programme to confront the international financial crisis for Venezuela must therefore be stimulation of its domestic economy.

Latin America and the Caribbean's trade confronted with the international financial crisis

The following article appeared on the blog The Venezuelan Economy.

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The international financial crisis will hit Latin America and the Caribbean via multiple mechanisms. They will, therefore, have to respond to each aspect. But these responses will only be most effective if they are part of an integrated reaction. The subject of this article is, therefore, Latin America and the Caribbean's trade as it enters the international economic crisis, but it is necessary to place this specific aspect in the context of other main trends.
First, and most fundamental, is that in the international recession private investment will sharply decline or collapse. This is the most important mechanism that will drive the economy deep into recession. Therefore the most fundamental aspect of confronting the economic crisis is that a programme of state investment must be undertaken in order to maintain the overall level of investment in the economy. Such state investment programmes should have both an immediate counter-cyclical objective of preventing a decline in demand in the economy, that is a directly Keynesian aspect, and a strategic one of improving the efficiency of the economy. For this reason, in many cases, the most fruitful forms of investment are in infrastructure.
Second, the core of the present international economic crisis is within the financial system. In most countries in the world, including in the US, a programme of nationalisation of banks and financial institutions is therefore being carried out - Citigroup, AIG, Fannie Mae and Freddie Mac, Royal Bank of Scotland, Northern Rock, Bradford and Bingley etc.
Third, due to the financial crisis, funding to large enterprises will be squeezed - as seen in the bail out of the US and other countries car industries. Governments are intervening to either take large shareholdings in, or fully nationalise, such companies in return for the financial assistance necessary to sustain them during the downturn.
Fourth, due to the financial crisis, private banks will drastically reduce or cease to lend to small and medium enterprises. Therefore new mechanisms, frequently bypassing private banks, must be developed in order to sustain lending to small and medium businesses.
Fifth, due to the financial crisis, mortgage lending for housing will severely contract or dry up - in the UK, for example, new mortgage lending has fallen by 80 per cent and a similar process is taking place in the US. This in turn will create a crisis in the house building industry. New mechanisms of lending for housing must be created and strong state intervention in the housing construction must be undertaken.
Sixth, while such programmes of state investment are geared up it is vital to prevent a decline in demand in the economy by maintaining the living standards and purchasing powers of the population. This should be done, in order to protect the strained position of companies finances during the recession, without placing extra wage costs on enterprises - this may be achieved by measures such as reduction in sales tax or increase in state benefits.
Seventh, despite these measures unemployment, particularly due the situation in the private sector, will rise. Measures of job creation and protection of the unemployed must be reinforced or put in place.
Eighth, the international recession has already led to a decline in commodity prices, including oil, which will create decreases in revenues to state budgets. However under conditions of recession all countries are expanding their budget deficits in a Keynesian fashion and therefore there must not be equivalent cuts in state spending to any decline in revenue.
It is evident from this list of key measures to deal with the international economic crisis that the policies of the Venezuelan opposition would be catastrophic, and are completely out of line with those being pursued in all other countries, as the opposition seeks to weaken, rather than strengthen, the role of the state in the economy. In all countries in the world a great expansion of the role of the state in the economy is taking place in order to confront the international financial crisis. The policies of the Venezuelan opposition would, therefore, greatly worsen the problems of Venezuela in meeting current international economic problems.
Within the overall context outlined above a very important place is occupied by the question of international trade. One of the most important factors leading to the deep economic depression after 1929 was the collapse of international trade. A decline in world trade would also further severely depress the price of commodity exports, including oil, which would greatly increase the budgetary problems of Venezuela.
Venezuela, and Latin America as a whole, therefore have a great interest in maintaining international trade during this international economic crisis. This article, therefore, examines overall parameters and objective possibilities of Latin America's trade - a second article will look at the specific features of Venezuela's trade within that context.
Taking first exports, the key weakness of Latin America is reliance on trade with the US. The dimensions of this problem are shown in Figure 1.
In 2007, the last year for which figures are available, 63.6 per cent of exports from Latin America and the Caribbean went to industrialised countries with 44.3 per cent going to the US. This represents some diversification of exports away from the US and industrialised countries during the last decade - the peak year for the share of industrialised countries in exports from Latin America and the Caribbean was 74.2 per cent in 1999 and the peak share of the United States in Latin American and Caribbean exports was in 2000 at 57.2 per cent.

