Sep 08 2011

The Great Prosperity, in pictures

Posted by: Nick Shaxson in: Thoughts

Here’s a quote from Treasure Islands, looking at the roughly quarter-century period from around 1947:

Capital flows were strongly regulated, taxes were high, and the Euromarkets were growing fast but still small. The golden age of capitalism was in full swing: American households, and particularly the poorest, were seeing tremendous improvements in wealth and welfare; Germans were basking in their Wirtschaftswunder; France was in the midst of its Trente Glorieuses; Italy was installing the springboard for its Il Sorpasso moment twenty years later, when its GDP outgrew Britain’s; and Japan was unleashing its own economic miracle. In large swathes of the developing world infant mortality was falling, economies were growing, unemployment was tumbling and hungry children were finding meat regularly on their dinner tables.

It all fell apart soon afterwards. I described the international system as a kind of ‘opposite of offshore.’ Whereas today capital is not only free to move internationally – it is actively encouraged to move, in pursuit of secrecy, escape from financial regulation and much more – in those days it was all bottled up. And prosperity was everywhere.

Well, here is a comparison of those two periods – the Golden Age, and the period that followed it, in simple pictures. Hat tip: Tax Research.

4 comments so far

Alien Edouard 9th September, 2011 11.03 am

“in those days it was all bottled up. And prosperity was everywhere.

Nick – prosperity was NOT everywhere. In 1960 about half a billion Chinese were just surviving. The same applies to India, Indonesia and about everywhere is South Asia. Half of mankind could barely feed itself.

For completeness, one should have added graphs of the GDP (both absolute and per capita) of China and India over the same periods as above.

Without this analysis you and others on the far-left will continue to miss the point. The stagnation in labor compensation (especially lower-qualified) is the result of the global trade (and eventually investments) deregulation that started in the late 1960. Sure, it has not been all good news for Joe and Jane who used to be employed in manufacturing in Michigan, but it has been good for the workers in Asia who have been willing to do the same jobs for a fraction of the price. The increase in capital flows is a consequence of trade and investment de-regulation, not its cause.

Nick Shaxson 9th September, 2011 6.25 am

AlienEdouard your argument collapses on examination. OK, first, that ‘prosperity was everywhere’ was probably a little too casually sweeping, as one sometimes is when quickly writing blogs. But only a little. What I meant to say was that ‘prosperity was rising.’ They weren’t there yet.

Now now two things. First, the general picture I portrayed was extremely, absolutely, accurate, and beyond doubt. Countries all around the world, rich and poor, were growing fast. Not only that, but this was broad-based growth: ordinary folk were seeing dramatic increases in welfare. Second, let’s look at China in the era of globalisation. Excellent growth. And which is the country which, above all, managed to maintain highly restrictive, and effective, capital controls, to this date? Yep, you guessed it. China has been the country with tightest capital controls, and China is the world’s most impressive growth stories. See here, for example. http://faculty.washington.edu/karyiu/confer/beijing06/papers/xiao-kimball.pdf

The countries that liberalised financial flows generally saw a similar result: a stratospheric rise in income of the rich, and the stagnation of the incomes of the poor.

Now in your argument you are talking about trade freedoms, not capital freedoms. You need to understand the difference between the two. In Treasure Islands I carefully make the distinction between trade flows and capital flows. Trade flows, for all the many many problems they generate, are beneficial, as I argue. History suggests that large-scale cross-border capital flows are, on balance, harmful. There is definitely a place for foreign investment, but this is the kind of capital flow that doesn’t need to engage in offshore shenanigans to make its return. Even then, as Keynes understood, you can have too much of a good thing. Read Ha-Joon Chang on the South Korean miracle and so on. And, for that matter, read Treasure Islands, thoroughly. I’d suggest you steer clear of this argument, as it’s one you can’t win.

Alien Edouard 9th September, 2011 12.40 pm

Nick, you are going down a slippery slope here. I am willing to help you not get too deep into trouble.

China definitely controlled capital in- and outflows, but this done with the exclusive economic objective of keeping the foreign exchange rate of the Yuan as undervalued as politically possible vs. the US. The result has been and continues to be that Chinese authorities are imposing an abnormally high savings ratio on their citizens, who are restricted from buying the foreign goods and services in the quantities they may desire. It has “worked”, but there are 2 major caveats:

First, we don’t know if this was the best outcome achievable or if an even better result could have be reached with fewer restrictions on capital controls. The jury is out and we shall never know. Second, and more importantly, this could only be achieved by restricting the economic and political freedoms of Chinese citizens. There has never been a democratic political debate in China about the desirability of this policy. I am pretty sure that you would not support a model of development that involves labor camps and other such niceties.

For the rest, I am not sure that your statement that the countries that liberalized financial flows generally saw a stratospheric rise in income of the rich, and the stagnation of the incomes of the poor. There must be a number of examples to the contrary and in any event, it does not really matter, since there is no consensus that income equality is something to aim for.

Nick Shaxson 9th September, 2011 6.22 am

Hmm, er, interesting argument. Several things. First, that word ‘exclusively’ is quite simply wrong. Countries including China put in place capital controls for all sorts of reasons. The broad reason is that they don’t want to be ruled by the markets. Second, your point means that you agree with me. Governments put in place capital controls in order that they aren’t ruled by markets but by their own domestic priorities. This is what China is doing. It is giving itself domestic room to set domestic economic policy. And this undervalued exchange rate thing is the priority they have set. Third, this resort to the word ‘freedom’ is always the refuge of the defenders of tax havens. And to argue against freedom, of course, is akin to arguing against motherhood, or against apple pie. But if course it isn’t. Keynes, like many who have followed him, understood that freedom is a subtle concept. What you are talking about is the freedom of the fox in the henhouse. Freedom for capital flows, as Keynes understood, can mean a form of financial bondage for ordinary citizens. To suggest, almost but not quite, that I would somehow support Chinese labour camps is to assume that freedom is a simple, uncomplicated thing. As anyone who thinks about it knows, freedom isn’t uncomplicated. One of the big problems that ordinary Chinese face is that their leaders are in a position of impunity. Financial impunity – through tax havens – is a big part of that. Capital controls apply to the leaders far less than they do to ordinary businesses. Dictators around the world see their powers enhanced by the offshore system as a safe repository for their loot. Etc etc.

Slippery slope indeed.

Leave a comment

*