Adam Tooze's Blog, page 11

Chartbook #168: Germany’s economic entanglement with China

For the last twenty years the German economy has thrived on globalization. Now that formula seems under pressure from many sides. Close trading and investment relations with China are yet another facet of the “German model” – after Russian gas – that is being called into question by our current polycrisis.

Berlin still cleaves to the EU mantra that China may be a systemic rival, but it is also conventional economic competitor and on key issues like climate and global pandemics, an indispensable partner. In recent days Chancellor Olaf Scholz has travelled to Beijing with the explicit message that whatever the current climate, Germany is not interested in decoupling from China. Berlin’s aim is to avoid dangerous dependencies and to ensure reciprocity. But Scholz intends to proceed with a sense of “proportion and pragmatism”, which is hardly the prevailing mood in Washington DC right now. All the signs are that Berlin still wants to walk the tightrope.

But what if that is no longer an option? In the lengthy article in the Frankfurter Allgemeine Zeitung, in which Scholz laid out the motivations for his controversial solo visit to Beijing, he attributed the trend towards decoupling to China, to Beijing’s “dual circuit” model and its drive to achieve technological autonomy. He made no mention of America’s strategic objectives or its determined drive to halt China’s high-tech development in its tracks. Of the two it is no secret that it is America’s uncoupling drive that is far more uncomfortable for German business than that by China, which still rolls out the red carpet for German investment.

Scholz also made no mention of the fundamental difference between Germany and the vast majority of its Western partners in their dealings with China. For the United States, decoupling from China raises issues of supply-chains, but it goes hand in hand with the basic protectionist impulse to redress a large trade deficit. For Germany the opposite is the case. China is a vital market for many German industrial exporters. For much of the last decade Germany ran a trade surplus with China. So much so that the question arises whether in the process of decoupling from China, Germany is at risk of losing a major driver of its economic growth.

How vulnerable is the German economy to decoupling and geopolitical confrontation between China and the West?

On this score caution is warranted. In the current moment, criticism of the “German model” have about it the air of Schadenfreude. To critics it is pleasing to note the way in which the German model is unravelling and to highlight the way in which Germany’s year of success were owed to dirty compromises with regimes like those of Russia and China. But such criticism is often simplistic and argumentatively tendentious.

With regard to Russian gas, I’ve argued in Chartbook #150 that there is an element of exaggeration and discursive overshoot in play. It is certainly true that the loss of Russian gas is a major blow to Germany. That is hardly surprising, any abrupt change in well-established trading relationships for a key energy source is bound to be disruptive. But it is quite another thing to claim that because Germany bought a lot of gas from Russia this materially contributed to the success of German exports, such that it is reasonable to say that the German model was dependent on “cheap Russian gas”. The evidence for that far-reaching causal claim is surprisingly weak.

So how about China? What is the significance of China for the German economy.

Recently, Brad Setser – who is an essential follow at @Brad_Setser – offered a nice macroeconomic debunking of the claim that China is currently an important driver of German economic growth.

It is true that since the 1990s Germany’s position has been unusual in that its sophisticated industrial manufacturing base was complementary to China’s economic development. Germany, though it suffered a “China shock” through cheap imports, also gained an offsetting boost through the success of its exports to China. As a result, Germany is the rare Western economy that since 2009 has run a trade surplus with China.

China now reports a small surplus in its trade with Germany. That is a big change.

Bilateral trade data can mislead — but the Chinese data vis a vis Germany easily nests inside the broader data for both Germany and China.

5/ pic.twitter.com/zocrlrcbrv

— Brad Setser (@Brad_Setser) October 29, 2022

This was conditioned both by industrial complementarity and the fact that German fiscal policy and wage policy were biased against imports and towards export-led growth. In this regard you could say that Germany beat China at its own game. Whereas China used exchange controls to prevent the revaluation of its currency, Germany merged the Deutschmark with the euro. In recent years, however, Chinese exports to Germany have surged, meaning that the trade balance with China is now in slight deficit. Meanwhile, if we examine German exports to China, as Setser shows, German exports have been flat since 2012.

German exports to China really did provide a positive impulse to Germany's economy in the years immediately after the global crisis.

But German exports (measured by Chinese imports) have been basically flat since mid 2012. The growth impulse was all from 05 through 11. pic.twitter.com/x5z3VbAWQ2

— Brad Setser (@Brad_Setser) October 29, 2022

The implication is that German exports to China did provide a substantial boost to demand for German industrial goods from the late 1990s through 2012. But since then, exports to China as a share of German GDP have plateaued at a level between 2.5 and 2.75 percent of German GDP. This is substantial, but as a static share of GDP, exports to China can no longer be plausibly seen as a current “driver” of growth.

Of course, if German trade with China were suddenly to be interrupted, that would deliver a severe and dislocating shock to the German economy, to the tune of 2.5 percent of GDP, plus multiplier effects. It is unlikely that other markets could absorb the goods that Germany would otherwise sell to China. So, German industry would be idled or have to dump goods at distressed prices. Nor is it likely that Germany could find domestic sources for the goods it currently imports from China. So it would either suffer supply chain bottlenecks or switch demand to other overseas suppliers.

Were this shock uncoupling to happen, critics would no doubt claim that it demonstrated the “dependence” of the German economy on China-trade. As with the Russian gas that would be an exaggeration. But as in the Russian case, it would be very bad news.

As with Russian gas, you get the most stark view of the depth of Sino-German interconnection if you shift the point of view from the macroeconomic balances to the balance sheets of individual corporations.

Handelsblatt recently compiled these data for the most heavily China-dependent corporations in Germany’s Dax stock exchange index.

Source: Handelsblatt

Given China’s weight in global GDP and its significance as a driver of global growth these large numbers are not by themselves surprising. But for Germany’s lone semiconductor champion – Infineon (formerly Siemens) – and for Germany’s entire automotive industry, China is clearly very important indeed. And this matters because whereas in GDP terms, one euro is the same as another, in terms of political economy the fortunes of the major corporate players have a disproportionate significance. When Scholz travels to China he does not take slices of German GDP as part of his delegation, he takes the CEOs of Siemens, VW and BASF – large and powerful, highly sophisticated corporate organizations enmeshed in national and international networks of power. Their weight in the political economy vastly exceeds their share of total value added.

For the powerful group of German firms, whose businesses are deeply engaged in China, three questions that matter: Is their business following the same pattern that Brad Setser has highlighted in the aggregate trade data. Has their business in China plateaued? Apart from sales, how are their profits? And what is the outlook for the China business? What strategic plans are major German corporations making? It is not easy to get a complete picture on all three of these questions but from recent reporting a clear picture does emerge, not of corporate German withdrawing from China, but of new engagement.

Amongst the Dax group highlighted by Handelsblatt a number have recently made strategic announcements on China.

Though for BASF Germany remains the most important market for revenues, accounting for 18 per cent of its sales in the year to date, compared with 14 per cent from China, the company has recently announced that it was intending to

“downsize “permanently” in Europe, with high energy costs making the region increasingly uncompetitive. The statement from the world’s largest chemicals group by revenue came after it opened the first part of its new €10bn plastics engineering facility in China a month ago, which it said would support growing demand in the country. “The European chemical market has been growing only weakly for about a decade [and] the significant increase in natural gas and power prices over the course of this year is putting pressure on chemical value chains,” chief executive Martin Brudermüller said on Wednesday.

As the FT reports:

BASF’s chief executive Martin Brudermüller has defended the approach and hit out at critics of his China investments. “I think it’s urgently necessary to stop this China bashing and look at ourselves a bit more self-critically,” he said last week. Experts say BASF has little choice but to focus its efforts on China. “China has 60 per cent of the world’s chemical companies and talent and 40 per cent of the resources,” says Wang Yiwei, professor of international relations at Renmin University and an adviser to the Chinese government. “If they don’t invest in China, where do they go?”

Covestro is less high-profile than BASF, but the spin-off from Bayer is also thoroughly committed to the China market. It recently announced a substantial expansion of its Shanghai production site for polyurethane dispersions and elastomers.

At Siemens, CEO Roland Busch like his predecessor Joe Kaeser is an unapologetic China bull. Under the code name Marco Polo he is driving a major program to prioritize development of Siemens digital industries in China.

For VW, China is quite simple existential. But it is a market in which the company is struggling to maintain its position. For many years VW was the leading car brand in China and the China business made a major contribution to its bottom line. But sales peaked in 2019 at 4.23 million units and have fallen sharply since.

Source: VW

VW’s China profits which once ran to over 5 bn Euros per annum have slumped to no more than 3 billion.

Source: Handelsbatt

But the firm has no plans to exit China or rethink its commitment, on the contrary. To increase its ability to respond to challenges in the China market, VW has opted to reorganize and localize control. As Electric Drive reports:

“The China region is being given significantly greater decision-making powers and autonomy,” says Brandstätter, who himself will take over the management of Volkswagen Group China and responsibility for the Chinese market on the Group Board of Management on 1 August. “We are therefore tailoring our services, technologies and products even faster and more consistently to the specific needs of our local customers.”

On October 13 VW’s China management team announced a “€2.4bn in a joint venture with one of China’s leading designers of artificial intelligence chips, as the carmaker bets on AI-assisted and driverless cars as a way to retain share in its biggest market.” This followed an announcement a week earlier of a 1 bn euro investment in a software development joint venture.

VW’s competitors in the German auto industry are no less clear about their commitment to involvement in China.

Ola Kallenius, CEO of Mercedes Benz, meanwhile, has suggested the west’s hands will be tied if Beijing were to try to seize Taiwan. “If one thinks that the Chinese economy could be unbundled from the European or the American, it is a total illusion,” he said in an interview with Die Welt in September. “It would have dramatic consequences for the world economy that would in no way be comparable to those of the Ukraine war.” BMW CEO Oliver Zipse October 19 even went so far as to defend China’s market policies and compare them favorably to how President Joe Biden is changing the playing field in the U.S. The 50-50 joint ventures that Beijing required foreign carmakers to set up in China were “fair for everyone,” Zipse said in an interview near BMW’s plant in Spartanburg, South Carolina. He warned that the Biden administration’s climate law designed to wean the US off battery materials sourced from China could provoke retaliatory steps and set off a “dangerous” game of trade barriers.

The ongoing commitment by corporate Germany to China shows up at the aggregate level in figures for direct investment. All in all, a recent IW economic research report concludes that German direct investment in China in the first half of 2022 has hit a record 10 billion euros. This is more than the annual total in any previous year and twice the level in 2021. The report’s title reads – “full steam ahead in the wrong direction”.

The title is telling. Though the assessment of China in German business has not turned to the degree that it has in the United States. It is nevertheless striking that the solid front of political and expert backing behind the German model is crumbling from within. It is not just economists like those who wrote the IW report who warn of traveling in the wrong direction. The Ministry of Economics and Climate under the command of Green Party boss Robert Habeck has taken an increasingly skeptical view, word of which is leaking to newspapers like the FT:

In May, Habeck’s economy ministry refused to extend Volkswagen’s investment guarantees for China, citing the repression of Muslim Uyghurs in the western region of Xinjiang. The ministry is now working on plans to cap the number of such guarantees for China. “They . . . are massively skewed to China right now,” says one official. On the other hand, many in Berlin are sceptical that such moves have much impact. The evidence suggests that companies will continue to invest in China, if necessary without the guarantees. Officials acknowledge they wield little influence over corporate decision makers. “If Brudermüller thinks investing €10bn in China is the right thing to do, it’s ultimately a question for BASF’s shareholders,” says the official. “But I do think we have to send a signal to companies that if their shareholders endorse it — fine, but please don’t count on the German government to underwrite it.”

Clearly the German elite are trying to find a way to navigate a new world beyond the self-evidence of globalization. Geopolitical tensions are mounting on all sides. But the collective imperative to face the technological challenge of the energy transition remains and China remains a key arena for global economic development. It is tempting to see this as a crisis peculiar to the German model. But in fact it is an expression of forces that are making themselves felt around the world in the current moment of polycrisis – the intersection of multiple, diverse, incommensurate and yet interacting forces that are disrupting the once taken for granted logic of economic globalization and the American-led unipolar order.

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Ones & Tooze: Can Lula Save the Amazon?

On this episode, Cameron and Adam discuss the challenges facing Luiz Inácio Lula da Silva, the new leader of Brazil. Also on the show, a report card for Olaf Scholz, who began serving a year ago as Germany’s chancellor.

Find more episodes and subscribe at Foreign Policy

The European Project Is Now at the Mercy of the Weather

This winter, Europe may be facing a crisis without any clear solution.

Right now, the sobering truth is that the future of Europe hinges on the weather. It seems absurd. But whether the winter ahead is cold or warm will determine if Europe gets through the next six months without major economic, political, and social stress.

We are in this situation because, thanks to the clash with Russia over Ukraine, Europe has lost roughly a third of its regular gas supply. Much of Europe, particularly in the former Soviet bloc, relied on Russian gas for electricity generation, home heating, cooking, and industrial purposes. Germany and Italy, the largest and third-largest economies in the Eurozone, were also heavily dependent on Russian gas.

