It is Wednesday and I am now unable to get home to Melbourne as a result of the border closure between Victoria and NSW. That closure is the result of the incompetence of the conservative NSW government who thought they could beat the Delta variant of COVID and leave Sydney open for business. They have now learned that their claim to be the world’s best virus containing government were hubris and so regional NSW is also suffering, what will be a very long lockdown. Victoria has sensibly closed its border as have the other states to NSW, which now is an isolated, pariah state. Pity the NSW Labor opposition is so weak. Anyway, today is a few snippets about the British Labour party being so weak, some reflections on monetary sovereignty, and a note that the barbarians are trying to kill off social sciences in our universities. Then some happiness via some great bass playing.
British Labour Party remains unelectable
The latest Survation poll results in the UK carried the headline – Conservative lead jumps to 11 points.
The poll was run between July 5 and 13, 2021 and shows that if a British General Election was held in that period the following voting intentions would be expressed:
More damning is that “There is no change from two weeks ago on who the public think would make the best prime minister, with Boris Johnson still leading Keir Starmer by 45% to 28%.”
And, “On party leader ratings, Boris Johnson and Keir Starmer’s net ratings are both down in the past fortnight, Johnson on -3%, down 3 points, and Keir Starmer on -11%, down 2 points on a fortnight ago.”
So, at a time that the Tories and the PM are obviously not very popular, the Opposition leader is going backwards.
Clearly, the Opposition leader is still locked into a neoliberal macroeconomic mindset.
The latest example is the debate in recent days about the Tory cuts to foreign aid.
The BBC article (July 13, 2021) – Foreign aid: Covid costs mean we have to cut payments, says PM – demonstrates that both political parties are locked into a flawed conception of the fiscal capacity of the government.
The Tories have cut aid by around £4 billion – which will leave aid around 0.5 per cent of GDP rather than the 0.7 per cent commitment that the Government voted on in 2015.
The Government is claiming that the pandemic has seen it spent £407 billion during the pandemic to “shelter our people from an economic hurricane never before experienced in living memory” so that there has to be “consequences”.
They cited the rising debt associated with that spending boost as the reason for cutting aid, despite the fact that the Bank of England has purchased most of that debt – the government buying its own debt in practice.
The Opposition leader played it ‘cute’ with his response in the Commons (see video below).
He said that the 0.7 per cent target should be retained and allowed the Government to scale aid to the current GDP levels.
Interestingly, he said that:
Every member here was elected on a manifesto promise to retain the 0.7% target … Cutting aid will increase costs and have a big impact on our economy. Development aid reduces conflict. It reduces disease and people fleeing from their homes.
It is a false economy to pretend that this is some sort of cut that doesn’t have consequences.
So, he is being cute because he is pretending he supports no cuts in spending while retaining the 0.7 per cent of GDP target.
Imagine GDP is 1000
0.7 per cent of 1000 is 7.
If GDP falls to 900, then 0.7 per cent falls to 6.3.
A cut of 0.7.
So if “Development aid reduces conflict. It reduces disease and people fleeing from their homes”, then the Opposition leader is voting to increase conflict and disease and force more people from their homes in less developed countries.
Sure enough, the Tory decision cuts aid more than if the 0.7 per cent rule was retained but that is not the point here.
In the video statement, the Opposition leader said:
Nobody in this House is arguing for overseas aid to be maintained at the pre-pandemic levels during the downturn … We all recognise that a contracting economy means a relative contraction in our aid budget.
I don’t recognise that.
There is every need at present for the British government to actually increase foreign aid spending to help the nations that are less able to help themselves.
There is absolutely no need for the contracting UK economy to cut foreign aid.
There was an interesting article about Fiji in the ABC News last weekend (July 11, 2021) – Fiji is racing against time to vaccinate its population while a COVID-19 outbreak explodes.
The COVID situation there is difficult now after a long period of being free of the virus.
The government there has “refused to implement a nationwide lockdown” despite “recording around 700 new infections daily”.
The Prime Minister Frank Bainimarama is a sort of Bolsonaro character and claimed that “We don’t want to lock people up”.
Better to let them die, it seems.
He invoked the myth that lockdowns do not work against the virus but “kill jobs”.
I think the evidence is to the contrary as long as there is good fiscal support for income protection etc.
Which brings me to the point.
An Australian-based professor of epidemiology was quoted as saying that while:
In a rich country, it’s a very easy solution. In a poor country, this becomes a major problem.
