Socialism and Communism in the 20th Century: A Historical Analysis

Posted on May 27, 2024 in History

Socialism was a way to express the communist regimes in the 20^th Century, born in the 19^th Century lead by Karl Marx. Marxist ideologies created two kinds of movements: social democracy (Marx was right, a more equalitarian society could be implemented under a liberal democracy) and real socialism (communism applied by the government, not as an ideology).

Real Socialism began in 1917 in the Russian Soviet Union.

Some historians believe the 20^th Century was extremely short (1913 – 1979). Some say that Communism marked the beginning and the end or the 20^th Century.

Soviet Revolution in 1917

During the beginning of WW1, the Soviet Revolution happened, changing history.

It all began with Stalin, the Soviet leader who had one of the most important roles in creating the system, being him one of the most lasting. Lenin died in 1924, around 1928 Stalin had absolute power.

FACT: We can say that Stalin was one of the inventors of Photoshop, it was really typical to remove people from photographs. When Trotsky got exiled, he was removed from a picture.

The Bolshevik Party had never expected to survive in isolation.

Russia was a powerful country in spite of being one of the most backward regimes (autocracy without democracy, leaded by a Tsar). One of the most conservative systems in the world. The system was under distress during the war and it all ended in a revolution. There were two phases:

1. Feb. 1917: those who succeeded were not communists, it was a wider group of people against the tsar, the war and the system.
2. Oct. 1917: The Bolshevik party took power and control of the revolution. It was at this moment that Lenin returned from exile, and through a very small party they were able to control the situation and take power. They transformed completely the economic and political system of Russia. It was the first time the communists took power, and a communist regime was created.

At the beginning, communists believed in a “war revolution” that had started in Russia and that would extend throughout Europe and the capitalist world. There were other communist revolutions in Hungary, Berlin (Germany was close to defeat when there was a revolution in the South) … however, only Russia succeeded.

When communism didn’t spread, they realised they had to create communist/socialism in a single country: Russia. This made Russia change its name to the Soviet Union (USSR), focusing their strategy in how they would survive. In order to make this new system survive, they had to modernise and improve their industrial capacity since only industrial powers were able to win wars. How much people an economy had was no longer important: industry was (this was also why they lost WW1).

At the end, the Soviets reached their objectives, becoming a great military power, which was reflected in the way they defeated Germany in WW2. The USSR made a very important effort to convert their State to a military and industrial power; it was their main objective during the 20s and 30s.

Stalin had these goals very clear, succeeding in creating the Nation he wanted, making the Soviet Union the second most powerful country with the second most important industrial power in 1945. Their influence increased, beginning to impose themselves upon the Western countries.

They managed to transform themselves in an incredibly fast pace: in just 20 years, they succeeded in modernising and industrialising themselves through a State plan, whereas other countries had needed many decades and private institutions’ initiative to do the same.

When it became clear that Soviet Russia was to be, for the time being, the only country in which proletarian revolution had triumphed, the logical policy was to transform it from a backward into and advanced economy.

The Soviet model of growth

This strategy of quick industrialization focused in basic industries: steel industry, coal, chemicals, electricity… those sectors that created the necessary material for other industries, not goods for consumptions. They sacrificed consumption for the production of basic industries and infrastructure (railways, roads, electricity networks, …)

During the 1930s, when this program was established (it was planned in the mid 20s), they managed to grow at a very high rate, outpacing all other countries except Japan. This meant a very high social cost: many peasants died from starvation, people died from not defending the model …

However, from an economic point of view, it was a success.

Everyone expected another war, which made the USSR want to grow as fast as possible in order to be prepared and able to defeat their enemies.

The Soviet recipe for economic development was centralized state economic planning aimed at the ultra-rapid construction of the basic industries and infrastructure essential to a modern industrial society. Infrastructure and basic industries became the priority in order to accelerate the economy.

Stalin established the first Five-Year Plan in 1928. It was proof of how the government was the one behind the growth plan. It was easier to achieve this from a central planned economy than a market economy. The government established the production target.  Firms that were also State-owned had to follow these guides (in a market economy, firms are free to choose their own strategy and produce what they believe people want)

The growth strategy was based in 4 elements:

1. Channelling investment into heavy industry and machinery production. This accelerated the capacity to build capital equipment and thereby pushed up the rate of investment.

People from the Soviet administration believed that these basic industries had to grow really fast.

1. The use of demanding output targets to direct business operations. It was the stressing of all of those affected by industries, in order to achieve an almost impossible target.
2. Agriculture was collectivized. This was anathema to the peasants. Collectivization resulted in a huge fall in farm output and led to famine in 1933.

