Category Archive: Analysis

1. Polycrisis 2025

   January 31, 2025 7:39 pm Comments Off on Polycrisis 2025

   The United States will be a source of chaos and volatility for the next several years. The first month of 2025 has set the scene. Events so far have included imperial gangsterism against both a poor Latin American country (Colombia) and a rich northern European one (Denmark); a long-overdue ceasefire ending a genocidal military campaign (Gaza); the most expensive natural disaster in US history with climate-fuelled wildfires destroying homes (California); a trillion dollar sell off in the AI bubble in reaction to a Chinese firm’s innovation from behind the chips blockade; and the outbreak of a virus (H5N1) that has killed hundreds of millions of US poultry, sending egg prices soaring and raising concerns among scientists of another pandemic. OK, doomer.

   It is hard to predict where exactly the administration’s stated goals of deporting immigrants, solidifying dollar strength, restoring trade surpluses, and maintaining low inflation will land—or how they may cause friction with the underlying agenda of authoritarian kleptocracy. Searching for a clearly defined, stably coherent ideology of the Trump administration may be a fool’s errand. In any case, it’s not as though the US has been known for providing stable, benevolent, or far-sighted hegemony; the rest of the world has been adjusting to an increasingly erratic US for many years.

   But if a coherent worldview is out of reach, there are still patterns to be discerned in the order being formed around Trump, and the ways in which the rest of the world is bound to respond.

   When we launched The Polycrisis two years ago, we set out to examine the intersecting crises in the economy, energy system, commodities markets, geopolitics, and climate. Our aim was to “break intellectual and political silos to give a fuller picture of what’s going on.” The overlapping crises of ecology, economics, and empire, have continued to interact and metastasize. This year, as much as we pay attention to Trump’s chaos machine, we will focus more on the rest of the world’s efforts to organize itself around and without the United States. Whether they will be successful is anyone’s guess. To paraphrase Adam Smith, there is a great deal of ruin in the world order. Here are the themes and developments that we are watching.

   Diplomacy and world-building

   From the point of view of US policymakers, American diplomatic leadership stabilizes the world. Without it, the “jungle grows back,” as Robert Kagan put it, and the international order descends into the chaos of “might makes right.”

   For the rest of the world, the US’s might has been something to strategically ally with or risk being crushed by, but rarely benign. And the liberal international order that the US has helmed is increasingly unstable—threatened by the economic and geopolitical ascension of China, the deindustrialization of the US domestic economy, the abuse of the UN and the international legal order most recently by the Biden administration’s support for genocide in Gaza, and the Trump-Biden move to protectionism and away from multilateral rules-based fora like the WTO, even as the rest of the world deepens its trade relationships.

   

   The G20 meeting in Rio de Janeiro last November, soon after Trump’s election, may provide some sign of what’s to come. There, China, Europe, Brazil, India, and South Africa insisted they would uphold the multilateralism that the Trump administration has promised to abandon.

   For many countries, that will mean continuing to build connections with China, even if warily. Most Asian countries are economically entwined with China but few are wholehearted geopolitical allies. Several African nations have been keenly receiving Chinese financing since the late 2000s—but that lending has shrunk dramatically since 2019 leading heavily indebted African countries to become more strategic in dealings with their creditors. Angola, for example, has managed to win space in servicing its considerable debt to China, and is also welcoming clean energy finance from Europe.

   Going forward, China will continue to seek to shore up its role as an alternative hegemon. The day after Trump signed executive orders pulling the US out of the World Health Organization and the Paris climate agreement, China vowed to strengthen both organizations. At the G20, President Xi Jinping turned on the charm offensive, announcing an eight-point agenda to support developing countries. Throughout meetings with world leaders, Xi solicited support for free trade, with an eye on China’s flagging economic growth. Participants from other countries noted that Chinese representatives expanded beyond traditional diplomatic practice of focusing only on China’s “most essential interests.”

   As the US recedes from the multilateral stage, other governments are stepping in. Last November, Dani Rodrik pointed to the middle powers helping to bring into being a multipolar world: “With advanced economies increasingly focused inward, middle powers like India, Indonesia, Brazil, South Africa, Turkey, and Nigeria have become the natural champions of global public goods.”

   The Trump administration is definitively not in the business of delivering such goods. After just a few days in power, the US International Development Finance Corporation (DFC) has been required to stop deploying clean energy finance, and instead fulfil Trump’s expansionist ambitions around Panama and Greenland. Development aid, in the form of USAID spending—on children’s education, clean water, lead remediation, climate—has been frozen until it can be checked for alignment with the objectives of “America First.” Where some are looking to China for signs of hope, as a source of a green Marshall Plan, there is little sign of a boost to shrinking Belt and Road lending, let alone a big play to aid financing of imported Chinese clean tech, or transfer of technological know-how.

   Europe

   How effective will Europe be in an America First world at protecting its own interests and preserving multilateralism?

   As Trump comes to power, the EU faces significant challenges. The euro area is projected to stagnate and Germany’s February elections look set to bolster the far right—domestically and beyond. In the aftermath of Russia’s invasion of Ukraine, energy vulnerabilities have been exposed. The inflationary surge following the pandemic prompted the European Central Bank to implement high interest rates, curbing investment without addressing underlying inflation causes. Such policy recalls previously self-inflicted wounds, like the austerity measures implemented following the financial crisis that led to Europe becoming poorer and weaker. For all the reports and grand plans, it’s not clear what the bloc will do to change its path.

   For now, Europe is distracted and paralysed: harangued by Trump to increase its defense spending to 5 percent of GDP; lurching through an impressively quick but painful energy transition; and beset by far-right parties that will oppose any of the integration that will be necessary for the bloc’s revival. Stung by the US, the continent is looking South and East. Last week at Davos, Ursula von der Leyen spoke positively of recently negotiated trade deals with Switzerland, the South American bloc Mercosur, and Mexico—although these still require complex and difficult European parliamentary approval. Most importantly, she encouraged constructive engagement with China so as “to find solutions in our mutual interest.” She declared the first visit she took in the new Commission would be to India and that the work of building local clean tech value chains in Africa would continue.

   Tech transfers

   However the next several years play out, technology transfers will be key. As we wrote in 2023, China’s successful pursuit of expertise from batteries to semiconductors to AI has been enormously significant. It has upended the status quo of “G7 countries holding the tech required by the rest of the world.” Chinese material goods and know-how are now sought after not only by African and Latin American countries, but also by the US and the EU—which last month inserted a requirement for tech transfer from Chinese recipients of battery manufacturing grants.

   

   This is what Adam Tooze recently called the “Second China shock”; if the first shock saw China being integrated into advanced tech supply chains, the second sees those same countries begging to be let into theirs. If the EU uses its considerable market power to negotiate tech transfers of intellectual property from China, making it available to other, less powerful countries, that would be a win for climate; and thus ultimately for everyone.

   Finance for realists

   The Biden administration acknowledged the urgency of mobilizing financial resources for global climate and development needs, centering its strategy on private sector involvement, which predictably failed to materialize. Now, with the Trump administration in place, any sense of commitment to addressing climate change among big US banks like Morgan Stanley and Goldman Sachs has dissolved. (The banks’ membership in a finance industry climate alliance, GFANZ, was used to make hyperbolic promises of $130 trillion waiting to lend to developing economies, which also failed to materialize.) If there is a silver lining in all this, it’s the casting off of the illusion that private finance would ever prioritize climate goals over profit; in turn, this might mean wider opportunity to refocus on fundamental financial reforms. These include the high cost of capital for global South countries (which Barbados championed, and South Africa has placed high up on its G20 presidency agenda) and the unsustainable debts owed to private creditors, which means governments tend to divert significant resources from essential investments toward debt servicing.

   The Vatican has designated 2025 as a Jubilee year, and Pope Francis has urged Northern creditors to consider forgiving debts, and aligned with broader efforts to address the global debt architecture. Halfway through this Jubilee year, the Fourth Financing for Development Conference (FfD4) will meet, led by the Group of 77 and facilitated by the UN. The conference’s zero draft includes proposals for addressing the systemic inequities in the global financial system that constrain development in the global South.

   The venue could make headway on the debt system and the barriers to climate finance, if the focus shifts away from relying on private finance or expecting leadership from the US government—neither of which has proven viable.

   Extraction

   Even as the world moves towards a more manufactured and less extractive energy system, things that are pumped or dug out of the ground remain central to geopolitics. In the wealthy world, fear of Chinese dominance and greed for new resources and markets continue to spur the scramble, as the latest grab for Greenland makes clear.

   These minerals are an evolving avenue of North-South trade and, potentially, industrial cooperation. Every developing country with transition minerals wants to emulate Indonesia, which used an export ban on unrefined nickel to leverage its large reserves for technology transfer with Chinese and Korean onshoring processing plants. Latin American countries are hoping to become economically prosperous by leveraging resources like copper (Mexico, Chile), lithium (Chile), graphite, and manganese (Brazil) to participate in battery and green supply chains.

   A powerful buyers’ club—involving the US, Australia, South Korea, Japan, and the EU—may be emerging in the form of the Minerals Security Partnership, but so far there is no critical minerals version of OPEC that would help poorer, less powerful countries with mineral reserves to advance their own interests as sellers.

   South Africa plans to use its G20 presidency this year to harness critical minerals for African development, with Cyril Ramaphosa describing “a grand bargain that promotes value addition to critical minerals close to the source of extraction.” It reflects a widening recognition that resource-rich developing countries need tech transfers to move up the value chain. Such transfers are rare. A Columbia University study which examined dozens of international projects in the pipeline across Latin America, Asia and Africa found that instances of tech transfer were scarce, even though it is the main source of innovation for value-adding in the critical minerals sector. It recommended that the WTO adopt the proposals of the African Group of 44 countries, and that developing country governments make tech transfer a condition of investments from foreign companies.

   

   Oil

   In 2025, oil demand looks more likely than ever to peak well before 2030, while supply climbs up, up, up. Saudi Arabia is still withholding in the region of three million barrels per day of production. Meanwhile, the US is producing record amounts, and China, which relies on imports, is curtailing its use—leading to what a Morgan Stanley analyst calls “a different oil market in the future than it has been in the past.”

   Gulf kingdoms are trying to diversify their economies by deploying footloose petrodollars to acquire new industries. They are also increasingly focused on development finance, especially carbon offset deals covering vast tracts of land in African countries—a fifth of Zimbabwe, 10 percent of Liberia, 10 percent of Zambia, and 8 percent of Tanzania—while rapidly expanding their domestic renewable power capacity to save their remaining hydrocarbon deposits for much-needed export dollars. Several low-income countries with fossil resources, such as Namibia, Senegal, and perhaps Uruguay, are hoping to develop them in time to exploit a declining market, while others such as Colombia and Ecuador are exploring ways to transition to new industries before the price decline.

   LNG markets are perhaps as significant as trade in oil. The versatility of LNG, its lingering (incorrect) reputation for being “cleaner” than coal, and relative ease of transport make it the marginal fossil fuel of choice. Demand is volatile, projections across most time horizons are fiercely contested, and price spikes are painful for importing countries—giving it big geopolitical ramifications, as well as climate ones.

   American LNG exports, the largest in the world, are a bullying tool for Trump against the EU—buy our gas or we won’t protect you!—and a convenient addition to the US “energy dominance” narrative. LNG is a source of potential tension between richer importers and poorer ones, as when European countries outbid Pakistan and Bangladesh for shipments in 2022. The relative speed of building facilities raises the risk of sovereign asset stranding (will Germany need all its new LNG import terminals?). As well as contributing to climate impacts, LNG is also a conduit for them to the wider world: when China’s hydropower dams are affected by drought, for example, world LNG prices rise (as seen in the lead-up to 2022).

   Domestic themes

   Domestic politics drive international political instability. The faltering and fracturing of formal multilateralism will underscore the importance of national policies and political coalitions—just as it did during the last Paris Agreement exit by the US. We see a couple of particularly important themes playing out across domestic contexts this coming year.

   How Europe addresses media and tech barons. In stark contrast to the mood of Trump I, US tech giants, with billionaires at the helm and staggering stock market valuations, have all either gone full MAGA or bent the knee. The battle over public opinion is now being waged largely through the platforms they control.

   Last year, Brazil demonstrated that states can in fact take on seemingly all-powerful social media platforms, by demanding that X adhere to its domestic anti-disinformation laws. The European Commission is investigating whether X has breached its Digital Services Act, and this January sought to review the platform’s recommendation algorithms. It’s unlikely to preempt any disinformation perpetrated in the lead-up to Germany’s late-February elections, but Brussels has enough institutional power to take on the platforms’ increasingly open attacks on democracy, and represents a large enough user base to hurt the social media oligarchs.

   Anti-migrant politics. A consistently growing theme in many western countries is the vilification of immigrants, waged increasingly aggressively by conservative political parties of all stripes. It is not just a violent agenda, but also a strategy to co-opt the centre right and centre left by preying on fears.

   Fuelling and exploiting anti-immigration sentiment is a playbook that has been repeated with great success by the far right in numerous rich countries.  Look at European leaders getting close to Meloni, and Germany’s CDU collaborating with the AfD. Having picked up on the narrative momentum of globalization eroding (“stealing”) manufacturing employment, the immigrant scapegoat can be blamed for inflation, high housing costs, and even climate impacts. The challenge is whether a successful politics and coalition can be forged that addresses exploitable woes—through better housing, energy, monetary, fiscal, and climate policies—and pulls the blame away from migrants.

   Climate

   This year, like all recent years, climate-driven disasters will affect billions of lives. What does the America First, fragmented, multipolar world mean for climate action? And especially for climate action in the context of international climate diplomacy which—like the EU—came of age at the high noon of neoliberal globalization?

   The return of COP to Brazil will highlight land use conflicts: forestry, renewables, food. Fights over land are fundamental to human society, with landowners underpinning resistance to change in the mid-transition to new energy systems. The relatively smooth global decarbonization pathways spat out by models provide little preparation for the reality of land contestation in one community after another.

   The retreat of private sector insurers from climate-vulnerable areas will push more and more pressure onto the state. People in countries with the fiscal means and the willingness to use it will have a safety net. The countries that don’t have the means, but have high exposure to climate impacts, have been escorted into arrangements like parametric insurance. After several big disasters that failed to pay out, will many of them want to continue? 

   Greenhouse gas emissions can’t be cut dramatically without big changes in our global trade and debt systems. In 2023, COP28 recognised the need for concessional and grant-based finance and was the setting for commitments by multilateral banks to extend catastrophe clauses in their loans. At the 2024 COP, just held in Azerbaijan, trade-related climate measures were given a formal space for the first time.

   The challenging context may induce siloed policy responses, which in turn gives oxygen to the right, keen to point the finger at targets like immigrants in order to cohere their own narratives without having to consider the nature of the intersecting crises in which we all live.

   Climate change cannot be addressed as a siloed policy area. Questions of mining and energy, finance and development, migration and tech, cannot be separated out from the vast changes occurring in the world’s climate. No crisis is an island. Each of these areas affects and is affected by the other, and addressing one will require addressing all.

2. State and Development

   January 30, 2025 7:29 pm Comments Off on State and Development

   The world economy has seen a resurgence of industrial policy in recent decades. National development programs are at the center of a variety of polarizing geopolitical axes: carbon emissions, world manufacturing shares, and integration into rival trade and investment blocs. The primary antagonism between the US and China over core technologies has shaped both industrial policy’s revival among countries that abandoned it at the height of neoliberalism, and its further development as an economic tool among countries that historically adopted it.

   In Brazil, however, the reaction to China’s growth has been different. Chinese commodity purchases have shaped the structure of the Brazilian economy in contradictory ways, stimulating growth for raw materials industries while constraining investment possibilities for higher value-added, newer technology ventures. Xi Jinping’s visit to Brazil in November 2024 for the G20 summit underscored China’s influence over the future of the Brazilian economy. In Latin America, almost all countries—with the exception of Brazil, Colombia, and Mexico—have signed memorandums of understanding with China as part of its Belt and Road Initiative. Discussions about new cooperation projects between the two countries, including Brazil’s possible accession to the Initiative, are ongoing. How the Brazilian economy will grow and evolve in coming years is therefore uniquely conditioned by the presence of Chinese demand and investment.

   Deindustrialization and “denationalization” in Brazil

   In contrast to US industrial policy, which has been driven by the protectionist measures for new technologies; to European industrial policy, which has prioritized reduced carbon emissions; and to East Asian industrial policy, which has sought to cultivate innovation and promote industrialization, Brazilian industrial policy confronts the problem of moving up the value chains it shares with its largest trading partner—China—while counteracting the major structural economic trends produced by that partnership. In the diplomatic realm, Chinese progress has broadened international negotiation possibilities through the creation of the BRICS currency bloc—currently expanding and diversifying geographically. In the economic realm, Chinese growth eased Brazilian balance of payments restrictions and increased aggregate demand.¹ However, by stimulating the Brazilian primary sector—agriculture and mining—Chinese purchases have made Brazil heavily commodity-dependent, as defined by the United Nations Conference on Trade and Development (UNCTAD).² The country has become a major exporter of oil, soy, meat, iron, and various other minerals, and a major importer of capital goods and electronics from China.³

   Chinese development has inverted the Brazilian growth model away from the industrialization objectives of the 1970s back toward its longer historical pattern of export-commodity specialization. This pattern continues to thrive despite the various industrial policies attempted—albeit in a fragmented way—in every government of the Worker’s Party (PT), including the current administration. Sociopolitical coalitions that have emerged out of Brazil’s export-commodity specialization significantly complicate the process of structural change. Between 2012 and 2022, the Brazilian manufacturing industry’s share of global manufacturing value added declined by an average 0.73 percent per year.⁴

   Although deindustrialization is widely discussed in Brazil, a different structural process has resulted from Brazilian fiscal policy that also constrains the pattern of economic growth. This is the process of “denationalization,” or the increasing role of foreign ownership and investment in the Brazilian economy. In the last decade, Brazil ranked among the world’s largest recipients of foreign direct investment (FDI). The low presence of national companies in areas most remote from natural resources means the Brazilian government’s industrial policies that rely on FDI are limited in how they can contribute to public goals of structural transformation. Denationalization, in the context of fiscal limits, makes it politically difficult to adopt industrial policies targeting new sectors and innovation processes.

   The current challenge is to build a path for sustainable development that simultaneously creates jobs and income, reduces social inequalities, and leads to a substantial reduction in deforestation—Brazil’s main contribution to climate change.

   Industrial policy and climate change in Brazil

   Climate change has assumed a central role in restructuring contemporary industrial policy. Great power competition, however, has complicated the formulation of the uniform programs and measurements for transitioning energy systems and mitigating the effects of climate change.

   Promoting these changes involves reviving and newly discussing Brazil’s relationship with China. The resumption of an industrialization program can help to bridge the divergent motivations of altering Brazil’s national economic structure and transitioning global energy systems away from fossil fuels. Brazil is a party in the Paris Agreement and has set a target of net zero emissions by 2050. Simultaneously, the country needs to overcome technological delay in the manufacturing sector. To face these challenges, Brazil can leverage some significant assets, such as its clean energy mix. In fact, for the world’s fastest-growing countries, such as China and India, reducing dependence on coal would already significantly impact CO₂ emissions reduction. Brazil’s large hydroelectric base and ongoing expansion of wind farms and solar energy could potentially increase industrial production with much cleaner energy.⁵

   However, the country’s energy issue is not only related to supply expansion, but also to pricing. Brazilian energy is expensive, and the price policy has become overcomplicated following Eletrobras’ privatization. Another hurdle comes from the type of diversification and current supply composition, with the significant presence, beyond hydropower, of wind and solar energy, as well as gas-based sources that complement them. Given hydroelectricity’s limitations, expanding supply will require more investment in renewable sources, and reducing rate prices remains a key distributive challenge.⁶

   Brazil also has promising possibilities in electric vehicle production, especially hybrid engines. Currently, Brazil exports manganese, niobium, nickel, lithium, graphite, and bauxite to China. The key task in these supply chains is to internalize important segments of these vehicles’ production chains. The 2023 Growth Acceleration Program (Programa de Aceleração do Crescimento, PAC) and the 2024 New Industry Brazil (Nova Indústria Brasil, NIB) already include a policy for industrializing lithium. The Chinese company BYD has begun producing batteries in the Manaus Free Trade Zone. Although small in scale, such ventures signal prospects for an industrial production program combining electric engines with ethanol and biodiesel.