Figure 1

To take data shown in Figure 2, in 2007 37.2 per cent of Latin America and the Caribbean exports were to developing countries - in other words exports to all developing countries were less than those to the US.
Latin American and Caribbean exports to the European Union and Japan are falling and show no sign of increase.
These figures have important implications. A trend of diversification of Latin America and the Caribbean's exports away from the US and the industrialised countries is taking place. This is strategically crucial, must be maintained, and is in line with the overall trend in the world economy of the increased weight of developing countries in world trade. Nevertheless this trend is one operating over a prolonged period of years, a decade or more, and it cannot be made sufficiently rapid to deal with an economic crisis that has already begun and which will pick up momentum in a matter of a few months.
The consequence of the reliance of Latin America and the Caribbean on exports to the US is very serious and will have strongly negative consequences in the current international recession. The origin of the present financial crisis is in the US and its economy is already moving sharply into recession. This means that imports into the US will fall sharply -a trend that will be made worse if a decline in the exchange rate of the dollar takes place. The working assumption in Latin America and the Caribbean must be that the volume of imports by the US will fall in absolute terms and this, combined with the decline in the price of commodities that has already taken places, means that income received by countries in Latin America and the Caribbean from their exports to the US will fall sharply.
Trade diversification to regions that are likely to suffer less severe recessions than the US, notably Asia, and expansion of trade within Latin America and the Caribbean is therefore important. But it cannot be put in place rapidly enough, or on a sufficient scale in the time frame available, to offset the negative consequences of the downturn of the business cycle. This means that the largest focus for Latin American countries must be the expansion of domestic demand by the measures outlined at the beginning of this article. The overall framework must, therefore, be domestic recovery programmes supplement by measures to diversify trade away from the US and towards areas of higher economic growth.
Turning to the situation of possibilities for increasing Latin America and the Caribbean's exports to developing countries, which will be growing more rapidly than the US in the coming period, the key trends are shown in Figure 2.
There has been a significant increase in the exports of Latin America and the Caribbean to developing countries in the last period - after a period of depression in the mid-1990s. The share of Latin America and the Caribbean's exports going to developing countries rose from 22.8 per cent in 1999 to 32.7 per cent in 2007.
Within that framework half of the increase, 5.3 per cent, was due to increased exports to developing Asian countries - which increased from 3.6 per cent of Latin America and the Caribbean's exports to 8.9 per cent. Latin America and the Caribbean, however, still represented the largest market for their own exports with 19.1 per cent of exports in 2007 - an increase from 16.6 per cent in 1999. This 2.5 per cent increase in share is, however, less than that for Asia. Exports to the Middle East and Africa are low and with no substantial tendency to increase.

Figure 2

The combined total for exports by Latin America and Caribbean states to other countries in the region and to developing Asia is however now very significant. It accounts for 28 per cent of Latin American and Caribbean exports - far exceeding those to either the European Union or Japan.
Exports to Latin America and developing Asian countries are now almost two thirds, 63 per cent, of Latin American and Caribbean exports to the US. Furthermore, exports to Latin America and the Caribbean and developing Asian countries were rising while those to the US were falling sharply - see Figure 3.
In 2000 exports to the US accounted for 57.2 per cent of Latin American and Caribbean exports compared to 21.9 per cent for the combined total for exports to other countries in Latin America and the Caribbean and to developing Asia - that is, exports to the US were 161 per cent higher than those to Latin America and the Caribbean and developing Asia combined. By 2007 exports to the US were only 58 per cent higher than those to Latin America and developing Asia.
The implications of such numbers are clear. If the alternative to Latin American and Caribbean exports to the US is conceived of as only being Latin American and Caribbean integration this is too small to counterbalance the US. If, however, the framework is conceived of as Latin America and the Caribbean together with developing Asian countries then this total is rapidly catching up with exports to the US.
It follows from this that the top priority in Latin America and the Caribbean's export trade in the international financial crisis must be within Latin America and the Caribbean and in relation to developing Asian countries.

Figure 3

Turning to Latin America and the Caribbean's imports the situation is far more favourable that with exports. Imports from developing countries have already substantially overtaken those from the US - see Figure 4.
In 2007 imports from the US accounted for 33.1 per cent of Latin America and the Caribbean's imports whereas imports from developing countries accounted for 44.5 per cent. Furthermore imports to Latin America and the Caribbean from the European Union, as well as from the US, were falling sharply - while those to Japan and Canada were low with no tendency to increase. In short Latin America and the Caribbean's import trade from developing countries is much more dynamic than that with the industrialised countries, including the US.
This trend is strongly entrenched. As may be seen from Figure 4 diversification of Latin American and Caribbean imports away from the industrialised countries and from the US has been underway for a considerable period.
Considering the industrialised countries as a whole, the peak year for the share of Latin America and the Caribbean's imports from these countries was in 1991 at 74.3 per cent - by 2007 this had declined to 54.4 per cent. For imports from the US the peak year was 1999 at 49.2 per cent - by 2007 this had declined to 33.1 per cent. By 2007 developing countries accounted for 44.5 per cent of total imports by Latin America and the Caribbean compared to only 33.1 per cent from the US.

Figure 4

This trend in imports is important not only in itself but because it can be used as a framework to develop bilateral Latin American and Caribbean relations, including for exports, with those areas or countries that are becoming increasingly important trading partners.
Considering imports from developing countries in more detail the most dramatic expansion is again in imports from developing Asian countries. This is shown in Figures 5 and 6.
The share of imports to Latin America and the Caribbean from developing Asian countries has risen dramatically from 2.1 per cent in 1980 to 18.5 per cent in 2007 - see Figure 5. The share of imports from other countries in the region to Latin America and the Caribbean has also recently risen significantly - increasing from 15.3 per cent in 1999 to 21.6 per cent in 2007.
Imports from the Middle East and Africa remain low and with no tendency to increase.

Figure 5

Taking these trends together the combined share of Latin America and the Caribbean's imports accounted for by other Latin American and Caribbean countries and by developing Asian states already significant exceeds imports from the US.
In 2007 the share of Latin American and the Caribbean's imports coming from the US was 33.1 per cent whereas the share coming from other Latin American and Caribbean countries and from developing Asian states was 40.0 per cent.