Before the Soviet Revolution, there was a very unequal distribution of land: very few very reach people owned almost all of the land, while peasants were extremely poor and exploited. Land-owners were killed/had to escape, and their land was given to the peasants.

In 1917, Russia was still an agricultural economy. When Stalin decided to foster economic growth, he realised that peasants were no longer an ally since they preferred to eat more food, work less and live better rather than transfer what they collected. As agriculture was the main sector of the economy and the peasants no longer wanted to offer as much food, and they made it more expensive; Stalin decided to collectivise agriculture, reducing peasant’s powers. This resulted in the birth of peasants fighting against Stalin’s decision, Kulacks. Many peasants died from starvation as the central government took their lands and food, or from getting murdered.

1. Mass education. Schooling was quickly made universal and compulsory.

Russia was very analphabetic and uneducated society. Russia believed that in order to quickly industrialise the nation, everybody had to go to school. It was applied as a fast strategy as it was forced: people were compulsory sent to schools and a lot of new schools were built.

It had a high human cost as there was no freedom of speech and many other consequences of the strong and strict regime.

The Soviet system was designed to industrialise a very backward and underdeveloped country as rapidly as possible. In spite of being inefficient and wasteful, it achieved this objective.

This was a model for countries lacking both private capital and a large body of private and profit-oriented industry. After WW2 many underdeveloped countries believed that this model could successfully be applied in their system (Poland, Romania, Bulgaria, …); many of them automatically did as they ended under USSR control. “Socialism” in this sense inspired a number of newly independent ex-colonial countries after WWII whose governments rejected the communist political system. Some of them, already developed and industrialised, applied the model with no favourable results as they were more advanced than the model itself. China, after 1949, also wanted to apply the model.

Not only did communist countries adopt the Soviet model, Arab regimes did too… they were not particularly communist although they did believe that in order to not depend on the former masters, they had to develop themselves quickly. These models prospered or not depending on the countries, there were more failures than successes.

The Egypt of Nasser and India are some examples.

Yugoslavia succeeded in becoming a real independent country from the Soviet Union as they had no SU troop in their territory. They did not want to follow Lenineven though it was also communist.

Economic decline

Economic decline

In the first 15 years after WWII, the economies of the “socialist camp” grew considerably faster than those of the West. The level of income per capita for Soviet citizens improved a lot during this period (40s and 50s).

Khrushchev sincerely believed that socialism would out-produce capitalism within a foreseeable future. This optimist view on the socialist system was on the Khrushchev era.

Stalin died in 1953, meaning that some of the worst elements (persecutions, executions, etc.) were over, resulting in live improving for Russian citizens. Even though it was still a dictatorship, consumption was “back on the radar”. This was a period in which this communist system could be seen as a better system than capitalism, mostly in military and technology (Sputnik and the moon), it was considered as a possible alternative. At the end, it was demonstrated that socialist regimes were behind capitalist in technology in spite of their efforts and great investment.

07.03.2017

However, the Soviet system in the 1960s was unable to cope with the problems of economic growth and technical change in a more advanced industrial society.

Once the industrial economy was in place, the system was seen as inefficient, less powerful and innovator than the Western European model. This was made clear in the mid 60s.

It was unable of encouraging technological innovation from below.

One of the key weaknesses of the Soviet model, extended to the Eastern countries under USSR control, was that they were unable to promote technological innovation from below. The Soviet Union could target some applications from above, there were good technicians and engineers that could be successful in very specific targets. However, from below, the firms, there were no innovations due to a lack of proper incentives. In the Soviet Union and central-planning economies, the heads of the firms had no incentive to change things since they had a fixed amount of goods to produce set by the Central Government and wanting to change the production quantity was a huge risk for the head of the firm. Firms wanted to reach the targets, but were afraid and made no efforts to improve.

When industrial societies became more complex, they had to produce more goods adapting to consumer tastes; something which wasn’t clear in the 30s and 40s, when the Soviet Union centred all of its energies to become an industrial society. Once they had reached their objective of becoming an industrial society, it was much more difficult to improve the economy through a central-planned economy.

At the same time, those most advanced countries in Eastern Europe were the weak elements of the Soviet power: they had some tradition of liberal democracies, they were more resentful to Soviet domination than other countries such as Romania. Hungary, Poland, East Germany and Czechoslovakia, the 4 most powerful countries under Soviet domination, attempted to reform the system several times. They tried to reintroduce democracy into the Soviet system, which was against the model itself, resulting in the intervention of the Soviet troops. Hungary 1956, Czechoslovakia 1968, Poland 1980:

In Poland, at the end of the 70s, a trade union was created resembling a political party (it couldn’t be one), taking 10 million people as militants (1/4 of the population became part of Solidarnosc). The head of military of power made a coup-d’état in order to stop this movement asking for a reform of the system.

