In early April I went with Cities Alliance to Colombia. The first meetings were in Bogotá. I was very impressed by the Waste Pickers of Bogotá. They were well organised and had their own warehouses for storing and cleaning the goods to be recycled. They had recently competed with private sector companies for the contract to collect waste in Bogotá and had won the contract, stressing that they recycled whereas the private sector put all the waste into landfill. The Mayor who gave them the contract was a radical and was then challenged and sacked by the President. When I was there the Waste Pickers seemed very determined that they would not be defeated, and sure enough I read in the Financial Times a few days ago, that the President has reinstated the Mayor because he thinks it will improve his chances of winning the forthcoming election.
We then moved on to Medellin and made a tour of the improvements that have been made to the city. Medellin used to be known as “the murder capital of the world”, then a Mayor from outside the main political parties was elected, and over a 10-year period made major improvements in the slums. Roads were built, escalators installed, schools, libraries, play areas and transport links to the rest of the city made easy with a modern metro and cable car. Life improved and violence declined. it is a real example to all cities with slums of the major improvements that can be made.
Ukraine
I am really shocked by the incompetence of US and EU policy towards Ukraine and Russia. There is no doubt that Putin is becoming more authoritarian in the way he rules Russia, though it seems that he remains very popular with most Russians. But that is not the issue at stake here. All informed commentators make clear that Ukraine is very strongly linked to Russia by history, economics, demography and trade. It is ridiculous to try to pull Ukraine into NATO and close links with the EU and to try to separate it from Russia both in the interests of the people of Ukraine and because Russia will feel deeply threatened if NATO suggests, as it has, that Ukraine might become a member.
As it is there has being lots of huffing and puffing and verbal threats but in practice the only action that can be agreed on are some sanctions aimed at highly politically connected individuals.
As Thomas Graham says in the FT of 28 April, “economically Russia is too large to isolate”; he points out that Russia is the world’s sixth largest economy and provides the EU with a third of its oil and gas. The right answer is surely to guarantee that Ukraine will not be invited to join NATO, and to encourage a new decentralised constitution in Ukraine so that Russian speakers cease to feel threatened, encouraged trade with all its neighbours and then help Ukraine to improve its governance and the management of its economy which have been pretty disastrous since independence. But as the days go by, the situation escalates and some American scholars of standing are comparing it to the Cuban Missile crises, that nearly led to nuclear war.
The new middle class
The Financial Times has been running a very important series since 14 April stressing that almost one billion people in the developing world are at risk of slipping out of a nascent middle-class “raising questions about the durability of the past 30 years remarkable march out of poverty”. There were more than 2.8 billion people or 40% of the world’s population living on between two dollars and $10 per day in the developing world in 2010 but there were 952 million people earning between two and three dollars a day. The World Bank’s chief economist has warned that many of the people who have emerged from poverty in recent years remained very vulnerable to slipping back.
A shifting economic consensus?
There are a series of new books and new analysis focusing more and more on the unacceptable levels of inequality in the US, UK and more widely across the world. The most significant new development is the publication in English of Thomas Piketty’s Capitalism in the 21st Century. In this book which I’m currently reading, and has been widely and admiringly reviewed, he shows, with the publication of new figures reaching back over very long periods of time, that capitalism constantly seeks to pay bigger returns to capital than Labour and this leads to inevitable conflict and crisis. His solution is a global system of redistributive taxation.
In addition Martin Wolf, the highly regarded FT chief economic correspondent, has drawn attention to an IMF note published in February and titled Redistribution, Inequality and Growth, which demonstrates that government intervention to redistribute drives faster and more durable growth, and redistribution is generally benign in its impact on growth, with negative effects only when taken to extremes. He says that the IMF study shows that over the past half-century market (i.e. pre-government intervention) inequality has been rising in high-income countries. The data shows clearly that inequality reduces growth. The direct impact of redistribution, by government, is negligibly negative and the indirect effect were reduced inequality is beneficial to growth.