Figure 6

Within that overall framework the most important single developing country market is China. China has already overtaken the US and Germany to become the world's largest exporter of goods. It is the world's third largest importer of goods, behind the US and Germany, with a more rapid increase of imports than either of these. Within the next twenty years it is projected that China will overtake the US to become the largest economy in the world.
The trend of Chinese imports into Latin America and the Caribbean, compared to the US, is shown in Figure 7.

Figure 7

What conclusions follow from these trends for Latin America and the Caribbean as they face the international economic crisis?
First, the process already underway in several Latin American countries to lessen dependence on exports to the US is entirely necessary. There will be a sharp contraction in US demand for imports during the coming recession, due to both US economic downturn and possible declines in the exchange rate of the dollar, and the more Latin America and the Caribbean succeed in diversifying their exports away from the US the more successfully they will be able to meet the international economic crisis.
Second, however, the scale of the shift involved in diversifying exports is very great. It will not be possible in the time available before confronting the consequences of the international economic crisis, which has already commenced and will develop in the immediate coming months and years, either to lessen the share of exports to the US, or to develop other export markets, sufficiently rapidly to provide large enough alternative international markets to compensate for the crisis in the US. Therefore the core of the anti-crisis economic programmes in Latin America and the Caribbean must be measures to boost domestic economic recovery - supplemented by measures diversifying exports away from the US. As in all countries confronting the economic crisis, the core of these programmes must be an expansion of activity by the state in the economy - in particular expansion of state investment to counter the sharp decline in private investment that will take place.
Third, regarding trade, strategically the process of economic integration in Latin America and the Caribbean is extremely important. But this market is not large enough, by itself, to constitute an alternative trade market to that provided by the US. The combination of Latin America and the developing countries in Asia is, however, sufficient to compensate fully for the US. Therefore, alongside the measures to strengthen Latin American and Caribbean economic integration must go policies to strongly increase the economic relations between Latin America and the Caribbean and the developing Asian economies - in particular China.

The share of developing countries in world exports

The rise of Asia, in particular China, in world export markets is well known. The aim of this post is, however, to provide a more systematic overall examination of trends in world visible exports - i.e. exports of goods and not including trade in services (to avoid excessive repetition all references to exports below are to be taken to be referring to visible exports unless otherwise specified).
The most fundamental, twenty year, tendency is shown in Figure 1. This is the well known consistent trend, since the late-1980s, for a major rise in the share of developing countries in world exports - and the decline of the share of already industrialised countries.
The share of industrialised countries in world exports fell from 70.3 per cent in 1988 to 53.3 per cent in 2007. In the same period the share of developing countries rose from 27.9 per cent to 45.2 per cent.

Figure 1

Considering these trends in greater detail, Figure 2 divides exports from developing countries between those in Asia and those outside Asia. Again the trend is clear.
The rising share of developing countries in Asia in world exports is continuous throughout the last quarter century - the share of developing Asian countries in world exports nearly tripling from 8.3 per cent in 1980 to 23.7 per cent in 2007.
For the initial part of the period after 1980 the share of non-Asian developing countries in world exports fell - this was particularly accounted for by a decline in the value of the share of world exports from the Middle East associated with the decline in the real price of oil in that period. However since the early 1990s the share of non-Asian developing countries in world exports has been rising steadily. The share of non-Asian developing countries in world exports rose from 13.5 per cent in 1992 to 21.5 per cent in 2007, while in the same period the share of Asian developing countries in world exports rose from 15.2 per cent to 23.7 per cent.
Since 1992, therefore, the increase in the proportion of world exports accounted for by Asian and non-Asian developing countries has been almost equal - the increase in the share of world exports accounted for by Asian developing countries being 8.5 per cent and the increase in the share of non-Asian developing countries being 8.0 per cent.
It is the combination of this rising share of world exports from both Asian and non-Asian developing countries that accounts from the strong overall rising trend in the share of developing countries in world exports. The phenomenon since the beginning of the 1990s is therefore one of developing countries in general and not one only of Asia.

Figure 2

Considering these trends in more detail, the huge role played by the development of China is evident. Figure 3 shows the share of world exports for China, developing Asia excluding China, and, to provide a comparison for the developed Asian economy, Japan.
The rise of China is evident - China's share of world exports rose from 1.0 per cent in 1980 to 9.8 per cent in 2006 - the last year for which full figures are available. In the same period the share of other developing Asian countries in world exports rose from 7.3 per cent to 13.7 per cent. Therefore, in this period, China alone accounted for 58 per cent of the increase in the share of developing Asian countries share of world exports - China's increase in the share of world exports being 8.8 per cent compared to 6.4 per cent for all other developing countries in Asia. Particularly since 1990 China's increase in the share of world exports has considerable exceeded that for the rest of the other developing Asian countries put together.
In contrast, to take the main developed country in Asia, the declining importance of Japan in world trade is evident.
In 1980 Japan accounted for almost as high a share of world trade as all the other developing countries in Asia combined. Since 1986 the share of Japan in world exports has declined sharply - falling from 10.3 per cent in that year to 5.3 per cent in 2007. In 1980 the developing Asian countries, including China, accounted for 8.3 per cent of world exports and Japan for 6.5 per cent. By 2006 the developing Asian economies, including China, accounted for 23.7 per cent of world exports and Japan for only 5.3 per cent. In 1980 Japan's exports were equivalent to 78 per cent of those from the developing Asian countries, while by 2006 Japan's exports were equivalent to only 22 per cent of those of the combined exports of the developing Asian countries.
The relative decline in importance in world of exports of Japan, and the rise of the developing Asian countries, above all China, is evident.