Since the spring, as the scale of the conflict became clear, Europe has been bracing for the worst. While buying as much Russian gas as it can, Europe has been scrambling to sign new gas deals and make up the impending shortfall by buying up cargos of liquefied natural gas, or LNG. Over the summer, as Russia’s situation became more dire, deliveries of Russian gas slowed to a fraction of their normal level. Europe’s purchasing went into overdrive, pushing gas prices to extraordinary levels—equivalent to roughly $400 per barrel of oil or more. As a result, the gas storage facilities are now full. Gas prices, at least for the next few months, have plunged. There is simply nowhere to put more of the stuff. It’s now the daily charges for LNG tankers that have gone through the roof, as shippers wait offshore for European demand to return. It is only a matter of time. The gas storage facilities are sufficient to cover no more than a few months. Gas prices for next year and for the foreseeable future remain severely elevated—in the $200-per-barrel range, around 8 times their precrisis levels. With no prospect of a resumption of Russian gas deliveries in sight, the outlook is grim—unless, that is, the weather stays warm.

Read the full article at Foreign Policy

Chartbook #167: Haiti 2022 – Polycrisis Extreme.

A man waves a red flag during a protest against fuel price hikes and to demand that Haitian Prime Minister Ariel Henry step down, in Port-au-Prince, Haiti, Thursday, Sept. 15, 2022. [AP Photo/Odelyn Joseph]

On 14 October 2022, the World Food Program issued an appeal that is unprecedented for the Western hemisphere. It concerns Haiti.

According to the latest IPC analysis, the WFP found that a record 4.7 million people in Haiti are currently facing acute hunger (IPC 3 and above), including 1.8 million people in Emergency phase (IPC 4) and, for the first time ever in Haiti, 19,000 people in the capital city of Port-au-Prince are in Catastrophe phase (IPC 5). This means that they are at imminent risk of outright starvation.

Outside Haiti’s urban areas, food security has continued to deteriorate. Below average rainfall and the 2021 earthquake caused widespread devastation and loss of harvest in cultivated areas of the Grand´Anse, Nippes and Sud departments.

The WPF is scrambling to distribute food and basic assistance:

In 2021, WFP reached 1.3 million people and in 2022 plans to reach 1.7 million Haitians. Over the next six months, WFP requires US$ 105 million for crisis response and to tackle root causes and bolster the resilience of Haitian.

Cholera, a classic disease of malnutrition, is spreading rapidly through Haiti’s slums.

The message from the UN is alarming and needs to be heard amongst the general din of bad news: This is not the normality of Haiti’s “ordinary” poverty or crisis. The current situation is far more dangerous and urgent. It is also unprecedented. Large numbers of people in the Western hemisphere are on the point of outright starvation.

***

This acute crisis is the result of a long story of state collapse, failed intervention, violence, exploitation going all the way back to Haiti’s historic uprising against slavery. But that trajectory has always been cross cut by global pressures. Indeed, this defines the history of the entire Caribbean, since first contact with the Europeans. Arguably the Caribbean is, as a result, the first modern place, where entire social systems and habitats were transformed by violent developmental change and global conquest.

In 2022 Haiti is perhaps the most urgent example of the polycrisis sweeping the world. It is emblematic of our situation that this disaster is unfolding less than 700 miles off shore from Florida, on the same island as the Dominican Republic, one of the economic success stories of the region. Though separated from North America by ocean, both parts of the island of Hispaniola are tightly linked to the US by a history of intervention and occupation and by mass migration. There are perhaps as many as a million people of Haitian descent in the United States and 165,000 in Canada.

The crisis in Haiti is often presented in the western media in naturalized form, as a question of earthquakes and hurricanes, “state-failure”, anarchy and disorder in their purest form etc. In the latest iteration the focus of reporting has been on “gangs” and “gangsterization” of the country. But one of the remarkable things about Haiti, given its dire poverty and the urgency of the crisis, is how active its civil society continues to be, even amongst the ruins. The crisis is therefore eminently political and it is both local and interconnected with wider global currents in politics and economics. The gangs in question are better thought of as minor warlords. They compete for control not only of logistics and transport, but also for territory and votes. They do so with and armory of weapons shipped in from the United States. And the immediate driver of the current crisis could hardly be more telling.

Modern Haiti is the product of a slave economy built to grow sugar. It was the original European solution to the “ghost acreage” question. Cheap sugar was the answer to the question of calories. Still today, Haiti’s crisis is a crisis of energy, but this time it is a question of energy imports not exports.

***

Overall consumption of fossil fuels in Haiti is very low. The majority consume tiny amounts. Only the top 10-20 percent have motor vehicles of any kind, generators, let alone regular power supply. But petrol and diesel are vital for what little power generation does take place and this secures basic transport and the logistics that maintain essential services like hospitals and connections between the countryside and markets. When farmers cannot get to market they sell by the side of the road. Of course sitting by the roadside only makes sense if there is traffic. Without petrol, no traffic comes. The result is comprehensive economic collapse.

The petrol and diesel that fuel Haiti’s hard-scrabble economy are entirely imported. Of late the main import terminal are two private docks in Port-au-Prince. Hitherto, for all the crises on the island, a trickle of petrol and diesel has always got through. Humanitarian relief could continue as well as rudimentary health services. The terrifying challenge of recent weeks is that this is no longer the case. What is happening is something close to total paralysis, or rather a desperate, restless search for any supplies that do become available. Whilst generators are still running to keep the network up, frantic cellphone messages send mobs of motorbikes and cars from one petrol station to the next. There is never enough. Fuel is mysteriously available on the black market for those with connections, deep pockets and guns. The prices are up to five times the official price. Even worse in the countryside.

In the embattled Cite Soleil neighborhood of the capital Port-au-Prince, where at least 100,000 people have been displaced from their homes by months of heavy fighting between rival armed groups, there is now a real risk of outright starvation with 65 percent of the population facing acute hunger.

How did it come to this? The answer depends on a combination of global forces, policy responses and local politics.

***

As a poor country, Haiti has been hard hit by the fluctuations in global energy prices. To cushion the shock one of the few things that the Haitian state does is to subsidize energy costs. In doing so it is far from alone, whether in the Caribbean or the world at large. But paying for energy subsidies takes a government capable of raising funds either through taxes or through borrowing. The Dominican Republic is now paying twice the rate for its borrowing that it did last year. It can still access credit markets. Haiti cannot. Since the subsidy is large and the direct benefit is felt above all by the better off, the IMF and other agencies have long argued for Haiti’s energy subsidies to be cut altogether.

In early 2022 the fuel subsidy was costing the Haitian government $400 million. As the IMF remarks:

Fuel subsidies have been absorbing at least one third of domestic revenues and crowding out productive spending on investment, health and education. They are also highly inequitable, with over 90 percent of the benefits going to the top 10-20 percent of the income ladder in Haiti. In this light, the authorities plan to prepare the groundwork to eventually tackle this issue. As a first step, they launched in April (2022) several social programs under the Programme d’urgence targeted to the groups affected by earlier fuel price adjustments.

Source: IMF

Like everywhere else in the world, cutting the subsidy makes sense, from a technocratic point of view. But it produces immediate losses for the minority who benefit. They tend to be influential and well-resourced, literally empowered. By way of transport and electricity prices, a subsidy cut sends a shockwave through the entire economy. Of course there are also off-setting benefits. If the Haitian government spent the $400 million elsewhere, many could benefit. But that begs the question of who the government is and how the freed-up funds would be allocated. If the cost saving is used not for new spending but to reduce the deficit and improve the “budget balance’, then the benefit could be something as abstract as a lower rate of inflation if the central bank is forced to monetize a smaller benefit. Few will see the connection or cheer.

The IMF economists are well practiced in these arguments and now recommend carefully calibrated social packages to offset any energy subsidy cut. But that balance is demanding at the best of times. It would have been a strain for Haiti even in better days. This is not the first time the issue has haunted Haitian politics. Under the peculiarly difficult circumstances of 2022 it is far more than the government in Port-au-Prince can handle.

***

The current configuration of politics in Haiti is defined by the US intervention of 2004 that removed Jean-Baptiste Aristide’s left-leaning populist regime from power and installed a UN-backed regime. The administration of President Latortue used considerable violence to impose its control and disempower Aristide’s party. This repression eased in 2006 after the election of René Préval who prior to being elected President in 1996 had also served as Prime Minister under Aristide. Préval pursued a strategy of development based on road-building and regional alliances, including an oil delivery deal with Venezuela. But he struggled to contain popular unrest over surging food prices, which exploded into mass protests in 2008 and in 2010, Préval’s government along with most of the rest of the Haitian state administration was buried under the rubble of the disastrous earthquake. The collapse of ordinary life precipitated a second major engagement by US forces which secured power for the brutal and corrupt government of Préval’s successor, Michel Martelly.

Martelly presented a glossy modern face to the outside world. He expressed support for policies ranging from universal education to health care, the rule of law, the creation of sustainable jobs, environmental protection and the development of Haiti as a destination for ecotourism and agritourism. He was well coached by the Clinton Foundation. It was also an open secret that the former singer, relied ever more openly on gang forces to secure power and hold any residual challenge from Aristide or the left in check. To function he also needed money. In line with its ecological agenda, in 2014, at the behest of donors and funding agencies, the Martelly government proposed to combine a major fuel price increase with greater spending on health and education. The result was to trigger a wave of strikes and a climb down on subsidies, which helped to put the outcome of the 2015 election in doubt.

After a tumultous period of political uncertainty, it was Jovenal Moise, designated by Martelly as his center-right successor, who took office as President in 2017. In 2018 he tried again to implement the energy subsidy cut. Citing the IMF, Moise proposed cutting fuel subsidies to qualify for $96 million from the World Bank, European Union, and Inter-American Development bank. Once again the proposal was met with a wave of protests that even Moise’s thugs could not contain. And the proposal was revoked.

In July 2021 Moise was assassinated. Unusually for a country full of gunmen, no one has been able to identify a clear “gang” connection. Instead, the killing was done by a squad of Colombians who announced themselves as DEA agents and several of whom were, in fact, former DEA informants. Their motives and their employer remains unclear. Weeks later Haiti was hit by another devastating earthquake. In the meantime, with the approval of the CORE group of international ambassadors, led by the US, the Americans and Brazil, Ariel Henry was chosen as President.

Henry, it is commonly acknowledged, lacks any real legitimacy. He was associated with the 2004 coup against Aristide and had been chosen by Moise shortly before his assassination to be his puppet prime minister. Haitian law enforcement officers have leaked documents that seem to tie Henry to Moise’s killing. Henry, of course, denies any connection. What is undisputed is that he has outlived the original Presidential term of his predecessor and canceled elections to the Senate thus leaving the Haitian government effectively without legitimacy.

It is against this backdrop of factious politics and the self-delegitimation of the Haitian elite that the fighting between armed groups, especially in Port-au-Prince surged to new levels in the second half of 2021. Once bustling neighborhoods have been reduced to empty shells. As never before, large parts of the city have come to resemble empty free fire zones.

The Martissant neighborhood, south of Port-au-Prince.Photographer: Jonathan Alpeyrie/Bloomberg

But politics goes on. In February 2022, faced with mounting inflation Port-au-Price was rocked by large-scale demonstrations calling for a $15 per day minimum wage. Henry’s government agreed to less than $7.50 per day, a 54% increase, but far less than protestors were demanding.

Then, despite his lack of grip, Henry proceeded to follow the IMF’s advice and push through energy subsidy cuts. This has earned him tributes from international observers. The policy is a totem of international policy common sense. But in the Haitian context in 2022, it triggered an uprising.

Amid spiraling inflation and rising costs, the government announced Sunday that the price of a gallon of gasoline would rise from 250 gourdes ($2) to 570 gourdes ($4.78), while diesel prices would go up from 353 gourdes per gallon ($3) to 670 gourdes ($5.60). The price of a gallon of kerosene would rise from 352 gourdes ($3) to 665 gourdes ($5.57). 

The reaction was immediate:

Young Haitians, frustrated by the lack of work and rising prices, took to the streets. The g9 coalition dug trenches to block access to the country’s largest fuel terminal, where it says it will stay until subsidies are reinstated. As a result, fuel has run out. Schools have not reopened after the summer holidays. Only three ambulances are working in Port-au-Prince.

It is G9’s blockade of the privately-owned Varreux oil terminal in Port-au-Prince that has precipitated the current existential threat to Haiti’s society

“Without that fuel, Haiti’s grid shuts down. So do the trucks that deliver food to supermarkets, the generators that refrigerate that food during the frequent power outages, and the factories and businesses that pay the wages that buy the food,” reports CBC News. The 12% of Haitian households with electricity are also affected because many of them rely on kerosene generators for power.

