India and China

The international financial crisis is shaking up and reshaping many economic relationships. One at the top of that list should certainly be economic relations between India and China.

The complementarity of the two countries in the present international financial situation is evident. India has naturally been affected by the international financial crisis but its economy is still continuing to perform strongly compared to almost all other countries - while GDP growth is almost certain to have decelerated from the 7.6% year on year year increase recorded in the third quarter, India will continue to be one of the few major economies experiencing economic growth this year and India's industrial production in December was down only 2.0% year on year, which is far superior to current performance in most countries. India's macro-economic fundamentals, particularly its high savings and investment rates, continue to be strong. China continues to register economic growth and its savings and investment rates are the highest in the world.

In short, India and China will be the world's two best performing major economies in 2009 and therefore able to offer more favourable markets for each other than almost any other combination of countries.

The Indian government, however, is quite open about the fact that India cannot finance alone all the infrastructure investment it requires to sustain its rapid economic growth at present – short term and medium term project requirements by themselves amount to over $250 billion. Meanwhile India's budget deficit of 6% of GDP limits the room for manoeuvre of the government in publicly funded infrastructure development.

China, however, is not only very strong financially but also has highly experienced companies capable of leading infrastructure projects. Simultaneously India has areas of great strengths where it has achieved leads over China – in a number of service sectors led, of course, by software in which China can benefit from Indian expertise. The two economies, in short, have developed significant complementarities. Discussions between India and China governments on economic issues would therefore seem to be a high priority.

The main obstacle to this at present would seem to be circles in the US which are seeking to create tensions between India and China for political purposes and some short sighted figures in India who are prepared to go along with such an agenda. The US is, however, in no position to aid India economically or to undertake the scale of infrastructure and other economic development which India requires to sustain its growth rate. Tension between India and China therefore damages India even more than China.

Economic relations between the world's two most rapidly growing major economies will therefore be a matter of great interest during the current financial turmoil.

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This article appeared on the blog Key Trends in Globalisation.

Monthly Review, Venezuela and Socialist Economic Bulletin

Readers of Socialist Economic Bulletin may be interested to know that the website of the US magazine Monthly Review has republished the article from SEB 'Will Keynesianism be enough to halt the investment decline?'
Such international exchange of views is very welcome because co-operation and discussion between socialists in different countries is obviously vital in confronting the international financial crisis.
Another development SEB readers may therefore be interested to know of is that co-operation has been taking place with socialists in Venezuela and a dual language English and Spanish website
La Economía Venezolana - The Venezuelan Economy has been created. This carries specific analysis of the Venezuelan economy as well as some articles which have appeared on SEB.

US 4th quarter GDP - will Keynesianism be enough to halt the investment decline?

The 4^th quarter US GDP figures confirm that the economic downturn, in its domestic aspect, is taking the classic form of an investment led decline.

As seen in Figure 1 US fixed investment already started to fall from the 1^st quarter of 2006 onwards - US consumer expenditure and GDP, in contrast, continued to rise until the 2^nd quarter of 2008. Government consumption is still rising.

Figure 1

US GDP has so far declined by 1.1 per cent since its peak. Consumer expenditure has fallen by 1.8 per cent - also since its peak. However US fixed investment has already declined by 8.8 per cent since the first quarter of 2006.

In order to illustrate the 'classic' form of the current downturn Figure 2 shows the decline in US GDP after 1929.

Figure 2

As may be seen the pattern of the current decline is almost identical to that after 1929 - with, of course, the dimensions of the latter case being much greater than those so far during this downturn.

US GNP (Gross National Product) fell by 29.7 per cent between 1929 and 1933. Personal consumption fell by 19.7 per cent in the same period. US government expenditure continued to rise throughout the depression. But US private domestic fixed investment fell by 73.9 per cent from its 1929 level.

Given the classic form of the present recession the decisive issue is therefore whether the decline in investment can be halted by indirect, Keynesian, means.