Figure 3

The more detailed trends for Asian developing countries, other than China, are shown in Figure 4. This confirms continuing strong export growth by South Korea. However Singapore, and more recently Malaysia, having been losing some world visible export share. Vietnam has been gaining export share steadily but from a very low base.
India stands out clearly as a large economy but with a very low share of world exports. India's share of world exports is only just over one per cent and has not been rising very strongly.

Figure 4

Such figures illustrate strikingly the different path of development being undertaken by China and India - the contrasting development in shares of world exports for India and China is shown in Figure 5.
India's economy is growing rapidly, but essentially within its domestic economy. India's share in world exports remains both very low and only slowly growing.
India's economy, in short, shows no signs of being strongly competitive on an international scale despite known strength in individual sectors such as software. China's economy is growing even more rapidly than India and enjoying rapid export growth - China's economy, in short, shows far more signs of being competitive internationally than India's. This is line with the the data on the much greater size and development of Chinese firms compared to India that has been analysed elsewhere.
Both India and China are extremely important markets but China's economc fundamentals and competivity continue to be significantly stronger than India's.

Figure 5

Turning to non-Asian developing countries, the overall picture is shown in Figure 6. The main trend in the early part of the period considered is the sharp fall in the share of exports coming from the Middle East - reflecting the fall in the relative real price of oil after the beginning of the 1980s. It may also be noted that, despite the increase in the price of oil in the most recent period, the Middle East has only moderately increased its share of world exports, from relatively depressed levels, and its has not retained the position held at the beginning of the 1980s - in terms of trade surpluses, as opposed to share in world exports, a number of Middle East countries continue to be extremely important.
In contrast, the share of world exports from developing countries in Eastern Europe has risen significantly - from 4.4 per cent of world exports in 1999 to 8.0 per cent in 2007. Within this total the share of Eastern Europe excluding Russia rose from 3.1 per cent of world exports to 5.8 per cent, while Russia's share rose from 1.4 per cent to 2.6 per cent.
Over the period as a whole Africa's share of world exports fell from 4.5 per cent in 1980 to 2.6 per cent in 2007- although there has been a small recent revival from the extremely depressed levels in the mid-1990s.
The share of developing countries in Latin America and the Caribbean (Western Hemisphere) in world exports fell significantly in the mid 1980s but has since risen again. The rate of increase, however, is still modest compared to countries in Eastern Europe and even more so when compared to Asia. Latin America and the Caribbean's share of world exports rose from 4.3 per cent in 1992 to 5.9 per cent in 2007.

Figure 6

Considering the situation within Latin America there was an increase in Mexico's share of world exports in the 1990s but this has since fallen back significantly. No Latin American country has gained world export share in the way that has been experienced in Asia. This is shown in Figure 7.

Figure 7

Summarising these developments overall the following the following key trends emerge.
The increase in the share of world exports from developing countries started in Asia, however since the early 1990s this trend has become substantially more generalised. The increase in the share of world exports coming from Asian and non-Asian developing countries was essentially equal in the 15 years 1992-2007.
The success of China is even greater when placed in a comparative framework than when considered by itself. China is now the world's largest visible exporter - overtaking the US and Germany.
Asia outside China in the recent period has ceased to gain world market share in visible exports, after an exceptional performance for several decades. South Korea continues to show outstanding visible export performance but several other Asian developing economies have lost world market share. India's share of world exports continues to be extremely low for such a large economy and shows no strong trend to rise.
East European developing countries, both Russia and non-Russian, have an export performance which is second only to Asia - although lagging substantially behind Asian success.
Latin America and Africa's role in world exports has not yet increased - despite the commodity boom.

* * *

This post first appeared on the blog Key Trends in Globalisation.

The significance of exports falling year on year for both China and South Korea

John Auther's 'The Short View' is always one of the most interesting features in the Financial Times. However his column, and accompanying video, on 10 December is particularly important. It shows that the latest figures for exports for both China and South Korea show year on year falls - China by 2.2 per cent in November and South Korea by 18.3 per cent.
China's currency was appreciating in this period against almost all other currencies, as it was following the dollar upwards, but the exchange rate of the South Korean won has fallen this year by 25 per cent against the dollar and renninbi and 46 per cent against the yen - ruling out upward movements in South Korea's exchange rate as an explanation of the export decline.
These falls in exports are important indices of the extreme force of the recessionary tendencies operating in the world economy. China and South Korea are two of the most competitive export economies in the world. If even they are unable to maintain exports in the current world economic situation this indicates clearly the dramatic force of contractionary economic pressures.
For China this increases even further the importance of the huge domestic stimulus programmes it is projecting. If the international recession is so severe that China is unable to count on significant export growth then a huge deployment of resources in its domestic economy is required to maintain high GDP growth levels. There are no financial obstacles to a huge Chinese recovery package, given its $1.9 trillion foreign exchange reserves, but gearing up for the huge investment programmes required will put great strain on China's project management capacity and strength of its companies.

