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Financial globalisation, inequality
and democracy : comments on
Erinc and Dimitri
Nobuharu Yokokawa
Musashi University, Japan
Erinc Yeldan,
“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.
Comments on Erinc Yeldan,
“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
(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.
Chart 3: OECD Manufacturing and Services
1960-95
(indices)
5.0
4.5
output
4.0
3.5
log-scale
productivity
3.0
manufacturing
services
2.5
2.0
employment
1.5
1.0
0.5
1960
1965
1970
1975
1980
1985
1990
1995
(2) Vertical specialization
in 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.
(3) Dynamic Comparative Advantage and Long Waves
Perez’s installations and deployments of each great surges of development
Great Dynamic industries
surge (Core country)
Irruption to
Big bang
Installation to
Frenzy
Turning point
(destruction
and creation)
Synergy
Maturity and
(Development) modernization
1st
The industrial
revolution (Britain)
Canal mania
Britain
1793-97
Great British
leap
1813-1829
2nd
1771
Arkwright’s
mill
1829
Stephenson’s
Rocket
Age of Steam and
Railways
(Britain spreading to
continent and US)
Age of steel, electricity 1875 Steel
and heavy engineering (Bessemer)
(USA and Germany
overtaking Britain)
Railway mania
Britain
1848-50
The Victorian
boom Britain
1857-1873
Cheap traffic
costs
Bell Époque
Europe
Progressive
era USA
1908-1918
Cheap steel
3rd
4th
5th
Age of oil, automobile,
and mass production
(USA spreading to
Europe)
Age of information and
telecommunication
(USA and Europe
spreading to Asia)
1908 Ford
Model-T
Trans continent 1893-95
investment in
railways, ship
and ports
Autos, electricity, 1929-33
radio, aviation
Europe 1929and real estate 43 USA
USA
1971 Cheap Telecoms and
1970-1990
microelectroni internet mania
cs
global
Post-war
1960-1974
golden age
Cheap oil
USA, Europe,
and Japan
1990Open modular
production with
core tipsets
Automobile and Mass Production
Value added
Heavy and chemical industry
per labour
Turing point
Industrial revolution
Open modular production with
Turning points
Great depression
core tipsets
Turning points
Long depression
Average VAL
Average wage
1
1890
1940
1990
(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.
(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”.
(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’ was introduced 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.
(4) East Asian Experience:
a new flying geese theory
• After the structural crisis of the 1970s the 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.
Chart 2. Share of Manufacturing Employment in Selected
Asian Countries
40
35
30
25
percent
Taiwan
20
Korea
OECD
Average
(weighted)
15
10
5
0
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Singapore
Japan
(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.
(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.
(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.
(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.
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.
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
(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.
(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.
(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.
(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.
(4) Rebuilding the Euro by the Geuro
• The ECB may be rebuilt introducing Keynes’s idea
of the International Clearing Union (ICU).
• The Geuro may 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.
(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.
• Thank You!
The 64th Annual Conference of the Japan Society of Political Economy:
Marx in the 21 century: 150 years after Capital
October 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.