Apparently, “Australia could turn to lockdowns as a way to reduce case numbers or minimise deaths, but countries like Fiji may not be able to afford such decisions.”
Fiji issues its own currency, the dollar but the central bank of Fiji does administer capital controls which “help prevent large and/or sudden outflows, which can significantly reduce Fiji’s foreign reserves.”
Fiji is a small, open economy that is impacted by foreign commodity price swings and natural disasters.
They gain foreign exchange from large flows of tourist income, remittances and sugar exports.
Tonight, I am presenting a lecture at the Madrid Summer School on the topic of monetary sovereignty.
One of the sub-topics is related to the Fiji question, which generalises to many small, less developed economies.
When we talk about monetary sovereignty, we must also recognise that there are other limits, even when a nation issues it’s own currency.
Some economists like to express this in terms of a spectrum of monetary sovereignty from high to low depending upon the circumstances that prevail in each situation.
Most developing countries do have limitations on the extent to which they can claim to be monetarily sovereign.
What Modern Monetary Theory teaches us is that any currency-issuing nation can ensure that all the productive resources that are available to it can be fully and productively employed.
But that doesn’t insulate the nation from material poverty.
A nation with very limited productive resources, particularly in terms of food and energy self-sufficiency may well be able to achieve full employment but still remain relatively poor in material terms.
There are several ways that developing countries lose monetary sovereignty.
The main reasons relate to their propensity to issue debt in foreign currencies and to peg their currencies to other currencies.
The extreme example of the latter phenomenon is dollarisation, where the nation uses a foreign currency (in this case, the US dollar) as its own.
The experience of the West African nations who still use the CFA franc as a relic of the colonial era is another example.
Within these constraints, mainstream economists, represented, for example, by the policies and practices of the World Bank and the IMF, prescribe various solutions for developing countries to improve material living standards.
The problem is that they all tend to undermine the goal.
None of the current advanced nations, which enjoy high material standards of living, could have achieved that state of development if they had have followed the prescriptions now in vogue and applied by the IMF and the World Bank.
The package of solutions that are proposed (and enforced through debt relief and structural adjustment programs) are multi-dimensional.
The first IMF-type strategy is to encourage Export-oriented growth.
This strategy has been a staple of the IMF, and, involves the conversion of subsistence agriculture into cash crop production for export mixed with some form of assembly-line manufacturing, which means the nation is seen as an assembly line for products destined to be sold in the advanced nations.
The problems of this strategy are many.
With the agricultural conversion, sustainable practices and food security are lost and nations depend on prices in world markets for income, which are volatile.
They also lose subsistence food self-sufficiency and become increasingly dependent on imported food, often of lower nutritional quality.
I am referring here, for example, to the rising dominance of the fast food industry.
History tells us that price drops are common in markets flooded with produce, which, in turn, creates problems of debt sustainability and nations enter a vicious cycle of increasing debt and resource depletion.
The decimination of finite resources, such as forests also undermines future prosperity.
The creation of assembly-line manufacturing, involves the importation of high value-added goods (capital, machinery, etc) and energy resources, which further imbalances the precarious trade situation of the nation.
The second IMF-type strategy is to encourage foreign direct investment.
This often invokes a ‘smokestack’ chasing exercise where nations race to the bottom to attract foreign capital, and, end up with depleted environmental outcomes, poor working conditions and wages, and a compromised tax base.
Nations also sign free trade agrements which privilege corporations via investor dispute mechanisms and compromise the legislative capacity of the elected national government, which degrades the quality of their democracies.
Rarely will the interests of the foreign corporations align closely with those of the local population.
The third IMF-type strategy is to encourage financial market deregulation.
Related to the problems of foreign direct investment, is the relentless push from multilateral agencies, such as the IMF, for nations to deregulate their financial markets in order to attract speculators – the so-called ‘hot’ money investors.
In addition to allowing these speculative flows of capital to enter and exit without control, nations are pressured to bias monetary policy in the direction of higher interest rates and fiscal policy in the direction of lowering tax rates in order to attract immediate inflows of foreign capital.
Taken together, these strategies typically align the national policy with the interests of foreign capital, and, undermine the well-being and future prospects of the local population.
While a nation might record large short-term inflows of foreign capital, minor shifts in conditions in world markets, precipitate sudden outflows, which create financial crises and share market collapses.
The fourth IMF-type strategy is to encourage tourism.
Turning cities and/or regions in less developed nations into ‘playgrounds’ for foreign visitors is a popular strategy and proponents claim it allows the nation to acquire valuable foreign currency reserves.