A brilliant video on China, India and Information Technology - by John Ross

I am currently in Shanghai speaking at a conference on the 2010 Shanghai World Expo - Exhibition & Convention Education and Research International at the Shanghai Institute of Technology.
One of the highlights of the conference was a talk by Professor Hailan Qu, Director of the Center for Hospitality and Tourism Research at Oklahoma State University. In addition to his own talk he made use of the video posted below entitled 'Did You Know' - on the subject 'Globalisation and the Information Age'. The video (showing what some people are really able to do with Powerpoint!) was created by Karl Fisch, and modified by Scott McLeod. Professor Hailan Qu supplied the link.
The video already has more than four million views on YouTube. But it deserves many more. Whatever is the current population of the planet, as part of their education for what the future will bring to humanity crammed into six minutes and six seconds, might seem quite close to an appropriate number.
This video captures brilliantly how the barriers between people will be brought down. It illustrates vividly why globalisation inevitably will be a cultural process just as much as an economic one.
One of the comments on the video on YouTube simply says 'So... Aren't we all happy that we live in this era?' The answer should be simply 'Yes'.
Those who believe that humanity can be pushed back into its narrow national boxes should simply watch this. You don't have a chance - nor do those who are scared of change, and wish to hide from the globalised culture that is coming. The globalised future of humanity will be even richer than anything in its past.

Japan feels the full weight of the financial crisis

Among the largest economies the immediate focus of the international financial crisis in the last three weeks has significantly shifted to Japan - where the government has been loosing its battle to hold down the yen's exchange rate.
This trend is illustrated in Figure 1 - showing the exchange rate of the yen against the dollar since the beginning of 2000. From 2000 to March 2008 the yen remained below its 3 January 2000 exchange rate of 101.7 yen to the dollar. This low exchange rate was maintained by fairly consistent intervention by the Japanese authorities - which saw such a low exchange rate as critical to aiding the competivity of Japan's exporters.
Therefore when in March 2008, under the impact of the gathering financial crisis, the yen moved above its beginning of 2000 exchange rate Japan again intervened vigorously to drive it down again. At that time it succeeded - essentially driving he yen below its beginning of 2000 exchange rate until mid-October.
How since mid-October, despite continuing Japanese Central Bank intervention, the yen's exchange rate has moved upwards - by 5 December rising to a level 10.3 per cent above its beginning of January 2000 exchange rate.

Figure 1

The result was sharp falls on the Japanese stock market amid fears that at the new higher exchange rate Japanese exporters would be uncompetitive and their profits would fall.
Thus, to take international comparisons, during the last three weeks share prices in the US have been essentially directionless. The Dow Jones Industrial Average hit its low for the current downturn on 20 November at 7552.3 - a fall of 46.7 per cent from its peak in October last year. Since then this low has not been seriously tested - although neither has any trend of recovery set in. This is shown in Figure 2.

Figure 2

The contrast to the situation on the Japanese stock market since mid-October is shown in Figure 3 - which graphs the trend of the US and Japanese stock markets measured in days elapsed since their their previous peaks. The share price cycles taken for comparison are, respectively, the US stock market following September 1929, the US stock market following October 2007, and the Japanese stock market since the bursting of the 'bubble economy' at beginning of 1990.

The sharp downward movement in the last period in the Japanese stock market is evident from Figure 3. Furthermore, the trend of the Japanese Nikkei share index is now significantly worse, in terms of the duration of depressed share prices, than that of the the Dow Jones after 1929.

The low point of the decline of the Nikkei since the bursting of the 'bubble economy' at the beginning of 1990 was on 27 October this year with a decline of 81.6 per cent. On 5 December the Nikkei was still 79.7 per cent below its level at the end of 1989 - at the same period of time after the crash of 1929 the Dow was 52.5 per cent below its peak level.

The Nikkei's performance after 1990 is therefore now clearly the worst of any major stock market in history.

Figure 3

* * *

This article is adapted from the blog Key Trends in Globalisation.

What happens in a recession?

The government's recovery package has gone in the right direction in the area of seeking to maintain consumption during a recession.
The cut in VAT will concentrate tax relief on the average and lower paid - which is what is required from the point of view of both keeping up consumer demand and social justice. There can be discussion about whether the consumer spending stimulus package should have been larger, and whether the restrictions on government spending are necessarily the best thing in current economic circumstances. But overall the package is a commitment to an unambiguously Keynesian approach and, in the fields of consumer and government spending it can, if necessary, be boosted later in any case.
But it is vital to realise that in a recession what is decisive is neither consumer nor government spending. What, above all, occurs in a recession is that investment declines or, in the most severe cases, collapses.
In order to illustrate this Figure 1 shows the changes in the main domestic components of US GDP in the most classic of all recessions/depressions - that in the US following 1929. [1]