   The resurgence of industrial policy requires a broader public-private interdependence to enable better coordination among government, tech industries, universities, and research laboratories. Important negotiation initiatives with foreign companies are ongoing—such as BYD’s partnership with the University of Campinas for developing solar panel technologies.⁷ Solar panels are China’s leading export product, and Brazil is currently a major importer. Developing local production of these technologies and integrating parts of this supply chain—along with advancing battery manufacturing and segments of the hybrid electric vehicle industry—presents significant opportunities for Brazil. These opportunities can be fostered through tariffs, financing, and government procurement. Additional opportunities can be seen in relation to BYD’s investments in big data and artificial intelligence, which have an increased potential to impact information and communications technology (ICT) infrastructure.

   Brazil’s large-scale production of bioethanol, biodiesel, aviation biofuel, and green hydrogen represents another opportunity for the country, given global demand and the country’s existing technological capabilities. Broadly speaking, the priority areas highlighted in the memorandums of understanding for technological cooperation with China—particularly bioenergy and ICT—could strengthen the connection between research and investment in Brazil. Amid growing trade tensions between the US and China, Brazil has the potential to enhance its commercial and diplomatic leverage to attract high-tech projects from these competing powers and increase the local content of investments from Chinese and American companies—in this manner, Brazil could follow a strategy similar to that of the US, China, and other Asian countries. Increasing the local content of these projects, however, requires more than negotiation skills. It relies on domestic initiatives and financial compensations, including increasing the resources available to BNDES, Finep, and university research laboratories.⁸

   Industrial policy and the Amazon

   Brazil’s main environmental challenge is not in emissions related to the energy mix, but in those linked to deforestation, through which the country contributes significantly to greenhouse gas emissions. Considering specific sectors, agriculture and livestock are the main sources of emissions, while land use, land management, and deforestation are the primary externalities of their expansion. The extensive deforestation that occurred in Jair Bolsonaro’s government resulted from deregulation, which favored uncontrolled expansion. Under Lula’s new term, inspection mechanisms were restored and deforestation rates decreased in 2023. These positive trends, however, will become increasingly insignificant if current expansion and accumulation patterns remain unchanged.

   Addressing this issue is particularly challenging as it involves confronting the political influence of large agribusiness owners. Brazil has already approved the creation of a carbon market, but due to agribusiness’ strength in Congress, the proposed “cap and trade” system excludes agriculture, which is responsible for the largest gas emissions.⁹

   What distinguishes the experience of the United States, China, and several Asian countries in facing commercial and technological challenges today is their governments’ and planning bodies’ strong commitment to industrial policy focused on innovation and structural change. In these countries, industrial policy has emerged as a top economic priority. In Brazil, the PAC, the NIB, and the Ecological Transformation Plan (ETP) from 2023, as well as the letters of intent for technological cooperation with China signed in 2024, represent attempts to address these challenges against an economic context defined by deindustrialization and a strong dependence on commodity exports. These programs prioritize infrastructure, productive development, reindustrialization, export diversification, digitalization, artificial intelligence, healthcare systems, decarbonization, and bioeconomy as key areas for investment allocation and research and development efforts. In order for the programs to be effective and transform into investment projects that impact the productive structure, they critically require not only coordination but also scale, fiscal resources, targeted credits, strategic trade policy, and government procurement focused on innovation.

   Unleashing the state

   During previous PT governments, various industrial policies targeting structural change did exist in principle. However, in a period marked by increased expansion of export agribusiness, they proved insufficient to counter the processes of deindustrialization and the deterioration of the industrial structure. Investments in infrastructure—an essential foundation for the country’s systemic productivity—are a central goal of the new PAC. It therefore marks a partial recovery in Brazil’s economic prospects. However, these investments remain at a low level compared to Brazil’s current needs—due to its prolonged stagnation—and when compared to other countries undergoing structural transformation are accordingly inadequate. Investments in Brazil during the 1970s accounted for about 10 percent of GDP. Today they represent only around 2.6 percent, with expansion largely relying on uncertain public-private partnership initiatives.

   Without an increase in the state’s investment capacity—which has been stagnant for years at the federal level—any process of structural transformation either fails to launch or proceeds in a lopsided and uneven manner. Currently the country operates under fiscal targets for primary expenditures, which constrains the inclusion of public investment in strategic infrastructure in the budget. This makes such expenses dependent on private investment flows and FDI, which are unlikely to meet the desired transformation process in terms of volume or direction. The National Bank for Economic and Social Development (BNDES) has undeniably gained prominence in Lula’s third term, following several administrations during which it lost its historical focus on industry and saw its role as a long-term lender diminished. The bank is now strongly committed to industrialization and structural change, developing new financial initiatives aligned with the priorities set out in NIB and ETP. Its expansion as a long-term investor is, however, limited by its dependence on the National Treasury. Regardless, the actual impact of BNDES on this transformation process relies not only on new financing mechanisms to expand credit but also on private investment and state-owned companies’ decisions.

   An institutional question also arises regarding the relationship between state and market. As observed, the industrial policy in the United States, China, and other Asian countries has involved not only the selective targeting of sectors and activities but also public procurement policies to drive innovation. Public procurements were historically strategic in Brazil in many areas, such as petrochemicals for the health sector.  Recently, however, procurement policy has been following a cost-based model shaped by efficiency and transparency, focusing essentially on obtaining the lowest prices, with no medium-term concerns for technological development.¹⁰

   Maria da Conceição Tavares’s observations on the central question of a developmentalist state are still very relevant:

   “The issue at stake is the very power of the state. […] A planning bureaucracy alone is not enough, nor are state-owned banks and companies. For a development plan to succeed, there must be a degree of structural economic coordination and control over investments and overarching public policies, which, in turn, require a high level of political cohesion within the state and some form of social pact.”¹¹

   This article was translated from Portuguese to English by Glenda Vicenzi.

3. After Antitrust

   7:25 am Comments Off on After Antitrust

   The Democrats’ defeat in the 2024 elections has put progressives’ antimonopoly program in jeopardy. If the party’s current crisis of legitimacy compels a broader reconsideration of political strategy, that is a good thing, because antimonopolism has always been a less desirable alternative to more direct means of redistributing wealth in America. The resurgence of antimonopolism in progressive policy over the past decade has been based on a critical misreading of the history of the New Deal state that emphasizes the fight against big firms. In fact, government regulation of prices and wages across entire industries and the economy—through public rate-setting, progressive income taxation, and union-friendly policies—was always far more important than antitrust litigation to an agenda that delivered record equality after World War II. 

   Attempts by antimonopolists in the Biden Administration to turn a campaign against monopoly—and the promotion of its inverse, competition—into the cornerstone of the progressive fight against economic inequality produced a set of quixotic initiatives. A Rube Goldberg plan to compete drug prices down by importing drugs from a country that directly sets their prices (Canada) never got off the ground. The administration’s major monopolization victory came against a firm (Google) that already offers its product for free to consumers. Another victory in an effort to use antitrust to help the average worker served only to protect the seven-figure royalties of bestselling authors like Stephen King. And the administration’s plans to use antitrust to fight inflation that had been unleashed by pandemic supply disruptions predictably fizzled. The average American worker or consumer would be hard pressed to identify any personal financial gain from four years of progressive antimonopoly policy.

   In the wake of the Democrats’ defeat, progressives should jettison antimonopoly and replace it with the focus on direct regulation of prices and wages that characterized progressive policy in the postwar years. Looking forward to 2026 or 2028, one way to do that would be to strive for a goal that even the New Deal state did not achieve: the creation of a universal price regulator along the lines proposed by Teddy Roosevelt in 1908. The first step is for progressives to rediscover the concept of economic rents, which served as the intellectual basis for the price and wage regulation of the New Deal state. Rents explain why, for the original progressives, antimonopoly policy was always an afterthought—and should be for progressives today as well.

   Inequality and the problem of rents

   Scholars belonging to the original Progressive movement of a century ago understood that markets as such—and not just monopolized markets or big firms—are the source of the inequality that characterizes industrial economies. Indeed, as Thomas Piketty observed more recently, inequality “has nothing to do with market imperfections and will not disappear as markets become freer and more competitive.” For a century, Progressives therefore had three main demands: direct regulation of consumer prices, the unionization of workers, and taxation to extract any surplus profits retained by firms. Antitrust was absent. 

   The original Progressives’ critique of markets rather than monopolies flowed from a foundational concept in left-wing economic analysis: rent. Rent is the surplus revenue generated by a firm above and beyond the revenue required to pay the firm’s cost of production, where “cost of production” is defined to include profits demanded by investors or founders, research and development costs, compensation for risk, labor and raw materials costs, and anything else that could conceivably be needed to make a firm ready, willing, and able to participate in the market.

   Rent, in other words, is the share of revenue that does not actually need to be paid to firms to ensure that they will produce. It can be taken from the firm and given to anyone without discouraging production, by definition. It follows that owners have no special claim to rent, but because they control firms, they can usually keep rent for themselves.  Rent therefore poses a legal and political, as opposed to economic, question: who should be allowed to share in the wealth and in what amount? Progressives’ answer was that rent should go to the people rather than to the owners of firms. The most direct ways to achieve that were to force firms to eliminate rent by charging lower prices, to help workers to appropriate rent from firms by demanding higher wages, and to tax away any rent that firms might still be able to retain.

   Antimonopoly did not have a place in this toolkit because, as the original Progressives saw it, even firms operating in perfectly competitive markets generate rents. If antitrust or some other antimonopoly initiative sometimes made its way into Progressive policymaking, it was as a fallback when Progressives could not get what they really wanted. 

   Firms can generate rents in perfectly competitive markets because all firms have at least slightly different production costs. Competition drives price down to the cost of production, but in a market in which every firm has a different production cost, that means competition can only drive price down to the cost of one firm—the marginal firm. All other firms will either have costs that exceed the competitive price and so will exit the market or will have costs that fall below the competitive price, allowing them to generate rents. Given that competitive markets generate rents, only price regulation, taxation, or unionization can prevent firms from appropriating them. Targeting monopolies for breakup or regulation doesn’t work because in competitive markets there is no monopoly to target.

   For the original Progressives, that did not mean that antimonopoly policy could never be useful. When firms monopolize markets, they push prices away from competitive levels in order to extract even more rent than they can under competition. By introducing competition, antitrust could be useful in eliminating that extra rent. But progressives’ preferred approaches had the advantage of being able to eliminate all rents, including both monopoly rents and those in competitive markets, by lowering prices or raising wages directly.

   The struggle to regulate prices, to unionize, and to tax

   Over a period of seventy years starting in the late nineteenth century, Progressives waged a massive struggle to place the regulation of prices by government administrative agencies on a firm legal footing. Opponents argued that when the government dictated the price at which a business sold its goods, the government was depriving the business of full enjoyment of its property rights without due process of law, in violation of the Fourteenth Amendment to the US constitution. 

   The challenge to price regulation on constitutional grounds would have surprised Americans who had done business in the first decades of the republic. Up until the mid-nineteenth century, price regulation had been the norm in American life. The courts were willing to force corporations to charge low prices even when there was no regulator present to tell the corporations what prices to charge. Given this history, how could price regulation suddenly become unconstitutional?

   The answer is that the ideology of economic liberty—or as its detractors call it, laissez faire—swept the West in the middle of the century, transforming attitudes toward regulation. Progressives and their political forbears fought back.  Their first major victory came in 1877, when the Supreme Court ruled that an Illinois law setting maximum prices for grain storage—a matter of great concern to farmers—did not violate the Fourteenth Amendment, thereby clarifying that governments could engage in price regulation.

   But twenty years later, Progressives suffered a major loss. The State of Nebraska passed a law capping the prices railroads could charge to haul freight across the prairie. The Union Pacific, Burlington, St. Paul, Fremont, Omaha, St. Joseph and Kansas City railroads sued, arguing that due process required that the cap be high enough to cover their costs. A unanimous Supreme Court held that due process required that the cap be even higher than that. “[T]he rights of the public would be ignored,” wrote Justice John Marshall Harlan, if rates were set “in order simply that the corporation may meet operating expenses, pay the interest on its obligations, and declare a dividend to stockholders.”  According to the Court, regulators had to ensure that firms earned more than what they required to do business. The Court euphemistically called this surplus “a fair return [on] fair value.” Another name for it was rent.

   For the next two generations, the Court became a price regulator in its own right, reviewing the prices set by a growing number of state and federal administrative agencies to ensure that businessmen would continue to appropriate rents. Progressives responded by developing the argument outlined above that owners have no special claim to rent. But it was not until 1944 that the Court, now staffed with a majority of Roosevelt appointees, at last repudiated the businessman’s right to rent. Over the same period, Progressives fought equally important struggles to establish the worker’s right to unionize and the government’s right to tax. 

   Antitrust as afterthought

   To the extent that antimonopoly had ever captured the Progressive imagination, it had done so very early, when, in the mid-nineteenth century, Congress tried and failed to create competition in the telegraph market. Every time Congress brought competitors into the market, they would knit themselves into a new monopoly. As Richard R. John put it, “the demonstrated perversity of antimonopoly left regulation as the only viable legislative solution.” The lesson easily generalized to the rest of the economy, leading to the establishment, in 1887, of the Interstate Commerce Commission, which went on to set prices for the railroad and freight trucking industries for nearly a century. 

   Antimonopoly policy only continued to advance through the foiling of Progressive attempts to regulate prices. The origins of America’s foundational federal antitrust law, the Sherman Act, reflect the compensatory politics of antimonopoly. Import tariffs on consumer goods were common in the nineteenth century and operated as a kind of domestic price regulation because they effectively set the minimum price at which domestic producers could sell their goods without fear of foreign competition. In 1890, the Republican Party rammed through a tariff increase that threatened to drive up prices across the economy. To mollify farmers and other groups concerned about the price increases, Republicans cast about for additional legislation that could be spun as addressing this concern. The result was a federal statute, introduced by Ohio Senator John Sherman, that outlawed persons “who shall monopolize.” 

   The Sherman Act initially languished little-used and affirmatively disliked by the emerging Progressive Movement. The Justice Department turned the statute against labor unions on the ground that they were fixing wages, using the act to jail Eugene Debs during the Pullman Strike in 1894. Theodore Roosevelt, who is inaccurately remembered today as a trustbuster, called the Sherman Act a “positive evil.” In 1908, the future founder of the Progressive Party pushed instead to create a federal Bureau of Corporations empowered to regulate the prices of every corporation in America. Congress thwarted him and a compromise emerged six years later: the creation of a new antitrust enforcer in the form of the Federal Trade Commission and the passage of other legislation that strengthened the antitrust laws.

   When Franklin Delano Roosevelt’s plan for ending the depression was struck down two decades later, antitrust reemerged as a compromise. The New Deal began as an aggressive regime of economy-wide government-sponsored cartelization and price setting meant to bring about broad-based redistribution of wealth in the economy. FDR responded to the defeat of this experiment by creating price regulators on the model of the ICC in a number of key industries. To impose some semblance of discipline on prices in all other markets, FDR turned to antitrust, kicking off three decades of vigorous enforcement looked upon as a golden age by antimonopolists today. 
   
   

   

   The intellectual trajectory of the leaders of this golden age reflects its character as a fallback. Thurman Arnold, whom Roosevelt tapped to direct his charge into antitrust enforcement, had once “ridiculed the antitrust laws as empty symbolic vehicles designed to assuage popular fears of bigness and power without actually constraining the behavior of the modern business corporation,” according to his biographer. After his appointment, Arnold walked those views back.

   Walton Hamilton, one of the most prominent Progressive thinkers to join the new antitrust effort, had once written that “in their attempt to ‘stay the development of large scale enterprise and to make big business behave as if it were petty trade’,” the antitrust laws “embody and ‘express the common sense of another age’.” Even after joining the antitrust effort, Hamilton continued to believe that the regulatory approach described in his magnum opus, “Price and Price Policies,” was correct.

   Even the judge who wrote perhaps the most celebrated opinion of this golden age hated antitrust. Judge Learned Hand, regarded by many as the greatest American jurist never appointed to the Supreme Court, found Alcoa liable for monopolization even while he privately lamented the Sherman Act: “I despise this whole method of dealing with a very real and very serious problem in industrial life,” he wrote. Hand preferred price regulation.

   New Deal Progressives never achieved their dream of an economy-wide price policy. Despite this failure, price regulation, taxation, and unionization became the defining features of postwar American economic life. During the 1950s and 1960s, 35 percent of workers were unionized, 25 percent of the economy by GDP was price regulated, the corporate tax rate was 53 percent, and the top marginal income tax rate was 94 percent. Inequality fell to the lowest levels on record. The antitrust bandaid taped over the gaps in this regulatory web was of limited importance to this Progressive triumph. 

   Progressive antitrust today

   One might have expected progressives today to pick up where the original Progressives left off. They might have made rents the centerpiece of their movement. They might have made the restoration of the price regulation, unionization, and taxation torn down over the past five decades of political reaction their principal demand. Instead, they have pursued antimonopoly, embracing policies that their intellectual forbears were disappointed to institute without having first tried and failed to achieve the policies their forebears preferred and often won. 

   This may be partially explained by progressives’ acceptance of conservative critiques of big government or progressives’ frustration at continuing voter hostility to some elements of the original Progressive synthesis, such as taxation. But it is also explained by something almost too parochial to be believed: an attempt by the media industry to use antimonopoly to smite the social media companies that have devastated newspaper ad revenues. 

   Newspapers were once themselves some of the most durable monopolies in the United States, but disaster struck in the 2010s, when millions of Americans put down the local paper in favor of the infinite scroll on social media. Journalists and, more importantly, senior management of newspapers, blamed their misfortune on monopoly—and started lobbying for antitrust action. Newspapers promoted antitrust action against the social media giants in hundreds of news and opinion articles that started appearing in 2016. They lionized progressives who advocated antitrust action and painted the social media giants as sinister monopolies.

   Ben Smith, then the media columnist at the New York Times, explained the business motivation behind the antitrust revival in 2020:

   [T]he power of the press, even nowadays, makes it a formidable political force. Rupert Murdoch’s bare-knuckled News Corp . . . has long led the fight to claw back revenue from the tech giants, and hostility to Google bleeds through the pages of The Times of London and Fox News’s airwaves. . . . While much of the American media rejects the idea that it is crusading in its pages to support its publishers’ business agenda, most news executives in this country share a viewpoint on the platforms, having seen them pull advertising dollars from the news business and . . . politicians remain eager to please the press that covers them.

   Politicians in both parties responded. By 2020, the Trump Administration had filed antitrust cases against Google and Facebook, and House democrats had convened major antitrust hearings. It is easy to see how progressives could have mistakenly seen in the deluge of reporting on antitrust, and the receptivity of the major parties to antitrust action, a grassroots antimonopoly movement that had a real shot at influencing policy. They found that recipe hard to resist.