There are many problems that arise however.
The quality of local urban environments where people live and work are compromised to satisfy the whims of the ephemeral inflows of foreign tourists.
Large scale resort style developments often permanently impair the local ecosystem and absorb valuable subsistence agricultural land.
Moreover, the nation has to import food, energy and capital to facilitate the hotels and other tourist infrastructure, which often undermines the trading situation and promotes currency instability as speculators bet on exchange rate depreciation.
The imports that are necessary to facilitate the tourist industry also reduce the import space available to the nation for bringing in essential goods and services to satisfy the basic needs of the local population.
We also witness race to the bottom strategies, where nations compete against each other for tourists via huge subsidies and tax breaks to foreign tourist operators, who often force local workers to work for poverty wages.
The final IMF-type strategy we consider here relates to the reliance on remittances.
The multilateral agencies often hold out that nations can develop if they allow their most skilled workers to work abroad and remit their incomes back to the local economy.
The problem with this strategy is that it builds cyclical fluctuations into family income where foreign workers are often the first to be made unemployed when the host nations encounter recessions.
But, the more basic problem with this strategy, is that it creates a brain drain, where the investment that the nation has made in education and skill development is lost and the benefits are enjoyed by other nations.
What is the alternative approach?
My MMT colleague, Fadhel Kaboub, who is the premier expert on these matters, refers to these mainstream approaches to economic development as ‘long-term structural traps’.
The alternative approach starts with a recognition that there several interrelated structural strategies that must be invoked to kickstart, and, then, sustain the development process.
First, the lack of food self-sufficiency has to be addressed to reduce the need to import basic nutritional requirements and free up ‘import’ space for other items, such as productive capital.
Sustainable agricultural policies lie at the heart of this approach.
Instead of converting subsistence agriculture into cash crops for exports, nations need to enhance the productivity and security of their subsistence sectors.
Second, nations need to reduce their dependency on imported energy sources by investing in renewable energy and reducing the need to import fossil fuels.
Third, the industrial strategy typically promoted by the multilateral agencies is typically deficient in that the value-added component of exports is low (unprocessed primary commodities or agricultural products) and the value-added component of the necessary imports (like fuel and processed food) is high.
Less developed nations need a big push led by state investment in infrastructure in the health, education and skill-development areas.
They need to invest heavily in research and development and seek to shift the value-added equation to processed exports and reduced imports.
They cannot just develop assembly lines for products that benefit the advanced nations.
As this strategy unfolds, subsidies to sectors and activities that do not fit this innovation profile should be phased out.
What should be the role of multilateral agencies like the IMF and the World Bank?
They should be replaced with a new agency that has the mission of ensuring less developed nations can always get sufficient foreign exchange to allow for imports of food and energy resources that are essential to maintaining adequate material living standards.
The bottom line is that Fiji can still protect the incomes of their workers in the same way that Australia can.
But that doesn’t mean that its other vulnerabilities are reduced.
It has experienced a huge GDP collapse – negative 19 per cent in 2020 in real terms.
It has a trade deficit and relies on imported energy.
It runs a continuous fiscal deficit – currently around 2.3 per cent of GDP.
And, its currency has been stable for many years
The Barbarians are at the gates
Like many universities in Australia, the University of Westen Australia is experiencing a budgetary crisis due to the COVID restrictions on international students and the failure of the federal government to provide adequate support to the higher education sector.
The budgetary crisis is, in part, due to the inflated salaries that the top managers take for themselves these days in the sector.
They always make budget cuts to the lower paid workers who actually do the work in our universities and keep rewarding themselves grossly scandalous salary levels.
Anyway, the UWA has decided to cut social sciences heavily and is basically scrapping the the Sociology and Anthropology areas.
You can read about the situation in this WA Today story (July 14, 2021) – ‘Degree factory’: UWA students revolt over $40 million restructure chasing ‘profits over people’.
The damage will be substantial.
If you want to send a protest voice to the UWA then please sign this petition – Save Social Sciences at UWA.
Music – Oscar Pettiford
This is what I have been listening to while working this morning.
One of the great bass players in jazz history is – Oscar Pettiford – who was one of the first bebop players.
He also pioneered the use of the cello in jazz (his story is interesting on that).
His great period was during the 1950s. He died of a polio related illness at the age of 37 in 1960.
This track is of a Bethlehem Records release in 1955 – Another One.
Appearing on this track with Oscar Pettiford is – Dan Abney (piano).
It is one of my favourite albums.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.