Figure 1

As can be seen the pattern is clear. The economic decline in US was extremely severe - on a far larger scale than anything occurring at present. The fall in US GNP (Gross National Product) was 29.7 per cent between 1929 and 1933.[2] The 1929 US level of GNP was not regained for a decade - until 1939.
Looking at the components of this decline in GDP, however, a clearly differential pattern shows itself.
Government spending increased throughout the recession - not only after Roosevelt became president in 1933 but even under Hoover.
The decline in personal consumption expenditure after 1929 was severe but less than the overall decline in GNP. By 1933 US personal consumption expenditure had fallen by 19.7 per cent compared to the 29.7 per cent drop in GNP. Personal consumption expenditure regained its 1929 level by 1939.
But the collapse in investment was extreme, far exceeding the decline in GNP - explaining the difference between the drop in personal and government consumption expenditure and the drop in overall output
By 1933 US private domestic fixed investment had fallen by 73.9 per cent from its 1929 level. Or, put another way, by 1933, US private domestic fixed investment was only 26.1 per cent of its 1929 level. This was by far and away the most severe element of the depression - which, by multiplier effects, spread its consequences through the rest of the economy.
The reason for this differential decline is that while 'demand' may be spoken of in general, in fact the different components of demand are controlled by quite different mechanisms.
Decisions on the level of government spending are taken directly by the state and can therefore be relatively easily controlled.
Regarding personal consumption, the aim of the mass of the population is to have as good a living standard as possible. The most powerful issue affecting personal consumption is the level of income, not the desire to consume. [3]
However, private investment decisions are not controlled by consumption but by profit. Therefore investment decisions are not controlled by the same mechanisms as personal and government consumption - and can fall to almost any level. It is this decline in investment which is by far the largest in a recession.
Why, therefore, cannot the government intervene directly to stop the decline in investment? The issue here is private property in the means of production. If the government takes decisions on investment out of the hands of the private owners of the means of production it, in fact, limits or abolishes that private ownership of the means of production. Therefore, in such circumstances, if the government continues to accept as private ownership of the means of production as an absolute right if cannot halt the decline in investment. Whereas if, in such circumstances, the government aims to halt the decline in investment it must encroach on private ownership in the means of production.
The practical consequences in terms of economic policy are clear. If a recession is relatively mild, acceptance of private ownership in the means of production, and therefore the inability to control investment, may at worst be wasteful but it will not be fatal. The government still has tools to increase its own, state funded, consumption demand - it can, for example, embark on huge new health or education programmes. In terms of personal consumption there is a very severe issue in terms of maintaining demand which is posed by unemployment - overall consumer spending can fall not only because wages drop but because the number of those in work falls. However the government can still carry out large increases in welfare benefits, cuts in taxation, or public works schemes that can significantly support consumer spending.
But in the area of investment the government has no comparable instruments. Approaching one fifth of the economy is accounted for by investment - and this investment also determines the long term economic growth. Public investment is a tiny fraction of this. While the government has powerful levers in the areas of state and personal consumption it has no comparable ones in investment. Nor can it have them without a encroachments on private ownership of the means of production. [4]
This will, therefore, determine the unfolding of the economic situation. There is going to be a severe recession - in terms of comparison to those since World War II. But a severe recession, in those terms, is naturally relatively mild compared to the type of economic crisis after 1929. While the financial crisis is clearly the largest seen since 1929 the downturn in the real economy does not remotely approach that of the Great Depression. The probability is that the current crisis will remain a very severe recession and but there will not be an economic depression - although this depends on the US adopting policies that avoid the type of disastrous errors that followed 1929.
If the economic downturn remains at the level of a recession then Keynesian measures will succeed, after a period, in bringing about a new economic upturn without any severe incursions into private ownership of the means of production - outside of the financial sector where they have already taken place. That is, put in other terms, the moral case for socialism will remain. But, while the role of the state, in a capitalist economy, will require to be increased in order to overcome the economic crisis - something which is already happening, it will not require a transition to a socialist society to overcome the economic downturn. If, however, the present severe recession were to pass over into an economic depression then another outcome would be posed.
It is at this point that the moral and economic cases for socialism become inseparable. A capitalist economic solution says private property in the means of production must be regarded as absolute, and untouchable, even if that means economic collapse - this answer says the rights of capital are absolute and the rights of society subordinate. A socialist solution says that if, in order to avoid economic collapse, it is necessary to make encroachments into the rights of private property in the means of production then this must be done - it is the rights of society that are absolute and the rights of capital are subordinate to this.
These 'cold' figures on the movement of components of GDP during a recession therefore spell out, in their own way, the structure of society - that one part of the economy is controlled by the desire of people to consume, that is to enjoy a better standard of life. That another part of the economy is controlled by profit. And that the interests of the two may clash.
How far they will clash during this economic downturn, and with what outcome, remains to be seen. But the socialist answer is simple. It is society, that is people, which comes first - not the private ownership of the means of production.


Notes
[1] The international source of demand is net exports. There was a drastic contraction of international trade after 1929 which seriously deepened the depression. However this does not affect the argument regarding the components of domestic demand dealt with here. Inventories also declined after 1929, adding to the recessionary effect, however changes in stocks, by their nature, are cyclical and again the concentration here is on the long term elements in economic shift.
[2] Gross National Product (GNP) differs from Gross Domestic Product (GDP) in that is equal to GDP plus net income earned from abroad. Long term US historical economic data is in GNP terms. The size of difference to GDP is, however, small and does not seriously distort comparisons to other countries GDP figures.
[3] In a recession personal consumers may decide to save more - among other reasons to protect themselves from the threat of future economic hardship or unemployment. However there are relatively effective mechanisms to tackle this, and in any case if the extra savings are invested by the government or companies no fall in aggregate demand takes place - the savings by individual are merely spent somewhere else in the economy. The biggest effect is the fall in income due to either declines in real wages or unemployment.
[4] Such encroachments may be through large scale expansion of areas of public investment, taking over areas at present controlled by private investment, or both.