   The consequences of applying antimonopoly to a problem that can only be solved through redistribution of rents were predictable. Progressives rushed about jamming the round peg of antimonopoly into the square hole of redistribution across a range of industries, failing to get much done and letting good opportunities go to waste. 

   Perhaps the most obvious example was the Biden Administration’s insistence that monopoly caused America’s post-pandemic inflation. That would only have made sense if firms had monopolized the entire American economy all at once during the pandemic. But there was no such dramatic drop in the number of firms in American markets—as basically everyone other than antimonopolists pointed out. Pandemic stimulus spending increased demand across the economy, in both competitive markets and monopolized ones. That gave both the grandest monopoly and the pettiest storefront alike the ability to raise prices and extract more rent from consumers. 

   Antitrust litigation, which can take a decade to run its course, would never have been able to respond in time, and even if it could have, it would only have reduced the prices charged in relatively concentrated markets, rather than across the economy as a whole. Rather than seize a golden opportunity to impose price controls or, as the Tories did in Britain, a windfall profits tax, Biden suggested antitrust action instead. The proposal was rightly laughed off the stage, and the administration landed to the right of British conservatives, who got their tax.

   Antimonopolists’ monomaniacal focus on prosecuting the tech giants was another missed opportunity. It is an inconvenient fact about tech platforms that the more people use them, the better they get. Because size makes tech platforms better, antitrust is not a good way to respond to their excesses. Breaking them up makes them less useful—the better way to make sure that the tech giants behave well is to regulate them. 

   That is just what the original Progressives did with the dominant tech platform of their day: the telephone company. Rather than break Ma Bell into pieces, progressives used price regulation to transform the company into a major engine of redistribution in its own right. AT&T charged high prices for the long distance calling services used by businesses and the wealthy, and used the profits to subsidize low prices for the local calling services used by regular Americans. Regulators famously pegged AT&T’s local calling rates to the cost of a medium pizza with two toppings. Progressives also unionized the company, transforming it into a model of progressive labor practices that paid above-market wages to the hundreds of thousands of workers who maintained the wires. AT&T’s role as a progressive success story made it a target of conservatives, which is why the AT&T breakup, which is mistakenly celebrated by antimonopoly progressives today, was actually initiated by the Nixon Administration and brought to a conclusion by the Reagan Administration. In the tech giants, progressives had a golden opportunity to create new icons of regulation along the lines of Ma Bell. Biden Administration antimonopolists chose to walk in Reagan’s footsteps by prosecuting all four major tech platforms for antitrust violations instead. 

   The biggest missed opportunity has been tax policy, which Thomas Piketty insists is the only way to reduce inequality. One might have hoped that antimonopolists would reverse the Trump Administration’s massive 2017 corporate tax cut because the corporate tax was first enacted in 1909 to target monopoly profits (although it also reaches competitive rents). The Biden Administration never even proposed a full rollback. It was too busy pursuing a flashy but ineffective antimonopoly policy.

   Rediscovering TR’s universal price regulator  

   Modern-day progressives seeking to return to their roots by ditching antimonopoly in favor of price regulation should consider reversing the early twentieth century defeat that led to the creation of the Federal Trade Commission. As President, Teddy Roosevelt sought what he described as “a general scheme to provide for [the] effective and thoroughgoing supervision by the National Government of all the operations” of corporations. The legislation that he championed would have vested in a federal Bureau of Corporations the power to pass judgment on every contract entered into by a corporation, including those relating to prices, realizing the Progressive dream of an economy-wide price policy.

   If Teddy Roosevelt had succeeded, FDR would not have needed to fall back on antitrust to fill in the gaps created by piecemeal, industry-specific price regulation. More importantly, Teddy Roosevelt might have prevented the deregulatory movement that destroyed the New Deal state starting in the 1970s from ever getting off the ground. The piecemeal approach made price regulation the business of numerous obscure government commissions. Public oversight was impossible and conservatives used the resulting capture by industry as a pretext for tearing down the administrative state. But a unitary price regulator cannot escape public scrutiny—and democratic accountability. 

   By winning a single battle to create a single new government office, progressives today could reverse deregulation, expand price regulation, and undermine conservative small government arguments all at once. But they will only be able to advance the original Progressive agenda in this way if they resist the lure of antimonopoly.

4. Developmental Tracks

   January 16, 2025 8:04 pm Comments Off on Developmental Tracks

   Recent years have seen an astonishing resurgence of industrial policy as a legislative agenda and topic for lively debate. Thanks in large part to the waning political fortunes of neoliberalism, deliberate efforts by governments to shape the economic trajectories of their countries are no longer condemned or dismissed. And somewhat surprisingly, given the country’s longstanding reputation as a bastion of liberalism, the origins of industrial policy as a concept are now routinely traced back to the early United States, particularly to Alexander Hamilton’s Report on Manufactures in the aftermath of the American Revolution, Henry Clay’s American System in the early decades of the nineteenth century, and Henry Carey’s neomercantilism in the decades straddling the Civil War. The political designs of these elite figures reveal that “industrial policy” was never antithetical to American traditions and ideals.

   But where and how was industrial policy in fact implemented, and to what effect? Concrete examples from the American past have been few and far between. The history of railroad regulation in the US—its making in the closing decades of the nineteenth century, consolidation in the New Deal Era, and its gradual unmaking in the postwar period—provides an exceptional example of how early industrial policies actually worked. Launched in the 1870s, the campaign to regulate American railroads sought to do much more than to curb rapacious and exploitative practices by railroad corporations. It aimed to proactively mold the emerging economic landscape of the American Midwest, and of American capitalism more generally.

   Indeed, the regulation of freight rates was designed to promote urbanization and industrialization on the American frontier and nurture the creation of a diverse regional economy. Pushing back against corporate prerogatives, it skewed shipping prices to favor regional manufacturing and local markets over faraway competition. As heterodox economist Alice Amsden phrased it, regulation deliberately “got relative prices ‘wrong’,” privileging public developmental priorities over market dictates. In other words, as I argue in a recent article, railroad regulation was a hugely impactful industrial policy and broadly emblematic of the long-overlooked workings of an American developmental state.

   Throughout the nineteenth and twentieth centuries, the regulation of the country’s railways was pursued not at the behest of elite visionaries or erudite technocrats, but through the push and pull of democratic politics. Surprisingly, it was driven by agrarian constituencies who looked to loosen their dependence on global markets, foster an urban market for their produce nearby, and facilitate the growth of a balanced agro-industrial regional economy. In the political battle between railroad corporations, who championed private property rights, and the farmers, who put political muscle behind government regulation and oversight, agrarian constituencies often had the upper hand.

   For contemporary advocates of industrial policy efforts, nineteenth century struggles over railway regulations pose a clear lesson—successful industrial policy depends on the mobilisation of broad political coalitions.

   Inventing the private sector

   Mythology aside, there never was an era of unregulated transportation in the US. In the 1820s and 1830s, the individual states had financed and built a massive system of canals to run as public utilities. Farmer-dominated state legislatures fought to make sure both expansion policies and shipping rates would be governed not by market logic but by long-term developmental priorities. Expansion plans in states like Indiana, Illinois, and Ohio looked to widen access to transportation as much as possible, to extend the “fostering care” of the government to “to all portions of our great and growing State,” regardless of preexisting demand. Canal tolls were calibrated to subsidize in-state manufacturers and protect against out-of-state competition. As one canal commissioner explained, “each state finds a justification on the score of interest, in furnishing to its own citizens the cheapest transportation of the surplus production of its industry to a market; while . . . the importations [from the other states] are burdened with as heavy a tax as their value will bear.”

   An array of products were shipped at lower rates if they were locally produced: flour, salt, coal, candles, cordage, crockery, glassware, paper, starch, woodware, and many others. Historian Harry Scheiber observed that the “aggressive pursuit of mercantilistic goals” decisively shaped patterns of interregional commerce. These policies nurtured a broad and diversified economic structure where agricultural growth rose side-by-side with urbanization and manufacturing.

   As Midwestern states entered the railroad era in the 1860s and 1870s, the cost of constructing transportation infrastructure far exceeded anything they could afford. Rather than financing railroads directly, the states instead chartered them as corporations that could raise the necessary capital from investors in securities markets such as New York and London. This was the common practice for fiscally-weak governments everywhere around the world at the time.

   Despite this turn to private financing, however, American policymakers insisted that their right to govern strategic infrastructure remained unchanged. State legislatures asserted their legal authority to regulate railroads as public highways and common carriers, just as they had long regulated turnpikes, bridges, and ferries. Investors strongly disagreed, but American law, concerned with protecting the sovereignty of elected government, generally accepted the subordination of property to the rules of democracy. Michigan Chief Justice Thomas M. Cooley, for example, affirmed in 1883 that regulation was “in strict accord with the principles of the common law, and by virtue of powers which are inherent in every sovereignty.” Rural states such as Minnesota, Iowa, Wisconsin, and Illinois reiterated the principle of the common-law recognition of the legality of regulation in their constitutions. Many states then bolstered their regulatory power by forming permanent state railroad commissions tasked with ensuring inclusive and adequate service and “just and reasonable” freight rates. These quasi-legislative, quasi-judicial bodies maintained that jurisdiction over these crucial arteries of commerce should never be relinquished to private interests.

   The battle over regulation in the states

   Throughout this period, railroad executives fought hard against these regulatory constraints, and especially against state legislatures’ authority to set freight rates. They argued that government interference unfairly infringed on the rights of property. Alexander Mitchell, President of the Chicago, Milwaukee, and St. Paul Railway Company, complained in 1874 that regulation “deprived capital permanently invested under the sacred promise and pledge” of the states “of a suitable and reasonable return.” Mitchell and others threatened that political meddling in the railroad business would have bad consequences for states that engaged in it, hurting their reputation “in money centres” and thus their ability to raise funds for future ventures. Timothy B. Blackstone, President of the Chicago and Alton Railroad Company, argued in 1889 that railroad corporations simply could not operate under state commissioners whose task it was “to secure to the people such railroad service as they may demand, under such regulations as they may think proper, and for such compensation as they may be willing to pay.” These corporate leaders proclaimed regulation to be unconstitutional and in some cases announced their outright refusal to abide by it.

   The confrontation over the question of regulation reached the Supreme Court in the landmark 1876 case of Munn v. Illinois, which handed the states a resounding victory over corporations. “When…one devotes his property to a use in which the public has an interest,” the court memorably explained, the owner “in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good.” The battle over this core issue continued throughout the 1880s and 1890s as corporate executives and investors denounced the Munn doctrine and its far reaching implications. They brought before the Supreme Court a steady trickle of cases that chipped away at the states’ jurisdiction. The Court agreed, for example, to limit the states’ regulatory authority over interstate traffic. It provided railroads with opportunities to challenge mandated rates in court. It reversed mandated rates that were deemed so low as to be “confiscatory.” Nevertheless, Munn was not overturned. Rather, as historian William Novak has persuasively argued, Munn became the foundation for “far-reaching experiments in the state regulation of new economic activity.” Even conservative Justices conceded that it was ultimately “settled…that a State has power to limit the amount of charges by railroad companies.”

   The states and their agrarian populations, however, never intended to confiscate railroad property but, more significantly, sought to gain control over it. The struggle turned not merely over whether rates should be high or low, but on their structures—and the broad economic implications of those structures. At the heart of the debate was the practice of rate differentiation—or what critics called “rate discrimination”—which charged large shippers, large metropolitan hubs, and long-haul interregional traffic with relatively lower rates than small-scale shippers, small towns, and short-haul traffic.

   Railroads managers and well-respected analysts insisted that rate discrimination was hardly discriminatory at all. Differentiation, they argued, was derived from sound economic logic. Long-haul shipping, by definition, faced more competitive pressures. Railroads often enjoyed monopoly power over a local line serving a particular town or county. In these contexts they could dictate prices. At longer distances customers could plot between alternative routes in order to negotiate better rates between rival interregional roads. Moreover, much of the expense in railroad shipping lay with loading and unloading cargo, which made long-haul relatively cheaper than short-haul shipping. It thus made sense to charge less per mile for longer shipments.

   Faced with fierce competition, railroads indeed cut rates on interregional throughlines to the bare bone. Any revenue on those lines was better than no revenue at all. By contrast, the rates on local shipping rose to pay not only for operating expenses but for the railroad’s overall fixed expenses as well (primarily the interest in the roads’ bonded indebtedness). Arthur Hadley, a Yale political economist who corporate executives hailed as the foremost authority on this question, endorsed this idea. He confidently explained that “the road must secure two different things—the high rates for its local traffic, and the large traffic of the through points which can only be attracted by low rates.” To legislate against this distinction would be both irrational and counterproductive.

   But this is precisely what state legislatures and railroad regulators, particularly on the western periphery, aimed to do: to get prices “wrong.” State governments in what would become the Midwest rejected the economistic logic of differential rates. Offensive to their deep-seated republican sensibilities, midwesterners deemed differential rates to constitute “unjust discriminations and extortions.” Cheap, long-distance, high-volume trade benefited large metropolitan hubs at the expense of medium cities and small towns, and benefitted large-scale manufacturers and merchants at the expense of smaller ones. Worse, these rates aggravated regional economic specialization, creating further polarization between an urban core and an agrarian and extractive periphery.

   In response, farmers enacted “long-haul, short-haul” legislation that prohibited differential charges from different locales along the lines and made local and regional shipping more affordable. As Alpheus Stickney, a practical railroad man from the largely-agrarian state of Minnesota, explained contra Hadley, “the competitive rates were rather too low, the non-competitive rates too high, and that, to do justice to the people, the legislature should reduce the rates which were too high, and leave the companies free to advance the rates which were too low.” In other words, by reducing rates on noncompetitive local traffic over which they had clear jurisdiction, state legislatures could force railroads to look for larger revenues elsewhere, indirectly compelling them to raise rates on their long-haul lines.

   Midwestern farmers of the 1870s argued railroad corporations were ultimately creatures of government and needed to put all citizens and locales under their jurisdiction on an equal footing. They were not supposed to absorb and reproduce the inegalitarian imperatives of the market, granting some citizens or communities special privileges while denying them to others. But an equally grave concern was the long-term economic impact of differentiated rates. Economic specialization would doom their communities, they argued, to be perpetually subservient to eastern economic interests. They looked to the regulation of rates to push back against this tendency, allowing the region to diversify its economic base beyond agriculture and extraction and instead to urbanize and industrialize.

   Growth through regulation goes federal

   Agrarian advocates were explicit about rate regulation being a protectionist form of industrial policy. They warned that differential rates would keep them in a state of dependency. “This is an agricultural State and we are mainly the producers of raw materials,” J. M. Joseph, an Iowa farmer, put it to a Senatorial committee studying the issue in 1886. “It seems to be the policy of the railroads to keep us producers of raw material.” Those congressional hearings in Washington marked two decades of struggle over the shape of economic growth. Their legislative result, the Interstate Commerce Act of 1887, ratified at the federal level that rate regulation, far from restricting growth, served to shape it towards democratic ends.

   Testimony to the Senate Select Committee on Interstate Commerce reveals how this worked. Whereas the rates farmers paid to ship their produce east declined significantly over time, high local rates within each state obstructed the growth of local industry. As Joseph explained, “Our troubles and hardships are not mainly on the stuff we ship out of state…the grain has come to be only a small matter even in Iowa.” High short-haul charges on coal as well as timber—raw materials that were essential for the growth of cities and industry—were in fact “a greater hardship on us than the shipment of grain.”

   William B. Dean, a trader from Saint Paul, similarly framed rate regulation as a method for fostering local industry. “As producers of grain, remembering that we desire to get our products to the seaboard, we ought to favor what is termed the long haul.” And yet “only about one tenth of our products are shipped abroad.” The alternative would be a rate structure that balanced short-haul and long-haul rates: “My own opinion is that…higher rates…to the sea-board…and to the manufacturing States of the East…would lead to the establishment of the same branches of industry farther West, nearer to the grain-fields and nearer to the ranches.”

   S. J. Loughran, a Des Moines machinist and newspaperman, agreed. “Our city is admirably situated for manufacturing,” he argued. Iowa had a large market of farmers as well as abundant raw materials and sources of energy to enable the production of agricultural machinery that made agriculture more productive: “wagons, plows, cultivators, seeders, hay-rakes, corn planters, mowers, harvesters, threshers, steam engines, boilers, and other machinery and implements.” However, eastern producers could “send their goods across States to almost any point in Iowa for less than we charged from one point to another within the State.” This situation threatened to make it impossible for local producers to develop their state’s industrial base.

   Again and again, agrarian spokesmen discussed the question of regulation in terms of protectionism, pricing power, and the imperatives of economic diversification, particularly the desire to support local manufacturing. The regulation of freight rates was only the beginning. The same ambitious goals that inspired legislatures to regulate rates also led them to impose other types of constraints and costs on railroad corporations, compelling them to support regional development. Legislation coming out of the states, and especially from the Midwest, forced railroads to fund adjacent infrastructure that made transportation affordable, safe, and accessible on the local level. It required railroads to fence railroad tracks, build grade crossings, elevate tracks, construct viaducts and tunnels, provide additional stations along the line, devise connections with other roads, change station locations, and supply switching services and side tracks—all at corporate expense.

   More significantly, legislation mandated that railroads must provide “adequate service” to small communities, maintaining frequent trains and stopping in every county along their line. Transportation on spurs and branches was to be provided at the same rates as traffic on the main line. Finally, “abandonment clauses” prohibited the reduction or discontinuation of service to a particular community without sanction from state regulators. As one observer put it, these legal requirements “constituted a serious modification of the right of private property” and “impose[d] vast expense upon the companies.” Indeed, privatizing the costs of railroad transportation—and socializing as many of the benefits—was precisely the point.

   This regulatory framework worked to produce the intimate relationship between railroads and midwestern communities. Regulation forced railroads to expand access to transportation and foster the growth of a decentralized network of urban and industrial centers, an ”agro-industrial” complex that was characterized by its incredible diversity, or as economic geographers Brian Page and Richard Walker put it, “a vast number of mutually reinforcing activities.” Midwestern cities grew rapidly but also proliferated, creating a dense urban system headed by a handful of large metropolises alongside dozens of small towns and medium-sized cities. Even more remarkable was the boom in manufacturing in this resource-rich region that transformed American capitalism as a whole. Manufacturing employment in the Midwest rose very fast between 1860 and 1920, increasing from roughly 125,000 to over 1.1 million between 1860 and 1900 and then to more than 2.2 million by 1920. In percentage points this was a leap from 11 to 25 percent of American manufacturing employment overall. Midwestern manufacturers became more prominent nationally, even as most manufacturing continued to target local and regional markets in a wide array of sectors. This process reached a climax in the dramatic rise of the most transformative manufacturing industry of the twentieth century—the automobile industry—born in Detroit, Michigan, out of this particularly midwestern institutional and economic ecology.

   By global standards, the ascendance of the Midwest as an industrial powerhouse was a highly unlikely story. It stood in stark contrast to the experience of other resource-rich peripheral regions around the world. In the nineteenth century and beyond, naturally abundant regions like the Midwest typically became “commodity frontiers” that fed agricultural produce and raw materials to existing industrial economies. These regions struggled to urbanize and industrialize. At the time, acute observers on the periphery of the world economy warned that without protectionist policies from their governments, their societies would become ever more dependent on cultivation, extraction, and the exports of primary goods. Control over railroads was at the core of these debates. India’s Mahadev Govind Ranade, for example, blamed railroads for making “competition with Europe more helpless” for Indian producers, because the roads facilitated “the conveyance of foreign [manufactured] goods to an extent not otherwise possible.” Uruguay’s José Batlle y Ordóñez decried the country’s heavy reliance on agricultural exports and advocated greater “economic self-sufficiency,” in part via greater government regulation of transportation. China’s Sun Yat-sen sought to counter the “invasion” of European goods into China and foster national industry with government control over transportation.