Keynes, as an explicit defender of the capitalist system, believed that a decline in investment, driving a recession, could be halted by indirect means - reduction in interest rates, government spending etc. It was not necessary for the state to directly control investment.

As Graham Turner has rightly and consistently stressed neither the US nor Britain is as yet applying real Keynesian methods. The most crucial issue in a Keynesian perspective is not primarily large budgetary deficits but driving down borrowing costs - in the present situation by central bank purchase of government debt. Governments are, agonisingly slowly, been forced to consider this through 'quantitative easing' - precisely direct central bank purchase of state debt.

But a further issue then arises. Will any indirect, Keynesian or other, method of halting the investment decline work? Because there is an alternative. This is the model which applies in China where a large state sector means that investment can be directly controlled.

This is coupled with a nationalised banking system in which financial institutions can be directly instructed to increase lending not simply to the state but to the private sector. China does not have to rely on indirect methods to attempt to persuade banks to expand credit - indirect methods which in the US and Britain have so far proved an almost complete failure compared to the rapid expansion of credit which is now taking place in China. But to employ these methods would require taking decisive sectors of the economy out of private ownership - that is preceding from a Keynesian to a socialist solution.

This is now the decisive practical issue of economy management facing every country. In only three months the economics of neo-liberalism has theoretically and practically disintegrated under the impact of the worst financial crisis since 1929. There is not a single government in an advanced economy, one which enjoys some freedom of action, which is attempting to meet the present crisis by neo-liberal methods. Neo-liberalism is now confined to fringe monetarist fanatics and the British Conservative Party. All major governments are attempting to meet the economic downturn by what they essentially conceive of as Keynesian methods - and are, far too slowly, being gradually forced along a route from the running of crude budget deficits to more properly Keynesian 'quantitative easing'.

The issue is whether any of these Keynesian methods will suffice. Or whether only a 'Chinese' style solution will work - that is state ownership of a sufficiently large sector of the economy to directly reverse the investment decline.

This will not be decided by economic theory but by how far and how deep the economic downturn goes. China will pursue its own path, which is more effective, but in the US, Europe and Japan if the downturn is 'moderate', which in current terms means the worst recession since World War II, then Keynesian methods may control it. If the downturn becomes worse than that then only 'Chinese' methods will suffice.

New data on China’s GDP and its total savings compared to the US

Two important sets of GDP data for China have been published recently.

The first, which has received wide publicity, is that China's economy grew by 9.0 per cent last year and at an annualised rate of 6.8 per cent in the year to the last quarter of 2008. This, as widely reported, is a significant slowdown from China's 13.0 per cent growth rate in 2007 and the first time since 2002 that China's annual growth rate has been less than 10 per cent.

Given China's rapid economic growth earlier last year this implies nil, or only marginal, growth in the last quarter of 2008. China's growth performance for the year as a whole, however, is far more rapid than for any other major economy and even the weak last quarter still compares favourably to the sharp recession in the US, UK and Japan.

Ma Jiantang, China's Commissioner for the National Bureau of Statistics, in releasing the GDP figures stated that there were signs of some revival in December – noting an upturn of consumer spending. He stated: 'The overall performance of China's economy, which is steady and fast, has not changed. The unexpected international financial crisis will not change this. The deep-rooted and underlying fundamentals that drive China's growth remain unchanged.' China's money supply was also expanding rapidly by the end of the year - indicating a first effect of China's economic stimulus package. However future figures will be required to evaluate Mia Jiantang'sconclusions.

The second set of data, which are highly interesting, is that the IMF has released figures consistent with its international standards for China's GDP in 2007. This casts considerable light on key strategic issues confronting China and also on comparisons with the US.

Comparisons of China and the US typically focus either on the relative sizes of their economies or on particular sectors where China is catching up with or has overtaken the US in absolute terms – steel production, total manufacturing output, mobile phone usage, internet users etc. However, from the point of view of both the international financial situation and judging China's growth potential, a critical issue is that of China's fundamental macro-economic indicators – its savings and investment rates. China's savings, not simply personal savings but including savings by companies and government, are the measure of its finance available for domestic or foreign investment.