In the Soviet Union, there wasn’t a massive movement against Soviet Domination, probably because for Russians, the communist system had been the big jump to modernity, it gave them some economic improvement. 

In the mid 1980s, there was a big change in the Soviet Union. In 1985, a young Gorbachevrealised the system needed a reform in order to compete with the Western model. He tried two types of reforms:

• Economic: Perestroika (transformation). Trying to introduce market incentives in the communist system, increase effectiveness.
• Politic: Glasnost (transparency). Political democratisation of the system, political pluralism.

The idea was, having an economy below the Western one with less military development, there was a need to reform the system in order to have better technology and innovation, increasing production capacity.

The Soviet Union was an industrial economy behind Western economies, in spite of being an innovative one.

Gorbachev believed that the system had to be more democratic than it already was, somehow following what the attempts in the previously mentioned four most powerful satellite countries asked for.

When the Soviet Empire “relaxed” from a political point of view, Easter European countries were given the chance to try to get their independence. Most of these countries changed their political model and, afterwards, the economical. Eastern and central European satellites tried to free themselves seeing Gorbachev was leading the Soviet Union. They ousted communist governments in 1989 and the USSR split up in 1991.

Berlin 1989.

Gorbachev’s plan failed, resulting in a huge economic crisis.  The project was clearly a failure, it proved that the communist system was unable to reform itself: changes in the Soviet system would make it die, it wasn’t compatible with political freedom. The introduction of political pluralism produced a lot of discussions and disputes among political parties. When the market incentives were introduced, the system finally fell. The most aggressive version of capitalism got to Russia.

A similar case of transition to capitalism: China.

Economic point-of-view difference: China introduced market incentives in some parts

Political point-of-view difference: Gorbachev tried to do 2 things at the same time, proving to be impossible to do together. The Chinese communist party is still the only political party in China, it is not a free democracy: all the elements of economic and political power are still on the hand of a unique party.

Chinese decided to reform to reform the economy, maintaining the political power. The Chinese experience was much successful. 

08.03.2017

China

After WWII, Communism succeeded since it was seen as a good and effective way to industrialise and modernise a poor country.Communist revolution succeeded in 1949. Mao Zedongthe leader of the beginning of the communist Chinese.

In the fight against the Japanese invasion, there were two “teams”: communists, and nationalists. After they made Japanese leave, these two teams fought against each other in a Civil War. Communists won except in Taiwan, where nationalists won, making it the Nationalist China until they got their independence.

China used to be a very poor agriculture country that had to be rebuilt by Mao’s communist China.

The first years were dedicated to recover from the war.

First five-year plan (1953 – 1957)

After recovering from the civil war in 1953 the First Five-Year Plan (1953 – 1957) was launched. This model was a growth plan managed from above, a copy of the Soviet model. The Soviet model of economic growth was established with its emphasis on heavy industry and capital-intensive technology.

China actually received help from the Soviet Union. The Soviets received some benefits from aiding them with the building of new factories, manufacturing of goods…

China managed to get free from Japan. Soviet technological assistance. State owned enterprises or joint public-private ownership in modern industry. Cooperatives in agriculture: they forced farmers to work with each other.

Great leap forward (1958 – 1960)

In 1958, they felt the Soviet model did no longer work and they decided they had to change their direction, being the Great Leap Forward the first step.

• Central planning was abandoned
• Decentralisation and relying on spontaneous heroic efforts by the entire population was the main element for reaching high levels of growth in agricultural and industrial production.

They believed that production could grow fast with people’s desire and efforts.

• Soviet assistance ended in 1960

However, this proved to be a complete failure. They wanted to change because they believe Soviet’s central-planning did not produce enough improvement, which resulted in their alternative being even worst:

• Agricultural output fell by 30% between 1959 and 1961.
• Industrial output fell by 55% between 1960 and 1962
• There was a widespread famine (14 million people died of starvation)

They left the Soviet model, at the same time that Soviet assistance and qualified individuals began to leave.

Agriculture First (1961 – 1965)

After such failure by the experiment, they tried to return to the previous system through emphasising agriculture. They wanted to foster agricultural production again, motivated by the existent famine.

They combined elements from the centralised Soviet model with the Great Leap Forward elements such as decentralisation of ownership and decision making, focusing on agriculture.