   These protectionist efforts usually fell short. Dominated by foreign investors and in many cases bolstered by colonial governments, railroads in those locales prioritized long-distance, high-volume traffic to and from port cities. They raced across the countryside, neglecting the needs of local and regional economies and leaving large districts and rural populations literally in the dust. In Mexico, to take one poignant example, travellers on the railroads could regularly observe Mexican peasants and their mules—“beasts and men of burden,” as one European observer put it—traveling by foot alongside the railroad trunklines themselves. The disregard for local service contributed to a pattern of uneven development, with a few booming import and export hubs surrounded by vast areas of poverty. Comprador elites, embedded in existing extractive sectors and trade relations, helped defeat political efforts to remake these economies along more balanced lines. The lack of political counterweights to the power of foreign capital thus led to more extractive and unequal economic paths, often with long-lasting effects. In the US, by contrast, the political power of western farmers and the willingness of state and Federal authorities to take bold regulatory action allowed for a more diversified development path. In other words, as Stefan Link and I have argued, what set the US apart from other peripheries was the capacity of the state, empowered by a mobilized agrarian population, to politicize economic policymaking and harness capital in favor of broad developmental priorities.

   Postwar period

   But as legal scholars Ganesh Sitaraman, Morgan Ricks, and Christopher Serkin have accurately shown, these policies were not irreversible. They rested on favorable political alignments that needed to be preserved against fierce opposition. These favorable alignments eroded in the postwar period.

   For many decades, starting with the Interstate Commerce Commission (ICC) in 1887 and through to the New Deal era, the state’s ability to discipline capital was on a clear upward trajectory. The use of regulation over transportation as industrial policy, inaugurated by the states, gradually expanded to the federal level, adding up to a robust system of government control. State commissions grew in number and capacity, coming to oversee additional forms of infrastructure and new modes of transportation, such as streetcars and later buses. Federal legislation in 1903 (the Elkins Act), 1906 (the Hepburn Act), and 1910 (the Mann-Elkins Act) cemented the ICC’s regulatory authority, including the prohibition on higher rates for short hauls than for longer ones. In 1935 the Motor Carrier Act expanded the ICC’s authority to bus and trucking companies, and in 1938 Congress created the Civil Aeronautics Board to regulate airlines in the same way. The National Transportation Policy Act of 1940, echoing familiar nineteenth-century language, sustained the ICC’s mandate over “the establishment and maintenance of reasonable charges for transportation services, without unjust discriminations.”

   By mid-century, however, the regulatory tide turned in a very different direction. The Transportation Act of 1958, followed by the Railroad Revitalization and Regulatory Reform Act of 1976 and Staggers Rail Act of 1980, empowered the ICC to overturn decisions by state regulators and discontinue rail service in unprofitable locations. In a reversal of the logic of long-haul, short-haul legislation, the ICC now allowed railroads to raise rates or eliminate local service altogether if operational costs “constitute[d] an unreasonable burden on the interstate operations of the carrier,” without considering the implications for served communities, organized labor, or the opposition of state legislators.

   These deregulatory acts made midwestern railroads into prime targets for predatory capitalists. They allowed newly consolidated systems to cut off branches and spurs and eliminate the regular transportation service that was the lifeline of many towns and cities. Overall, as keen observers have pointed out, the turn away from the principles that guided railroad regulation up to the middle of the twentieth century has led to declining service in large swaths of the United States, weakened the bargaining position of workers, and contributed greatly to the hollowing out of once thriving urban and industrial regions. Regional inequality has since widened considerably, with at first surprising but by now all-too-familiar political consequences.

   Industrial policy as political struggle

   When scholars think of industrial policy, especially in the nineteenth-century US, they tend to associate it narrowly with tariffs. The history of freight rate regulation reveals that industrial policy can in fact come in a wide array of shapes and sizes. Policymakers have proven incredibly creative and resourceful in using areas under their jurisdiction to shape economic change, pulling on whatever policy levers they could gain control over. Furthermore, while development has conventionally seemed like the domain of nation states, this history brings to the fore the crucial significance of subnational and regional scales. The United States might in fact be the pioneering case in point. Finally, and most important, rate regulation reveals that states can gain the capacity to impose broad and long-term priorities on capital in many different ways, and not necessarily through a centralized bureaucracy or top-down directives. Success depended not on any set of institutions to be replicated everywhere but above all on the coherence of political alliances and coalitions—agrarian constituencies, in this case, that leveraged their political influence to direct policy. As we urgently search for development policy today—in pursuit of sustainability, equality, productivity, and resilience—we will be well served by this much broader and more versatile historical perspective.
   

5. Adverse Terrain

   6:59 pm Comments Off on Adverse Terrain

   The 2017 reform of Brazil’s labor law is part of a broader movement that arose over the first two decades of the twenty-first century, especially after the 2008 financial crisis, with the purpose of eroding labor rights on an international scale. This trend represented a return to the structural reforms of the 1990s, when rising neoliberal governments crafted their agendas from policies of flexibilization and the deregulation of labor relations, under the pretext that the problems of unemployment and informality were insurmountable without them. Despite their inefficacy, policy changes empowering employers in determining wages and working conditions have been repeatedly prescribed over the past four decades as a way of stimulating economic growth and solving labor market problems in different countries. 

   By now, a number of studies indicate the negative impacts of policies that reduce the role of labor unions and public regulation in labor markets. The reforms have deepened social inequalities and created job precariousness by legalizing contracts that guarantee fewer employer obligations. The proliferation of these contracts has consequently affected union organization and representation in ways profoundly challenging to workers’ collective action. 

   The Brazilian scenario is no exception.¹ Five years after the implementation of the reform, unionization rates in the country have fallen to 8.4 percent, which is equivalent to 8.4 million union members out of 100.7 million employed individuals in 2023. This is the lowest percentage in the official data series that began in 2012, when the unionization rate was nearly double (16.1 percent).² In ten years, the share of the Brazilian workforce organized into unions has fallen by half. 

   

   Several simultaneous and interrelated factors are at play to produce this result, which cannot be exclusively pinned on labor reform. These are economic, political, and ideological factors that contribute to delegitimizing and discrediting trade unions, leading to workers’ indifference toward organizations meant to represent them. Although the ongoing erosion of workers’ rights in Brazil is not limited to those measures adopted in 2017, they are a milestone and a crucial dimension of this process. The unionization rate fell from 16 percent to 14.4 percent between 2012 and 2017 and to 11 percent in 2019, which points to the decisive impact of the reform on this downward trend.³ The number of union members is falling in all sectors of economic activity, including the public sector, where unionization is traditionally higher, from 28.1 percent to 18.3 percent between 2012 and 2023. The situation is more dramatic among precarious workers, as the fragility of their occupations, while not preventing unionization, makes it more difficult: employees in the private sector without a formal employment contract have a unionization rate of 3.7 percent, the self-employed 5.0 percent, and domestic services 2.0 percent in 2023.  

   The total effect of these trends has been self-reinforcing in empowering employers and reducing workers’ control over their own lives. This significance can be seen in the declining unionization rate among youth: in 2022, the unionization of the population aged between 15 and 29 stood at 5 percent. Many young people enter the labor market in precarious occupations and are unable to move into more stable and protected jobs over the years. The legal attack on the Brazilian union movement not only fragments existing workers’ organizations, but, in the recent national context, has allowed a culture of entrepreneurial ideology to spread as the most readily available perspective through which young workers understand their material situation. 

   The 2017 labor reform contributed to this scenario in several ways. Firstly, precarious contracts inhibit worker organization by increasing job turnover, leading to low wages and weak labor rights associated with them. Secondly, the multiplication of contractual forms—effectively misclassifications—hinders the perception of a sense of common belonging and, therefore, the creation of a collective identity. Thirdly, the amendments have clearly anti-union features, with a number of measures aimed at circumventing the role of unions.

   Back to the 1990s?

   The changes approved by Michel Temer’s presidential administration in 2017 were largely built upon projects begun in the 1990s to make wages and employer obligations more flexible. Law 13.467 (which instituted the union reform) was part of a package that included Law 13.429, which allowed for the expansion of subcontracting for work previously performed by direct employees. Both laws were based on the premise that the Brazilian Labor Code (CLT), the law that governs labor relations in Brazil, was outdated and archaic, stifling employers’ freedom, restricting free enterprise, and discouraging hiring. 

   Among employers, politicians, and columnists in the mainstream press who pressed for reform, the common argument stressed the need to “modernize” labor relations in order to adapt to transformations in the productive structure of the capitalist economy, and technological innovations intensified by uberization and the development of artificial intelligence. Invoking what businesspeople in Brazil refer to as a need for “legal certainty” for capitalist investment,  they argued that direct understanding between the interested parties “taking into account people’s wishes and realities,” rather than legal rights for labor, would enable companies to “safely conduct business.” The reforms were passed amid a chorus of claims  that “social rights must be made more flexible if there are to be jobs,” on the grounds that “you’ll never be able to tackle unemployment by expanding rights alone.” Attacking labor legislation that supposedly promoted injustice, and condemning the “activism” of the courts, proponents of modernization advocated for private contractual legal standards over universal ones—standards to be agreed to, if possible, on an individual basis and not collectively. As Justice Ives Gandra Martins Filho, former president of the Superior Labor Court (TST) at the time of the reforms, argued, reform would ensure “prestige to collective negotiation” and “break legislative rigidity.” The result, however, has been to relieve companies from assuming liability for the whole of their workforce, and the state from maintaining its obligation to the welfare of its citizens. 

   Dimensions of precariousness

   By weakening unions, the 2017 changes to Brazilian labor law have had the effect of relaxing health and safety standards for workers, reducing inspections of employers, and making it more difficult for workers to access Brazil’s Labor Court. 

   The changes also legitimated forms of precarious employment previously considered illegal. Take the case of zero-hours contracts, through which employers are allowed to count working hours according to their needs, without being required to guarantee their employees a set working day or ensure a minimum wage. Other practices weaken the employment relationship generally. Hiring workers as permanent freelancers evades employment law, for example, as it allows employers to falsely classify labor as self-employed and shifts onto the worker, who has become a de facto entrepreneur, the burden of securing their individual social protection.

   Such new kinds of work relationships were legalized incrementally before the 2017 labor law reform: legislation in 2005 allowed for companies made up of a single person, defined as a “Legal Person” (PJ), to provide professional services; and in 2008 legislation established the legal category of “Individual Microentrepreneurs” (MEIs) that pay reduced social security contributions for self-employed people up to one employee. Once established, the process of “pejotização” or “pejotization” and the use of MEIs spread to different sectors. Such contractual relationships promote the de-standardization of working hours and wages, as they seek to eliminate idle time considered “non-productive” insofar as the employer determines it not to contribute to capital growth. In terms of working hours, rest, and income, these contracts create greater uncertainty in the lives of those who make their time available to the company, since pay can vary according to the demand for work and the way in which the employer calculates the working day. Being at the company’s disposal is no longer considered working time, as the time clock only starts ticking if the hours worked generate profit for the employer. It is therefore a way of increasing productivity to the detriment of living standards.

   The pay cut alongside the replacement of employees by freelancers, MEIs, and PJs reduce social security contributions, impacting social security revenues. ⁴In this respect, these contracts affect both hired individuals as well as their communities. As the state loses revenues intended to fund public programs, the discourse in favor of austerity has perversely strengthened the stigma of public-sector failures. This unleashes a continuous process of labor and social security reforms and spending cuts, especially in the field of health and education, restricting the social citizenship of future generations. In addition to the fact that precarious contracts reduce tax revenues, workers with precarious contracts find it difficult to make continuous contributions and, without accumulating the necessary contribution time, are unable to exercise their right to retirement.

   The reform also authorized the inversion of the hierarchy of regulatory instruments. Until the 2017 labor law reforms, labor agreements could only improve upon employment law where they were more favorable than the wages and working conditions established by legislation. The 2017 law allows private agreements to supersede public regulations even where they provide lower wages and worse working conditions, allowing the least favorable rule for workers to take precedence over the others. Instead of strengthening unions, as some argued the reform would, it became feasible for unions to consent to reducing rights guaranteed by law. Thus, the argument of encouraging collective bargaining disguises the real objective of the reform: to reduce labor costs.

   Obstacles to union action

   The reform undermines trade union prerogatives by making it possible to ratify employment terminations without union participation, previously thought essential to ensure that workers are not harmed and do not give up their rights when they are dismissed. The reforms also allow workers whose salaries are twice the social security ceiling to negotiate some rights individually, on the assumption that they are able to negotiate on an equal basis with their employers. Making negotiation an individual process promotes differentiation between workers according to their bargaining power and makes unions redundant in the worker’s eyes. Furthermore, the law contains clauses allowing companies to create committees to represent workers in the workplace and negotiate on their behalf. This not only introduces competition with unions, but also broadens the employer’s power to unilaterally determine conditions for the hiring, use, and pay of labor. 

   Although some of these forms of contracting, such as the intermittent contract, have little impact on aggregate labor market performance, they bring significant challenges to union organization. Contractual diversification—which is even happening in the public sector, previously protected by its own contracting system—and liberalized  subcontracting undermine union representation and fragment how workers experience their collective enterprise. Being salaried, self-employed, or subcontracted changes the conditions in which people work, affecting the way they do or do not see themselves as workers, the relationships they establish with their colleagues, and their willingness to join unions. While formal employees have guaranteed rights, the self-employed in a disguised employment relationship work without rights or union protection. Subcontracted workers, as a rule, receive lower wages and fewer benefits than those guaranteed by the company that is doing the outsourcing. In addition, subcontracting fragments labor collectives into distinct professional “categories,” which, according to Brazilian labor law, means they will be represented by different unions. These unions are generally weaker than those who represent non-subcontracted workers and negotiate collective agreements that are less protective.

   Teleworking and other forms of remote work—not widely adopted in the first years after the reform—expanded during the Covid-19 pandemic due to social distancing, creating an additional challenge for unions’ ability to organize workers subject to territorial dispersion. Platform work contributes to this, along with the distancing of workers from the union, since they are not gathered in the same workplace, which has repercussions on forms of sociability and the construction of solidarity networks. 

   The reform has also shaped worker ideology. The reforms are based on an entrepreneurial, neoliberal ethic, in which labor is measured against accumulating property ownership. That ethic is spreading among workers, fostering illusions about the power of personal abilities and freedoms, nurturing self-sufficiency expectations and the often illusory dream of running one’s own business. By praising the advantages of self-employment, the ideology of entrepreneurship distances workers from collective organization and the struggle for rights. This undermines trade unionism in two ways: by encouraging individualism and competitiveness, and by weakening solidarity—after all, it’s about bearing the inherent risks of free enterprise in order to secure a position in the market. Entrepreneurship has been used to justify precariousness and the rolling back of rights, and this has had a demobilizing effect. Moreover, the cult of meritocracy makes trade unions, as well as any form of association, supposedly unnecessary, since everything depends on the effort and competence of individuals. It’s also important to mention the smear campaigns against unions, anti-union practices promoted by companies, as well as the political and ideological environment that has been shaped by the rise of conservatism and the extreme right, especially during Jair Bolsonaro’s term in office (2019–2022), marked by political positions against the union movement and progressive social movements. 

   Yet no hegemony is absolute. There are cracks, crevices, through which organizations are built and actions are carried out to defend rights, although not without conflicts and contradictions. Workers who experience exploitation and precariousness on a daily basis see the need to organize in order to reduce their vulnerability. However, this organization increasingly does not necessarily take the form of a trade union. Workers more heavily exposed to precarious work, such as casual workers and the self-employed, have been setting up alternative organizations to trade unions, such as associations, cooperatives, and collectives. On the one hand, there is a widespread misunderstanding in Brazil that the informal and self-employed do not “have the right” to join unions. On the other hand, there is a movement to delegitimize and reject the union form because, given their working conditions, precarious workers, as a rule, do not feel represented by the union. The very nature of the Brazilian union structure contributes to this perception, since the rules governing union organization in Brazil have fostered the existence of bureaucratized, registry-like entities that exercise a monopoly on grassroots representation and solid sources of funding, the most important of which is the so-called “union tax.” According to a widespread view, unions are inefficient, only interested in collecting fees from members and maintaining the bureaucratic structure, rather than representing the interests of workers in their government-granted jurisdictions.  

   But what are workers’ interests and to whom should they be addressed? There is no consensus on this. The experience of some of the informal and falsely self-employed contradicts the discourse of autonomy and free enterprise, allowing them to claim their status as workers from the state and employers. Others form associations not to defend labor rights, but searching to improve their situation “in the market,” in a similar model to that of clubs or trade associations:  delivery and app drivers, for example, benefit from discounts on the purchase of vehicles, gas, insurance, , as well as insurance for the goods they transport. For other categories, such as caregivers for the elderly and children, initiatives to promote professional development, service provisions, or even the intermediation of the workforce stand out.⁵ In other words, there is a wide range of scenarios and perspectives that have grown to fill the gaps of an atrophied union movement in Brazil, comprising both solidarity values and individualistic benefits as reasons for collective organization. In the same way that some trade unions are more representative or more or less proactive and have varying political and ideological profiles, there are different types of associations—some of which have not ruled out the possibility of becoming trade unions in order to better undertake the mission of organizing, representing, and mobilizing workers.   

   Changes in occupational structure and the expansion of hiring methods enabled by the labor reform, coupled with competition from other forms of social organization, have contributed to a decline in the unionization rate. Other obstacles the unions face are expressed in the reduction of collective agreements and conventions. Contrary to the rhetoric that the reform would stimulate collective negotiation, several analyses carried out using Mediador, the collective-bargaining registration system maintained by the federal government’s Labor Relations Office, indicate that the number of regulatory instruments negotiated fell after the reform, by 19 percent in terms of agreements and 10 percent in terms of collective bargaining agreements, between 2012 and 2022. ⁶

   Besides struggling to reach agreements, the results tend to be worse. The negotiation process is marked by greater pressure from employers to introduce contract clauses that downgrade working conditions, in accordance with changes introduced into legislation after the reform.⁷ Meanwhile, many collective agreements and past practices now include fees to be charged to all workers who benefit from the negotiation process, as a kind of contribution for the work done by the unions. The so-called “negotiating fee” became a strategy for unions to try to compensate for the loss of revenue, since the reform made the collection of union dues—one of the three contributions provided for in Brazilian law—conditional on the worker’s prior consent. This measure followed the guidelines of the 1998 decision by the Superior Labor Court (TST) and the 2003 decision by the Federal Supreme Court (STF), which restricted the collection of the other two compulsory contributions (confederation and member benefits) to affiliated workers, on the grounds that making them compulsory violated freedom of association. The STF’s decision was reviewed in 2023, given that, with the end of the compulsory union dues after the reform, unions lost practically all their previously guaranteed sources of funding, leaving them with only monthly fees paid voluntarily by an increasingly smaller number of union members.⁸ Following this ruling, trade unions can collect dues from all workers, even non-members, as long as they are approved by grassroots meetings. 