Government purchases worst share rights issue in history - taxpayer loss £2.6 billion in one day

The government's recovery package has gone in the right direction in the area of seeking to maintain consumption during a recession.
The cut in VAT will concentrate tax relief on the average and lower paid - which is what is required from the point of view of both keeping up consumer demand and social justice. There can be discussion about whether the consumer spending stimulus package should have been larger, and whether the restrictions on government spending are necessarily the best thing in current economic circumstances. But overall the package is a commitment to an unambiguously Keynesian approach and, in the fields of consumer and government spending it can, if necessary, be boosted later in any case.
But it is vital to realise that in a recession what is decisive is neither consumer nor government spending. What, above all, occurs in a recession is that investment declines or, in the most severe cases, collapses.
In order to illustrate this Figure 1 shows the changes in the main domestic components of US GDP in the most classic of all recessions/depressions - that in the US following 1929. [1]

Figure 1

As can be seen the pattern is clear. The economic decline in US was extremely severe - on a far larger scale than anything occurring at present. The fall in US GNP (Gross National Product) was 29.7 per cent between 1929 and 1933.[2] The 1929 US level of GNP was not regained for a decade - until 1939.
Looking at the components of this decline in GDP, however, a clearly differential pattern shows itself.
Government spending increased throughout the recession - not only after Roosevelt became president in 1933 but even under Hoover.
The decline in personal consumption expenditure after 1929 was severe but less than the overall decline in GNP. By 1933 US personal consumption expenditure had fallen by 19.7 per cent compared to the 29.7 per cent drop in GNP. Personal consumption expenditure regained its 1929 level by 1939.
But the collapse in investment was extreme, far exceeding the decline in GNP - explaining the difference between the drop in personal and government consumption expenditure and the drop in overall output
By 1933 US private domestic fixed investment had fallen by 73.9 per cent from its 1929 level. Or, put another way, by 1933, US private domestic fixed investment was only 26.1 per cent of its 1929 level. This was by far and away the most severe element of the depression - which, by multiplier effects, spread its consequences through the rest of the economy.
The reason for this differential decline is that while 'demand' may be spoken of in general, in fact the different components of demand are controlled by quite different mechanisms.
Decisions on the level of government spending are taken directly by the state and can therefore be relatively easily controlled.
Regarding personal consumption, the aim of the mass of the population is to have as good a living standard as possible. The most powerful issue affecting personal consumption is the level of income, not the desire to consume. [3]
However, private investment decisions are not controlled by consumption but by profit. Therefore investment decisions are not controlled by the same mechanisms as personal and government consumption - and can fall to almost any level. It is this decline in investment which is by far the largest in a recession.
Why, therefore, cannot the government intervene directly to stop the decline in investment? The issue here is private property in the means of production. If the government takes decisions on investment out of the hands of the private owners of the means of production it, in fact, limits or abolishes that private ownership of the means of production. Therefore, in such circumstances, if the government continues to accept as private ownership of the means of production as an absolute right if cannot halt the decline in investment. Whereas if, in such circumstances, the government aims to halt the decline in investment it must encroach on private ownership in the means of production.
The practical consequences in terms of economic policy are clear. If a recession is relatively mild, acceptance of private ownership in the means of production, and therefore the inability to control investment, may at worst be wasteful but it will not be fatal. The government still has tools to increase its own, state funded, consumption demand - it can, for example, embark on huge new health or education programmes. In terms of personal consumption there is a very severe issue in terms of maintaining demand which is posed by unemployment - overall consumer spending can fall not only because wages drop but because the number of those in work falls. However the government can still carry out large increases in welfare benefits, cuts in taxation, or public works schemes that can significantly support consumer spending.
But in the area of investment the government has no comparable instruments. Approaching one fifth of the economy is accounted for by investment - and this investment also determines the long term economic growth. Public investment is a tiny fraction of this. While the government has powerful levers in the areas of state and personal consumption it has no comparable ones in investment. Nor can it have them without a encroachments on private ownership of the means of production. [4]
This will, therefore, determine the unfolding of the economic situation. There is going to be a severe recession - in terms of comparison to those since World War II. But a severe recession, in those terms, is naturally relatively mild compared to the type of economic crisis after 1929. While the financial crisis is clearly the largest seen since 1929 the downturn in the real economy does not remotely approach that of the Great Depression. The probability is that the current crisis will remain a very severe recession and but there will not be an economic depression - although this depends on the US adopting policies that avoid the type of disastrous errors that followed 1929.
If the economic downturn remains at the level of a recession then Keynesian measures will succeed, after a period, in bringing about a new economic upturn without any severe incursions into private ownership of the means of production - outside of the financial sector where they have already taken place. That is, put in other terms, the moral case for socialism will remain. But, while the role of the state, in a capitalist economy, will require to be increased in order to overcome the economic crisis - something which is already happening, it will not require a transition to a socialist society to overcome the economic downturn. If, however, the present severe recession were to pass over into an economic depression then another outcome would be posed.
It is at this point that the moral and economic cases for socialism become inseparable. A capitalist economic solution says private property in the means of production must be regarded as absolute, and untouchable, even if that means economic collapse - this answer says the rights of capital are absolute and the rights of society subordinate. A socialist solution says that if, in order to avoid economic collapse, it is necessary to make encroachments into the rights of private property in the means of production then this must be done - it is the rights of society that are absolute and the rights of capital are subordinate to this.
These 'cold' figures on the movement of components of GDP during a recession therefore spell out, in their own way, the structure of society - that one part of the economy is controlled by the desire of people to consume, that is to enjoy a better standard of life. That another part of the economy is controlled by profit. And that the interests of the two may clash.
How far they will clash during this economic downturn, and with what outcome, remains to be seen. But the socialist answer is simple. It is society, that is people, which comes first - not the private ownership of the means of production.