Cultural Revolution (1966 – 1976)

At the same time, there were some political turmoil, which included the Cultural Revolution (1966 – 1976), an ideological and political event (rather than economic one), characterised by:

• Anti-intellectualism: they believed intellectuals had too much power, and that were the ones behind the introduction of ideas that were bound to fail.

Many intellectuals were prosecuted since they were accused of not being true communists, and of being against China’s interests. This was a way for Mao to fight against internal opposition raised by his failures of the previous recent years.

• Gang of Four (1974 -1976): the most powerful members of a radical political elite convicted for implementing policies directed by Chinese Communist Party chairman Mao Zedong. When Mao’s health began to decline over the decade, they gained control of a number of major government functions.

Economic Reform (since 1978)

Mao died in 1975, resulting in the Gang of Four’s loss of power.

In 1978, Deng Xiaoping(who had been repressed by Mao, and whose children had been murdered by the Communist party) became the Chinese leader and promoted an economic reform: to increase the role of market mechanisms and to reduce government planning and direct control.

Xiaoping tried to maintain government control at the same time as he introduced incentives to improve productivity. He knew that people would work harder and better if they would get rewarded for their efforts, which was used as an incentive to increase production.

Special Economic Zones and foreign capital. Some of these elements were established only in some specific Chinese territories. They tried the attempts in certain areas of China and, if the experiment had positive results, they would be extended to other areas.

China joined the WTO in 2001.

Chinese Constitution included the protection for private property rights in 2003. Recognition for private firms in order to invest money and create other companies. Basic idea of liberalism, market-economy. Protecting what companies produce and collect.

China has been the fastest growing economy since 1990. An average of 10% growth in GDP per year.

In spite of the economic system, from a political point of view, it follows the Soviet political model, with no democracy being the monopolistic power of the Communist party the one in charge without opposition.Communist Party of China still retains the monopoly of power.

Since the reforms began, China was much poorer than the Soviet Union. Today’s China, is the result of Deng Xiaoping’s big shift.

It can be said that this Chinese transformation was extremely successful.

Today, China is a new model that combines political communism with more liberal economy.

At the same time, inequality is significantly increasing inside China. The growth benefitted some more than others.

Tiananmen(1989). This year was characterised by most Eastern countries’ revolts. In China, students asked for more rights in a concentration in Tiananmen. The Chinese army massacred the people in the square. Use of force to stop the petition for democracy, they had to break the political reform in spite of allowing the economic one.

(Remember that in Russia, the combination of both types of reforms was a failure)

13.03.2017

1. The end of Bretton Woods

The 1970s crisis and the triumph of Neoliberalism.

The system of Bretton Woods allowed countries to have their own economic national policies. This system was the one in force during the best period for capitalism. The combination of market and government worked as desired during the period. However, with people suspecting of dollar’s value and the 1973 crisis, the system failed.

1930s crisis were demand crisis, Keynesian policies were policies on demand.

The crisis of 1973 was a supply crisis. Keynesian policies could not work.

Since 1971, the Bretton Woods system was over and Keynesian were in crisis: crisis in both the economy and economic ideas.

Starting from the 70s, to the 80s and 90s, there was a political shift to the right. Before, there had been a shift to left-wing ideas. Now, free market policies got stronger reaching the “Neo-liberal” era. The role of the government in the market economy was beginning to be strongly criticised.

From 1970s to the beginning of the actual depression, there has been dominance of right-winged ideas and politics.

Stagflation

Stagflationis the combination of stagnation(No economic growth) and inflation(increase in prices).

This was a new notion. During the Keynesian years, economists believed that there was a trade-off between unemployment and inflation: you could have one or the other, but never both at the same time; inflation was conceived as the result of too much activity, whereas unemployment was seen as the result of not enough activity. Therefore, authorities applied expansionary or contractionary policies according to what their objectives were.

During these years, an Australian economists known as Phillips developed the Phillips curve: he tried to analyse the data for the past (long run), on taxes of unemployment and inflation rates. he realised that when there was high unemployment, inflation was low; whereas, when unemployment was low, inflation was high. This was an empirical study which confirmed what Keynesian economists already believed. At the end of the 50s, the curve was really successful.

Monetary expansionary policy. We put more money into the economy. Interest rate decreases. GDP increases.

Phillips curve: if you have high unemployment (following P), inflation is low so you can apply expansionary policies; and, as collateral damage, you will have some inflation (not a problem since it’s already low). On the other hand, if unemployment is low, there will be more inflation and so, the policy applied would be the opposite.