   Reduced resources have affected the ability of trade unions to promote grassroots actions and support social movements in defense of citizenship rights. Unions have started to cut back on their expenses, laying off staff, divesting assets, cutting services and communication costs, while at the same time adopting initiatives to increase their income, such as unionization campaigns. However, attracting new workers is impeded by the proliferation of different types of contracts and the aforementioned subjective issues, which lead to indifference or a negative perception of unions.⁹

   The future of the trade union movement

   The reform has drawn significant criticism from the trade union movement. Although a fair number of union leaders have bought into the discourse of modernizing labor relations as a means to strengthen unions, a broad majority has proposed repealing the reform. The Priority Agenda of the Working Class, signed by seven trade union federations and presented to the 2018 election candidates, calls for the repeal of only parts of the reform, indicating either the existence of benefits from the reform, or the lack of consensus among the federations on what should be repealed.¹⁰

   The position in favor of repealing the “regressive milestones” of the reform was agreed upon mid-pandemic, during the National Conference of the Working Class (CONCLAT), organized by the Forum of Trade Union Confederations.¹¹ The repeal flag made a strong comeback in the 2022 presidential campaign. After hinting at a possible repeal in his government program, Lula backtracked and instead suggested reviewing  points of the reform, in order to accommodate sectors of the trade union movement that defended this position.¹² Upon taking office, Lula set up a tripartite task force to discuss a new regulatory framework for labor relations, but talks have stalled. Repeal remains a distant project with no concrete action taken thus far. 

   In the meantime, in addition to confronting a drop in unionization rates, unions continue to face difficulties in mobilizing members. Participation in demonstrations has been very low, reflecting a weak commitment to political demands that go beyond the economic-corporate sphere and growing depoliticization of the labor movement. The May 1, 2024 fiasco—no more than two thousand people attended the demonstration, which included the presence of Lula—was an example, in addition to lackluster attendance for the march to Brasilia in defense of the working class agenda, held that same month, of how the legislative changes have affected the very ability to mobilize around labor agendas. Strikes, which soared significantly from 555 in 2011 to 2,114 in  2016, fell dramatically to 649 in 2020 at the peak of the pandemic. While structural changes in the labor market, the economic crisis, and the health crisis certainly contributed to this shift, the expansion of informality and disguised employment relationships also played an important role in making workers more vulnerable in joining strikes. Of course, this hasn’t entirely stopped strike activity, as demonstrated by the “app strike” carried out by couriers in 2020, but increased precarity has posed challenges for informal worker organization. While strikes increased after the pandemic, they are still below those recorded between 2013 and 2018. There were 1,132 strikes in 2023.¹³ Furthermore, strikes today tend to be defensive, in favor of maintaining the working conditions in place or advocating against rights infringements. Precarity has shaped the content of the demands made and reduced strike duration. Strikes have become significantly shorter, with the majority only lasting a single day. 

   Present-day demonstrations carry different meanings. The disputes surrounding the regulation of platform work exemplifies the different positions taken by unions and associations, which remain divided between defending the CLT, self-employment, and a compromise that guarantees some level of rights. After setting up a tripartite task force to draw up proposals to regulate the transportation of goods, people, and “other activities carried out by means of technological platforms,” the government presented a controversial Supplementary Bill (PLP 12/2024) that is limited to passenger transportation in four-wheeled vehicles. Many workers have rejected the proposed regulations, arguing that the “autonomy with rights” model promoted by the government represents an attack on their freedom to conduct business. Drivers and couriers, fearful that the proposed rules would be extended to them, held rallies in several capitals across the country against the project. The demonstrations not only represent a criticism of government intervention, but they also reflect a popular rejection of the unions and union confederations, who claim to represent non-unionized workers at the negotiating table.¹⁴

   In addition to being weakened by the legislation, the trade union movement has been abandoned by the workers it sets out to organize. Successive advancements toward greater flexibility and subcontracted work, culminating in the 2017 labor reform, have made it difficult for unions to reach out to the grassroots, especially in the most precarious segments of the labor force. Despite these hardships, however, unions are not doomed to disappear. A recent survey suggested that unions have room to grow: 19 percent of workers surveyed “never participated, but would like to join a union.”¹⁵ The necessity of a more durable and organized movement to address these expressed needs is evident, for example, in the campaign against the “6×1” work shift (six days on, one day off), launched by the Life Beyond Work (Vida Além do Trabalho, VAT) movement.¹⁶ By undermining the basis of existing class relations to workers’ collective disadvantage, the legal changes themselves create the social material for new organization, giving the trade union movement the opportunity to embrace the demands of precarious workers revitalizing the country’s labor movement. It should not be forgotten that the reduction of working hours is a historic flag of the trade union movement and that the fight to reduce working hours to forty hours a week with no reduction in wages has been on the agenda of the trade union federations since the first Lula government. Will not having a leading role in the campaign launched by VAT prevent trade unions from joining this movement? 

   Translation: Marina Ribatski

6. Selling Power

   January 8, 2025 6:53 pm Comments Off on Selling Power

   President Joe Biden began his term with Rooseveltian ambitions. Perhaps the most exemplary were those to remake the electric power industry. To this end, the Inflation Reduction Act (IRA), the United States’ first national climate law, could disburse as much as $800 billion over the next ten years for clean energy investment if it survives without amendment. As it currently stands, the law is projected to increase clean power generation capacity in the United States and substantially reduce national greenhouse gas emissions.

   Among the IRA’s many features is the expansion of federal funding eligibility to include public and non-profit institutions, delivering the biggest national boost to the cooperative and public power sectors in several generations. Publicly and cooperatively owned utilities—including the Los Angeles Department of Water and Power, and Seattle City Light, and thousands of others—collectively serve more than one in four power customers in the United States. Most electric cooperatives in rural and now-suburban areas were formed under the New Deal’s Rural Electrification Administration (REA), which brought light and power to the countryside.

   A comparison of the New Deal power program and the IRA exposes key design questions regarding the financing of power systems. Foremost among these are whether aid takes the form of grant or loan, the conditionalities imposed on that aid, and preferences given to public and non-profit institutions. By these standards of comparison, the IRA has made some improvements on the New Deal in the first two respects: it offers aid in de facto grants to publicly owned and cooperative utilities, rather than loans; and, as grants, they do not bind recipients into restrictive power-purchase agreements to ensure repayment of the debt. On the last criterion, however, the IRA’s neutrality with respect to ownership of the utilities it finances means it leaves the political-economic structure of the power industry intact. Whereas the REA promoted public and cooperative ownership as part of asserting greater democratic control over the electric power industry, the IRA maintains the current balance in the industrial structure between for-profit and non-profit utility companies and is not part of a larger reconstruction of the sector.

   The New Deal brings the “next greatest thing” to rural America

   In the 1930s, Congress undertook a systemic, though not necessarily systematic, restructuring of the power sector. Throughout the 1910s and 1920s, private utilities had mostly dismissed the rural market as costly to serve and unlikely to yield profits. As a consequence, in 1935 only about one in ten farmers had electricity service. Federal agencies such as the Bureau of Reclamation and the newly created Tennessee Valley Authority built large multipurpose dams that controlled floods, stored water for irrigation and domestic consumption, and generated power. Congress broke up and regulated the sprawling utility holding companies that then dominated the industry. The splintering of this power trust reduced its political economic might, including by transferring utility systems from financiers’ hands to public control in places like Omaha and San Antonio. In addition to regulation of private power companies through the Federal Power Commission and Securities and Exchange Commission, the federal government strengthened public control of the power sector through direct investment in new ownership models for the generation and distribution of power.

   Most visibly for millions of Americans, the government helped electrify the countryside through the REA. A victory for the developmentally oriented Midwest and South, the program created by President Roosevelt’s executive order—and made permanent by Congress in 1936—extended low-cost loans for rural electrification projects such as line construction and the building of generation and transmission facilities. The loans initially had interest rates tied to yields on US Treasury bonds and terms of up to twenty-five years. Critically, the loans could cover up to 100 percent of the cost of line construction: these projects did not require upfront equity commitments from communities or sponsors. Congress directed the REA to give preference to non-profit and public agencies over for-profit utilities when deciding between competing projects to fund.

   Much of this electrification was done by rural electric cooperatives—new consumer-owned institutions that hardly existed before the New Deal. The REA not only funded line constructions but also provided vital technical assistance, such as developing lower-cost designs for rural power lines and drafting model state laws to support the formation of electric cooperatives. The REA also demonstrated uses of electricity in country homes and farms and organized a “Big Tent” that traveled throughout the Midwest and South to showcase the assorted agrarian and domestic uses of power. “Selling power” in this fashion helped ensure rural electric cooperatives sold enough electricity to repay their REA loans.

   With ample justification, the REA declared in its 1939 Annual Report that it served as “a partner, a friendly creditor, and a ready adviser” to borrowers—mostly locally owned distribution companies.

   The result was transformative. By the mid-1950s, more than nine in ten farmers had electricity. Electricity meant light bulbs, indoor plumbing, and washing machines replaced kerosene lamps, outdoor privies, and the strenuous handwashing of clothes. Farmers and other rural residents held symbolic burials of kerosene lamps to commemorate the end of pre-modern living conditions. On one Sunday in 1940, a Tennessee farmer testified at his church, “The greatest thing on earth is to have the love of God in your heart, and the next greatest thing is to have electricity in your house.”

   The IRA’s direct pay

   Since the George W. Bush years, federal investment and production tax credits, rather than grants and loans, have been the major incentive for renewable development in the United States. Until the IRA’s passage, cooperative and publicly owned utilities could not claim these credits because they are tax-exempt institutions: no federal tax liability meant no federal tax credits.

   Under the IRA as written, these entities can obtain tax credits as direct disbursements from the federal government, acting as a kind of quasi-cash subsidy popularly called “direct pay.” If a for-profit power developer receives a $200 million investment tax credit for building a 500-megawatt solar field (enough power for 300,000 to 400,000 homes), a public agency developing the same plant can now receive a check for $200 million from the Internal Revenue Service on completion of the project. With the creation of direct pay, the IRA established parity between for-profit and non-profit institutions.

   The potential fiscal support is huge. Congress did not cap the total funds available through the tax credits and direct pay, inspiring one commentator to liken them to “bottomless mimosas.”

   Through direct pay, the IRA could help public and cooperative power play catch-up in clean energy investment. Their power supply is more fossil fuel–intensive than those of investor-owned utilities and merchant generators, with their prior ineligibility for federal tax credits contributing to the disparity.

   Direct pay is already paying off. In 2023, New York State, as part of its annual budget, enacted the Build Public Renewables Act (BPRA). The law grants the publicly-owned New York Power Authority (NYPA), formed during Governor Franklin Delano Roosevelt’s tenure in 1931, the ability to build and operate utility-scale renewable energy plants. Legislative supporters of BPRA had failed to secure passage on two previous occasions. Thanks to the new pot of federal money available to public agencies under the IRA, some previous skeptics recognized a major opportunity and supported BPRA on its third introduction.

   Exercising its new authority, NYPA has proposed to build 3.5 gigawatts of renewable energy by 2030 on its own and through joint ventures with private actors. To be sure, NYPA should do more and lead the state’s energy transition instead of merely filling anticipated gaps in New York’s climate goals. In other words, it should be a vigorous public competitor, not merely a clean energy supplier of last resort. But regardless of which role NYPA adopts, the IRA has already expanded political possibilities.

   IRA vs. REA

   The decades-long struggle over electrification in the first half of the twentieth century revealed a handful of key design problems in the financing of power systems. Among the most fundamental was whether public support would take the form of grants or loans, what conditions would accompany the fiscal aid, and whether certain institutional classes would receive funding preference.

   Direct pay functions more like grant financing than debt. This is an important policy advance over the New Deal approach to rural electrification. Under its statutory mandate, the REA could only extend loans to “self-liquidating” distribution and generation projects, or those expected to generate enough revenue to repay federal loans on their original terms. Accordingly, the REA evaluated rural electrification projects with a banker’s scrutiny, assessing factors like the cost of line construction and probable uses of power for domestic and farm purposes. As a result, poor areas with low population densities were less likely to receive REA funding for electrification than denser and more affluent areas.

   Congress set up the REA to function as a conservative lender. Channeling the banker mandate that the law imposed on the agency, the REA’s 1937 Annual Report stated that the administrator “must assure himself by reasonable means before a loan is made that the project is sound and that it will be managed prudently. He must follow through to assure repayment.” This was a policy choice of the monetarily sovereign federal government, which creates dollars, rather than a legal necessity.

   Congressional insistence on debt financing triggered some opposition in the 1930s. After all, the federal government, at the same time, was offering both loans and grants to public agencies in towns and cities to build infrastructure and put people back to work. At a House hearing, Morris Cooke, the REA’s first administrator, pointedly noted the federal Public Works Administration had awarded “30 to 45 percent grants to urban communities for sewer systems, schools, and dog pounds.” In contrast to this largesse for urban areas, he lamented the fiscal conservatism practiced toward the rest of the country, asking, “When you come into the rural districts you insist on the thing being made self-liquidating, with no grants or subsidies?”

   Although cooperatives and other REA borrowers generally paid off their initial loans with ease—indeed, often repaying them in advance of due dates—debt and its accompanying restrictions have impeded cooperatives’ autonomy and kept them tied to fossil fuels in more recent times. Starting in the 1960s, the REA provided loans to federations of distribution cooperatives, called generation and transmission cooperatives or G&Ts, to build coal and nuclear power plants to secure their own wholesale power and end their dependence on often unreliable private suppliers.

   To guarantee that the G&Ts sold enough power and repaid their loans, the REA offered financing on the condition they sold power to their distribution members on an all-requirements basis. Under these contracts, distribution co-ops had to obtain most or all their wholesale power from G&Ts. The REA obtained strong security from the transmission cooperatives as their lender, but at the expense of distribution cooperatives’ freedom of action and democratic control. Many distributors remain locked into contracts with often-expensive and polluting coal-fired power G&Ts, despite the availability of cheaper, cleaner alternatives. These federal financing terms inhibit distributors’ ability, and their community members’ desire, to decarbonize their power supply.

   But the comparison isn’t entirely in the IRA’s favor. Unlike direct pay, which awards, for instance, an investment tax credit equal to 30 percent of a project’s construction costs, the REA provided 100 percent upfront federal financing for its projects. Farmers and other rural residents did not need to contribute any capital to an electrification project. They could obtain the entire funds needed to build a power system, at a low cost and on a long repayment term, from the federal government. Even with a conservative lending authority, these were real advantages and allowed wealthy and poor rural communities alike to escape the strictures of private finance.

   Direct pay involves upon-completion, partial federal support for clean energy, which has material shortcomings. For example, a rural electric cooperative building a solar farm would recover a portion of its construction costs from the IRS only after a project is built. It would need to figure out financing to cover the full upfront cost of project development.

   Ironically, the IRA itself shows a different and superior funding option is available. In one provision of the law, Congress set up an approximately $10 billion fund for the USDA to award front-end grants and low-cost loans to electric cooperatives for clean energy investment. Unsurprisingly, this program drew vigorous interest from cooperatives, which “flooded” the USDA with applications.

   As a revenue agency, the IRS has important institutional limits. It won’t be able to provide much practical assistance to co-ops and public agencies venturing into clean energy development for the first time, whereas the REA, set up expressly for the purpose of rural electrification, extended such essential support. Rather, co-ops, public agencies, and other direct pay-eligible developers need to rely on non-profit technical assistance hubs and hope that they can access bridge financing from state green banks. The administrative capacity they require is immense.

   In attempting to advance social policy through tax credits, Biden’s post-neoliberalism looks a lot like neoliberalism. Congress stuck with the multidecade model of using the IRS to disburse fiscal support to private and public institutions, instead of federal agencies investing directly for public ends.

   The IRA also perpetuates what Suzanne Mettler calls the submerged state, which asserts public authority in ways largely invisible to most people. Many Americans may not even draw a connection between increased investment and new jobs in clean energy as a function of federal action, although President-elect Donald Trump, as is his wont, may loudly take credit for the “steel in the ground” and jobs created. By contrast to this passive back-end support, REA staff was on the ground from day one to stand up rural electrification. Roosevelt touted the achievements of the REA, but the agency’s prominence in the countryside made such promotion supplementary rather than integral. The association with the federal government was so strong that, for many years, rural electric cooperatives were commonly called REA cooperatives.

   Unlike the REA’s clear preference for cooperative and public ownership, the IRA establishes, at most, parity between for-profit on one hand and non-profit and public institutions on the other. It makes available to co-ops and public agencies tax benefits that federal law long denied them. This statutory parity is a deviation from national policy that has encoded preference clauses in US power laws for more than a century. Federal law requires agencies like the Federal Energy Regulatory Commission and TVA to favor cooperative and public applicants for hydroelectric dam licenses and wholesale electricity generated by federal dams. This preference is rooted in the idea that public resources, whether credit, navigable waterways, or power, should be shared with the public directly, instead of through for-profit intermediaries. If the IRA had a preference clause, a public agency eying the same site for energy development as a private firm could pursue the project more confidently, knowing it would receive priority on federal fiscal support.

   Practically, most IRA funds will flow to for-profit institutions equipped to take advantage of tax benefits, not publicly owned or non-profit entities. The mimosas may be bottomless but whether cooperative and public power will liberally imbibe is far from certain. So formal parity hides what will likely be an effective preference for the private sector.

   Conclusion

   In both the REA and the IRA, the federal government increased spending to advance important public ends. In the former, Congress spent money to deliver light and power to the countryside. With the latter, it has disbursed substantial funds to accelerate investment in solar, wind, and other clean energy. While the IRA’s direct pay is an improvement over the debt financing that Congress in 1936 gave rural communities seeking electric service, it falls short of the REA’s no money down, upfront financing, and technical assistance for rural electrification projects and preference for supporting cooperatives and public agencies. Further, rural electrification was part of a broader federal effort to exercise stronger public control over the generation, transmission, and distribution of electricity, through both investment and regulation. The federal government asserted muscular authority over the power industry. The IRA is plainly not that, nor embedded in such a project. For that reason, it is not likely to be anywhere as transformative as what the New Deal state did.

   Biden’s signature climate law, however, could be a steppingstone toward sectoral reconstruction. By offering major fiscal support for cooperative and public power, the IRA could help these institutions build clean energy on a large scale. New York will be ground zero for the proof of concept of public power building renewable energy efficiently and rapidly. Successful development of wind, solar, and energy storage infrastructure by NYPA could help the Empire State meet its climate goals and change the standing of public power across the country. If it brings a long-term, social orientation and delivers abundant clean energy, NYPA could convince other states and eventually Congress, out of sheer pragmatism, that public agencies should not only be partners in national decarbonization of the power sector, but the lead actors in this undertaking. The IRA is not the Green New Deal, but it could be a bridge to one.

7. Brave New World

   December 27, 2024 10:26 am Comments Off on Brave New World

   Forty years ago, in 1984, Michael Piore and Charles Sabel published a MacArthur award-winning book, The Second Industrial Divide: Possibilities for Prosperity, that shaped a decades-long debate about the future of markets and the social orders supporting them.¹ Piore and Sabel characterized the 1970s and early 1980s as a second critical inflection point in the history of capitalism. The first shift had been from craft to mass production in the early 1900s. Mass production matched large fixed investments in product-specific production equipment with semi-skilled workers struggling for long-term employment stability. P&S argued that those investments had created an overly rigid production structure vulnerable to almost any shock. And the 1970s and early 1980s presented a multitude of shocks—strikes, unstable oil prices, rising inflation, intensifying conflict between the US and Soviet Union in terms of nuclear threats and proxy wars, the beginning of deregulation and privatization, and new global public health challenges like the AIDS epidemic. Political struggles to reorganize society created an opening for a watershed in economic relations that gave their book its name: a second industrial divide. They argued that enterprises could and would increasingly shift towards what they termed “flexible specialization”—smaller, more equally sized firms using newer general-purpose equipment, run by a more egalitarian workforce, in a more competitive market—because this form was more resilient in the face of shocks. The rules of the game everywhere were about to be re-written, and their speculative sketch of a possible future won their place in intellectual history. 

