Financial globalisation, inequality and democracy : comments on Erinc and Dimitri

1. Financial globalisation, inequality and democracy : commentson Erinc and Dimitri Nobuharu Yokokawa Musashi University, Japan

2. ErincYeldan,“De-industrialisation and the rise of external and democracy deficits”. • De-industrialization, Decline of Savings and the rise of the democracy deficit are related • Much of the developments in the Turkish economy are directly tirggered by the important changes in the global economy • De-industrialization, fall in the savings effort and the rise of the democracy deficit are interrelated.

3. Comments on ErincYeldan,“De-industrialisation and the rise of external and democracy deficits”. • (1) De-industrialization • (2) Industrialization within Global Value Chain • (3) Dynamic Comparative Advantage and Long Waves • (4) East Asian Experience • (5) The Open Modular Architecture • (6) Savings in a Demand Constrained Accumulation Regime

4. (1) De-industrialization • Stylised Facts About Industrial Economies (Bob Rowthorn) • The output of manufactures and services grows at the same rate. • Productivity (output per worker) grows faster in manufacturing than in services.

6. (2) Vertical specializationin Global Value Chain • Distinction between manufacturing and service was useful when production took place within a country. • Once production takes place with vertical specialization in the production networks among advanced and developing countries, the distinction becomes insignificant. Advanced countries specialize in research and development in closed area and marketing, and developing countries specialize in production in open area.

7. (3) Dynamic Comparative Advantage and Long WavesPerez’sinstallations and deployments of each great surges of development

9. (4) East Asian Experience: a new flying geese theory • The first thesis of the new flying geese theory (Akamatsu +Vernon) • (1) A dynamic industry is first developed in advanced countries. Demand for its products develops in advanced countries. • (2) As the dynamic industry develops in advanced countries productivity and Value added per labour (VAL) increases. Production expands to achieve economies of scale, and exports begin. • (3) With the further spread of production the prices of the product falls, and the VAL falls. Decreasing dynamic comparative advantage (VAL –wages) forces reductions in domestic production, and production moves to less-developed countries with lower wages. • (4) Finally, the foreign-produced commodity is imported.

10. (4) East Asian Experience: a new flying geese theory • The second thesis is “development from crude goods to elaborate goods” (ibid.), i.e. the shift to more sophisticated products or industries when they lost existing dynamic comparative advantages. • The third thesis is the “development of advanced and less-advanced countries in a wild-geese-flying pattern”.

11. (4) East Asian Experience: a new flying geese theory • After World War II, the mutually reinforcing mechanism between productivity growth and demand growth enabled the long-lasting high rate capital accumulation of the 1950s-1960s. • In the USA the locus of dynamism shifted from heavy and chemical industries to machine and electrical industries in the 1920s and 1930s. The US mass production system in machine and electrical industries known as ‘Fordism’ was established in the early 1950s . • ‘Fordism’ wasintroduced into Europe in the 1950s and 1960s. • Japan shifted its dynamic industry from textile to heavy and chemical industries in the 1950s and the 1960s. • The upgrading of Japanese industries left room for less-developed East Asian countries to industrialize in the flying geese pattern.

12. (4) East Asian Experience: a new flying geese theory • After the structural crisis of the 1970sthe center of economic growth shifted from the USA and Europe to East Asia in the 1980s. • Japan and NIES’s export-led growth strategies were hugely successful in the first half of the 1980s. After the Plaza accord of 1985, these countries’ currencies appreciated rapidly. A current account balance surplus reversal triggered structural changes of their accumulation regimes. • They increased foreign direct investment initially to ASEAN4 (i.e. Indonesia, Malaysia, Philippines, and Thailand) and then to China to reallocate lower value-added area.

14. (5) The open modular architecture: the new dynamic industry • In the 1980s, US encouraged joint R and D based on consortia of firms to develop industry-wide consensus standard. • In the standardized open area implicit knowledge and know how were revealed and became explicit. It enabled new companies to compete with existing companies in the standardized open area. Firms in emerging countries welcomed open area with detailed standardization as a good opportunity for industrialization • In open area fierce price competition reduced value added per worker (VAL). In contrast in the protected closed area leading companies could enjoy high VAL.

15. (5) The open modular architecture (cont.) • In the USA, the platform business in the closed area has been most successful. The platform is composed of a core component and other peripheral with standardized interfaces. In the 1990s US platform leaders successfully implemented their core technology into chipsets. • For example, Intel integrated peripheral circuits on the CPU as a chipset to form a platform, and then supplied this platform to companies in emerging world. It increased Intel’s VAL, and made assembly makers in developing countries to produce quality products easier and more competitive. • Design and production makers in advanced countries are losing competitiveness to the combination of platform leaders and assembly makers in personal computer, LCD TV, and mobile phone.