These are substantial statistical difficulties in calculating comparisons in savings between the US and China – in China's case the official exchange rate understates the size of its economy compared to calculations using more realistic Parity Purchasing Powers (PPPs), for the US there are significant divergences between different measures of savings etc. Nevertheless the ballpark comparisons that can be made on the basis of the new data are highly revealing.

At official exchange rates in 2007 China's GDP was 24 per cent of that of the US - $3.3 trillion compared to $13.8 trillion. As calculated by the IMF in PPP terms for the same year, China's GDP was 51 per cent of that of the US - $7.0 trillion compared to $13.8 trillion. Essentially similar figures have been calculated by the World Bank and the CIA. China's economy is between on quarter and one half the size of that of the US.

Savings are, by an accounting identity, necessarily equal to fixed investment, plus increase in inventories, plus the current account of the balance of payments. On IMF data US gross domestic capital formation plus inventories, minus its' balance of payments deficit was equal to 10.7 per cent of US GDPin 2007 - $1,477 billion. More direct measures of US savings give a figure of 14.2 per cent of GDP - $1,956 billion. The parameters of US total saving, that is finance available for investment, may therefore be taken as $1.5 - $2.0 trillion dollars.

The proportion of China's economy devoted to gross domestic fixed capital formation (fixed investment) rose to 42.7 per cent of GDP from 40.8 per cent in 2006, the highest level on record. Inventories grew by 2.0 per cent of GDP, giving a combined figure with fixed investment for 44.7 per cent of GDP - equivalent to $738 billion at official exchange rates and $1,566 billion at PPP exchange rates.

China's balance of payments surplus for 2007 was $372 billion – which, as China's trade is overwhelmingly denominated in foreign currency, may be directly compared in currency terms to the savings figures for the US. It implies China's balance of payments surplus is therefore equivalent to 11.3 per cent of GDP at official exchange rates and 5.3 per cent of GDP in PPP terms

Therefore adding domestic and international savings together gives a lower bound for the real value of China's savings, using official exchange rates, of $1,110 billion and a probable upper bound, using PPP figures, equivalent to $1,938 billion. This equates to savings rates for China of 56 per cent, if official exchange rates are used, and 50 per cent if a PPP exchange rate is used.

If even the lower figure is taken, that is 50 per cent of GDP, a necessary corollary is that China's total savings in absolute terms will be as large as those of the US when its economy is only half the size of that of the US. If the higher percentage is used then China's total savings will exceed those of the US before it is half the size of the US economy.

It may, therefore, already be the case that China's total savings have reached in absolute terms those of the US. More probably its savings are still somewhat lower than those of the US in absolute terms but they are already approaching it.

While China's GDP will not overtake that of the US in absolute terms for some time, China has therefore either already overtaken the US as the world's greatest source of finance for investment or will do so in a relatively short time frame.

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This article originally appeared on the blog Key Trends in Globalisation

Vince Cable on bank nationalisation

Vince Cable was one of the first to call, rightly, for the nationalisation of Northern Rock - and he received justified credit for that. He has a piece in The Times today arguing the position that Ken Livingstone and Socialist Economic Bulletin have been putting forward since last autumn regarding the extreme seriousness of the economic situation and that, therefore, if a counter-cyclical increase in bank lending is to be achieved the core of the UK banking system must be nationalised now.

Vince Cable argues: 'there is also widespread scepticism about whether the Government is still on the right track - it now looks like someone giving the kiss of life to a corpse. Yet it is only a few months since the Government “rescued” failing banks with interbank lending guarantees and a £37 billion recapitalisation package for RBS/NatWest and Lloyds/HBOS.

'The new bank lending that was expected to materialise has not done so. Large numbers of perfectly sound small, medium and large companies are being starved of working capital, aggravating the recession. The withdrawal of foreign banks is clearly a factor. But, in addition, UK banks have broadly taken the view that capital should be held against future losses, a strategy that may reassure shareholders but undermines the economy.'