   The big questions about the re-written rules were, of course, by whom, how, and with what outcomes? Forty years later, we now know P&S were wrong about how the second industrial divide eventually played out. They were right, however, about the fact of a historical divide in the interaction of labor relations and the supply side of the economy, and about the stakes inherent in the massive shift in the organization of production, consumption, and innovation this entailed. Today we face a similar inflection point—a third industrial divide. 

   These macro-sociological inflection points are moments of political and social openness, when struggles between workers and firms, among firms themselves, and among various social groups determine everything important: whether or not growth will resume, what the distribution of income will look like, and who will have status and power. Echoing the 1970s and 1980s, inter-imperial rivalry using proxy states, separatist wars, and heightened trade tensions raise fears of great power conflict today. Democratic governance is under siege, secular stagnation and its associated deflation threaten debtors, and global pandemics are no longer science fiction plot points.² Just as with the mass production era P&S analyzed, the normal processes of endogenous decay inherent to an economic growth wave have created a series of overlapping crises that are transforming the world economy and the societies it structures. The growth wave dating to the 1980s, propelled by investments in information and communications technology (ICT) and first-generation recombinant-DNA biotechnology,³ is now decaying. While partly a technical phenomenon, this endogenous decay is even more so an erosion of the social and political basis for that growth wave. Why decay? And what might happen in the next few decades?

   The conflicts unleashed by this process of endogenous decay in both the mass production and ICT economies will determine how this third divide plays out. Going back to P&S’s analysis helps understand these processes, not simply because it was an immensely influential book describing the decay of an earlier growth wave and forecasting a new one, but because we can only really understand the full shape of the current growth wave retrospectively—as Hegel said, the Owl of Minerva flies at dusk.⁴ What history has exposed as the flaws in their forecast help us understand where we might ourselves go wrong in analyzing the potential pathways out of what I will argue is the waning ICT and biotech 1.0 era.

   The exhaustion of the mass production growth wave in the 1970s

   The Second Industrial Divide responded empirically to the evident exhaustion of the mass production era in the 1970s, and intellectually to the flood of books and analyses attempting to explain this exhaustion and advance ameliorative strategies. Those analyses had three main foci. The first, exemplified by two books edited by the British academic John Goldthorpe⁵ and the OECD sponsored McCracken Report,⁶ identified inflation as a manifestation of social disorder and recommended with varying degrees of emphasis tighter monetary policy and a weakening of union power—a kind of unilateral incomes policy. The second, exemplified by MIT Dean Lester Thurow⁷ in the United States and French economist Michel Albert⁸ in Europe, argued for more vigorous state intervention and corporatist bargaining—formally negotiated incomes policies—to bridge the valley between older declining industries and potential new growth industries through targeted investment. And the last, exemplified by labor historian Mike Davis,⁹ identified the profound weakness of the American labor movement and the impossibility of formal negotiations—echoed in the other Anglo-economies and industrializing Asia—as the source of the breakdown of the post-war social compact balancing supply and demand. Finally, though ignored by P&S, Keynesian economist Hyman Minsky¹⁰ was already warning about the tendency for financial systems to generate systemic financial crisis when an era of stability encouraged ever riskier innovation in credit creation.

   An exogenous shock—an asteroid—may have caused the Cretaceous-Paleogene dinosaur extinction. But changing industrial eras and the waves of growth that define them, P&S showed, are more like dinosaur die-offs from internal, endogenous dynamics, like over-grazing of foliage or slow-moving mammals. P&S thought the arguments advanced by the “usual suspects” above viewed raw materials shocks and the 1960s expansion of the welfare state too much like asteroids. They had missed the degree to which the technological imperatives of mass production created the potential for an unstable economy. Mass production, in their view, was neither more efficient than other production systems nor an inevitable outcome of technological progress. Politics mattered in the choice of production systems and thus in the shape and stability of the economy: it was the rigidity of 1960s-style mass production in the face of shocks like rising oil prices or wildcat strikes, as much as the shocks themselves, that were the major cause for the crisis and the coming industrial divide. Just as politics had shaped the outcome of the first industrial divide, they argued, politics in the 1980s would condition the way industrial societies adapted to their new technological possibilities. 

   Those possibilities were important to understand because of the exhaustion of the mass production growth wave—that is, the era of investment in corporate-organized semi-skilled workers running expensive, long-lived, and specialized machinery. Mass production was highly productive, and thus potentially highly profitable, if—and this is the critical “if”—that expensive, long-lived, and specialized machinery could be run at something close to full capacity. But specialized machinery and the need to run at full capacity created enormous rigidities. As Thorstein Veblen¹¹ pointed out eight decades before P&S, the need for constant and consistent inputs to feed those specialized machines required application of what he called the “machine process” to nearly all parts of the economy: not only uniformity of materials, standardization of parts, synchronization of delivery times, and precision in machinery, but also assured demand through marketing and advertising. As Aldous Huxley¹² satirized in Brave New World, the machine process could extend to the production of workers themselves: as differentiated but internally standardized groups of selectively bred humans, even if the post-World War 2 compromises trading wage increases and employment security for unilateral managerial control (what academics typically stylize as “Fordism”) made those workers well-paid. 

   With everything so tightly linked, any internal or external shock could send the mass production economy into a deflationary (1930s) or inflationary (late 1960s-early 1970s) spiral that rapidly propagated through national economies and thence the global economy. P&S thus argued that the 1970s crisis opened a space, a potential second divide, for a return to flexible specialization, a more stable, less rigid, and more humane form of production rooted in the earlier craft tradition. Fordism’s huge vertically integrated firms had become too clumsy to compete successfully against smaller, nimbler, vertically disintegrated craft-based firms. The networks of smaller, less hierarchical firms typical of Italy’s Emilia-Romagna region were P&S’s ideal model for a better future: in those industrial districts, firms often changed places between prime and sub-contractor, workers circulated across firms as they needed different skill sets, and firms essentially self-financed. By using general purpose machinery, the specialized firms around Bologna, and those who adopted their organization and strategy, could adapt to whatever the market demanded. 

   P&S thus sought to inject new ideas into those policy debates around inflation, unions, and the state’s role in the economy. They saw only two paths out of the problems animating the debate. One path was what they saw as an improbable expansion of mass production and thus Keynesian policy of demand management to the global level. The other was a transformation of the industrial base in the direction of flexible specialization, which they thought would help reestablish cooperation between capital and labor, allowing for a more communitarian politics capable of taming inflation. Though P&S heeded Yogi Berra’s famous advice about prediction,¹³ they clearly favored an economy centered on those flexible industrial networks. A flood of academic and business publications identifying and lauding Japanese and German industrial districts as similar congeries of flexible firms followed: industrial districts normatively and empirically seemed to be the way to go.¹⁴

   The reality of the ICT and biotech growth wave and the inadequacy of growth models

   Alas, the next forty years did not confirm their preferred outcome. Writing in the early 1980s, P&S were fairly pessimistic about a new growth wave and could barely imagine the rapidity of subsequent technological change. Computers feature only briefly in their account; biotechnology not at all. Industrial districts in their sense remained important—but constituted a narrow slice of industrial output. The Pearl River Delta, upstream from Hong Kong, became arguably the biggest and most important industrial district in the world. Elsewhere, most rich country economies increasingly revolved around service provision rather than manufacturing, much of which became the province of low-wage, highly exploited labor. Even the poster child region for flexible specialization, Emilia-Romagna, increasingly relied on cheap immigrant labor to remain competitive. Italy’s economy as a whole saw no increase in per capita income after 2000.¹⁵

   While the unstable 1970s and 1980s eventually gave way to the great moderation of the 1990s, GDP growth in the largest economies slowed in each decade after 1992. The new growth wave, which started around the time P&S were writing, built upon ICT and biotechnology 1.0 and arguably lasted until the 2008–2010 financial crisis. As this ICT and biotech 1.0 wave reached its financial, physical, and social limits, rich country economies in the decade before Covid-19 experienced the growth slowdown contemporary analysts called “secular stagnation.”¹⁶ Global smart phone sales plateaued in 2017; privacy, geopolitical, and psychological concerns limited continued growth of social media; semiconductor chip manufacturing technologies approached physical limits in terms of shrinking transistor size but more importantly faced rapidly rising capital costs; biosimilar pharmaceuticals proved outrageously expensive for consumers and public health authorities; climate change called into question the entire fossil fuel- and petrochemical-based systems powering energy, agriculture, and packaging. 

   Perhaps the most comprehensive attempt to examine this decline came in the growth model literature, which sought to move away from equilibrium-style analyses of national industrial structures and from excessively supply side-oriented analyses back to a neo-Keynesian focus on the sources of demand, albeit at the national level.¹⁷ Explicitly political, these analyses trace the origins of production structures back to fundamental compromises among powerful actors. The growth model literature, though, lost sight of two key features in P&S analysis: Where P&S were explicitly Schumpeterian in their focus on innovation and organizational change, the growth model literature has tended to focus on decomposing economic aggregates to see the sources of demand, neglecting innovation and corporate organizational change. Second, the growth model literature is typically methodologically nationalistic, focusing on domestic patterns in isolation from the broader global economy.¹⁸ Consequently the growth model literature struggles to explain change or the arrival of inflection points. 

   What, then, can we learn from P&S about the current inflection point in the economy? As with the mass production wave, the decay of this wave emerged endogenously from the very processes that initially drove growth, from the very success of ICT technology as an economic and social phenomenon.

   Five critical errors in forecasting the ICT and biotech growth wave

   Five critical errors of omission in P&S’s analysis clouded their predictive ability. The first omission involves their understanding of distributional conflicts in capitalism. Veblen’s classic anthropology of business enterprise clarifies this. Capitalism has two core distributional conflicts: the first is between capital and labor—firms and their workers—over the respective share of profit and wages in total output; the second and equally important is between firms over shares of the subsequent pool of profits. P&S attended closely to the first conflict, matching their analysis of production structures—the supply side of the economy—with an analysis of “labor relations”—the income distribution and thus demand side of the economy. But they largely ignored the second. 

   Firms strive for monopoly profits, as Veblen and Schumpeter argued. But as the evidence about profits and public equity returns shows, few actually attain them.¹⁹ The dominant mass production firms had pursued monopoly and oligopoly profit by controlling large volumes of physical capital and integrating vertically. This helped to deter market entry by potential rivals and enabled direct control over the entire value chain. After the divide, firms pursued monopoly profit through possession of intangible assets protected by intellectual property rights (IPRs—patent, copyright, brand, trademark), a strategy that enabled them to shed tangible assets and labor. IPRs create legally protected monopolies without the risks and obligations of an employer, and without the risk of under-utilized physical capital. P&S did not anticipate this change in how firms pursued monopoly profit.

   The second omission ironically concerns how the distributional conflict among firms drove the vertical disintegration that P&S foresaw and desired—but created vertical inequalities in power and income rather than an egalitarianism of horizontal competition. As Alfred Chandler²⁰ argued, profit strategy determines organizational structure. P&S correctly foresaw that firms could and would shrink themselves via outsourcing and demerger to reduce the rigidity accompanying mass production. The IPR-based profit strategy motivated lead firms to shift rigidities and risks downward onto their subcontractors and to suppress the independence of satellite firms in their value chains and industrial districts. Even the iconic Fordist-era automobile firms spun component production out into independent firms and began subcontracting some assembly operations. From a legal point of view, this vertical disintegration created the kind of specialized producers P&S favored. But subordinate firms’ de jure independence concealed lead firms’ continuing de facto control. Rather than the fluid hierarchies P&S envisioned, with lead and subcontractor firms exchanging position as needed, both older Fordist firms and newly emerging technology firms constructed sets of dependent subcontractors who competed against each other. Meanwhile, lead firms’ possession of monopoly-generating IPRs enabled them to capture the lion’s share of profits from those hierarchies.²¹

   The third omission concerns the sources of innovation. P&S’s networked Italian firms were highly innovative with respect to variation in their existing line of products. They reliably generated novel shoe, tile, and clothing designs. But as Schumpeter said, “Add successively as many mail coaches as you please, you will never get a railway thereby.”²² One might similarly say, link as many flexible firms together as you please, and you will never design and build an airplane or semiconductor fab or a telecommunication switching server. P&S focused overmuch on what Schumpeter scholars call “Mark 1”-type innovation: heroic (and mythical in almost all senses) entrepreneurs toiling away in their (rich parents’ four car) garages and developing something entirely novel. But they ignored the systematic corporate “Mark 2”-type innovation that necessarily occurred inside a hierarchical management structure capable of contributing to and preserving the vast pool of human and operational knowledge—basic and applied science— behind the generation and production of complex products.²³ Though some segments of the software sector were Mark 1-type firms, and many large Mark 2 firms generated only incremental advances, most innovations constituting the new technology sectors emerged from Mark 2 innovation done by large firms, or captured by them from smaller subcontractor firms. The very kind of relationships P&S saw withering away in the second industrial divide defines modern supply chains, which are typically networks of subordinate firms dominated—and exploited—by lead firms that own IPRs. 

   Fourth, P&S overlooked the inherently financial aspect of capitalist economies. Firms exist to make profits, but they need credit to operate, and the creation of varied financial assets in which to park cash profits. As Carlota Perez notes, the huge infrastructural development behind Schumpeterian growth waves requires equally huge financial investment.²⁴ But P&S had no way to understand how financial “innovation”—read, the predation and short-termism labeled the “shareholder value model”—would reshape corporate organization and affect the two central distributional conflicts in capitalism. Financial pressure embodied in the shareholder value model magnified the shift to a de jure vertically disintegrated, but de facto still-integrated, organizational structure that concentrated profit into a handful of firms through captive supplier markets.

   Finally, P&S overlooked geopolitical competition and conflict, which incentivized most of the radical innovation that Mark 2 firms undertook. Historically, security reasons drive states to promote radical innovation and, equally important, the rollout of new infrastructure. DARPA’s role in funding what became the internet in the United States is well known, but merely echoes the roll-out of nineteenth century railroad systems, early- to mid-twentieth century electrification, and product standardization,²⁵ and mid- to late-twentieth century telecommunication. Likewise, security or actual war-fighting concerns drove much research in pharmaceuticals, electronics, and new (but now old) materials.²⁶ Put simply, war is the mother of almost everything related to basic research and the early stages of radical innovation, even if civilians ultimately field that technology. P&S missed the enormous US government promotion of ICT technology in the late 1970s and 1980s; that technology enabled private firms to develop the new “franchise“ organizational structures characterizing the ICT-plus-biotech 1.0 growth wave.²⁷

   Explaining decay

   These five errors of omission also indicate the endogenous dynamics that eventually crippled that growth wave, yielding the period of decay in which we are now living. Rather than achieving a new stability of horizontal competition, the turn toward the market brought about a vertical domination of brand-name intellectual property claims and captive supply chains. In any given sector, a handful of firms captured the bulk of profit. Thus, in the broad computer sector (NACE code 26), the standard gini inequality index for cumulative pre-tax profits from 2010 to 2019 was 0.907, well above the gini index for household income in the United States (.48) let alone Sweden (.29), because the top 20 out of 6511 firms captured over half of all profit. Pharmaceuticals (NACE code 21, including 2677 firms) similarly was .895 and 63 percent; the broad automobile sector (NACE code 29, 1190 firms) was .921 and 67 percent.²⁸

   Two new general-purpose technologies powered the ICT wave. Ever cheaper computing meant ever more opportunities to deploy software in production and communications, which reduced some of the rigidity of labor and inventory costs in mass production. More flexible automation and better information about consumer desires allowed firms to move away from producing potentially unsellable inventory ahead of demand to something approximating a “sell one, make one,” on-demand model, in which lead firms directed subcontractors to make something only after a customer committed cash. Digitalization cut transportation and transaction costs for many services (no need to go to the bank or a travel agent, for example). While biotech 1.0 had a relatively smaller economic impact, recombinant DNA technologies allowed pharmaceutical companies to move away from exhausted discovery processes and small molecule drugs towards more precise diagnostics and larger biological drugs, and, significantly, manufactured human insulin. Biotech 1.0 also allowed the engineering of a range of agricultural products with better nutritive features, pest resistance, and yield (though it also sparked social resistance against “frankenfoods”). 

   These two new general-purpose technologies powered a wave of investment, and thus growth, in the 1990s and early 2000s. Yet they also set in motion dynamics of decay corresponding to the strategy, organizational structure, innovation, geopolitical, and financial issues raised above. Certainly technological or physical limits to the ICT and biotech 1.0 wave existed. By 2014, semiconductor production technologies hit an apparent limit as the elements (“gates” or “nodes”) on a semiconductor chip became so small that sub-atomic effects potentially disrupted their function. Efforts to overcome this limit by shifting from two-dimensional to a more three-dimensional chip architecture have stretched out the historic doubling of transistor density every two years (Moore’s law). Worse, the shift to three-dimensional gates reversed the historic decrease in gate cost. The cost of producing a transistor gate began rising after 2012, reflecting a jump in the cost of building a cutting-edge semiconductor fabrication facility from roughly $5 billion in the early 2000s to $20 billion by 2020.²⁹ As smartphones absorb about one-third of global semiconductor output, and within that a much larger share of cutting-edge output, the peak of smartphone sales six years ago poses a potential damper on demand for semiconductors. 

   But the endogenously emerging organizational and social limits were more profound than the technological ones. While biotech 1.0 yielded a range of sophisticated and effective pharmaceuticals, these largely sold at prices threatening fiscal stability for public health systems (including that in the United States, where public budgets finance roughly half of health care directly, or two-thirds when tax-expenditures are included). Government budget politics today reflect this impasse. From the point of view of equity markets, the increase in profits and thus return on a much smaller pile of physical assets justified rising stock market capitalization for those factory-less lead firms. Meanwhile firms doing actual production were thrown into a Hobbesian competition with each other as lead firms threatened to end contracts unless those subordinate firms delivered annual price reductions, or, in the case of grocery stores, payment for advantageous product placement. The winners spun off labor-intensive and physical capital-intensive production to newly formed firms, reinventing themselves as factory-less owners of intellectual property. Offshoring and outsourcing production both accessed and created cheaper labor. Subordinate firms tried to depress wages as much as possible to remain profitable, aggravating income inequality and thus slowing economic growth, or pursuing horizontal mergers to regain some market power. These individually rational firm choices meant that firms on the whole won the vertical distributional conflict against labor, and undermined prosperity in general. 

   Lead firms’ victory in the distributional conflict among firms for shares of the profit pool also set a decay process in motion around innovation and investment. Lead firms had a low marginal propensity to invest in actual productive processes, which meant their profits were available for reinvestment. Some went into the normal passive vehicles—if they were a country, Microsoft and Apple’s collective $112.2 billion in US government bonds and $92.6 billion in corporate bonds in 2023 would make them the thirteenth largest foreign bondholder on the US government and corporations, ahead of all Korean, German, or Norwegian holders of fixed income debt.  Similarly, the logic of maximizing profits through an asset light strategy and intangibles generated what Cory Doctorow has called the “enshittification” of the app-economy narrowly and the internet more generally.³⁰ Once useful products become increasingly dysfunctional via search engine optimization strategies and ceaseless efforts to maximize attention, click-through rates, and purchases.

   Signs of exhaustion

   As a social process, the transformation from vertically integrated firms to the new de jure disintegrated structure played out slowly. Unions resisted layoffs, management had to master contracting and the new business process software, and states had to build the physical infrastructure to support offshoring. But the wage share of GDP declined, and with it demand relative to supply. Profits came in as cash but had to be parked in some new asset: the rising profit share thus had rising household debt as its necessary counterpart.³¹ But only rising incomes could sustain the rising debt powering growth. Absent that, a crash was inevitable—and one came in 2008. With central banks and politicians largely wedded to fears of inflation, most rich country governments opted for tepid fiscal responses to that crash, creating a lost decade in terms of growth, and powering an intensifying populist politics everywhere today.