The third important and interesting article published in the last couple of weeks is again from Martin Wolf on 24 April under the headline ‘Strip private banks of their power to create money’. He argues that there is a giant hole at the heart of our market economies that needs to be plugged. He points out that banks create deposits as a byproduct of their lending. In the UK such deposits make up about 97% of the money supply. (It is of course out of this power to generate new money that the banks have been paying themselves such enormous salaries and bonuses.) He reminds us that most critics demand that the bank should hold more capital so that the state isn’t forced to bail them out whenever things go wrong, but suggests that were significant response would be to give the state monopoly on money creation.
In the 1930s Irving Fisher laid down the Chicago Plan whose core requirement was for 100% reserves against deposits to be held by the the banks. He argued this would greatly reduce business cycles, and bank runs and drastically reduce public debt. A 2012 study by the International Monetary Fund staff suggests the plan could work well and he points to a number of books that have recently been published that advocate similar ideas. Martin Wolf expects another financial crisis in the future, given existing arrangements, and suggests that then perhaps this idea will be properly considered. Apart from the very important advantage of preventing financial crises and state bailout of banks that leads to cuts in public expenditure and therefore the services needed by people, this plan would also mean that new money could be used to finance government spending in place of taxes or borrowing; or to make direct payments to citizens; or to redeem outstanding debt. This means that the vast sums that have been spent on Quantitative Easing could being spent for example on insulating all the houses, building new houses, investing in renewable energy and generally taking care of people instead of making even more rich the top 1%.
The new storage industry
All across our cities there are new storage facilities where people pay to store domestic possessions that won’t fit into their houses. To be fair these facilities, which are still growing and expanding everywhere, also store documents and goods for commercial organisations, but a significant part of their task is to store the excess of consumer goods that we are all encouraged to continue to buy when there are serious shortages of things that people really need. It seems to me that this underlines the decadence of the times we are living in
Tony Blair’s speech on the Middle East
The speech was widely criticised. The best commentary I think was by Patrick Cockburn in the Independent on Sunday on Sunday 27 April. His article is available below. Blair argues that extreme Islamist movements are a serious threat and then fails to criticise the situation in Saudi Arabia,where this problem originates. He then goes on to attack the Muslim brotherhood, which may have made a big mess trying to govern Egypt, but they participated in democratic elections and do not advocate violence. He supports the Egyptian coup and seems to try to suggest that the Gulf states are advocating tolerant and pluralistic values!
The Guardian publicised a silly but very enjoyable video which reshaped his words to have a rather different meaning and it is available here.
The proposed takeover of Astra Zenica by Pfizer
This might seem of little concern to ordinary mortals but it is important to understand what is going on. John Gapper in the FT of May 1st says “…the UK has suceeded so well with its plan to become a respectable kind of offshore tax haven that it has turned its pharmaceutical industry into a takeover target.”
He explains that US corporation tax is 35% and the UK 21%. To get the reduced tax rate Pfizer wants to turn itself into a UK company – although its headquarters and stock market listing would remain in New York. On top of this, Osborne brought in a “patent box” in the UK to match the Netherlands. It permits companies that research and develop new products in the UK to pay only 10% tax on the income. By becoming domiciled in the UK Pfizer could channel many of its new drugs through the UK patent regime.
Interesting facts
- More than 900,000 people were given emergency food last year, according to the Trussell Trust, a 168% rise on last year (Independent 26/4).
- UK Bank assets are 492% GDP, Iceland’s are 880% (Chris Giles FT 23/4).
- Before WW1, the top 1% received about a fifth of total income in both the UK and US. By 1950 the share had been cut by more than half. But by 1980 in the US the top 1% had seen its share surge back to where it was at the beginning of the century (Krugman reviewing Piketty New York Review of Books May 8).
- US is likely to slip behind China this year as the world’s largest economy. The US has been the global leader since it overtook the UK in 1872. But China’s per capita purchasing power is 99th, 115 of GDP per head in the UK (Chris Giles FT 30/4, David Pilling FT 1/5).
- 15% of German workers earn less than the proposed minimum wage (Claire Jones FT 1/5). If the rate of population growth observed from 1700 to 2012 – 0.85 per year – were to continue for the next three centuries, the world’s population would be of the order of 70 billion by 2300 (Piketty Capital in 21st Century)