• Unemployment high: expansionary policy
• Unemployment low: contraction policy

Oil was and is a crucial element for industrial economy. During the Golden Age, industries used big amounts of oil for a very low price. In 1973, the oil crisis began. From there forward, there were two important crises:

1. 1973: there was a war between Israel and Arabian countries. Most of Western countries helped Israel, making Arabs incredibly annoyed and driving them to use the price of oil as a weapon. Arabian countries decided to block those nations helping Israel through oil deprivation (OPEC, Organization of the Petroleum Exporting Countries: a pact among oil-producing countries that export most of their production, acting as a cartel). These western States were industrial and developed economies, incredibly dependant of this resource. At the beginning, it was a political measure, until Arabian countries and oil producers saw how powerful this tool was. Therefore, OPEC decided to reduce the quantity of oil that would be exported, increasing its price. It was a strategy that succeeded in achieving high prices, making such countries extremely rich.

The “victims” of such policies, were the developed and industrialised economies that had no own oil-producing companies, making them hugely dependant of foreign oil.

The effect of an increase of prices results in a decrease of demand. However, industries needed oil as people need water: they could not reduce the levels of oil consumption (inelastic demand). Prices increased, making industrial economies suffer an adverse supply shock(= the supply curve shifts to the left, so things are more expensive, with a decrease in unemployment and inflation). Since it’s a problem of the supply curve, everything is more expensive, and there is no other alternative than to pay for what is asked for. There was a combination of an oligopoly (group of powerful companies in a same industry, making decisions together) and a highly demanded and dependable good. Keynesian policies were no longer applicable, Phillips curve was over.

As oil became incredibly expensive, industries tried to improve their systems in order to save energy. Most countries decided to rise the national price on oil. Spain was different: they were so worried of how the future after Franco’s death would be, they reduced taxes on oil to compensate for the price of oil on consumers; they wanted peace and social stability. Prices are a valuable way of transmitting the economies’ states to the people; therefore, when Spain proceeded with such policies, they could not start to transform their systems in order to safe oil and energy. The delay of the Spanish government made the necessary adaptation processes of the economy to the higher prices of oil much longer and harder; the cost of such adaptation was higher.

14.03.2017

There was an important change on economic thoughts and policies during the crisis of the 70s since the policies that worked after the Second World War was no longer effective. The crisis began with inflation first, followed by unemployment. Even though inflation was first, unemployment rose above it due to the policies applied. Unemployment reached very high levels in the mid 80s.

Netherlands is an example of one of the countries that was not as severely affected thanks to its economy’s firm structure.

High inflation and unemployment didn’t fit inside the Phillips curve nor the Keynesian ideas.

New economic schools gained power. Milton Friedmancame up with monetary theory, a theory that rose as anti-Keynesian schools, as the new classic school did too. They both succeeded in changing the mind of people, reaching the re-apparition of Neoliberalism, with origins in Adam Smith. Capitalism recovered its essence, the idea that market incentives could work better than the ones developed by the government.

Both Milton Friedmanand Edmund Phelpshad predicted that the Phillips curve would not work.

New Phillips Curve

When the government introduced more money, increasing inflation, real wages decreased, making employment more appealing for companies. By making inflation higher, salaries would be cheaper which resulted in less unemployment since labour was cheaper for companies.

Friedman predicted the Phillips curve’s failure since he saw how people would realise the truth behind the trade-off. When people understood the policies, their effect diminished due to a cry for higher nominal wages in order to compensate.

As inflation got higher, the inflationary tendency predicted by Friedman got more probable. Inflation was incorporated in the expectations of agents. This resulted in the Phillips curve moving upwards, with a final vertical long-run curve. Contra-cyclical policies were no longer effective to solve unemployment issues. If people realised how inflation would be higher in the future, they would ask for higher wages.

Friedman and monetarists focused on reducing inflation, not unemployment (as Keynesian central focus was). They wanted to convince people to believe inflation would be lower in the future, which would, in turn, result in people relaxing on their wages until inflation got back to normal levels.

As inflation could not be at such high levels because it distorted the economic agents’ attitude and behaviour. It was no longer conceived as the solution for unemployment.

Economic crisis in 1972, high inflation and unemployment, Keynesian policies were applied in order to solve the problem but resulting in failure. Margaret Thatcherwas one of the main believers of monetary solutions, as well as Ronald Reagan(US President) and Paul Volcker (president of the Federal Reserve). Even before Reagan became president, Volcker tried to block the increasing quantity of money to reduce inflation.