   Meanwhile, the bulk of profits at the peak of the last growth wave flowed into venture capital and private equity (PE) firms that favored investments with a low labor headcount and asset light profile.³² Indeed, PE is apotheosis of the model: purely financial firms that own but do not generate intellectual property or physical innovation. PE’s share of the US economy is relatively small compared to publicly listed firms.³³ The 3640 public firms employed 42 million people in 2019, while PE firms controlled 7200 firms employing only 5.4 million workers. But those numbers reveal that PE typically controls the smaller firms that drive Mark 1 innovation and grow into the new large firms doing Mark 2 innovation. Finally, PE, like all financial strategies, has also suffered from endogenous decay as more and more investors engaged in and funded PE-type buyouts, harvesting the low hanging fruit. From 1984 to 2015, a weighted average of PE firms’ returns was only about 10 percent higher than that of the S&P 500, and VC funds only outperformed during the 1990s. By the 2010s, PE firms were returning less than simply investing in an S&P 500 index fund: 13.8 percent versus 14 percent.³⁴

   Finally, the ICT wave also exhausted itself by changing the geography of production and thus the balance of geopolitical power. The organizational shift to a three-layer production chain—IP owners, capital-intensive firms in markets with high-barriers to entry, and labor-intensive firms in markets with low-barriers to entry—moved significant slices of physical production out of rich countries, especially the United States, towards developing economies, especially China. By 2023, firms in China generated 35 percent of global manufacturing output and 29 percent of value added, versus only 12 percent and 16 percent respectively in the United States. Put differently, China’s share of global manufacturing output was double its share of global GDP while the US share of global GDP was half of its share of global profits. Value added is related to profitability, so the inversion of output and value added here reflects the lingering dominance of US lead firms relative to Chinese subcontractors. But wars are won with actual production, not with profits—you can’t DoorDash munitions. By the early 2020s, rich country governments and particularly the United States responded with a wide range of industrial policies and subsidies intended to mitigate or reverse dependence on China, undoing the globalization trends of the ICT era.

   So, what’s next?

   In principle, the decay of the ICT and biotech 1.0 wave should incentivize a new growth wave. The physical basis for a new wave is already visible. Solar and wind generated electricity, plus geothermal heating, are already often cheaper than and thus beginning to replace fossil fuels, mitigating the global CO2 load. AI-enhanced bio-genomics combined with CRISPR-Cas and other second generation, precision biotechnologies, along with AI-assisted additive manufacturing processes and new, non-biological, non-petrochemical based materials provide new general-purpose technologies. (Generative AI, though, is mostly a sideshow.) Electric vehicles, electric heating, and new materials like bioengineered spider silk (for textiles) are new consumer goods.

   But everything that is important remains hidden in the fog and mist of the future. Those are the social and political struggles shaping new forms of production, corporate organization, and demand creation. Here we can have a moment of sympathy for P&S’s misreading the direction of change. While the important drivers of change are more visible, the probable outcomes hinge on local and geopolitical struggles. Those geopolitical struggles are inducing a re-verticalization of some production, particularly in the crucial EV space. And at the margin, in combination with local struggle and protest, geopolitical concerns have motivated some state efforts at expanding social policy and social protection again, potentially reprising the “home front” policies of the first Cold War. Finally, the slow-moving demographic collapse, which was partly driven by weak wage growth and rising debt, has helped shift labor markets back in favor of workers and rekindled interest in private sector unionization in the United States. 

   But if P&S were correct about only one thing, it was the utter indeterminacy of any given divide. Yogi Berra, the Prophet of Prudence, suggests waiting a few decades to see what the Owl of Minerva says. But in the meantime, the openness of the future suggests organizing to shape that future. That future will not look like P&S’s ideal and idealized flexible specialization. But it also need not be a continuation of giant monopolies harvesting personal data while providing services of dubious value and goods produced with exploited offshore labor.

8. Transfer and Transition

   December 18, 2024 6:33 pm Comments Off on Transfer and Transition

   Over the past years of escalating trade disputes between China and the US, the latter has repeatedly highlighted a practice it considers anathema: technology transfers that US companies need to offer to their Chinese collaborators if they want to do business in the country. Donald Trump railed against them and Joe Biden branded them “unfair.” Across the other side of the Atlantic, European Commission President Ursula von der Leyen explained that such practices by China threaten Europe’s “economic and national security” and necessitate multipronged “de-risking” measures to unlink the two economies. In this framework, technology transfers are being “forced” by a major competitor.

   But the demand that foreign investors help lower-income countries move closer to the technological frontier in exchange for facility siting or accessing their labor markets is nothing new. In fact, most now-industrialized countries employed precisely such policies when they were at lower levels of industrialization.

   The indiscriminate criticisms of technology transfers are especially misguided in the current juncture, when the world is attempting, however haphazardly, to change economic practices in order to curb climate change. In the global North, the new consensus on climate action has meant developing industrial policy packages—mainly consisting of subsidies and incentives—to spur the technological development and production needed to decarbonize the economy.

   Most countries in the global South do not have enough financial firepower to pursue this kind of industrial agenda. Instead, they have to rely on a regulatory approach to welcome foreign investment and ensure that such investment transfers the knowledge necessary for Southern economic actors to innovate and move up the value chain. This was precisely the approach used by Japan, Korea, and Taiwan, some of the twentieth century’s fastest developing economies, when they regulated the activities of multinational companies to ensure the transfer of technologies and the creation of domestic virtuous cycles of technological spillovers.

   The global North’s case against technology transfers takes issue with such a state of affairs. By opening themselves up to international trade through joining the World Trade Organization (WTO) and signing trade treaties, global South countries—the argument goes—have committed to respecting intellectual property rights, which are there to ensure that innovators benefit from their inventions, and so promote technological development. For this reason, “forcing” any technology transfer is seen as “uncompetitive” behavior that should be penalized. The current regime of intellectual property rights thereby enshrines a system that prevents development, rather than fostering it.

   Intellectual property rights and the limits to technological development

   Countries in the global South have criticized the strict trading regime that prohibits their technological advancement. This regime originates in the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, signed in 1995 and enforced by the WTO. The agreement set out an ambitious agenda of aligning national intellectual property protections with global benchmarks. This system—backed by countries in the global North—has been broadly successful at diffusing these protections around the world. But it has also stifled technological upgrading in the global South by increasing the costs of technological acquisition. For these reasons, developing countries waged challenges to intellectual property rights restrictions, demanding equitable access to transformative innovations.

   The “access to medicine” campaign was perhaps the most important—and successful—instance of such a challenge. The rapid spread of HIV/AIDS in Sub-Saharan Africa in the late 1990s and early 2000s pointed to how the intellectual property rights regime effectively prevented access to very expensive, patented antiretroviral drugs. Multiple campaigns by states and civil society took issue with this state of affairs and started mobilizing to promote access to medicines for all. Challengers leveraged the flexibility allowed by international trade laws for the promotion of public health. Compulsory licensing mechanisms, whereby a government can compel a copyright holder to license their intellectual property, enabled challengers to allow the manufacture of patented medicines. Developing countries still make use of this tool: as recently as April 2024, Colombia issued its first-ever compulsory license for HIV treatment medication.

   The benefits of the relaxation of intellectual property rights and technology for global South countries went beyond deaths prevented and money saved. These exemptions also contributed to the rise of domestic innovation and industrial development. For example, India used its phase-in period for compliance with trade law to become a global generic drug manufacturing powerhouse, thereby spurring subsequent investments and innovations even after this period ended. The pharmaceutical industry in East Africa relied on the same flexibilities of international trade law to manufacture generics and become globally competitive.

   The criticisms waged against the TRIPS system and the effective resistance exhibited by the access to medicine campaign have a renewed significance in light of the existential threat of climate change. The 2023 Havana Declaration of the Group of 77 developing countries and China noted that “technological barriers […] limit adaptation to climate change and the implementation of the National Determined Contributions (NDCs) of developing countries,” and called for the urgent scaling up of technology transfers and the exploitation of “flexibilities” in the intellectual property rights regime.

   Just as life-saving medicines were deemed essential for public health, green technologies are vital for environmental sustainability and global public welfare. Knowledge to manufacture battery cells, electric vehicles, solar photovoltaic cells and wind turbines, should be understood as critical to green industrialization pathways. The principle of lifting intellectual property rights to facilitate access to essential goods can be extended to green technologies to support the green transition in the global South.

   ⁠Technology transfers at the climate technological frontier

   Climate change presents distinct challenges for how to think about the role of technology in development. The urgent call to reduce carbon emissions requires the rapid scaling of technologies that do so—in this sense, climate change has pushed the technological frontier of the contemporary global economy outwards. The consequence is that every country is now a developing country, playing “catch-up” to the technological cutting edge.

   The assumptions of comparative advantage in mainstream, neoclassical economics imply a neutral attitude toward the location of the production of such green technologies. Given this view, which has dominated global debate over climate policy, the most important policy lever to pull is that of prices. Under this logic, manipulating prices through a tax on the consumption of carbon-emitting technologies will generate sufficient supply of green technologies to replace them.

   But the recent rise of industrial policies, particularly in the global North, is born of a recognition that critical technologies for decarbonization cannot be scaled merely by nudging consumer preferences. For Northern nations, this has not meant a turn to full-scale industrial planning, but new regimes of tariffs and subsidies are, however, being used to aid new and often unproven technologies in reaching market maturity. There is an emerging agreement among Northern governments that this is part of their role in the task of decarbonization.

   And yet, even the development of some of the key green energy technologies shows the limits of the emergent, quasi-protectionist policy toolkit—and demonstrates the critical importance of flexible intellectual property rights and technology transfers for their scaling.

   Perhaps most prominent is the rise of China’s solar photovoltaic panel production, which now accounts for more than four-fifths of the global total. While other technologically advanced economies in the global North increasingly see this development as a threat, it is, in many ways, a success story of global cooperation. Jonas Nahm, a political scientist and former member of the White House Council of Economic Advisers, found that while much of the research and development of solar photovoltaic technology was conducted in the United States, this research was translated into modular production techniques by German firms, and ultimately, it was Chinese firms that were able to take both this basic research and modular production know-how to mass production. Similarly, energy scholar Joanna Lewis has documented the role of research partnerships between US and Chinese institutions to enable such scaling dynamics for renewable energy technologies. A key consequence of this process of technology sharing is that China has now been able to localize basic research and development around critical technologies for decarbonization.

   The Chinese experience of rapid economic growth is seen as a model for developing countries. The longstanding demand for development in global climate politics was once codified by the UN Framework Convention on Climate Change, which articulated the principle of “common, but differentiated responsibilities.” Countries in the global South will be the site of the majority of the flow of future carbon emissions, especially if they want to grow their economies and incomes. The longstanding goal of development through upgrading one’s position in global value chains has deeper relevance as value chains are being reshaped by the rise of mass production for green technologies.

   The model of transnational green technology research and joint venture partnerships that enable China’s continued economic dynamism are therefore justifiably attractive to much of the world. Further, the higher value components of global supply chains are located in the knowledge components of these technologies; precisely the research, development, and design competencies that China has been able to localize through strategic partnerships with rich countries like the US and Germany. Taken together, this suggests a critical role for green technology transfer to shape a meaningful global development agenda. Credible partnerships for development in an era of green industrial policy will necessitate corporate joint ventures and research cooperation.

   Cutting off the technological frontier means cutting off development

   Prior to China, nearly every case of rapid development has relied on knowledge partnerships to move up global value chains. The experiences of Korean and Taiwanese engineers in European and US firms are a critical part of the “Asian tiger” development story. These cases all suggest that active state intervention targeting growth in the scale of production is critical for exponentially expanding markets for goods that enable a rapid energy transition.

   The growth of Chinese firm BYD, one of the world’s largest sellers of electric vehicles (the largest, depending on the financial quarter), is among the most high profile and politically explosive instances of this today. The firm has become the poster child of new tariff schedules raised by the US and the European Union over the past two months, in anticipation of its low-cost, high quality electric vehicles that are being produced at seemingly unmatched capacity.

   BYD’s success is rooted in technology transfers for decarbonization. As shown by sociologist Kyle Chan, who documented the story of Tesla’s Shanghai factory, the US firm worked with a Chinese equipment manufacturing firm and an Italian casting machine maker to produce the world’s largest “casting” machine—one which enables Tesla “to make an auto component as a single, large continuous piece instead of dozens of smaller pieces welded together.” The collaboration generated an ecosystem of firms that spread this innovation to all the major Chinese EV makers.

   Some of the most successful Chinese electric vehicle firms are themselves now going abroad. For example, BYD is at various stages of completion in establishing major manufacturing operations in Brazil, Indonesia, Mexico, and Hungary. At a groundbreaking ceremony for its new factory in the state of Bahia in Brazil’s impoverished northeast, the company’s CEO for the Americas, Stella Li, emphasized its intention to create “Brazil’s silicon valley” through founding a research and development center in the state. By March of this year, Li had announced further investments in the Bahia factory complex to ensure that at least 25 percent of components for the vehicles would be produced in Brazil. The symbolism of the moment was striking: BYD’s manufacturing complex in Bahia will take over a space that was built and previously operated by the US firm Ford, before it left the country in 2021.

   Developing nations with strong manufacturing potential are looking for access to the high-value-added knowledge components of green technologies. In areas where China is establishing a lead in green technology, such as electric vehicles, the country’s firms are at least taking some tentative steps toward enabling local production as they expand into key developing-country markets.

   The turn in the US and EU toward establishing prohibitive tariffs on Chinese EVs suggests a potential perversion of their own green industrial policy goals. If Chinese firms are further ahead of the technological frontier for these critical goods, then the US and EU may even be impeding access to cutting-edge green technology at home. Zhu Min, a member of China’s Five-Year plan committee and former IMF deputy director, recently put the Chinese agenda on green technologies in stark terms. “It is time for China to export technology,” he told the Financial Times, citing electric vehicles and batteries, where the country has a lead, as examples.

   The road ahead

   Because global technology transfers are about redistributing knowledge, their implementation is highly political. Countries in the global North want to protect the intellectual property of their companies that, in turn, lobby extensively to secure such high-level support. But the politics of preventing technology transfers clash with the stated objective of most countries in the world, whether high-income or developing ones: introducing and diffusing green transition policies to ensure a decarbonizing global economy.

   Green technology transfers can help spur the adoption of cleaner innovations and  production processes around the world. Yet, they are systematically blocked by an intellectual property rights regime that does not recognize climate change as an existential threat, and through the resistance of global North governments that want to maintain a competitive edge against would-be competitor countries. The ensuing zero-sum “equilibrium” becomes one of limited transfers, trade wars, and recriminations that degrade global governing institutions and increase global conflict.

   In terms of green technological upgrading, the needs of the global South are largely ignored. Washington has increasingly come to recognize this pattern. For example, former National Economic Council Director Brian Deese recently wrote about the need for a “Green Marshall Plan” to spur global development. Green technology transfers can simultaneously aid the spread of knowledge that will facilitate decarbonization,  introduce climate change mitigation policies, spur industrial development and thereby reduce international inequalities, and reduce prices for green technologies around the world.

   Under the Biden administration in the United States, the greening of industrial policy was rife with the parochial and contradictory impulse to make the country globally competitive while preaching emissions reductions to poorer countries abroad. The return of Trump to the White House will likely preserve the general orientation toward industrial policy that his first term inaugurated, with a more explicit disregard for the developmental prospects for the rest of the world—while dropping much of the green emphasis. But amid the current period of rethinking the global trading system, an extension of already present flexibilities—such as compulsory licensing mechanisms—to the case of environmental policy is one step toward ensuring that green technology transfers are institutionalized and contribute to positive-sum solutions on climate.

9. Structural Dependence

   4:09 pm Comments Off on Structural Dependence

   In November 2024, demonstrators from various cities of Pakistan defied lockdowns to gather in Islamabad and demand that Imran Khan, former Prime Minister, be released immediately from jail. Khan, incarcerated since the summer of 2023, has been charged with a range of offenses, including corruption and immorality. 

   An excessively callous response from security agencies has quelled demonstrations for the time being, but the central issues raised have not been addressed. At first glance, the protestors’ demand seems simple: free Imran Khan and hold fresh elections. But the discontent has much more complex roots in the political economy of Pakistan and its heightened and recurring encounters with authoritarianism and austerity. Khan’s political party, the Pakistan Tehreek-e-Insaaf (PTI) was elected to power in 2018. But in 2022—as the Covid-19 pandemic abated and Russia invaded Ukraine—the PTI was ousted from government through a strategy backed by the Pakistan military and ostensibly supported by the Biden administration. The involvement of the US has been the subject of deep anti-Western conspiracy theories, perhaps most systematically articulated in the debates around the cypher case. Since then, a coalition of parties have liaised with the military to oversee constitutional amendments that limit judicial independence, the rule of law, and human rights protections. 

   Khan’s own legacy is mixed. Even from a jail cell, he is an exceptionally powerful voice that condemns military overreach. But his own government had a reputation for curtailing democratic freedoms and for being complicit with the security forces in a regime of brutality and the violent repression of dissent. Nevertheless, his arrest last year has coincided with worsening cost of living pressures and the heightened presence of the military in politics. Tough economic conditions are underpinned by a tight monetary environment and high inflation. Young Pakistanis have been leaving the country and causing shortages in skills. To squelch unrest, the authorities have taken to blocking internet connectivity to limit access to platforms such as X, which might be used as tools for mobilizing protests. Internet shutdowns have been bad for business and unwelcome in a struggling economy.

   Pakistan’s crippling and compounding economic struggles have a long and complex past, one that is closely intertwined with its position as a strategic geopolitical partner for the US in the region. This has complicated Pakistan’s relations with neighboring countries and exacerbated its structural position of dependence on foreign debt. While the rise of China as an alternative lender presents some opportunities for maneuver, Pakistan’s core social and political burden—its debt—remains.

   

   Overlapping crises

   Pakistan is among the most frequent users of IMF resources and has been under IMF-supported programs almost continuously since the late 1980s. For decades, Pakistan has continued to receive IMF loans despite failing to meet the lender’s stringent reform targets. From 1988 to 2000, the IMF agreed to loan Pakistan over $4 billion. But weak state capacity and the failure to meet conditionalities meant that only half of this sum—around $2.1 billion—was actually disbursed.

   This dynamic—lending despite non-compliance—is not unique to Pakistan. It is a common feature of the IMF’s lending practices that arise from the institution’s dual role as both a lender of last resort and a vehicle for advancing the interests of powerful countries. The IMF’s programs, especially those imposed on Pakistan, proved unworkable because they entailed profuse tax burdens and unbearable price increases in staples like food and fuel. As a result, they regularly failed to achieve their stated goals, deepening the country’s economic instability and contributing to rising inequality. Moreover, the conditionalities attached to loans have been criticized for exacerbating poverty and undermining Pakistan’s development objectives. The IMF’s insistence on fiscal austerity and market liberalization has failed to address Pakistan’s fundamental structural issues, such as its low tax-to-GDP ratio, which severely limits the government’s ability to expand domestic fiscal space.

   Beyond the hopeless cycle of lending and noncompliance, Pakistan’s economic vulnerability is also tied to the global financial system and particularly the dominance of the US dollar. Monetary hegemony, often referred to as the “original sin” of sovereign debt, restricts countries like Pakistan from borrowing in their own currency. As a result, they are forced to rely on foreign currency loans, exacerbating the risk of balance-of-payments crises, currency devaluation, and inflation. This creates yet another vicious cycle in which the demand for foreign currency to service debt exceeds the available supply, pushing countries further into economic precarity.