The warlord who has taken advantage of the situation to make a bid for power is Jimmy “Barbecue” Chérizier the head of the G9 Family and Allies. Though he loves the camera, he is a shadowy figure. An ex-policeman who was previously connected to Haitian Tèt Kale Party (PHTK) of Martelly and Moise, since Moise’s assassination Chérizier and G9 appear to have gone rogue. His forces routed Haiti’s frail police and seized control of significant chunks of territory including much of the shantytown of Cité Soleil and the polling stations there.

G9 acts with apparent impunity. In one particularly notorious case, Christella Delva, a 17-year-old student protester, was killed by the gang with a bullet to the head, while two young Haitian journalists, Tayson Lartigue and Frantzsen Charles, were also killed by G9 while returning from an interview with the parents of Delva. Several other massacres are attributed to G9 as it fought its way to the top of the pecking order.

With the blockade of the oil port crippling the entire country, it is hardly surprising that Chérizier has been singled out for UN sanctions. But you don’t grasp the complexity of the Haitian scene if you take the characterization of G9 offered by the Henry government and its international supporters at face value. From expert local commentators, there is an insistent strain of Haitian commentary that insists that BBQ and G9 are different. The G9 coalition earned its reputation not only through violence but also through imposing order in the Port-au-Prince slums during an uprising in 2019. Allegations of massacre leveled by the international community are refuted point for point. According to the man himself, BBQ owes his nickname to his mother’s fried chicken stand not to any liking for burning his opponents alive. Chérizier is a nationalist and names Papa Doc Duvalier as his main inspiration. Though this is routinely omitted by international media, the full name of the G9 coalition is the Revolutionary Forces of the G9 Family and Allies, or FRG9. In leading the blockade to topple Henry, Chérizier declared: “We have to mobilize and chase out all the politicians, the corrupt bourgeoisie that hold this country hostage.” Whether we credit it or not, Chérizier proclaims himself the leader of an armed revolution who declares indignantly that he could not have been involved in the massacres he is accused of because he would never use violence against people “in the same social class as me”. For a gang leader he has unusually capacious demands. Apart from an amnesty for himself and his men, according to Al Jazeera, G9’s demands:

President Henry’s resignation, positions in the cabinet, and the creation of a “Council of Sages” that has one representative from each of Haiti’s 10 departments, … The gangs’ demands are “a symptom of their power, but also a symptom that they may fear what is coming,” said Robert Fatton, a Haitian politics expert at the University of Virginia.

What G9 must fear is a major international military intervention. They boast that they are willing to stand and fight. In the short run there is not much that Henry as head of state can do about BBQ. The national police are out-gunned, though a shipment of Canadian armored vehicles may change that. In the mean time, the main fighting is done by other gangs. Most notable G-Pep, a longer established gang coalition associated with the opposition to Moise and Martelly. It has been reinforced by an alliance with another grouping known as 400 Mawozo, whose boss was extradited to the US by Henry’s government in May 2022. It surprises many Haitian commentators that G-Pep has so far escaped sanction. The extent of gang power is now such that in the event of any elections a majority of the votes would be cast in polling booths controlled by one or other of the armed factions.

It is his total lack of a domestic power base that leads Henry’s government to appeal loudly for outside intervention. He and Haiti’s ambassador in DC are only too happy to see the US, Canada and Mexico lobbying at the UN for action against G9. But when the idea of UN action was mooted it was clear that there was no UN mandate for intervention. Russia expressed its unwillingness to go along and the motion was dropped. That accounts for the incongruous appearance in demonstrations in Port-au-prince of the Russian flag. The logic of the new non-alignment is spilling into Haiti’s streets. As comments by President-elect Lula have made clear, the suspicion towards any alignment with the US against Russia, is widespread in Latin America. It is worth noting, however, that Haiti is one of the places where no one on the left celebrated Lula’s victory. He is remembered there for Brazil’s disastrous leadership of the UN intervention force after 2004.

There is much talk in Haitian commentary about America’s hegemonic ambition in their country. Haitians follow US strategy closely and have taken note – far more han many commentators in the US – of the bipartisan Global Fragility Act that Donald Trump signed into law in December 2019. It was a bipartisan effort by US development policy experts to craft an alternative to China’s One Belt One Road. it commits the US to long-term investment and stabilization programs over a long-term time horizon. Haiti along with Libya were proposed as the first candidates for this policy. Approval has been held up in the Senate by Republican opposition. For the Haitian left this is a new iteration of America’s designs on their country.

In fact it seems wildly implausible to imagine that the Biden administration would want to put boots on the ground in Haiti. In 1994 Biden broke with Clinton to opposed intervention in Haiti. Washington is primarily concerned to avoid a humanitarian disaster and possible spillover. The Biden team certainly doesn’t want a repeat of the disgraceful scenes of September 2021 when thousands of Haitian refugees were caught on the Texas border.

The solution? Washington would dearly like Canada to intervene. Canada is carefully sizing up the problem.

Informed judgement seems to be that any attempt at a full-scale international intervention would most likely end disastrously. To have any hope of success, foreign aid needs to be carefully targeted and above all it must have solid local backing. Though the CORE group and Washington continued to deal with Henry, if there is one thing that is clear it is that Henry cannot provide that solid political platform. The problem is not that there is no civil society in Haiti, but that it is too vociferous and complex and mobilized. To resolve that problem Henry wants to push for early elections but in the midst of widespread hunger and a cholera outbreak, that seems entirely unrealistic. It would mean handing control of the outcome to the armed groups.

US experts like George Fauriol of CSIS tend to talk about the need for “Haitian political consensus”. More realistic than a consensus is the call to assemble a powerful coalition of local backers. The obvious forum is the multi-party Montana Accord which is further tied to the Protocole d’Entente Nationale (PEN), a coalition of some 70 political organizations and groups. Unlike Henry and Washington they have called for a protracted transition process, what leading US experts refer to as “a plausible transition formula out of the crisis”.

The danger in such a protracted process is that the crisis escalates. And in the mean time the political coalition sustaining the transition effort fractures. What spooks many commentators on the Haitian left is the closeness between the Montana Accord and agencies like the US National Endowment for Democracy, that were tied to the Aristide ouster in 2004. Since the beginning of the year the main representatives of the Haitian left including Aristide’s party have broken with the Montana grouping.

Stymied in every direction the clock continues to tick. Violence, insecurity, hunger and now cholera too, are wracking the country. Will it take a full-blown humanitarian catastrophe with people starving to concentrate minds? Will even that be enough?

***

There is little doubt that the main concern in Washington is a refugee crisis. As the Economist put it:

Mr Biden’s government was slow to act, says Robert Maguire of George Washington University in Washington. Its main concern is the rising number of migrants. Some 50,000 were apprehended in the United States between September last year and this August, 12 times as many people as the same period two years ago.

It is telling that the first reaction of the US, rather than engaging with grouping in Haiti like the Montana Accord, has been to send a coastguard vessel to patrol Haitian waters.

Haiti’s own ambassador to DC, an ally of Henry, is unafraid to spell out the threat. Send armed force to back the current regime or face a refugee wave from a country that is only 700 miles from Florida.

But well before the US, the Dominican Republic will feel the effects of the crisis. The gap in living standards between the DR and Haiti has long been large. It is now a gulf. Over that gradient, people move one way. The total number of Haitian workers in the Dominican Republic is uncounted. It is clearly in the many hundreds of thousands. Meanwhile, as people go one way, petrol and diesel go the other.

The Dominican Republic, like Haiti, imports its fuel. Unlike Haiti, faced with the impact of what President Luis Abindar calls a “war-time economy”, the DR has spent over $1 billion on food and energy price subsidies, even as the yield on its sovereign debt has nearly doubled from 4.4% to over 8 %.

On the border that means that there is a huge price differential between low-cost DR petrol and the spiraling prices in Haiti. Petrol bought at the subsidized pricer of $5 a gallon in border cities in the Dominican Republic, when smuggled to Haiti fetches as much as $50 a gallon. Unsurprisingly, lines of petrol buyers are forming in the DR, a visible manifestation of the tax pesos that will be heading across the border.

At the meeting of the OAS on September 16 2022, President Luis Abindar put the situation in dramatic terms: “For the Dominican Republic”, the “low-intensity civil war” in Haiti, “is a matter of national security. I want to repeat it so that it is engraved in the memory of this solemn session in the Hall of the Americas: the crisis that overflows the borders of Haiti is a threat to the national security of the Dominican Republic”. For many this was a gross exaggeration designed principally to provide a justification for international intervention. So long as the Haitian crisis remains domestic it is harder to justify calls for international action. But the escalation of anxiety in the DR is real.

With Dominicans marching in protest against Haitian migrants, members of Abindar’s own government such as Economy Minister Pavel Isa Contreras have warned against “inflammatory”, anti-Haitian, anti-black “discourse that points in a racist line”. Liberals in the DR are acutely conscious of the bloody history of the border region, where in 1937 the Dictator Rafael Trujillo unleashed a racist pogrom that claimed tens of thousands of Haitian lives.

What then is the solution of those in the DR concerned to preserve the balance and avoid an escalation into outright and open racial antagonism? The government of Luis Abindar and Economy Minister Pavel Isa Contreras is building a wall. When completed it will be the second largest in the America’s after the US border wall with Mexico.

Of course, the DR’s enlightened spokespeople hasten to add that this is not just an exclusion measure. It is not meant to seal the border, but to regulate it. It is vital for regional economic development, from which everyone profits, to ensure that Haitian chaos does not spill over to the DR.

Meanwhile, as Jim Wyss at Bloomberg points out, responsibility for the violence and poverty that wrack Haiti extends far beyond the island of Hispaniola.

The wall is also, at some level, a reproach to an international community that has spent billions in Haiti but has been unable or unwilling to alleviate the growing humanitarian crisis.

The effect is that whilst Port-au-Prince is ground to rubble, Haiti’s misery is being concreted in. This then is the answer to the polycrisis on Hispaniola, the Island where the violence of modern history first reached the Americas. Put up walls. Erect check points. Control the flow.

****

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Chartbook #166: 1922/2022 – The centenary of Mussolini’s “March on Rome” and the dilemmas of the liberal expert class.

100 years ago Mussolini’s fascists – the movement that first defined the political brand – staged their much ballyhooed “March on Rome” and completed a tumultuous four-year journey that brought Mussolini to power, first as Prime Minister and then, from 1925, as Il Duce – the authoritarian leader of a one-party state. Often treated as the diminutive little brother of Nazism, Mussolini’s fascism was, in fact, the archetype of a new style of authoritarianism. It was a new, modern form of power and as such it also initiated a new and disturbing cooperation between power and expert knowledge. We tend to think of the interwar period as the incubator of the New Deal and the “postwar welfare state”, which brought to power new kinds of expertise, above all Keynesian economics. But, as Clara Mattei of the New School shows us in a powerfully argued new book, if the name of the game was incorporating economic expertise into the state machinery, it was in fact the fascists who got there first.

***

But before we get onto the question of expertise let us spend a minute locating the significance of the 1922 events.

Existing elites were crucial to Mussolini’s rise to power – in business, in the military, in the civil service, and in politics. When 12 months after Mussolini’s March on Rome, Hitler made his attempt to stage a similar coup in Munich, it failed miserably. Unlike in Italy, the German military, political and business elites were still looking for a different solution to the crisis of the Weimar Republic. When Hitler did eventually come to power in 1933, he did so against the backdrop of a very different kind of crisis – something akin to a vacuum of power both at home and abroad crated by the global Great Depression. This was a situation quite unlike the postwar inflation and class conflict that provided the backdrop to Mussolini’s seizure of power.

Though the Nazi party mobilized a giant para-military force in the form of the brownshirted SA, it was above all a vast electoral movement, dwarfing the small political party that Mussolini commanded in 1922, which was far more reliant on conservatives and liberals for its majority. There was street-fighting in Germany in the early 1930s, but nothing like the conditions of low-intensity civil war that prevailed in both Italy and Germany in the early 1920s.

It is worth remembering that in 1922 when Mussolini muscled his way to power, World War I was only four years in the past. The arrival of the fascists in power caused as little stir as it did because all eyes in Europe were on the Franco-German struggle over reparations which in early 1923 spilled over into the French military occupation of the Ruhr. Ten years later, when Hitler finally took control, the men who had been young veterans in the early 1920s were entering middle-age.

In the 1920s it was Mussolini’s movement and regime that set the mould for a new kind of authoritarianism, self-consciously modern and popular rather than aristocratic or elitist. It actually helped that Italy, unlike Germany, Britain or France, was not Europe’s leading economic power. It made fascism appear as a developmental dictatorship that inspired imitators and admirers around the world from Portugal and Bulgaria, to India and China. In the late 1920s Japan was swept by what was at the time dubbed a “Mussolini boom”.

But it was not just imitators that Mussolini influenced. The Communists, his sworn enemies, crafted their concept of fascism around the features of Mussolini’s movement. Clara Zetkin produced an early report for the Third Enlarged Plenum of the Executive Committee of the Communist International in June 1923 that defined fascism as follows:

Fascism is the concentrated expression of the general offensive undertaken by the world bourgeoisie against the proletariat….