During the 70s, Keynesian theories were over, whereas neoliberalism became the new tendency. Monetarism gained protagonism, although it was only applied in the USA and Britain due to its severance. Monetarism defended that the supply of money had to grow at a constant and slow rate. Counter-cyclical policies had to be over. Inflation was always consequence of the increase of the quantity of money, and such increase should only take place when looking at the long-term economic growth.

Following Fisher’s equation (P · Y = v · M), in order to achieve stability in prices, there must be an increase in the supply of money at the same level as it is believed that money is growing in the long run, assuming the speed of money is constant.

As the economy was already in a bad shape with high unemployment, these types of policies produced a lot of unemployment. INFLATION IN THE LONG RUN DOESN’T HELP TO REDUCE UNEMPLOYMENT. They were applied by Volcker and Thatcher to reduce inflation, resulting in very high unemployment. Many politicians stopped applying such policies after they had been applied since they were fatale for many people who were left unemployed. Even though neoliberalism succeeded in their own way, they were only applied for a short term. Later on, governments went back to looking at unemployment statistics to figure out how much money they had to inject into the economy.

From the mid-70s, the prices and the shift of economy policy, lead to a new era known as Neoliberalism, which had as main objective anti-inflation. However, it had other policies most of which were applied after WWII:

• Financial deregulation – strict division between commercial and financial banks began to dissolve.
• Tax reform – higher taxes on richer people to pay for the Welfare State were reduced since they no longer feared communism. The idea of Keynesian ideas’ failure, helped the decrease on Income and Wealth taxes, more emphasis of indirect taxation, and less on direct taxation. The tax system was not as progressive as before.
• Competition policies – elimination of regulations that blocked competition on certain sectors, resulting in a decrease of prices due to higher competition.
• Industrial policies – increase of government’s involvement
• Privatization measures – the companies that had been transformed into State-owned after the War were being sold tofirms, making the private companies once again. This was a way of obtaining resources for the government, balancing economies’ budgets and reducing the governments’ involvement in the economy.
• Labour market reform– during the Golden Age, especially in Europe, labour rights increased, protection from the government through legal laws. With the reform, firms asked for a reduction in compensation for unemployment since they decided they would not hire if they had to pay such high prices. “Make firing people cheaper for firms”. Workers became more fearful of getting fired so they decided to reduce strikes, calls, cries, …

In Western Europe

In Europe, during the mid 80s, many politicians and economists began to think the European generous system was bad for the economy. Labour rights and government intervention was higher than in the US, which made the general crisis worst in Europe.

Neoliberalism gained momentum: the priorities of the European community were to reduce government expenditure, try to improve market integration, …

Reasons for the slowdown:

1. End of catch-up prospects
2. Labour market constraints
3. Increasing competition form the NICs
4. Increase in the prices of primary products (oil shock) à 26% of EEC imports in 1980
5. “Eurosclerosis”
6. Real wage growth rate is higher than productivity growth rate
7. Very high social spending
8. Protection of inefficient industries: barriers between countries (the “Non-Europe”)
9. Technological failure

New approach to European integration: the lemma “Never again war between us” is out to date à integration is a guarantee for economic survival.

Fontainebleau summit (1948):

• Higher budget for the EU
• Clear the way to new members
• Set in motion the process to the single market (European Single Act, 1986): abolition of all internal barriers in 1992.

These policies had an important effect of inequality. Inequality increased in Britain and US from the 60s to the 90s due to these Neoliberalist policies. The Gini Index increased and maintained constant when a certain level of inequality was achieved.

In France, however inequality decreased from the 60s to the 90s, as they didn’t apply the same strict level of Neoliberalist policies as the US or Britain.

Even if government had reduced its role in the economy, Neoliberalism had gained protagonism form the 50s,: US and Britain had become more liberalist than other European countries such as France and Germany, at least until the start of this last crisis of 2008.

20.03.2017

1. Long-term growth and global inequality

The world’s GDP didn’t grow much in the long run for many centuries. There might have been good decades for economic growth, but they would always end with a decrease of the GDP per capita. During these agricultural years, there was some kind of ceiling on growth for GDP per capita, a ceiling known as the Malthusian trap. The GDP per capita of society was linked to the agricultural economy, with a lower productivity than today. During good years, natality increased which meant more deaths when GDP fell. Previous to the industrial society, the number of people living in the world and the income per capita, both had a ceiling.

At the end of the 18th century and during the 19^th century, GDP per capita rose thanks to the triumph of the Industrial Revolution. The societies that implemented the Industrial Revolution, were able to grow much more than before, increasing productivity. This began in the 18^th century in Britain, following in the 19^th century in many countries, and almost finishing in the 20^th century.

