Category Archive: Analysis

  1. Energy Offshoots

    Comments Off on Energy Offshoots

    Petróleos de Venezuela (PDVSA) has been integral to Nicolás Maduro’s government and the greater Chavista project. Despite the state-owned oil company controlling the largest crude oil reserves in the world, its production capabilities have fallen sharply since 2014: the country went from producing 3 million barrels of crude per day in 2013, accounting for 96 percent of the country’s exports, to producing 800,000 barrels per day today. This 70 percent drop in oil production has gravely impacted funding for state social protection programs. Hyperinflation further aggravated the situation, ushering in a wide-scale crisis. The political turmoil unleashed by the most recent election has only exacerbated tensions. 

    The scope of the crisis attests to the central role of oil and gas in Venezuela’s development model. Dependent on oil as its main export, the Venezuelan national economy is left vulnerable to external shocks, which have the ability to impinge on social services and employment. Chávez’s election in 1999 marked a new era of the relationship between the state and the oil industry—one of direct government and party control. But the promise of the Chávez model, premised on greater control over the financial industry combined with a broadened welfare state, had already begun to crumble as investments and production fell during the first decade of the twenty-first century. 

    More recently, geopolitical transformations surrounding the oil industry have constrained Venezuelan politics. The Maduro regime has faced sanctions from the US government since 2014. Five years later, the US imposed further sanctions against the PDVSA and Venezuela’s Central Bank. These moves have imperiled the PDVSA’s finances, leading the Venezuelan government to seek closer relationships with China, Russia, and Iran in order to ensure the regime’s survival. But this realignment strategy has not drastically altered Venezuela’s commodity-based development model. In short, the horizon of Maduro’s regime still hinges on the country’s oil dependency. 

    Development and dependency

    Since the 1922 “blowout” of the Barroso II well, the oil industry has been the main axis of Venezuela’s economy and politics. The oil boom precipitated the onset of deep transformations to the structure of the republic. With the end of dictatorships and the dawn of democracy, the second half of the twentieth century was marked by rapid urbanization and modernization, which was almost exclusively funded by oil income. From the 1950s to the 1970s, economic growth was noticeable through high national growth rates and substantial improvements in the quality of life of citizens, culminating with the creation of PDVSA in 1976. 

    In short, the oil boom allowed for the expansion of infrastructure, public services and, for the first time, the rise of a middle class. In addition, the nationalization of the oil industry with the founding of PDVSA secured state control over rents, which incentivized high public spending, despite the country’s lack of a solid tax base. The state became the main provider of goods and services, while the private sector lagged behind. This model laid the foundation for a rent-based state that would inspire and sustain Chavismo in the years to come.

    But this progress was accompanied by increased dependency, leaving the country vulnerable to the fluctuations in the international market. The cyclical rise and fall of oil prices that started in 1973 revealed the vulnerabilities of the national model. Assuming the presidency in 1994, Rafael Caldera faced a banking crisis that devastated the financial system. In response, Caldera engaged the IMF and applied the “Venezuela Agenda” to stabilize the economy. His government pried open the oil sector, allowing PDVSA to lead investments and recover its growth by 1997. 

    From 1989 to 1998, PDVSA positioned itself as one of the five largest oil companies in the world, with interannual growth at 7.5 percent and production reaching 3.3 million barrels per day (mbpd). From its creation up until 1999, the company had distinguished itself as a global innovator in the hydrocarbons industry.1

    A decline in oil prices during the 1997–1998 Asian financial crisis forced the country to create a Macroeconomic Stabilization Fund and to privatize state companies to mitigate volatility. Despite the efforts, institutional deterioration persisted, and widespread dissatisfaction laid the groundwork for Hugo Chávez’s electoral victory in 1998.

    Oil welfare

    With the election of Hugo Chavez in 1999, control over oil became a key political, financial, and geopolitical tool of the state. The state intensified its control over PDVSA, whose rents were used to expand social protections. At the same time, the Chávez regime pushed the twentieth-century model of oil statism to its limits. The result was the consolidation of national dependence on oil rents and exchange-rate controls.2

    Two laws supported the changes in the relationship between the state and PDVSA: the Constitution of the Bolivarian Republic of Venezuela (CRBV), drafted in 1999, and the Organic Hydrocarbons Law of 2001. The Constitution marked the beginning of what Chavismo called the “Fifth Republic,” emphasizing the principle of sovereignty over subsoil resources. In practice, this meant that the state owned hydrocarbons reserves. While this regulation had been stipulated in prior laws, the new constitution stressed the role of the state in order to prevent the exclusion of the executive branch from industry decisions. 

    The legal changes also transformed the relationship between PDVSA and the welfare state. In 2003, PDVSA started to finance welfare missions worth $549 million each year. Two years later, the National Development Fund (FONDEN)—financed by oil holdings—was created. Now burdened with greater financial commitments, PDVSA needs to meet increasing welfare costs.