   Pakistan’s reliance on external debt has consistently undermined its monetary sovereignty, complicating efforts to regulate the money supply and exchange rates effectively. The IMF’s stringent policies, which prioritize fiscal stability at the cost of domestic economic autonomy, often fail to take into account specific structural challenges. Because the debt burden grows every time the Pakistani rupee loses value, debt repayment invariably diverts resources from essential social services, such as healthcare, education, and basic infrastructure. 

   Structural challenges are compounded by a persistent paucity of US dollars. Pakistan has grappled with continuous dollar shortages throughout its history, a predicament deeply intertwined with chronic fiscal and trade deficits, as well as an overreliance on debt. When dollars are scarce, imports cannot be paid for, leading to shortages of food, fuel, and medicines, among other things. In such crisis situations, only external loans can come to the rescue. Despite various reforms, the root causes of these shortages remain embedded in both domestic and international financial structures.

   

   One of the primary drivers of Pakistan’s dollar shortages is its chronic trade deficit. With the exception of three fiscal years (1947–48, 1950–51, and 1971) Pakistan’s exports have consistently lagged behind its imports. This imbalance has forced the country to depend heavily on foreign currency inflows, primarily through remittances, loans, and aid, to meet its external financing needs.

   The structural issues underlying Pakistan’s trade deficit are multifaceted. Limited diversification of exports, reliance on low-value goods, and insufficient investment in value-added industries have constrained the country’s export potential. Meanwhile, a dependency on imported goods, including energy, machinery, and consumer products, exacerbates the deficit. Moreover, tax revenue collection has averaged just 10.3 percent of GDP over the last few decades—significantly below regional peers. In the fiscal year 2023–24, the equivalent of over 80 percent of tax revenue, according to the IMF, was absorbed by debt servicing. 

   The heavy costs of debt, augmented by recurrent trade deficits and weak foreign exchange reserves are reflected in the country’s debt-to-GDP ratio. This stands at about 70 percent, with domestic debt accounting for about two thirds and external debt the rest. This crippling debt burden consumes resources that could have been used for more essential expenditures, such as on pensions, salaries, development projects, and subsidies. Consequently, Pakistan relies heavily on deficit financing, borrowing from both domestic and international sources, further exacerbating its debt challenges.

   The rapid accumulation of public and publicly guaranteed (PPG) debt—in which the public sector reduces the risk for private sector lending—has created a “strong sovereign–financial sector nexus,” as described by the World Bank. Today, this sort of debt exceeds two thirds of Pakistan’s GDP. Most of this PPG debt is held by commercial banks in Pakistan and creates an interdependence between the government and the financial sector. Banks have tended to lend relatively little to the private sector because of an over-concentration of bank lending toward government needs. Currently, over 80 percent of bank lending is directed at the government, crowding out private sector investment and stifling economic growth.

   Low revenue collection has been a major contributor to the fiscal deficit, regularly exceeding 5 percent of GDP in recent years. This trend violates the Fiscal Responsibility and Debt Limitation Act or FRDLA, a critical fiscal rule meant to ensure prudent financial management. Compounding this issue is a flawed national fiscal architecture that has only worsened since 2010 when Pakistan implemented significant revenue-sharing reforms. These devolved financial powers to the provinces to empower local governments. But they introduced painful inefficiencies, including the duplication of tasks and fragmentation of responsibilities. As a result, the fiscal deficit has grown significantly since these changes were enacted.

   These dynamics have worsened since the reversal of unconventional monetary policies. Quantitative easing led by the Federal Reserve and other large central banks, following the Global Financial Crisis 2007–9, created a low interest environment and boosted investor interest in the global South when banks had extra liquidity. But this was temporary. Over the last few years higher international interest rates have dramatically exacerbated Pakistan’s vulnerability to shocks. Managing its exchange rate, and meeting external debt obligations has become very challenging. Exchange rate depreciation has been a significant driver of Pakistan’s escalating public debt. Between 2012 and 2022, currency devaluation contributed 22.5 percentage points of GDP to the PPG debt level. Notably, 15 percentage points of this increase occurred during two periods of acute depreciation in 2019 and 2022. These revaluation losses far outweighed the reductions in debt stock achieved through favorable interest rate changes during the same period.

   

   While interest rate changes contributed to debt accumulation prior to 2019, their impact was relatively smaller, accounting for an 11.4 percent GDP increase from 2012-2018. These figures highlight the critical role of exchange rate management in Pakistan’s fiscal stability. A weak currency not only inflates the cost of external debt servicing but also undermines investor confidence, exacerbating capital flight and further depleting foreign exchange reserves.

   Geopolitics of debt

   Pakistan’s chronic indebtedness and economic vulnerability is entangled with its Cold War history, when the country became a key US ally. When the Soviet Union invaded Afghanistan in 1979, Pakistan’s strategic location became pivotal in the struggle between the US and the USSR. This led to an influx of foreign aid, grants, and concessional loans (and also millions of refugees) as Pakistan was the base for the Saudi-American alliance behind the mujahideen, the coalition of anti-Soviet fighters that eventually defeated the Moscow backed government and took control of Kabul in 1992. The Taliban, which came to control most of Afghanistan by the mid 1990s, was formed because of infighting within the mujahideen coalition. The US once again enlisted Pakistan as a central partner when the Global War on Terror began in 2001. Pakistan again became awash with foreign currency; and through the Coalition Support Funds, the third largest recipient of the US military and economic support in the world. 

   Even before these events, Pakistan’s economy faced significant challenges. In 1971, Pakistan lost half of its territory when East Pakistan became the independent nation of Bangladesh. This moment of national upheaval coincided with a broader global shift that saw countries in the global South lose significant monetary power. Two pivotal events defined this era: the Nixon Shock and the oil shocks of the 1970s. The Nixon Shock marked the end of dollar-gold convertibility and laid the groundwork for capital account liberalization, allowing dollars alone to expand global credit. This shift restructured global finance and diminished the monetary autonomy of many developing nations, including Pakistan. Compounding these challenges, the Organization of Petroleum Exporting Countries (OPEC) quadrupled crude oil prices, triggering a series of oil shocks that reverberated through economies reliant on imported oil.

   The surge in oil revenues for producing nations found its way into global commercial banks as deposits, creating a surplus of funds that fueled a cascade of loans to countries in the global South. Pakistan, like many other nations, became a recipient of these petrodollar-driven loans, often offered with minimal scrutiny. The availability of cheap loans at negative real interest rates, owing to high domestic inflation, made borrowing an attractive option. However, this practice exposed Pakistan to significant exchange rate risks and constrained its ability to pursue independent monetary policies. Western banks, driven by the imperative to expand credit, were central to this recycling of petrodollars. The situation worsened later in the 1970s when rising interest rates made debt servicing prohibitively expensive, especially as the International Monetary Fund (IMF) imposed structural adjustment conditions in exchange for financial assistance.

   During this turbulent decade, Pakistan’s trade deficit became increasingly pronounced. The gap between imports and exports widened as the country struggled to bolster its export base. To bridge this gap, Pakistan turned to external lenders for assistance. However, the same period also brought some respite in the form of increased remittances from Pakistani workers in the Gulf states. Even today, the Gulf-South Asia migratory corridor is the largest in the world.

   The oil boom in the Gulf significantly boosted worker remittances, which rose from 3.1 percent of GDP in 1976 to 7.7 percent in 1986, peaking at 10.2 percent in 1983—a historical high that remains unsurpassed. These remittances provided much-needed foreign currency inflows and played a critical role in mitigating the country’s current account deficit. Remittances continue to provide sustenance to Pakistan, often bringing in foreign currency inflows comparable to those earned from trade in goods. They have also acted as a hedge against oil price surges. When the Pakistani rupee (PKR) depreciates, remittances sent in foreign currencies such as US dollars, Saudi riyals, and UAE dirhams become more valuable in domestic terms, offering some relief to the economy. Despite these benefits, reliance on remittances has not compensated for the country’s failure to grow exports and rectify its trade imbalance.

   The inability of Pakistani policymakers to address the structural issues in trade has deep political and economic roots. However, this domestic shortfall should not obscure the broader historical context that has shaped Pakistan’s economic struggles. The events of the 1970s stripped monetary power from the global South, leaving countries like Pakistan vulnerable to external shocks and dependent on subordinated financial arrangements. Some countries, particularly in East Asia, made themselves relatively secure by growing their foreign currency reserves through industrialization and export growth, but similar policies in Pakistan were not successful. 

   Geopolitics have been particularly detrimental for Pakistan’s regional trade. Pakistan’s three largest trading partners, in terms of two way trade, are China, the United Arab Emirates, and the United States. China shares a land border with Pakistan and is the only neighboring country to feature in the list of ten largest trading partners. Pakistan does some trade with Afghanistan, relatively less trade with Iran, and of neighboring countries, the least with India, despite sharing a border thousands of miles long. Afghanistan is impoverished from sanctions and from the US seizure of their central bank assets. Iran is today the most sanctioned country in the world after Russia. Bilateral trade ties with India have been particularly thin since the abrogation of Article 370 of the Indian Constitution which had given Kashmir, a disputed territory, a special autonomous status.

   New arrangements

   In this context, the global rise of China has been alluring. The increasingly prolific lender has always been a strong ally to Pakistan. But China’s financial support for Pakistan—most notably through the multi-billion-dollar China–Pakistan Economic Corridor or CPEC—raises critical questions. Is China’s alternative model of development financing giving Pakistan the flexibility it needs to pursue its own policy goals? Or does reliance on another powerful lender simply shift, rather than undo, dependence?

   The CPEC initiative has been hailed by many as a game-changer for Pakistan’s development, with promises of infrastructure modernization, energy security, and job creation. Yet, it also deepens the country’s financial ties to Beijing, adding layers of complexity to its already fraught economic landscape. China’s lending practices, characterized by long-term investments with fewer conditions, have been described as a form of “patient finance,” which contrasts sharply with the short-term, often disruptive loans provided by Western institutions like the IMF. This model of investment offers developing countries more room to maneuver, as it tends to be more tolerant of risk and less focused on immediate returns. Yet, while China’s financing approach offers a different dynamic, it is not without its challenges.

   China’s massive financial footprint in Pakistan might be a welcome departure from IMF-imposed austerity measures, but it still raises concerns about the growing indebtedness. The narrative of “debt trap diplomacy” has been used—and also abused—to claim that China’s strategic lending could lead to Pakistan becoming economically beholden to Beijing. But this view oversimplifies the situation as it obscures the prominence of commercial creditors and private debt in Pakistan’s rising debt burden. 

   The internationalization of China’s currency, the renminbi, through mechanisms such as currency swaps, also presents an alternative to the dollar-based global financial system. China’s use of currency swap agreements with countries like Pakistan has provided a lifeline during periods of foreign exchange instability. This development reflects China’s broader ambitions to challenge the dominance of the US dollar in global trade, a goal that is also embodied in the creation of the “petro-yuan”—an attempt to internationalize the renminbi as a currency for oil trading.

   The rise of China as a global creditor certainly marks a significant shift in the international financial system, but whether it can fully replace the IMF or offer a viable alternative to Western-dominated financial institutions remains an open question. There are also clear political limitations to any aspirations in which China replaces the IMF. These were revealed in efforts of the PTI government, particularly between 2018-9 to uphold election promises of avoiding IMF conditionalities, by seeking alternative sources of external finance. But the $ 15.8 billion gathered from different countries, including China, Qatar, Saudi Arabia and the United Arab Emirates was not enough and Pakistan resumed negotiations with the IMF in the summer of 2019. 

   For Pakistan, the challenges of its political economy and turmoil that it produces cannot be separated from its indebtedness. This is inextricably linked to a global financial order, once again in the process of being reordered. Pakistan’s ability to navigate these new realities will determine the trajectory of its economic future. 

10. America First?

    1:38 pm Comments Off on America First?

    The reelection of Donald Trump to the presidency has sent shockwaves around the world. And just hours after results came in, the ruling three-party German coalition government, which had been teetering for months, collapsed. The survival of dominant political coalitions in other G7 countries—including in France, Japan, and Canada—is now more uncertain than ever.

    Amid speculation about how the second Trump term will play out, the question of trade measures is occupying headlines. It is expected that the quantum of tariffs will certainly increase under the incoming administration, and that they will be more assertively weaponized. The extent to which they will represent a break with the Biden era, however, is less clear. 

    

    Biden in 2021: “Every single thing, from the deck of an aircraft carrier to the railing of a new building, is going to be built by an American company, American workers, American supply chain, so that we invest American tax dollars in American workers.” (Source: White House)

    It’s well known that the Biden administration left the majority of Trump’s trade-war tariffs intact. In fact, revenue collected from tariffs grew under Biden’s watch—particularly on Chinese goods:

    

    It is hard to predict how Trump will move ahead with his proposals, which include 60 percent tariffs on Chinese imports and 25 percent tariffs on goods from Canadian and Mexican imports. Appointments of people like Scott Bessent do suggest some strategic crafting of new and increased tariffs, but what will be their effects be, and how will they be managed? Many are expecting significant price hikes for consumers as well as retaliatory measures from trade partners. According to Michael Pettis, it will become even harder to navigate trade-offs with Trump’s desire to maintain dollar centrality.

    Might the new tariffs be blocked, especially seeing as they will almost certainly contravene World Trade Organization rules? In light of the fact that Trump has already stymied nominations for the WTO panel that assesses claims, rendering it all but ineffective, it’s unlikely the multinational organization will play a significant role. It was the Obama administration that had set this ball rolling in 2011 when it blocked nominations to the Appellate, claiming that the WTO failed to protect American interests. For his part, Biden maintained a suspicious attitude toward the organization, citing broad grievances while offering little by way of solution. In 2022, it was Biden’s Deputy US Trade Representative María Pagán who declared, “The United States will not cede decision-making over its essential security to WTO panels.”

    The high tariffs introduced under Biden were part and parcel of his administration’s “foreign policy for the middle class,” a doctrine created by senior Biden officials that sought to address the decline of various Democrat-leaning workforces and regions, as well as the domestic disillusionment with American interventionism and the forever wars. While it did help to underpin the resurgence of industrial policy under Biden, it also put blame for Democrats’ faltering base at the door of free trade, specifically Chinese imports. That blame elided the importance of domestic measures such as labor support and place-based interventions that might have alleviated the effects of China’s WTO accession. Instead, both sides of Congress opted for hawkishness toward China, insisting on  “decoupling” and “derisking” relations with the world’s second biggest economy. 
    

    Sanctions

    Another aggressive tool of the first Trump administration was sanctions. 

    

    Source: How four US presidents unleashed Economic Warfare, Washington Post

    The use of sanctions as an economic weapon goes back to World War I, and it was a significant feature of Obama’s time in office, too. The Biden administration largely maintained and increased the sanctions imposed under Trump, hitting historic highs.

    Thanks to the dollar’s centrality in the global financial system, Washington is able to unilaterally impose sanctions via SWIFT on any institution participating in global dollar transactions. SWIFT, an inter-bank messaging system located in Brussels, provides the US real-time data on all transactions. Today over half the global economy is subject to some sort of US sanction.

    Even when sanctions appear to only target specific entities or individuals, they affect targeted countries broadly. Despite humanitarian exemptions granted on paper, in practice aid organizations and those working to deliver support are unable to process payments or transactions related to sanctioned countries. The UN Special Rapporteur on sanctions documented how unilateral measures caused major delays in the ability to respond to the Covid-19 pandemic and ensure access to lifesaving medical supplies.

    At the same time, sanctions often fail to achieve their stated objectives. The US and its G7 partners expected their sanctions against Russia to severely weaken that economy and hinder Putin’s ability to wage war. This, of course, hasn’t occurred. Crude oil from Russia is still sold on world markets and the implementation of oil price caps has only effected a small discount on Russian barrels of oil, relative to the Brent benchmark. Russia still maintains a current account surplus and in spite of its costly campaign against Ukraine, the Russian economy is amongst the fastest growing in the world.

    As more states get excluded from the dollar system, the incentives to build alternatives get stronger. However challenging setting up an alternative to the world’s premier reserve currency is—and Trump has threatened BRICS members to desist from developing alternatives—it is ever more appealing for countries alarmed by US sanctions.

    While more than unlikely to threaten dollar centrality in the short term, such alternatives would hamper the ability of the US to apply sanctions where it sees fit.

    Multilateralism

    The first Trump administration was openly antagonistic toward multilateral bodies, rapidly quitting the Paris Agreement and appointing David Malpass, a former Reagan and Bush advisor, to head up the World Bank. It withdrew from the UN Human Rights Council and sanctioned International Criminal Court officials.

    When he came to power, Biden changed tack, promising to work with “our allies and partners,” thereby “renewing our role in international institutions, and reclaiming our credibility and moral authority, much of which has been lost.”

    Beyond forming new military alliances, and bolstering existing ones, Biden’s contribution to multilateralism was thin. His administration did nothing to compel commercial creditors to participate in even the mildest deferrals for debt-stricken countries, nor did it help to make Covid vaccines available quickly to developing countries.

    On climate, there was some progress under Biden; the reversal of Trump’s 2017 withdrawal from the Paris Agreement was followed by the cleverly crafted Inflation Reduction Act, which went some way towards improving the US contribution towards global climate action (although it is still far from being a leader). When it came to international trade and finance, he largely maintained what had been put in place by Trump.

    Perhaps the only really significant action the Biden administration can point to is using its decisive voting share in the IMF to support a new distribution of Special Drawing Rights. SDRs are a type of asset issued by the IMF that can be swapped for dollars, euros, yen, pounds, and yuan. The 2021 allocation of about $650 billion worth of SDRs  was the largest ever—just below the threshold that required approval from Congress. It provided access to hard currency badly needed by indebted countries struggling with Covid’s hit to their revenues. The allocation turned out to provide the largest non-debt support for developing countries, many of which used their new SDRs to pay down their debts:

    

    The new allocation was far from adequate, however, and calls for more were refused. The demand for governance reform at Bretton Woods institutions and for measures to provide Southern countries with more fiscal space were also ignored.

    What proposals were put forward on these issues lacked substance, and focused mainly on instruments that emphasized conditionality for recipients. Expansions of World Bank lending capacity progressed at a snail’s pace. A G7-led reform roadmap for the Bank proposed more climate finance but upheld that it should continue to be led by those countries most responsible for historical emissions; no additional funding was suggested. At the IMF, a new facility offered long-term affordable loans to build resilience on climate and health issues—yet accessing these loans required having a traditional IMF program, where conditions impose harsh austerity measures and promote policies that contradict climate and development goals. 

    America, left out

    For decades, the US has served as the leader of what it has come to term the rules-based international order. The legitimacy of this order has been under threat at least since the global financial crisis; with the destruction of Gaza—met, in galling contrast to the invasion of Ukraine, with insouciance from the G7—that legitimacy is beyond repair. Failure to deliver on climate finance and development assistance has not helped to improve the image of a US that, even under Democratic administration, refuses to deliver meaningful international to countries around the world.

    Global South nations, lacking representation at the IMF and World Bank, brought their calls for reform of the international financial architecture to the UN. Led by the G-77 and China, the process was set in motion for a Financing for Development conference where these matters could be discussed. Alongside this process, the G-77 is also leading efforts to negotiate an international tax at the UN to deal with profit-shifting and tax avoidance tactics of multinational corporations. The US and its close allies have opposed these processes and have refused to engage productively in negotiations, confirming that their support for multilateralism is limited to those places where they can still call the shots. Little wonder, then, that Beijing is viewed more favourably than Washington in the global South.

    

    Source: Global Public Opinion on China, Asia Society