Zetkin explicitly insisted on the primacy and novelty of the Italian movement and her characterization both of fascism’s popular character and its relationship to Italian elite interests was on point. The squads, disproportionately middle class (in the broadest sense of the term), did operate in many localities as the strong arm of local employers to smash trade unions. This was very far from the reality in Germany in 1933, where both the Communists and Nazi vote were surging on the back not of strikes and mass mobilization but of depression and mass unemployment. There were street battles, but no factory occupations. The question was not who would control the means of production, but whether there would be any production at all.

***

Of course, these finer points of difference between Nazism and Fascism matter little for the general use of the term “fascism” today. Redefined by political science in the 1950s, it is the name of Mussolini’s movement that echoes down to the present as a pejorative label freely applied to regimes and movements hostile to the values of liberal-democracy, but also by right-wing propagandists in the US to liberal regimes of state intervention. It is telling that the most commonly used label is fascist and not Nazi. Fascism serves to summon the specter of Hitler and the Holocaust without naming them explicitly, which would over-stretch credulity.

Meanwhile, In Italy, just weeks before the centennial, a post-fascist Prime Minister has actually taken office. So what is post-fascism?

The postwar MSI, from which Meloni’s present-day Fratelli d’Italia descend, were the heirs not just to Mussolini’s movement but to the Republic of Salo, the puppet state supported by the Germans after the collapse of Mussolini’s regime in 1943. Salo was the most extreme and violent manifestation of fascism. By the late 1950s the MSI was the fourth largest party in Italy and a vital prop of Christian Democratic rule. By the early 1970s following a twin-track strategy of electoralism and violent radicalism, the party had almost 470,000 members. After splits within the party in the late 1970s and a turn to terrorism by the most extreme wing, the Italian post-fascists revived in the late 1980s and early 1990s, profiting from the collapse of the Cold War party system. After joining Berlusconi’s coalition with the Lega, they reemerged as a distinct party, the Fratelli d’Italia in 2012, following Berlusconi’s ouster from power during the Eurozone crisis. Meloni disowns overt fascist sympathies today, but the lineage of her movement speaks volumes.

But tracing a lineage is not the same as claiming that Meloni is likely to repeat Mussolini’s politics today. Indeed, to make such a claim would be absurd. What then is the purpose of such labeling? One purpose is clearly to place oneself in a lineage of descent rather than a continuity of actions. Political languages invent traditions. Political labels, whether authentic or not, may be helpful to stigmatize ones opponents by historical association. Flourishing such labels may serve your purpose if it is to claim authority as the historical expert. Whether that is a good or a bad thing, depends on what you say (and do) next.

For more on this, check out this fascinating conversation with Nick Mulder, Anton Jäger and Dominik Leusder.

New episode:

On the centenary of the March on Rome, Anton and Dominik are joined by Adam Tooze (@adam_tooze) and Nick Mulder (@njtmulder) for a fairly comprehensive and slightly raunchy recapitulation of the fascism debate. Listen in below:

https://t.co/ZXZILmOOVK pic.twitter.com/WMUPsbgrrm

— Eurotrash (@eurotrashpod) October 30, 2022

If the aim of the game in talking about fascism in the 21st century is actually to suggest real similarities with the movements of a century ago and to draw practical political conclusions from such inferred similarities, the exercise is likely to prove misleading and unhelpful. The conditions of the 21st century in both Europe and the United States are radically different from those prevailing in Italy in 1922 and so too are the movements that emerge in response to those conditions.

You might then ask, why refer back to the past at all? If current conditions are not the same, is enquiring into fascism’s history an antiquarian indulgence? That is a polemical question. But as far as fascism and Nazism are concerned one should approach it with an open mind. There are periods of history that are truly neglected. Stories that have been suppressed and need telling. That can hardly be said for fascism or Nazism. The umpteenth TV documentary about the evil’s of Hitler’s regime most likely serves the interest of escapism and titivation rather than casting fresh and useful light either on history or the present.

The strong answer to the question is that we should be interested in 19th- and 20th-century history not because the present is like the past. Modern history moves too dramatically for that to be plausible. The reason to be interested in those periods of history a hundred years ago, is that they are only a hundred years ago, a blink of the eye in the broader sweep of history, the history of our grandparents and great-grandparents. And it is out of that history that the present was made. The questions that should guide us, are how did we get here? Where do we come from? The challenge is how to understand change on a truly dramatic scale. Change that is indeed ongoing all around us on ever greater scale. One function of history may in fact be to help us grasp that. We may be able to better grasp the protean drama of modern history-making looking backwards than when we confront our own immediate polycrisis.

In this back and forth between present and past, there will, of course, be repetition and similarity in certain respects, but even that will be recognized as significant only against the backdrop of difference.

***

So, with those preliminaries out of the way, if we aim for is a general historical understanding of fascism, I would argue that we have to see it as shaped by three framing conditions. (1) the experience of total war; (2) the active threat of class war and revolution; (3) the shadow of the end of history as defined by the rise of Anglo-American global hegemony.

All three contexts shaped both Mussolini and Hitler’s movements. We can relate to all three of these dimensions form the point of view of 2022, but in large part through difference and contrast rather than similarity of situation.

Mussolini and Hitler were both combat veterans whose politics were defined around that experience. The fact that we mercifully have no experience of total war, helps to make the 21st century in Europe and the US distinctly post-fascist.

Both Hitler and Mussolini railed against the new American-led world order that emerged after 1918. Hitler did so at greatest length in his speeches of the late 1920s, collected in the compilation we call his “Second Book”. Mussolini, who was more of an intellectual, and more aware of the world scene launched his critique of Wilsonianism already in 1919. He defined Italy’s position as that of a proletarian nation that must struggle against British and American plutocracy.

That, however, was an awesome task involving international war. The Western powers had shown their might in crushing the Central Powers led by Imperial Germany. In 1915 Italy had picked the winning side of that war. But the Italian political class knew how close they had come to defeat. Mussolini defined the task of fascism, as Hitler did that of his movement, in terms of ensuring that the next time Italy was involved in a total war there would be no cracks either on the frontline or on the home front.

The moment for their “jail break” effort to break Anglo-American hegemony came in the 1930s, with the Great Depression. In the European arena, it was Mussolini who would lead the way. In Asia it was Japan’s militarists who would lead the way ramping up their efforts to subordinate China. It was an existential gamble and the insurgent regimes knew it. For both Italian fascism and Nazism, their desperate drive to change the world order would bring about their downfall.

Given the odds stacked against them, the reason why it is ultimately fatuous to draw strong analogies between historic fascism and current right-wing movements is that the only true fascist is a dead fascist buried amidst the ruins of their regime. The survivors of the interwar period survived by moderating their position. Those that remained active in fascistoid politic after the epic defeat of 1945 are, by virtue of that fact properly described as post-fascist.

War fought against the odds for existential stakes is not an accidental aspect of fascism, it is a defining feature. The results were predictable. The mobilization of US power, including the Manhattan atomic bomb program, was launched to counter the challenge they posed. To gauge the scale of the joint reaction by the British Empire and the United States, remember that in the summer of 1940, after the fall of France and the rest of North Western Europe, the Nazi regime was allied not only with Fascist Italy but with the Soviet Union and Imperial Japan as well. It took the mobilization of gigantic forces to crush the Nazi block, but that destruction was comprehensive and definitive.

An illuminating contrast is offered in this respect by Franco or Salazar’s regimes – authoritarian but not fascist – in Spain and Portugal. They emerged from the same historic cauldron as Hitler’s and Mussolini’s. At times they cultivated the support of local fascist movements and flirted with fascist ideology. But they survived down to the 1970s, because at the critical moment in the 1940s they shrank from a confrontation with the Western powers. If he had chosen to stay out of the war in 1940 and not to chase his historic destiny, there little reason to doubt that Mussolini could have matched Franco’s longevity. Certainly, the violence of fascist colonial policy in Libya and the war against Ethiopia in the 1930s did not condemn his regime to extinction. Portugal’s authoritarian regime was still fighting its African colonial wars into the 1970s.

Eisenhower visits Madrid, 1959

It was Mussolini’s reckless decision to join Hitler’s world war that doomed his regime and allows us to close the book on it. But at this anniversary it is important to remember that that is not at all what most participants or observers imagined the future course to be. What they saw in Italy was a new-fangled synthesis of fascism’s energy and authoritarianism with more established institutions of political and cultural authority. And this is where Mattei’s new book comes in.

***

In economic and financial terms, the regime that Mussolini established with the cooperation of Italy’s elites not by the kind of adventurous economic policy associated with fascism in the 1930s. It was a regime of thorough-going austerity. But this was austerity not merely as fiscal traditionalism, or cameralism, but as a new science and discipline, a strictly logical, truly neoclassical economics. In the old era of Italian liberalism and the emergency of the war it had struggled to get a hearing. With Mussolini’s rise to power, its moment had come.

The bloody work of breaking the Italian left done by fascist squads between 1919 and 1921, created the political room for maneuver that enabled Mussolini’s regime and his economic advisors to impose severe austerity after 1922. Those economic advisors were not early followers of fascism. They were for the most part liberals who saw in the alliance with Mussolini the condition of possibility for the implementation of a form of pure economics that thought of itself as unpolitical but de facto required authoritarian power.

Not only does Mattei show that Italian liberals collaborated closely with Mussolini’s regime. But she also shows by way of comparison with British fiscal and monetary discussions at the same time, how a common discourse of austerity emerged in the 1920s in the common push to restore monetary stability after the war.

The anchor of this drive was not just national but international. The aim was the restoration of the gold standard. Mussolini, somewhat perversely, saw an overvalued exchange rate – Quota 90 – as a key source of stability and authority for his regime. As Gian Giacomo Migone showed in his classic study The United States and Fascist Italy: The Rise of American Finance in Europe this in turn helped to turn Mussolini’s regime into a darling of Wall Street.

Mussolini made it clear early on that he understood the power of the US. As he put it to King Vittorio Emanuele III in 1923 in urging him to make a state visit to America: “The return of migratory flow into the United States and cooperation with American capital represent two elements of vital importance for us. Beyond the economic advantages…it would be of immense benefit to Italy…because of the inarguable influence it would have on our relations with other States,…and among them none more than England.”

As Mattei shows, unlike the democratically elected politicians who ruled in Paris, in Italy Mussolini’s dictatorship delegated financial policy to a succession of businessmen and technocrats. Unlike the French, they accepted the basic economic terms set down by Congress and articulated by Commerce Secretary Herbert Hoover and Andrew Mellon at the Treasury. Circulating among them, as ubiquitous facilitators of conversations on both sides, were prominent bankers and above all J.P. Morgan.

In 1930 when President Hoover began his last-ditch effort to rebuild the internaitonal order, starting with the London conference on naval arms control, fascist Italy, after Ramsay MacDonald’s Labour government in Britain, was Washington’s favored partner in Europe. When Mussolini’s foreign minister, the charismatic ex-squadistra Dino Grandi, met Hoover in 1931, the president is said to have assured his Italian guest that the vocal minority of antifascists in America should be ignored: “They do not exist for us Americans, and neither should they exist for you.”

Mussolini’s regime, in other words, was not per se an alien force, an “other” that was rejected from the existing international order. On the contrary it was understood, especially, in the 1920s as a force of order, offering a new set of solutions to the problem of capitalist governance and one which forward-thinking liberals and conservatives associated themselves.

And this opens a further disconcerting historical vista. In his elegant study Globalists Quinn Slobodian showed how the Austrian school of neoliberalism emerged after 1918 from the collapse of the Habsburg Empire. It promised to find a way of encasing the economy so that it would be immune to the unleashed politics of national democracy. It would have huge ramifications decades later because of the influence of the Austrian school on Mont Pelerin and the worldwide market revolution. What Mattei shows us, is that a view of economics as having key role in disciplining both state and society went far beyond the confines of the Austrian tradition. It was a basic element in the vision of (new) liberalism from World War I onwards and its influence extended well beyond the diminished crisis-ridden rump of the Habsburg Empire. What motivated it and formed the bridge to the fascists was its desire to restore control – if necessary by repressive means – over government finances, inflation, the workplace and the labour market. The risk otherwise was not Stalinist communism – that was still a far off threat – but a descent into anarchy of the type they saw being played out in civil war Russia.

With her history of the relationship between liberal economists and fascism, Mattei puts the skids under complacent champions of liberal democracy who today summon the fascist figure as a reassuring boogyman. For Mattei this is the launching pad for a round house critique of the role of liberal economics in general. She takes swipes at all the usual suspects – the Chicago boys in Chile in the 1970s or Berkeley economists in Suharto’s Indonesia, or Western economists in Russia in the 1990s.