    The arrival of Nicolas Maduro to the presidency in 2013 did not bring significant change. In fact, in July of 2014, oil prices fell by 76 percent, speeding the fall in oil production and investment. Consequently, social protection programs saw significant cuts, from around $13 billion in 2013 to $5.3 billion in 2014. 

    The plummeting of prices aggravated the social crisis, where dependency on oil income led to the collapse of the welfare state. This resulted in higher poverty rates, a dearth of goods and services, and the largest population exodus the region has experienced in modern history. During Maduro’s first term, crude exports accounted for up to 90 percent of total exports, but incomes dropped dramatically.3 Production in 2019 was only one-seventh of what it had been in 1976. 

    The sanctions effect

    The economic sanctions against Maduro’s regime further deteriorated PDVSA’s production. The goal was to modify the state management of the sector by constricting oil rents. Until 2017, the United States was a top destination for Venezuelan oil. Even as late as 2015, Venezuela was the third most important crude exporter to the United States, following Canada and Saudi Arabia. The result of the sanctions was to push Venezuela to realign with other geopolitical actors. 

    Overall, US sanctions drastically reduced the regime’s ability to operate in global markets, slashed its oil incomes, and consequently worsened the internal crisis. The possible reactivation or intensification of sanctions in the near future could hamper any attempt to revitalize the national energy sector—which is crucial to a country whose economy is still struggling to recover from years of poor management and international isolation.

    The 2017 sanctions affected the oil sector directly. PDVSA was banned from accessing US financial markets and its abilities to refinance its debts and sell crude were restricted. In January of 2019, in parallel to Juan Guaidó’s self-proclamation as interim president, the United States froze some $7 billion in PDVSA assets, while blocking more than $11 billion in projected income.

    To secure additional income, Maduro resorted to exploiting unconventional resources and selling strategic assets. Two new projects, the exploitation of the Orinoco Mining Arc and the introduction of the “petro,” a cryptocurrency backed by oil reserves, both resulted in failure. They were incapable of attracting investor confidence or offering a sustainable solution to the country’s liquidity crisis.4 The “petro” failed because of generalized distrust in the currency, in addition to the restrictions it faced after its launch.5 Meanwhile, the exploitation of the Orinoco Mining Arc mainly benefited the upper echelons of the government and military, in addition to foreign allies, such as Colombian rebel groups like the National Liberation Army (ELN) and the Revolutionary Armed Forces of Colombia (FARC),6 as well as the Russian private military company known as the Wagner Group.7

    In 2021, exports dropped to a historic low, amounting to $3.2 billion, of which gold exports made up $104 million. Oil was removed from the record of legal exports. Instead, it was sold in clandestine markets via triangulations with Russian tanks that would cross the open sea to send crude to India, then reexporting it to other parts of Asia, especially China, at a heavily discounted rate. This operation, which was not accounted for in official figures, was marred by Russia’s invasion of Ukraine and by sanctions on Russian oil, which also impacted Venezuela. 

    Geopolitical realignments

    In a context of international isolation and economic collapse, Maduro had to appeal to strategic alliances once forged by Chávez, leaning into a geopolitical bloc that has allowed Venezuela to partially evade sanctions, maintain a minimum oil income and, above all, secure Chavismo’s survival amid a hostile international environment. In the quest for new partners, Maduro’s bargaining chip continues to be, above all, the national oil sector.

    Under Chávez, the government deployed the state-owned oil company’s resources to bolster ties with certain countries in Latin America, the Caribbean, Eurasia, and Africa. For example, the Petrocaribe initiative sought to coordinate the energy policies of Central America and the Caribbean. Venezuela provided the region with oil at low interest rates, with payment plans of up to twenty-five years. In exchange, Venezuela would receive commodities and agricultural products. But the agreement was questioned for its lack of transparency and confidence in its transactions. Most member countries canceled large chunks of their debt by bartering products whose value was hard to measure.8

    China has also been a key partner to Venezuela. The pillar of the China-Venezuela relationship is an agreement to exchange funds for oil, first initiated by Chávez. Venezuela began to receive loans that were mainly backed by oil-debt agreements in 2007—the China-Venezuela Joint Fund is one key example. Under Maduro’s tenure, and Xi’s regime, the agreements remain but they hold less weight given the changes in the sector. China has extended approximately $67 billion in loans to Venezuela, which have largely been paid by crude shipments. With the drop of oil production during the 2010s, the agreement has become increasingly unsustainable. The volume of oil sent to China has plummeted, forcing Caracas to restructure its debt on various occasions. Despite these challenges, Beijing has continued to support Maduro—no longer with loans, but with various infrastructure and technology investments, as well as military-equipment sales, though in a more cautious and conditional way than before.9

    In 2023, China and Venezuela signed an agreement to mutually promote and protect investments. Three years prior, in 2020, the state-owned China Aerospace Science and Industry Corporation (CASIC) took up the transportation of Venezuelan crude as a way of compensating for some of Venezuela’s debt to China. But the relationship with China is not limited to the mere transfer of resources—there is a broader strategy at play. By participating in infrastructure, mining, and telecommunications projects, China has secured a significant presence in key sectors of the Venezuelan economy. This is the case in the field of telecommunications, for example, with support from companies like Huawei and ZTE, as well as in the military plane. 