When this happened at the end of the 18^th century and during the beginning of the 19^th century, there was some kind of divergence: many countries innovated and industrialised, whereas many others didn’t industrialise, maintaining the GDP level of the first centuries. At the beginning, everybody was poor; now, many are rich and other remain as in the past.

This modern economic growth made differences between rich and poor countries more significant. It was a clear phenomenon, resulting in a discussion between those who believed that this differentiation among countries couldn’t be changed (the wealth of the rich, is the poverty of the poor), and those who believed that poorer countries could become rich if they followed the most advanced countries’ models. The more optimistic and capitalist idea vs. rich exploiting poor ideas.

The most optimistic came up with the idea of convergence, which defends that those countries that had been left behind have more possibilities to grow faster than the ones who have become richer. Richer countries have less room to grow fast, in contrast with the poorer ones which have much more room to grow faster.  They came up with two convergence tests:

1. Growth rates are higher for countries with lower income levels (β-convergence)
2. Income per capita dispersion among economies will tend to decrease (σ-convergence, concept 1 of global inequality)

For instance, the Russian case is an example of how they reduced the distance to the industrial economies in very little time. Poor countries partially converge with the rich: they don’t reach the same level, but they do get close.

The idea of the Theory of Convergence is that, in the long run, there is an equalisation of income per capita in the world. Poor countries only need to copy what the rich countries have done, whereas the wealthier ones can only grow if new technology is introduced. The reality is that between the 1960s and 1990s, there have been countries that have developed, poor countries that have remained the same, rich countries that have grown a lot, and rich countries that haven’t that much. The OECD countries, the ones that are wealthy now, do follow the convergence.

The predictions didn’t work in the long run (or, at least, until 2000). The model renounces to explain initial differences.

21.03.2017

Two proposals for reconciling the convergence hypothesis with reality:

1. Gradual diffusion of the Industrial Revolution model (Lucas R., 2000).

The supporters of the Industrial Revolution tried to support and defend the model. They said that convergence is not a general rule, but looking back in history, it can be seen how countries gradually converge. Therefore, those who haven’t converged yet, will in a future.

At the beginning, only 9 countries were part of the “convergence” group, at the end of the 20^th century, 47 were.

There is a tendency in the world of countries industrialising and reducing the distance to the more developed countries – a tendency to convergence.

1. “Conditional convergence” hypothesis: only similar economies converge among them (they are members of the same “club”). Conditionally convergence means that you will convergence with the richer ones only if you follow certain elements and conditions

there are two tests:

1. Convergence analysis for regions of the same country.
2. Convergence analysis among countries, conditioned to control variables (ex. Investment rate, location, openness, political variables, etc.): “Barro’s regressions”

We may not find convergence among countries, but we do find it among regions/States of a same country. i.e. USA

Therefore, some of the conditions that might be significant and defining are: same legal system, certain level of education, free movement of people…

Pure convergence doesn’t work, but if we seek other important elements and factors, we can find convergence.

Countries that are poor but make an effort to improve human capital (education), can grow faster than the rich countries; however, they must improve other relevant and basic factors such as education – if education isn’t necessarily developed, the country might not be able to absorb new technologies.

In theory, those less-developed countries can get to the same level of richer ones since all they have to follow their steps. Nevertheless, this doesn’t happen as easily: education MUST be worked on.

Global inequality

Global inequality isn’t just the difference between various countries, but also the difference inside a single country. For instance, as inequality might be disappearing among countries, but growing inside each one of them. The measure of inequality combines both.

There is a tendency for OECD countries to be more equal than rich countries. We have some exceptions: poor countries that are more equal (India), and important countries that are more unequal (USA)

Kuznets tried to find the relation between economic growth (GDP) and inequality (Gini Index). To find out, he looked into a single country and its process of economic development. He found out an inverted U curve; which made him conclude that when modern economic growth happens, at first, inequality increases, and then it reaches a point where inequality decreases once more.

When countries are very poor, there isn’t much economic surplus and so, GDP has to be used to feed people. At first, they all are equally poor; then, when development starts, some might win more than others, increasing inequality. Yet, the continuity of the process makes more and more people join it, reducing inequality. This led him to believe that a poor country could not undergo economic development without increasing inequality first.

On the other hand, the reality of this theory is much more complex. A clear example is the United States, more developed than Spain but also more unequal. The hypothesis for USA’s inequality is racial diversity: it is believed that when there is more diversity in a country, it’s harder to redistribute wealth from the rich to the poor and they have less social solidarity.