Notes
[1] The international source of demand is net exports. There was a drastic contraction of international trade after 1929 which seriously deepened the depression. However this does not affect the argument regarding the components of domestic demand dealt with here. Inventories also declined after 1929, adding to the recessionary effect, however changes in stocks, by their nature, are cyclical and again the concentration here is on the long term elements in economic shift.
[2] Gross National Product (GNP) differs from Gross Domestic Product (GDP) in that is equal to GDP plus net income earned from abroad. Long term US historical economic data is in GNP terms. The size of difference to GDP is, however, small and does not seriously distort comparisons to other countries GDP figures.
[3] In a recession personal consumers may decide to save more - among other reasons to protect themselves from the threat of future economic hardship or unemployment. However there are relatively effective mechanisms to tackle this, and in any case if the extra savings are invested by the government or companies no fall in aggregate demand takes place - the savings by individual are merely spent somewhere else in the economy. The biggest effect is the fall in income due to either declines in real wages or unemployment.
[4] Such encroachments may be through large scale expansion of areas of public investment, taking over areas at present controlled by private investment, or both.

Raising the top rate of income tax, a second very good step - by Ken Livingstone

Further good news about today's economic package comes in briefings to the BBC, Financial Times, Guardian and other media that the top rate of income tax is to be raised to 45p in the pound for those earning over £150,000 a year.
Yesterday, in strongly welcoming the decision to cut VAT, I argued: 'this should be the beginning of a reshaping of the taxation system. It is being briefed that this reduction in VAT will be temporary, and it will then be restored to its previous level to reduce the budget deficit during an economic upturn. This is not what should occur - any increase in VAT would be deeply regressive for the reasons already outlined. Instead, when taxation increases again to reduce the budget deficit during an economic upturn, an increase in direct taxation on the highest incomes should take place. That is, any reduction in VAT should be used to begin a reshaping of the tax system in a more equitable direction.'
Clearly a rise in the top rate of income tax to 45p is therefore a step in the right direction. At present the fiscal arithmetic shows that it does not go far enough. This increase in income tax on the higher paid by itself will raise £2 billion, which would not by itself be sufficient to avoid the need to increase VAT as it becomes necessary to reduce the overall budget deficit during an economic upturn. An increase to 50p would have been better and the left must continue to argue that VAT must not be re-increased at a later date after the present cut.
But nevertheless the fact that for the first time direct taxation on the very highly paid is to be raised is a hugely symbolic, and important practical, step. It would be wrong at this stage to quibble and this measure increases the attractiveness of the economic package still further.
Reduction in VAT, and this increase in direct taxation on the high paid, are measures that are good for economic recovery and social justice and should be strongly supported by the left.
Note also how Labour's popularity has been transformed since it has been campaigning centrally on the economy, with measures that combine economic rationality with social justice, rather than making its central thrust being on attempting to appear right wing on crime and immigration. That must be a key lesson up to the general election. There is now a total dividing line with the Tories and their economically damaging and socially unjust policies. The party that sets the agenda has a key advantage in an election. Focusing on this economic divide is the agenda that can win Labour the election.

A cut in VAT should be strongly supported - by Ken Livingstone

It would be astonishing if, after the briefing to the Sunday Times, Observer, Sunday Telegraph, The Independent and other newspapers, tomorrow's government economic statement did not centre on a reduction in VAT. If so this is measure which should be strongly supported - not only for immediate but for strategic economic reasons.

One of the most iniquitous features of Tory tax policy, particularly from Thatcher onwards, was the shifting of the tax burden from direct to indirect taxation.

Indirect taxation hits the lowest paid proportionately more than the high paid and is therefore deeply socially regressive - which is exactly why it was a policy pursued by the Tories and Thatcher. Cutting VAT will therefore hit two birds with one stone.

First, as part of the government's measures to combat the economic downturn, this is one of the most effective measures in keeping up consumer demand. A reduction in VAT will aid all sections of the population. But, precisely because indirect taxation is socially regressive, reducing VAT will aid the lowest paid most.

The lower an income the more certainly any available income is spent, as the low paid can least afford to save. A reduction in VAT has almost exactly the same effect as a boost in income because it allows a greater quantity of goods to be bought with the same money. Reduction in VAT is therefore one of the surest ways to ensure that the maximum amount of any economic package is translated into an increase in consumer demand - one of the key measures required to fight the economic downturn.

Reduction in VAT is also, politically, just the type of measure required to ensure Labour holds together the alliance of those on around average incomes and the low paid which it should be based on.

Second, strategically, this should be the beginning of a reshaping of the taxation system. It is being briefed that this reduction in VAT will be temporary, and it will then be restored to its previous level to reduce the budget deficit during an economic upturn. This is not what should occur - any increase in VAT would be deeply regressive for the reasons already outlined. Instead, when taxation increases again to reduce the budget deficit during an economic upturn, an increase in direct taxation on the highest incomes should take place. That is, any reduction in VAT should be used to begin a reshaping of the tax system in a more equitable direction.

Discussion on the future of taxation will continue, as will that on other measures such as the proposal for the government to purchase bank shares at above market prices. But tomorrow one thing is decisive. The left should give the strongest support to a reduction in VAT and applaud the government for it. Such a measure provides a striking contrast to the economically disastrous and socially regressive policies being openly advocated by the Tories.