16. (5) The open modular architecture (cont.) • Chinese industrialization until the mid-1990s was based on cheap labour. When its market exchange rate and real effective exchange rate were stabilized in the mid-1990s Chinese quasi Lewis-type industrialization reached its limits. • Open modular architecture with core chipsets enabled China’s compressed industrialization possible.

17. (6) Savings in a demand constrained accumulation regime • In the golden age after the second world war, wages increased in proportion to increase of productivity, which enabled demand to grow in proportion to supply. Investment and savings grew rapidly. • After 1980s wages did not increase in proportion to increase of productivity. As the result demand did not grow in proportion to supply. Savings decreased along with the decrease of Investment. • When the rate of productivity growth is larger than the rate of demand growth, industrialization reduces employment in manufacturing.

18. Dimitri Papadimitriou, “The continuing crisis in Greece, poverty, inequality and social conditions.” • The new round of austerity measures implies another year of recession in 2016. Our model shows that a slow recovery can be expected from 2017 onward, at a pace well below what is needed to alleviate poverty and reduce unemployment. • We then analyze the impact of a public investment program, financed by European institutions. It would not sufficiently speed up the recovery. • We revise our proposal for a fiscal stimulus financed through the emission of a complementary currency (Geuro) targeted to job creation. Our model shows that such a plan would be more effective.

19. Comments on Dimitri Papadimitriou, “The continuing crisis in Greece, poverty, inequality and social conditions.” • (1) Industrialization in open economy • (2) Structural Problems in the EU • (3) Structural Problems of the Euro • (4) Rebuilding the Euro by the Geuro • (5) The ECB as a Venture Capital

20. (1) Industrialization in open economy:Bretton Woods system • Keynes proposed an International Clearing Union (ICU) as the international payment system. All international trade was to be denominated in bancor, which was supposed to have a given exchange rate with each national currency. • There is a built-in symmetric balance adjustment mechanism. If a nation exports more than it imports the ICU takes a percentage of that surplus and put it into the ICU’s reserve fund. If a nation imports more than its exports the ICU depreciates their currency against the bancor. • The Bretton Woods system was realized following White’s plan, where international currency was supplied by the key currency country and the adjustment mechanism of international imbalance was asymmetric.

21. (1) Industrialization in open economy: national economic growth strategies with capital flows • The international monetary system that replaced the Bretton Wood system is characterized by large private capital flows. • (a) Domestic demand-led hedge finance. A surplus country may use domestic debt to finance domestic demand. • (b) Export-led hedge finance. A surplus country may use foreign lending to finance external demand. • (c) Export-led speculative finance. A deficit country may use foreign debt to build “real capital” to increase net export. • (d) International Ponzi finance. As far as it can ensure the lenders of its ability to borrow, a deficit country may use foreign debt to finance domestic demand or to service foreign currency commitments.

22. (2) Structural Problems in the EU • North European countries have been successful in upgrading dynamic industries with the combination of closed and open areas and took export-led international hedge finance position. • South European countries such as Greece have been unsuccessful in upgrading dynamic industries and took domestic demand-led Ponzi finance • A currency union is an extreme case of free trade and capital market liberalization. It made it difficult for south European countries to use foreign debt to build real capital, since it does not allow domestic producers the time to improve productivity to compete with north Europeans.

23. (3) Structural Problems of the Euro • There was no built-in symmetric adjustment mechanism for current account imbalance. Once crisis started the asymmetrical adjustment process forced south European countries to take austerity policy to service debt, which deepened crisis into full scale debt deflation.

24. (4) Rebuilding the Euro by the Geuro • The ECB may be rebuilt introducing Keynes’s idea of the International Clearing Union (ICU). • The Geuromay be used as the domestic currency in Greece instead of the Euro which is used only in the international settlement. • The exchange rate is a useful policy tool for less developed countries to upgrade their industrial structure, and to insulate domestic monetary conditions from those prevailing elsewhere.

25. (5) The ECB as a Venture Capital • Export-led international speculative finance is a useful strategy for developing countries to create real capital. The ECB should recirculate surplus countries’ Euro so as to allow deficit countries to build real capital. • A build-in symmetric adjustment mechanism of international imbalance in the EU is needed for stable economic growth.

26. Thank You!

27. The 64th Annual Conference of the Japan Society of Political Economy: Marx in the 21 century: 150 years after CapitalOctober 15 (Saturday) and 16 (Sunday), 2016 Fukushima University, Fukushima-shi, Fukushima-ken, Japan • Invited Speaker: Makoto Itoh 2015 winner of the JSPE-Routledge International Prize • JSPE invites proposals for the English sessions in the following categories. • English Sessions I: Topics relating to the plenary session such • English Sessions II: All proposals reflecting the tradition and analytical perspective of JSPE which include such as (a) basic theories of political economy; (b) historical and theoretical analysis of modern capitalism; (c) Historical developments in the critique of political economy and economics; (d) Critical analysis of current political economic problems and policy challenges, including crisis, financial instability, economic development, socialism, gender, environment, and climate change.