***

From the perspective of a settled leftist politics this is no doubt a confirming historical narrative. It is a history painted in dark colors, but at least it is one in which the lines of continuity and difference, between the past and the present, between friends and enemies are clearly drawn. Unsurprisingly, reading Mattei as I do, from the position of a left-inclined liberal, I find her portrait of the choices of liberal economists not so much confirming as deeply unsettling.

One might say that a commitment to Keynesian economics would immunize one against the kind of authoritarian austerity which Alberto de’ Stefani and Luigi Einaudi promoted after Mussolini’s “seizure of power”. I would argue that that is the case. But in a more complicated sense than might at first appear.

After all, though the alliance with conservatives and liberals brought Mussolini to power, it also in the first instance constrained the fascist regime. The drive for austerity acted as a check on what a would-be militarist regime could do. Indeed, that was one of the reasons why liberals and even many social-democrats favored budget balance too. It disciplined military spending. Wars, after all, not welfare were the real drivers of government spending, deficits and debt. Fascism in its more aggressive mode in the 1930s, as exemplified by Nazism and the Japanese militarist regime, was a different economic beast. Far from being wedded to austerity, both regimes made use of “new” economics to fuel their expansionary militarization drives. As Keynes himself acknowledged in the preface to the German edition to the General Theory, his macroeconomic theory was “much more easily adapted to the conditions of a totalitarian state”. And on that score the feeling was mutual. Mussolini, who unlike Hitler was something of an intellectual, read and liked Keynes’s 1926 essay, “The End of Laissez Faire”.

So it is not economics as such that draws a sharp line between Keynesianism and authoritarianism. In the case of Keynes himself there can be no doubt that his personal politics and values made fascism distasteful to him. But there is also a more basic answer, which goes back to the three structural conditions that define historic fascism: Anglo-American hegemony; total war; and class war. On all three dimensions one can see Keynes staking out positions that are effectively an answer to the fascist and authoritarian temptation that Mattei skewers in more conventional liberal economists in Italy and that Keynes himself clearly knew to be real.

If Anglo-American hegemony was one of the ultimate targets of fascist politics, Keynes was a self-conscious architect of Anglo-American hegemony. Both after World War I and World War II he worked feverishly to shape a postwar world that would moderate the resentment of the defeated powers, constrain the victors, reduce the chance of radicalization, or, in other words, “neutralize” them. With this in mind, as I hinted in my book Deluge, Keynes should be seen as the anti-Schmitt.

On total war mobilization, the central preoccupation of fascist domestic politics, Keynes too was the architect of a strategy of total mobilization. But his strategy was designed to minimize the disruptive pressure of inflation on the home front and thus secured a maximum for the war effort with a minimum of coercion. He was also an advocate of a strategy of “Homes Fit for Heroes” i.e. a strategy of securing cooperation and mobilization by promises of large-scale postwar reform. Both were clearly designed to address the risk of escalating distributional struggles on the home front without resorting either to massive indoctrination or coercion – the fascist solutions.

But the basic thread running through all of Keynes thought was the need to contain the risk of escalating class struggle. Why? Because Keynes clearly understood, and Mattei’s Italian history shows, that class war was the ultimate challenge to Keynes’s strategy of liberal balance. When push came to shove, as it did in Italy in the early 1920s, Keynes knew which side he was on. As he put it in, “Am I a Liberal?” in the summer of 1925:

Ought I, then, to join the Labour Party? Superficially that is more attractive. But looked at closer, there are great difficulties. To begin with, it is a class party, and the class is not my class. If I am going to pursue sectional interests at all, I shall pursue my own. When it comes to the class struggle as such, my local and personal patriotisms, like those of every one else, except certain unpleasant zealous ones, are attached to my own surroundings. I can be influenced by what seems to me to be justice ad good sense; but the Class war will find me on the side of the educated bourgeoisie.

This was the dilemma, you might say, that the likes of de’ Stefani and Einaudi had found themselves in, in Italy, in the early 1920s. Keynes like them was deeply concerned both by Bolshevism and what he saw as the dull power of organized labour. The Bolsheviks deliberately and organized labour unwittingly might through the escalation of class struggle destroy the place on which a balancing liberalism stood and thus force Keynes to take sides in the class war. Reactionary conservatives were an even greater danger in this respect. They were only too keen to bring on the crisis that would justify their own authoritarian tendencies.

Avoiding the condition of extremis that would evacuate the space for liberalism was precisely what Keynes’s political economics was ultimately intended to do. Conventional gold standard economics was a ticking time bomb as exemplified by the deflationary pressure created by Britain’s return to gold and the general strike that provoked in the spring of 1926. The only way to escape such ruinous confrontations that created the setting for the disastrous collaboration between liberalism and authoritarianism was to convert both the center-ground and the democratic left-wing of politics to an expansionary Keynesian view of economics.

***

A hundred years on from 1922, the problems of that era are not our problems. We do not live in an age of intense and politicized class-struggle, in the aftermath of a total war, or under the shadow of an ascendant Anglo-American hegemony. Our reality is that of the polycrisis. But, thinking about 1922 and the choices made then by the likes of Einaudi and the de’ Stefani must lead us to ask, where are the pitfalls today?

In the classic domains of economic policy, the absence of class conflict and the dampness of wage-price spirals ought to free technocratic policy-making. If it does not, if policy-choices remain locked in a discourse of TINA. If we see no alternative to aggressive inflation-fighting that is a matter of hidebound thinking and narrow vested interests rather than a real structural dilemma.

The two more fundamental challenges of our moment are:

One, THE distributional struggle of the 21st century, namely the battle over the remaining carbon budget, which stands here as a cipher for broader environmental constraints.

Two, the struggle over the terms of a new multipolar world beyond the end of US hegemony i.e. the relation of the West to Russia and China.

These are the challenges for the 21st century and in both dimensions the Keynesian dilemma could not be more urgent: how can progressive and left liberal thinking sway policy so that narrow-minded and self-interested forces do not create disastrous situations in which all the choices, dictated in extremis not merely by good will and good ideas, but by one’s own identity and interest, are disastrous?

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Chartbook #165: Polycrisis – thinking on the tightrope.

This weekend I launched my new monthly column in the FT with a short piece about the idea of polycrisis.

Polycrisis is a term I first encountered when I was finishing Crashed in 2017. It was invoked by Jean-Claude Juncker to describe Europe’s perilous situation in the period after 2014. In the spirit of “Eurotrash”, I rather relished the idea of picking up a “found concept” from that particular source. On Juncker check out Nick Mulder’s wonderful portrait of “Homo Europus”. It turned out that Juncker got the idea from French theorist of complexity and resistance veteran Edgar Morin, who is a whole ‘nother story.

In the meantime, polycrisis was emerging as a term of art in the subfield of EU studies, having been taken up, amongst others, by Jonathan Zeitlin.

I found the idea of polycrisis interesting and timely because the prefix “poly” directed attention to the diversity of challenges without specifying a single dominant contradiction or source of tension or dysfunction.

The term seemed even more relevant faced with the COVID shock. And I took it up in Shutdown to contrast this rather indeterminate European vision of the crisis to, on the one hand, the more compact not to say solipsistic American vision of a grand national crisis centered on the figure of Donald Trump and, on the other hand, the perspective of Chen Yixin, a leading thinker of Xi Jinping’s security apparatus.

Shutdown came out in September 2021. Since then I have explored the concept of polycrisis in the newsletter. And it has begun to acquire widening currency.

Independently of any of my writing, in April 2022 the Cascade Institute published an interesting report on the theme by Scott Janzwood and Thomas Homer-Dixon. They defined a polycrisis as follows:

We define a global polycrisis as any combination of three or more interacting systemic risks with the potential to cause a cascading, runaway failure of Earth’s natural and social systems that irreversibly and catastrophically degrades humanity’s prospects. A systemic risk is a threat emerging within one natural, technological, or social system with impacts extending beyond that system to endanger the functionality of one or more other systems. A global polycrisis, should it occur, will inherit the four core properties of systemic risks—extreme complexity, high nonlinearity, transboundary causality, and deep uncertainty—while also exhibiting causal synchronization among risks.

They even offered a diagrammatic summation:

Picking up on Shutdown, a couple of interesting substack pieces took up the term in early 2022. The rather wonderful Antereisis cultural blog articulated the radical psychological condition we find ourselves in.

Die beengte Welt, der dauerhafte Alarm, die Hysterie, Panik und Paranoia derjenigen, die tatsächlch verfolgt sind: was als “Polykrise” subsummiert worden ist, kann durch sprachliche Artikulation und Rationalisierung allenfalls punktuell aber nie hinreichend kompensiert werden. Das Fortsehen, Forthören und Fortleben – die Apokalypse-Blindheit – sind nicht Ausdruck einer Verweigerungshaltung oder politischen Passivität, sondern mechanische Konsequenz einer Assymmetrie zwischen universalen Herausforderungen und individuellen Bewältigungskapazitäten.

(Loosely) Translation:

The confining world, the permanent state of alarm, the hysteria, panic and paranoia of those who are actually persecuted: what has been subsumed under polycrisis can only be partially and never fully compensated by linguistic articulation and rationalization. Seeing-past, hearing-past, living-past – the blindness to apocalypse – are not an expression of refusal or political passivity, but mechanical consequences of an asymmetry between universal challenges and individual coping capacities.

Christopher Hobson took up the term polycrisis in several interesting posts on his substack and co-authored a piece with Matthew Davies – “An embarrassment of changes: International Relations and the COVID-19 pandemic” – which is framed by the idea.

For them “Polycrisis is a way of capturing the tangled mix of challenges and changes closely interact with one another, bending, blurring and amplifying each other.”

In the last few weeks Larry Summers talked about polycrisis over lunch with Martin Wolf. And the term was also adopted by my friends Tim Sahay and Kate Mackenzie as the title for their excellent new blog at Phenomenal World. All this made it seem an obvious theme with which to introduce the new column at the FT.

The FT essay was a short piece – originally drafted to run to only 750 words. In that short compass I focused on three aspects:

(1) Defining the concept of polycrisis in simple and intuitive terms;

(2) Stressing the diversity of causal factors implied by the term “poly”;

(3) and emphasizing the novelty of our current situation.

There are two aspects to the novelty that I stress in the FT piece, one is our inability to understand our current situation as the result of a single, specific causal factor and secondly the extraordinary scale and breadth of global development, especially in the last 50 years, that makes it seem probable, according to the cognitive schemata and models that we do have at our disposal, that we are about to crash through critical tipping points.

You might say: are you not contradicting yourself? Is development not precisely the single causal factor that is actually the driver of all our crises? To that extent, is there not polycrisis, but just one big crisis?

Though this response expresses a nostalgia for a simpler world that I fully share – I am as attracted as anyone by the idea of history as the gigantic developmental unfolding of “concrete spirit” – the objection fails to reckon with the sheer diversity of crises in the current moment.

Secondly and more importantly it begs the question. Do we actually know what development or growth are? As Bruno Latour forced us to recognize, it is not at all obvious that we do understand our own situation. In fact, as he convincingly argued in We Have Never Been Modern, modernity’s account of itself is built around blindspots specifically with regard to the hybrid mobilization of material resources and actors and the working of science itself, which define the grand developmental narrative.

Marxist friends will no doubt be tempted to say that it all boils down to capitalism and its crisis-ridden development. But, by the 1960s at the latest, sophisticated Marxist theory had abandoned monistic theories of crisis. And in the current moment the obvious challenge for Marxist critics is to explain how CCP-led China has emerged as by far the most consequential driver of the anthropocene. This isn’t to say that Marxist theory might not be able to offer an answer, but, to be convincing, it would be a Marxist theory of complexity and polycrisis, something towards which thinkers like Louis Althusser and Stuart Hall pointed the way.

What I wanted to highlight in the FT piece was this double point: both the fact that we have every reason to think that we are at a dramatic threshold point, but also that our need to reach for a term as unspecific as polycrisis indicates our flailing inability to grasp our situation with the confidence and conceptual clarity that we might once have hoped for.

Implicitly, I am referencing a short-hand history of social philosophy and social theory that goes back to what Reinhart Koselleck called the “Sattelzeit” of the turn of the 18th to the 19th centuries, which saw the emergence of modern historical consciousness in the West. The arc of that intellectual history defined political, historical, economic and social thinking at least down to the mid 20th century. From the 1960s onwards a range of thinkers – Arendt, Anders, Bloomberg, Foucault, Althusser are just a few of the thinkers that come to mind – recognized the need to rethink and resituate inherited categories of social analysis and political philosophy in light of contemporary development. By the 1970s and 1980s that diagnosis was framed by an increasingly powerful environmental critique, which has taken on more and more encompassing form in the dawning awareness of the anthropocene. Since the 2000s, as global development lurched forward on the back of China’s world-changing economic growth, we have been increasingly confronting realities that can be described only in terms that would once have seemed implausible or grotesque.

In writing the short FT piece about the polycrisis I had Bruno Latour very much on my mind and it shows in my double emphasis on the heterogeneity of forces at work in the current moment and on the conceptual challenge we face.