South American and Asian countries are mostly in the middle between poor and rich. However, as South American have a quite homogeneous high level of inequality, Asian Gini indexes vary quite a lot.  A key factor might have been the fact that all Latin American countries are former colonies, all colonised by the same countries: Spain and Portugal. The model of Iberian colonisation might have some relation with their inequality in spite of centuries having gone by. Whilst, in Asia, countries were colonised by others that might have been better examples; i.e. India was a British colony.

Therefore, we can conclude that historical, political, social and many other elements can drastically affect inequality in a country.

Of the two components of inequality, the most important source of it is the difference among countries. For someone poor in a poor country to get a better life, the best option is to migrate to a richer country.

27.03.2017

The evolution of inequality takes place during the globalisation process, the second globalisation process. The growing integration of international economy, protectionism decreases, a lot of capital movements among countries, international capital markets are very integrated, and high levels of human capital movement (migration).

The characteristic restriction of capital mobility of the Bretton Woods era has been decreasing throughout the years. Moreover, the Cold War was also happening, making economic relations with communist countries harder; communist countries blocked migration between the two blocks.

Globalisation also happened between the 1870s and 1930s: free movement of people (especially among rich countries), increase of trade, and capital mobility. After WWI, it was intended to reapply this globalisation, as well as the Gold standard, but neither worked. Today, globalisation has many supporters and opponents – especially since the 2007 crisis. The main critics

• Firms can choose the country where they’d like to have their headquarters. Before the laissez-faire philosophy, moving capital from a country to another was much harder, taxes were usually paid everywhere. Now, many multinationals make business everywhere without paying taxes, establishing their headquarters in smaller countries with less fiscal control. Usually, multinationals force loss (no profits) in countries where they have no benefits, and they artificially concentrate income in a specific States where they have more advantageous schemes (legal evasion)

à Countries have to compete in order to attract capital à decrease on the country’s taxation

• Movement of economic growth due to the production of goods that they couldn’t generate before (increased production capacity), and that were produce in other countries. Resentment against the globalisation process since many people lost their jobs as a result of the new competition.

The negative reaction towards globalisation is also reflected, consequently, as aversion towards other factors: free trade, immigration, …

Some of the reasons for such reaction include economic objects, racism, … but the most common used argument focuses in the competition between working classes: local and native working class have to compete with those new-comers who work for a lower salary in order to escape from their home. The anger of working people who had higher levels of income in global terms comes from the feeling of losing their high wages, Welfare State and high standards to immigrants. In some sense, this is supported as inequality has increased since the 80s in richer countries.

The political trilemma of the world economy by Dani Rodrik describes the situation explained above. It describes how hyper-globalisation, democracy and national sovereignty can’t happen at the same time.

• Hyper-globalisation: high integration of the economies of the world. High international trade, international human capital movement. Borders are disappearing.
• Democracy: policies in a country and leaders are chosen by the majority of citizens.
• National sovereignty: each country has control over its own economy. Freedom to define, establish and apply whatever policies wished (democratically or not). Country is independent – control over its tools.

Hyper-globalisation + democratic politics =The countries are so integrated that governments are losing their independence over economic policies.

In Spain’s case, national sovereignty is extremely weak. In the EU, very important decisions are taken in European councils/Institutions, and must be implemented in all participant countries: loss of national sovereignty.

In a case with democratic politics, people would probably vote for national sovereignty and decrease hyper-globalisation. If hyper-globalisation was the centre piece, people would renounce national sovereignty to have democratic policies and even create a supranational democratic government structure that would control the economy.Globalised economy, national politics – the governments would have the right to control the economy as long as it’s made in global terms. If the economy is international, the government has to be international; you can’t control the economy from your national state as the economy is more powerful.

Usually, democracy can be found in either developed countries, or countries without extreme inequality (otherwise, there would be a very radical redistribution policy).

Three possible outcomes:

1. Gold Standard era: Hyper-globalisation and national sovereignty, but no democratic politics.

Governments were doing whatever needed to attain globalisation, even if most people were against it.

Washington Consensus: 80s-90s, neo-liberal policies were established as hegemonic in the world: communist schemes were over, Keynesian ideas in crises…). Each government adapted their program as they liked the most – they were either not democratic, or they didn’t care at all for what people wanted. Anti-globalisation programs.

1. Bretton Woods: National sovereignty and democratic parties, but no hyper-globalisation.
2. Global governance: Hyper-globalisation and democratic parties, but no national sovereignty

Today’s problems in international politics can be explained by the trilemma.