The logic of accumulating risks on the other hand points less to Latour – whose account of that process was rather vague – and more obviously to Ulrich Beck and his vision of “risk society”. For me Beck was a key reference point in 2020 when we were face to face with the COVID shock. The point that a Beckian version of my FT haiku might have foregrounded is the degree to which polycrisis emerges in the current era out of our efforts at crisis-management. What Beck taught us was that risk is no longer in any simple sense “natural” but a phenomenon of second nature.

A Beckian reading of polycrisis might look a bit like the version produced by Christopher Hobson and Matthew Davies summarized on Hobson’s substack.

A polycrisis can be thought of as having the following properties:

(1) Multiple, separate crises happening simultaneously. This is the most immediate and comprehensible feature.

(2) Feedback loops, in which individual crises interact in both foreseeable and unexpected ways. This points to the ways that these separate crises relate to each other.

(3) Amplification, whereby these interactions cause crises to magnify or accelerate, generating a sense of lack of control. The way these separate problems relate and connect works to exacerbate and deepen the different crises.

(4) Unboundedness, in which each crisis ceases to be clearly demarcated, both in time and space, as different problems bleed over and merge. It becomes increasingly difficult to distinguish where one issue ends, and another commences.

(5) Layering, a dynamic Tooze attributes to Yixin’s analysis, whereby the concerns of interest groups related to each distinct crisis overlap ‘to create layered social problems: current problems with historical problems, tangible interest problems with ideological problems, political problems with non-political problems; all intersecting and interfering with one another’ (quoted in Tooze 2021, 18).

(6) The breakdown of shared meaning, stemming from crises being understood differently and from the complex ways in which they interact, and how these interactions are subsequently perceived differently. As each crisis blurs and connects to the other, it becomes more difficult to identify a clear scope and narrative for each distinct crisis, as well as coming to terms with all the interactions between different issues.

(7) Cross purposes, whereby each individual crisis might impede the resolution of another crisis, in terms of demanding attention and resources, and the extent to which they have become tangled together makes it difficult to distinguish and prioritise.

(8) Emergent properties, the collection of these dynamics, which all exhibit a high degree of reflexivity, exceeds the sum total of its parts. The polycrisis is ultimately much more than a collection of smaller, separate crises. Instead, it is something like a socio-political version of the ‘Fujiwhara effect,’ a term used to describe when two or more cyclones come together, morph and merge.

Hobson wrote a nice follow up post on Ulrich Beck’s final book The Metamorphosis of the World.

It had not struck me before, but Metamorphosis also figures prominently in the title of Latour’s COVID book, After Lockdown: A Metamorphosis. A theme to return to.

Defining polycrisis in these rather grand and abstract terms runs the risk of airy vapidity. It will be a bit too Zeitgeisty for some. But that seems a risk worth running given the drama of the situation we are in. We need to think “big”. Or rather we need to learn how to span the void between the very big and the very particular, the micro and the macro – another Latourian theme.

What all this talk of grand social processes and movements of the mind should not obscure is the extent to which the current crisis is also a matter of identity, choice and action. As much as it is a matter of sociology, social theory and grand historical sweep, it is also a matter of psychology, both at the group and very intimate level, and of politics.

The polycrisis affects us at every level. And if you want to take seriously the problem of thinking in medias res you cannot bracket the matter of psychology. For now, however, I am going to defer that question.

The issue of politics must however be flagged. And I will give credit for this to Anusar Farooqui aka @policytensor.

The tension of the current moment is not, after all, simply the result of long-term processes of development, or environmental change. It is massively exacerbated by geopolitical tension resulting from strategic decisions taken by state elites. Some of those are elected. Some not.

What is characteristic of the current moment, and symptomatic of the polycrisis, is that the decisive actors in Russia, China and the United States, the three greatest military powers, are all defining their positions as though their very identities were on the line.

In the short FT piece I gestured to the Cold War between China and the US – an inadequate short-hand, admittedly. And then went on to argue that recent history has been shaped by improvisation, makeshift, innovation and crisis-fighting. Is that a fair or fitting description? Can one really say that the Biden administration, the Chinese, Putin’s regime are crisis-fighting? Are they not escalating?

It is surely a matter of both, and in interdependence. Each of the major powers will insist that they are acting defensively (crisis-fighting in the extended sense). But what this entails, if you feel fundamental interests are at stake, is escalation, even to the point of engaging in open warfare or risking atomic confrontation. It is like the classic Cold War but only worse, because everyone feels under truly existential pressure and has a sense of the clock ticking. If no one confidently believes that they have time on their side – and who has that luxury in the age of polycrisis? – it makes for a very dangerous situation indeed.

Obviously, these are huge themes and I look forward to using different platforms to explore them in future installments both here, in print and elsewhere.

It may be a tightrope walk without an end. But at least we don’t walk it alone!

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Ones & Tooze: Tooze Unplugged

This week we bring you a live recording of Ones and Tooze, taped at the Caveat Theatre in New York City. The show begins with a segment on Adam himself—how he came to be an economic historian and what political and philosophical tenets underpin his writing. Cameron and Adam also discuss the malign influence of billionaire Peter Thiel on American politics, and the declining importance of Wall Street as a place to hang out your shingle.

Find more episodes and subscribe at Foreign Policy

Welcome to the world of the polycrisis

Today disparate shocks interact so that the whole is worse than the sum of the parts

Read the full article at the Financial Times

Chartbook #164 The return of TINA & the impasse of 2022 inflation politics.

The politics of inflation in 2022 are surprising.

Perhaps my priors were wrong, but as price indices surge by almost 10 percent I would have expected more talk about the losses inflicted on “small savers” and their vulnerable bank accounts, in other words the classic “petty bourgeois” politics of inflation.

Perhaps the relative lack of such talk points to the fact that no one actually believes that this inflation will be anything more than transitory, so that it amounts not to a landslide devaluation, but a one-off tax on savers and there is thus less reason for panic. Perhaps savers now have more diversified portfolios and are better protected. If so, the collapse in stock market prices hardly offers much comfort.

Or perhaps, as some historians have long suggested, talk of protecting the “widow’s pension”, was never more than an instrument in a broader anti-inflation politics and right now there are better instruments to hand.

In light of the furious debates over debt sustainability since 2008, one might have expected more discussion of the extraordinary windfall (to tax payers) delivered by a surge in nominal GDP – a surge in the denominator of the debt/gdp ratio, or, in other words, a real devaluation of the public debt. In Italy, long seen as the weak link amongst the G7 economies, nominal GDP growth reached 7.919 percent in March 2022.

Source: CEIC DATA

Back in 2019 many of us would have cheered ecstatically at the prospect of such an acceleration in nominal GDP growth, promising, as it does, to bring down the debt/GDP ratio. Clearly rapid real growth would be preferable. But inflation too serves to reduce the ratio. Indeed, as experience since 1945 has shown, the best way to undramatically liquidate an unmanageable debt burden is to modestly elevate the rate of inflation. Though higher inflation for longer is now what many are predicting, they say it like it is a bad thing.

If a conversation about the balance sheet effects of the current inflation – both the costs and the benefits – has been going on somewhere and I have missed it, please let me know.

Instead, what has taken center stage is a feverish debate about the cost of living, price controls, the risk of Gilets Jaunes style protests. This is not by itself surprising. For far too many people, the cost of living crisis is acutely real. What is striking however is how seemingly disparate or even opposed strands of politics and policy debate have converged around what amounts to an anti-inflation consensus. If you frame inflation as a problem of the cost of living, it seems, there really is no alternative but to end inflation by all means necessary.

Even Jacobin magazine – the flagship journal of the American new new left – whose beautiful new issue I had the pleasure of helping to launch a few weeks ago, chimes in with this chorus, denouncing inflation and unconventional monetary policy as an attack on the American working-class. You can listen to the spirited discussion we had here:

But stand back for a second and consider an alternative framing. Consider for instance the vision offered by the BIS earlier in the summer. They argued that inflations were dangerous because they tend to induce a comprehensive societal shift towards greater inflation-sensitivity. I discussed their report in Chartbooks 133.

Chartbook #133 Under the hood of the power dynamics of inflation

In 2021-2022 we are living through something very unusual – a historic break, a sudden shift from a low inflation regime, that had persisted for several decades, to a moment of much higher inflation. Amongst those who fear inflation, it is raising deep and concerning questions. Might we be entering a new era, a new regime of higher inflation? What, prev…

As I explained there, what really worries the BIS is that rising prices may become a comprehensive unsettlement of the status quo:

Ultimately, the most reliable warning indicator is signs of second-round effects, with wages responding to price pressures, and vice versa. These can be especially worrying if they go hand in hand with incipient changes in inflation psychology. Examples include demands for greater centralisation of wage negotiations or indexation clauses, or surveys indicating that firms have regained pricing power, as part of broader changes in the competitive environment, as observed in some countries recently (Chapter I).

Their concern is more abstract terms is that inflation will emerge as a macroeconomic and, one might say, a macrosocial phenomenon.

Chartbook #134: Inflation as an emergent macroeconomic phenomenon

The current situation of unexpected and rapid price increases, has forced us to define more clearly what is inflation. In a nominalist vein you could say simply that inflation is whatever the CPI or some other index says it is. And for everyday purposes it is almost perverse to refuse this simple answer…

All of that is code for a world in which organized labour is stronger and in which workers receive not gratuitous handouts from socially minded employers to help with the grocery bills, but proper cost of living adjustments.

As the FT recently reported, many well-meaning UK employers are currently handing out one off payments to the their staff. But none of them are willing to actually properly adjust wages. Talk about “team transitory” with a vengeance.

The upshot of the BIS analysis is that it is crucial for central banks to act fast to prevent a price surge unleashing a social avalanche. This is the classic justification for anti-inflation politics. From a historical point of view moments of inflation have undeniably been moments of opening for the left – think of the 1914-1925, 1940s and 1970s. But if the latest issue of Jacobin is anything to go by, there seems little appetite for such a militant politics of collective organization in the current moment.

Read Henwood’s article with this link.

Of course the left does not speak with one voice and Jacobin has also offered a platform to those, like Hadas Thier, arguing for a more assertive approach to the class politics of inflation.

In the UK, faced with the omnishambles of Tory economic policy, Keir Starmer’s labour party has distanced itself from the strikes of the railway workers and has adopted a “sound money” line.

Perhaps they are right. Perhaps Jacobin and Starmer are merely realistic when they register that militant class politics around the cost of living is a losing political proposition. Perhaps talk of wage-price spirals is either over-excited (from the left) or alarmist (from the right). Certainly there is precious little evidence right now of a spiral.

In Europe, wages even for highly organized German industrial workers continue to lag behind inflation.

Where is the "wage-price spiral" in Germany? The latest agreement in the chemical industry leads to annual increases of 3.25% over two years, with one-offs. This will almost certainly imply further real wages losses in 2023/2024.

chart via @OliverRakau pic.twitter.com/d4FNKxuCtq

— Philipp Heimberger (@heimbergecon) October 20, 2022

In the US in some sectors wages have caught up, but they are not driving prices on a broad front.

But might things change? Inflation is a dynamic. Will a prolonged period of rising prices unleash the much feared spiral?

The BIS suggests as much. But in the latest issue of the World Economic Outlook, another team of high-powered mainstream economists, this time from the IMF, takes a look at the question of wage-price spirals and comes to rather different conclusions. The IMF find that apart from a few very unusual incidents, which they discuss at some length, there is, in fact, remarkably little systematic evidence that periods of rising inflation, rising nominal wages and falling real wages – our current situation – tend to develop into sustained spirals of wages and prices.

Source: IMF blog

So, no wage-prices spiral. Less fear of inflation? Less need to stamp on the monetary break? That is what would follow from the “classic” experience of the 1970s. That has been the orthodoxy for half a century. But that is not our world in 2022. Au contraire. What the IMF foregrounds is the real wage shock. If there is no wage price spiral, if expectations are backward-looking then as prices spike, real wages will fall. To prevent that, what policy should we adopt, in the interests both of working people and aggregate economic growth? The IMF’s conclusion seems clear: A severe does of anti-inflationary medicine, administered as soon as possible!

When wage and price expectations are more backward-looking, monetary policy actions need to be more front-loaded to minimize the risks of inflation de-anchoring. Using a newly developed model of expectations and wage and price setting, scenario analysis suggests that the observed decline in real wages has acted as a drag so far, reducing price pressures and thereby helping inhibit development of a wage-price spiral dynamic. However, the more backward-looking (adaptive) expectations are, the greater the chances that inflation could de-anchor to a higher-than-target level. The monetary policy response in this inflationary environment should depend on the nature of wage and price expectations: the more backward-looking they are, the quicker and stronger the tightening needed to avert inflation de-anchoring and prevent large declines in the real wage.

So in 2022 it turns out that whether or not you fear wage-price spirals (BIS) or doubt that they are an immediate threat (IMF), or simply don’t think that the Democrats can win on the back of large-scale working class militancy (Jacobin) you conclude that we should put an end to inflation as soon as possible by all means necessary.

At this point, I don’t want to revert to the question of whether US inflation is actually transitory or not. Call it what you will, the consensus forecast right now is that inflation has peaked in the US, the Euro-area and the UK. And it is unlikely that the monetary policy turn of the last few months has very much to do with that. If central bank policy has an influence it will be mainly on what happens next.

Source: Daily Shot

I want simply to register this remarkable convergence of analyses around the conclusion that there is no alternative to stopping inflation as quickly as possible. And to ask, in a Keynesian spirit, whether that is really persuasive.

As far as balance sheet effects are concerned there are good reasons for thinking that the more time we take in getting inflation back down to 2 percent, the better. If we live in a world of debt, a sharp spike in interest rates is very dangerous indeed. On the other hand, a sustained period of modestly elevated inflation is exactly what the doctor ordered. Why else did many of the best and the brightest in macro policy once advocate an inflation target of 4 percent or more. That is now easily within our grasp. Why spurn the opportunity?

The cost of living crisis on the other hand is not properly speaking a macroeconomic issue at all. It is a problem of poverty, inequality, precarity and unequal power relations in labour markets. If one is serious about addressing those problems, the solutions are clear enough: Raise benefit levels substantially above the rate of inflation. Control the prices of essentials, if you must, but only for the purchases of those on the lowest incomes. Make the tax system more progressive and remove punitive benefit traps for those on low incomes. Rebalance the labour market by institutional reforms that empower trade and individual workers. Run positive labour market schemes. Redress the overlapping structures of racism and discrimination that concentrate poverty amongst minorities, single mothers and children. Do all of this not slowly, but with the urgency of the cost of living crisis at your back.

This cannot be a top down, drawing board exercise. Addressing inequality, discrimination, poverty is not as simple as conducting monetary policy. The world is designed to make central banks and their instruments pivotal to the economy. They are structurally empowered, designed to be the ultimate technocrats perch. By contrast, in the vast majority of settings welfare and social services are more or less deliberately underfunded, understaffed, underpowered and institutionally hemmed so as to ensure that they are unable to deliver real uplift and lasting and sustainable protection for their “clients”. They are not empowering but disempowering mechanisms both for those they serve and their staff. So a true answer to the “cost of living crisis” would be a question not just of more spending but of political organization and mobilization to create a state structure actually capable of securing a decent standard of living for those in the bottom half of the income and wealth distribution.

This, you might say would be not just a wage-price spiral but something closer to a comprehensive politics of the standard of living, of well-being, of living well. It is the care agenda of the Green New Deal updated for the inflation moment.

Of course, this will likely involve more public spending. So if you are worried about excess demand – inflation hawks and MMT advocates can agree on this – impose offsetting increases in taxes on those on higher incomes who are better able to pay and, despite lower marginal propensities to spend, are also responsible for the majority of consumer expenditure. If that lower propensity to spend means that the tax increases have to be stiff, so be it.

But adopt this macroeconomic anti-inflation stance only if you judge that it is not actually in the interests of a broader social balance to allow modest rates of inflation to continue for a while until it has redressed dangerous debt overhangs.

This, or something like it, would be a “functional finance”, left-Keynesian response to our current predicament. Has it any chance of being realized? I don’t think it does. Of course Europe is experimenting with energy price controls and various types of subsidy regime. This is clearly essential. But one should not mistake emergency policy measures for a broader political shift. To exalt over the politics of price control in the EU in the name of post-Keynesian heterodoxy, is a bit like exalting over central bank asset purchases in 2020 as the harbinger of an MMT-inspired total mobilization of the fiscal and monetary state.

Ultimately, spelling out this alternative vision of a progressive response to inflation serves, therefore, to drive home a rather grim realization: the anti-inflation consensus of 2022 is conditioned by not one, but two moments of resignation.

It is conditioned by the fact that there is no powerful wage price spiral, nor much prospect of one developing and for a party like Labour to give political backing to a militant wage push seems, to its current leadership, like a risky proposition. As a result, real wages are taking a savage hit. And so left-wing criticism comes to focus on inflation itself as the problem that needs to be addressed.

But why are the social problems exposed by the cost of living crisis not the focus rather than general inflation? Why conflate the two? For some this is no doubt a cynical conflation, an updated version of the rentier interest that hides behind the “window’s pension” argument. But that cannot explain the breadth of the anti-inflation appeal. It surely reflects a deep skepticism about the efficacy of a proactive state-led policy of redistribution and uplift for those most seriously victimized by the cost of living crisis.

So out of this double resignation – both about the chances of social mobilization and the possibility of progressive state policy – “sound money” progressivism emerges by default as the best defensive option. We are back to TINA (there is no alternative), it seems.

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Chartbook #163: Warfare without the state – New Keynesian shock therapy for Ukraine’s home front.

As the war in Ukraine rages on, the question on the battlefield is whether Russia resorts to nuclear escalation. In Washington the political consensus is crumbling. After the midterms will a re-energized Republican party pull back from support of Ukraine? Meanwhile, Ukraine celebrates its military triumphs but is increasingly concerned about its mounting economic and social difficulties. In Washington during the IMF and World Bank meetings earlier this month, all three questions – nuclear risk, GOP risk, and economic and financial risk – converged.

It is clear that Ukraine, unlike Russia, faces an urgent economic and social crisis. The World Bank and IMF at their latest meeting confirmed dark predictions that Ukraine’s GDP will likely shrink by 35% this year. More than ten million people are displaced and need relief. As one report notes: “According to estimates by the National Bank of Ukraine (NBU), more than a million workers have been dismissed from previous employment and more than half of firms have cut nominal wages (in many sectors by 50%) since the war started. Many firms report operating under reduced hours.”

Furthermore, it is increasingly clear that the policies with which Kyiv has successfully met the early stages of the war are not sustainable. Inflation is surging towards 30 percent and more. The national currency, the hryvnia, has fallen in value by roughly 70 percent. Meanwhile, Ukraine’s foreign exchange reserves are being burned up in the effort to slow the depreciation of the currency.

There is gamesmanship on all sides. In negotiating for concessions from creditors Kyiv has no incentive to paint its situation in rosy colors. But there is little doubt that the situation is truly serious. By the winter Ukraine’s parlous economic and financial situation may well begin to undermine its ability to continue the war.

There is an obvious solution in the form of foreign aid. But will that be forthcoming? If not, what does realism dictate? And specifically what is the role of Western commentators and experts in such as situation? I am prompted to ask these questions both by reflecting on my own engagement with the issue and by a close reading of a report issue by CEPR on September 14th co-authored by an all-star group of American and European economists.

The report is clearly motivated by real concern for Ukraine’s situation. But I fear that its proposals threaten to undermine what it seeks to defend. When democracy is under attack we need to tread carefully on political economy. The CEPR authors do the opposite. Contrary to what you might expect, namely that war would lead to a search for solidaristic social and economic measures to shore up the Ukrainian home front, the CEPR team demand radical deregulation. In this respect they outdo the imagination of even a radical observer such as Slavoj Žižek who in a recent piece in project syndicate fondly imagined that the war had led to a temporary retreat of neoliberal designs on Ukraine. History, it seems, is more radical than that. Licensed by formulaic assumptions about endemic corruption and inefficiency on the part of the Ukrainian state, the CEPR authors propose to sever any association between war-making and the state as anything more than a residual safety net. The 21st century has thus given birth to a new strange new vision of warfare without the state. This is all the more striking for the fact that it emerges unbidden out of a far more familiar set of questions.

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The most urgent issue at hand is, after all, how to pay for Ukraine’s war. Ukraine’s tax base is weak. Military spending is surging and cutting non-military spending is easier said than done.

7. There is little that can be done on the expenditure side in Ukraine. Cutting spending during the war is neither realistic nor prudent. pic.twitter.com/Xh1PotR5GQ

— Elina Ribakova (@elinaribakova) October 17, 2022

h/t @elinaribakova of the IIF an essential follow!

Foreign funding covers only a fraction of the resulting deficit. Local investors are not keen to buy Ukrainian local-currency bonds, on account of inflation. So borrowing from the central bank, the NBU, i.e. printing money has become the last resort of (inflationary) war finance.

4. Ukraine needs funding, but also a credible macro framework. One cannot be caught in a program like Argentina or Egypt where the lack of a credible macro framework meant the gap was an ever-increasing number. The NBU is the largest "donor" to the budget it prints money. pic.twitter.com/65Hnzwqtq0

— Elina Ribakova (@elinaribakova) October 17, 2022

No central bank wants to preside over rampant inflation. Since the summer, the NBU had been urging the Zelenskiy government to raise the interest rates on the debt that it issues to make the loans more popular. The government has demurred.

Back in September, I argued in Chartbook #149 that the social and economic pressure on Ukraine would likely exacerbate divisions within the elite and notably those between the government and the central bank. At the time – those were the days of Ukraine’s spectacular military advances on the Northern front – I felt some nervousness about even bringing up the issue. But then, on October 6, under somewhat mysterious circumstances, Ukraine’s central bank governor Kyrylo Shevchenko resigned and disappeared from the scene, to reemerge on facebook somewhere outside the country. He claimed medical grounds, but it also emerged that he is facing a corruption investigation.

Some very well-informed observers note that this may be all there is to it, a corruption case – see for instance the commentary by @DaveDalton42 who is a great follow on Ukraine’s political economy. But one does have to wonder why a corruption investigation, of which there are presumably many ongoing at any one time, should have been allowed to unseat such a critical official just ahead of the IMF meetings. Strikingly, Anders Aslund, who can hardly be accused of lacking sympathy for Kyiv, interpreted Shevchenko’s departure in political terms.

The Ukrainian Rada accepted NBU Chair Kyrylo Shevchenko's resignation for "health reasons" with 263 votes. He was only allowed 2 years on the job. His two excellent predecessors received each only 3 years on the job. Nobody was allowed serve a full term.https://t.co/g0Ih0CmzQz

— Anders Åslund (@anders_aslund) October 6, 2022

Likewise, the well-connected Bloomberg team of Volodymyr Verbyany, Jorge Valero, and Daryna Krasnolutska did not shrink from a political reading of the reshuffle at the NBU. Tensions between the government and the central bank go back to June and the new boss at the bank, Andriy Pyshnyi is well connected in Zelenskiy’s circles.

With Zelenskiy’s government continuing to put pressure on the central bank to stretch its capacity to finance the war-battered budget, it’s not clear how Pyshnyi, a 47-year-old ally of the president’s chief of staff Andriy Yermak, will react. “This is the main problem and threat,”said Dmytro Boyarchuk, executive director of the economic-research company Case Ukraine in Kyiv. After serving on Oschadbank’s board in the early 2000s, Pyshnyi began his political career when President Viktor Yushchenko appointed him deputy head of the National Security and Defense Council. He and his allies later joined forces with the political party that became the driving force of the so-called “Revolution of Dignity” that ousted pro-Russian President Viktor Yanukovych in 2014. He resumed his banking career soon after, serving as Oschadbank’s chief executive officer until 2020. While Pyshnyi is a political and business veteran, he doesn’t have universal support among economists, some of whom said a candidate with more of a technical background would be a better fit. “The main monetary body should be governed by an economist, who understands macroeconomic processes, not by a business person like banker,” Boyarchuk said.

Given the instability of Ukraine’s economic policy team and the apparent resolution in favor of Zelenskiy loyalists, who immediately announced that they were holding interest rates at their current levels, the question now becomes whether Kyiv can establish what Elina Ribakova of the IIF (the chief lobby group of international finance) describes as a “credible macroeconomic framework”.

***

If you were looking for such a framework one of the places you might be tempted to go would be the September 14 report published by the CEPR team. They formulate Kyiv’s dilemma in dramatic terms.

For over 160 days, Ukraine has been resisting Russian aggression. A prolonged war is increasingly likely, a prospect that calls for a recalibration of the country’s macroeconomic strategy. Specifically, the current policy mix, which relies on running down foreign reserves and other temporary measures, is progressively untenable. Unless altered, this course will result in a major economic crisis that will cripple Ukraine’s ability to sustain its war effort over an extended period.

They then go on to argue:

The government can hope for foreign aid in necessary amounts, but this may be wishful thinking: the moral support for Ukraine is only partly translating into a strong financial lifeline. The recommendations in this report will help Ukraine adjust to this reality.

So, with Ukraine’s survival and Europe’s future at stake, what does “realism” dictate?

The report is divided into four parts. The first three components, as they pertain to macroeconomic stabilization and the question of how to pay for the war are, in fact, easy to agree with. The Ukrainian state clearly needs to strengthen its revenue base. It needs to ensure a modicum of price stability. It should let the exchange rate depreciate whilst preventing mass capital flight by means of tough capital controls.

To their credit the CEPR team note the need for progressive taxes to finance the war.

Ukraine has a flat personal income tax with a rate set at 18%. The existing military levy (introduced in 2015) is also a flat 1.5% of income. If the government cannot make these taxes progressive, it can introduce a progressive ‘war surcharge’ (for example, the surcharge would apply only to income or capital above a certain threshold) that may be easier to accept politically and could be rolled back after the war. Higher taxes on luxury items can also help to make taxation more progressive.

Beyond tax revenues the team aims for an ambitious agenda of domestic resource mobilization.

The aim should be to increase the collection of tax revenues and for remaining shortfalls to be financed primarily through non-monetary means: preferably through external aid, but if not, through domestic debt issuance, with much less reliance on seigniorage (printing money).

How exactly domestic savers are to be persuaded to subscribe to war loans at a time of rapidly rising inflation, remains unclear. Handwaving towards the example of the US in World War II is largely beside the point. Most likely, Kyiv will have to rely on forced savings.

Sensibly enough they argue for a “durable nominal anchor” i.e. price stability.

The aim should be for relatively low inflation. In a time of national mobilisation, the main responsibility for attaining price stability falls on the fiscal authority, which can strongly influence inflation through the tools it chooses to raise resources from the domestic private sector. The government should aim to enhance national savings rather than rely on monetary financing from the central bank. In coordination with fiscal authorities, the central bank should implement a flexible framework to support macroeconomic stability. A managed float of the exchange rate is consistent with this goal.

Third, external imbalances should be addressed through a combination of strict capital outflow controls, restrictions on imports, and some flexibility in the exchange rate to avoid jeopardising internal macroeconomic stability in the face of huge fiscal needs. A comprehensive standstill on external debt payments is essential.

All of these are sensible, stability-orientated policies that seem well-designed to secure a platform from which to sustain the war effort. All the more jarring is the fourth section of the CEPR report in which the team depart from the task of macroeconomic stabilization to discuss the adjustment of Ukraine’s economy to the shock of the invasion. In this section, all notes of sensible caution are abandoned in favor of a breezy radicalism and a fatalistic view towards the Ukrainian state itself.

… although wartime governments usually take over the allocation of resources, Ukrainian circumstances call for more market-based allocation mechanisms to ensure cost-effective solutions that do not overburden the state capacity, exacerbate existing problems (such as corruption), or encourage (untaxed) black market activities. To this end, the aim should be to pursue extensive radical deregulation of economic activity, avoid price controls, and facilitate a productive reallocation of resources Ukraine’s very survival – and Europe’s future – is at stake. Extraordinary challenges must be matched by extraordinary policies and extraordinary support from Ukraine’s international partners.

Faced with the shock of Russian invasion rather than seeking to strengthen the Ukrainian state, the authors call for it to stand back.

Historically, wartime governments have relied on a mix of central planning and market-based allocations. In many cases, governments had to play a critical role in the economy to mobilise resources to produce weapons and munitions, given market incompleteness and imperfections (and lack of confidence in the market mechanism during WWII, which occurred in the aftermath of the Great Depression). But allocating resources through rationing and executive direction requires institutional capacity. Ukraine currently lacks such capacity to micromanage flows of goods and services to meet the needs of the defence and civilian sectors. Hence, the capacity of the government to direct the economy should be used sparingly … market-based mechanisms can be helpful in reinvigorating the economy, thus providing a larger tax base. To this end, the government should minimise regulation and other red tape that can constrain or slow down the reallocation of labour, capital, and materials in the economy. On balance, market-based allocations are preferred.

This puts a rather different complexion on their fiscal policy advice. When it comes to non-military government spending the report takes a stern view.

The need to provide safety nets is urgent and clear: the UN estimates that approximately 12 million Ukrainians need humanitarian assistance. Still, the government can be more efficient in its provisions. For example, it recently decided to fix prices for utilities and other public services. Apart from undermining the financial health of state-owned enterprises and private firms that provide these services and goods and creating a need to recapitalise these providers, this blanket approach is costly because it effectively subsidises households and businesses that can afford higher prices, and because it creates disincentives for saving energy and other critical resources. Current financial assistance to refugees and internally displaced people roughly corresponds to providing basic income. While this approach was adequate in the early chaotic days of the war, the cost of basic income is high. There is no differentiation between vulnerable and relatively well-off refugees … Furthermore, this type of assistance does not create an adequate incentive for refugees to look for jobs, while getting displaced workers back into the labour force should be a priority for the government. To this end, the government can tie continued assistance to job search and employment in public works.

As far as possible the report argues the basic functions of Ukrainian government should be outsourced.

Doctors Without Borders can provide basic medical services, while the UN and Red Cross can provide (and pay for) medical supplies. Spending on cultural programmes (such as protecting museums and galleries) can be covered by international organisations and NGOs.

And given the exodus of a large part of the population, reserved categories of civilian spending cannot be sacrosanct:

Although military spending is the highest priority and hence must be protected from budget cuts, the government may need to re-examine other currently protected items of spending categories. Furthermore, spending should not be tied to pre-war guidelines or objectives (e.g. X% of GDP should be allocated to Y). For example, given that many children and young adults have left the country, the number, locations, and budgets of schools and universities can be recalibrated, freeing up resources for other uses.

On price controls the CEPR teams argues against responding to the social crisis by limiting price movements. It offers a familiar series of arguments about inefficiency and market distortions etc., but then adds this high-tech zinger

… price controls are often justified by the need to ensure solidarity and equal access to goods. However, governments during WWII and other wars lacked the technology to target aid to those most in need. The current level of digitalisation provides alternatives to price controls, such as targeted transfer payments, that can protect vulnerable groups of the population at a lower cost in terms of economic efficiency.

The CEPR team thus seems to imagine a Ukrainian society and economy adjusting to the shock of the war, assisted by high tech and NGOs, but with the Ukrainian state itself pruned back as far as possible. And this vision becomes explicit when it comes to the question of deregulation.

As a result of the Russian invasion, some sectors and locations in Ukraine have little to no economic activity currently. The released resources must be employed elsewhere, and government policies should facilitate this large-scale reallocation of resources. The government has encouraged businesses to move to Western Ukraine, where security risks are lower, but this policy has had only modest effects (fewer than 1,000 firms have moved). This problem can be addressed by a radical liberalisation of markets to accelerate the flow of the workforce and capital towards sectors/regions where the economy can operate robustly. For example, the government dramatically loosened labour market regulations (e.g. firms can fire workers relatively easily and unilaterally suspend elements of labour contracts; workers who would like to quit do not need to give advance notice to their employers). This approach should be applied to other areas. Land regulation, access to electricity, and other infrastructure should be streamlined to allow easier reallocation for firms. … Perhaps, the government can appoint a high-level official (e.g. ‘deregulation chief’) to coordinate and push for deregulation.

In conclusion the team ends by arguing

The marathon of this war requires prudence and caution in public finances, a durable nominal anchor, a resilient financial system, a careful management of external balances, and flexibility and efficiency in the allocation of scarce resources. Various branches of the government must coordinate their efforts to this end.

The CEPR reports thus ends with a jarring and, it seems, largely unselfconcious juxtaposition: On the one hand, when it comes to macroeconomics, what is called for is prudence, caution, durability, resilience. On the other hand, when it comes to the fate of the Ukrainian economy, the CEPR team envision a radical liquefaction of labour market regulation, the land market etc.

Ukraine has turned out to be a very competent military actor but the experts continue to doubt its capacities as a social or economic actor. So best to strip to strip those regulations down to the bone. The CEPR’s proposals would seem to amount to a vision of warfare without the state.

You might say that this is the apotheosis of the “MIT synthesis” as classically proposed in Paul Samuelson’s textbook, in which macroeconomic stabilization is combined with an uninhibited embrace of conventional, markets-first microeconomics.

But since several of the CEPR authors are associated with “new Keynesianism” in the US and since they invoke WWII and New Deal experience as a guide, let it be said that their position is the antithesis of Keynes’s own position. He argued for active macroeconomic management precisely because he considered an assault on the collective structures of society as ruinously dangerous.

***

One might criticize the recommendations as a remarkable example of the maxim that one should never let a crisis go to waste. They are a typical, top-down technocratic proposals for radical social upheaval justified by the claim that the end justifies the means. One might describe them as an attack on the social fabric of Ukraine under the mantle of martial law and limited freedom of the press. You might think of them as an anti-politics. Except that they are not. In fact, as the reference to the evisceration of Ukraine’s labour law suggests, the CEPR team are explicitly taking sides with the highly politically contentious deregulatory agenda of the Zelenskiy government and its supporters in parliament and in Ukrainian business.

The labour market measures which the CEPR team cite as a model for their deregulatory drive were first touted in 2020 but stopped in their tracks by domestic opposition and the COVID crisis. They were reintroduced in 2021, in part with inspiration from a consultancy funded by the British embassy, which, in the mounting tension with Russia, spied an opportunity to bounce the measures through. They were finally signed into law in August 2022 over protests from European labour movement. The one international agency which has not had its grandstand moment in Kyiv this summer is the International Labor Organization (ILO).

The legislation that was signed into law by Zelenskiy at the end of August effectively removes 70-80 per cent of the country’s workforce—employees of small- and medium-sized enterprises—from the protection of national labour law. As Thomas Rowley and Serhiy Guz report in Social Europe.

According to an ILO technical note, the legislation ‘appears to exclude a significant share of the Ukrainian workforce from … the general labour law through the establishment of a parallel and less protective regime’. It will institute the possibility of ‘termination at will’ of employment and ‘unilateral change by the employer of essential terms and conditions’ of work.

Under pressure from opponents of the reform, the law that Zelenskiy signed into effect obtains only for the duration of the war. But it will create facts on the ground. And it is clear that the struggle is already beginning in Ukraine about the terms of postwar reconstruction. Ukrainian labour lawyer and activist George Sandul described the final goal of the draft reconstruction plans as a ‘Mad Max-style dystopia’ where ‘everybody will negotiate on their own without any rules’.

Melodrama aside, the advocates of the new laws speak frankly about their agenda.

In an interview published on the Ukrainian parliament’s website on 28 July, Halyna Tretiakova, head of the parliamentary committee on social policy, claimed the ILO was a barrier to Ukrainians striking individual employment agreements and protecting their employment rights through more flexible means. ‘People don’t want to negotiate their employment through collective agreements, but through civil law, royalties, author rights,’ Tretiakova said. ‘But the International Labor Organization, created in 1919, in the epoch of industrialisation, says no … [The ILO says] a person is economically dependent on their employer and should therefore come under Ukraine’s labour code, developed in 1971.’ Tretiakova told openDemocracy that ‘international agreements’ such as the ILO conventions were ‘part of our legislation’ but that claims at the European Court of Human Rights against Ukraine for breaches of social and employment rights were ‘snowballing’. She said: ‘We have to re-examine the obligations of the state, and they have to match the capacity of the state at this specific historical moment. To ensure the number of claims don’t rise, we have to “reset” the labour code and [Ukraine’s] social model, which was not done during the country’s transition from socialism to a market economy. Whether this will require Ukraine leaving some forms of international agreements is a question for the executive branch, which will have to clearly define what we have funds for—and what we don’t.’ Critics have claimed that deputies in the Ukrainian parliament have used Russia’s invasion, which has displaced millions inside and outside the country, as a ‘window of opportunity’ to pass potentially controversial reforms. Before the war, Ukrainian trade unions organised protests against attempts by the ruling Servant of the People party to cut back on workplace and trade union rights. The draft reconstruction plan names ‘low loyalty of workers to the reforms’ and the ‘active position of resistance taken by trade unions’ as ‘key constraints’ on economic development.

***

Any program of economic policy involves a politics. Arguing for international assistance for Ukraine in its struggle with Russia is itself a political choice. Macreconomic stabilization is anything but innocent. But, in a Keynesian spirit, I would argue that there is a difference between setting the broad parameters of macroeconomic policy, especially if it is done in the progressive spirit implied by the first three points of the CEPR program, and the kind of no-holds-barred deregulatory agenda that they tout in their program for Ukraine’s social and economic future. Furthermore, we should also insist that there is no necessary relationship between the two. As the Ukrainian advocates of deregulation are clearly aware, the deregulatory agenda involves a radical reconstruction of the post-Soviet order in their country. And they may, of course, have a point. But to conduct this kind of reconstruction under wartime conditions when the scope for public debate, strikes and opposition is limited, short-circuits democracy. Since defending democracy is part of Ukraine’s appeal this is bitterly ironic. It is also a gamble. It risks driving wedges into the national solidarity that is, if history is any guide, necessary to sustain the war. Of course, it may be the case that in the 21st-century and particularly in the post-Soviet space, the logic of politics and war is different. In any case, as a highly divisive policy it is fundamentally at odds with the image of patriotic national mobilization that Zelenskiy’s team have been so effective at communicating and which has been so appealing to much of the rest of the world. It is remarkable that such a high-profile group of international experts as the CEPR authors should choose to add their weight to such a program in the name of economic necessity.