    On the other hand, Russia has been a key ally in the survival of the Maduro regime, not only supporting its energy sector but also providing military and diplomatic assistance. The relationship between Moscow and Caracas has intensified in response to pressures from the United States and European Union. For Russia, Venezuela represents an opportunity to defy US influence in its own hemisphere.

    The Russian state-oil company Rosneft played a key role in the commercialization of Venezuelan crude oil, especially after the imposition of US sanctions. In 2020, Rosneft sold its shares in Venezuela to the security company RN-Okhrana-Ryazan, which is controlled by Roszarubezhneft, an entity created by the Russian government. This transaction allowed Russia to continue to exploit Venezuelan oilfields through the National Oil Consortium (CPN). Rosneft affiliates, like Rosneft Trading and TNK Trading International, were sanctioned for facilitating the trade of Venezuelan crude, a clear attempt by the US to prevent both governments from reaping benefits from their transactions. 

    Through a complex network of companies and transactions, Rosneft helped Maduro evade sanctions, while also keeping up a constant flow of crude exports. The main recipients were Asian markets, which accounted for 64 percent of total exports in 2023, before the Biden administration temporarily eased sanctions. 

    Perhaps one of the most surprising and least predictable alliances has been between Venezuela and Iran. With its refining infrastructure in ruins and under the pressure of sanctions, Maduro turned to Iran, a country also facing a severe regime of international sanctions, to help with its fuel supply. Defying US sanctions, Iran sent several fuel shipments to Venezuela, which inaugurated a new phase of cooperation between two regimes isolated by the West. In exchange, Venezuela granted Iran access to gold and other strategic resources. 

    But the cooperation between Caracas and Tehran goes beyond shipments. Iran has provided technical assistance for the reactivation of Venezuelan refineries, sending spare parts and materials for fuel production in an effort to temper the collapse of Venezuela’s refinery industry. The relationships with both Russia and Iran also have a significant symbolic charge. By presenting itself as an ally of Eurasian powers in defiance of US hegemony, Maduro guarantees an image of resistance on the international stage that aligns his regime with the multipolar narrative that Chávez promoted.

    Through this process of political realignments, driven by sanctions themselves, Venezuela fully embraced a circuit of evasion by selling oil on unregulated fleets, with the transactions conducted in the Chinese currency renminbi. This scheme has allowed Venezuela to keep exporting crude despite restrictions, by relying on alternative financial systems beyond Western control that undermine the effectiveness of sanctions.10

    Uncertain horizons

    In 2023, the Biden administration temporarily lifted certain sanctions in order to incentivize free elections. After long conversations and at least six gatherings in Doha, the Barbados Agreement was reached between Maduro’s government and Venezuela’s opposition party. The agreement involved a series of political commitments and the granting of a license to produce, extract, sell, and export oil from Venezuela. However, sanctions were reinstated mid-2024 in response to the Venezuelan Supreme Court ratifying an electoral blockage against the opposition campaign of María Corina Machado.

    The threat of reimposing sanctions looms over the Chavista leadership. Ongoing negotiations could reach a critical turning point on January 10, 2025 when Nicolás Maduro is set to assume his next term as president. Donald Trump’s reelection in the United States also adds to the uncertainty, as he could choose to reinstate sanctions and intensify pressure from Washington.

    Parallel to these political developments, the US Department of the Treasury renewed General License 41, allowing Chevron to continue limited operations in Venezuela up until April of 2025, with certain restrictions. This suggests that a dual strategy is emanating from Washington: some economic channels are being kept open for US companies, but the US government is maintaining its ability to exercise political pressure against the Venezuelan regime. This dynamic will undoubtedly influence political decisions in Caracas.

    In light of the geopolitical situation, the Venezuelan regime faces the need to urgently revitalize its energy sector amid economic collapse. The exploration of new wells along the Orinoco Oil Belt—which houses the greatest heavy crude reserves in the world and has been historically underexploited—has become key to this strategic attempt to reverse plummeting production. Collaborating with Chevron, as authorized by the US Office of Foreign Assets Control (OFAC) in 2022, has allowed the American company to resume plans to drill up to thirty new wells along the Belt by 2025, and increase production alongside PDVSA by up to 35 percent to reach 250,000 barrels per day. Yet the sanctions still limit Chevron, which cannot expand operations to new fields or distribute dividends to PDVSA. This restriction secures Washington’s control over the regime even as PDVSA seeks to sustain its energy sector.

    Furthermore, the exporting of natural gas from Venezuela to Colombia and the oil discovery in Guyana have similarly become crucial strategies. The exports of natural gas to Colombia are not only economically significant, but they also carry political weight, as Colombia has offered to mediate the regime’s crisis of legitimacy while Venezuela, in turn, has served as guarantor for Colombian president Gustavo Petro’s “Total Peace” dialogues. However, the dual role as mediators and guarantors strains the partnerships between the countries, putting the export project under intense political pressure, both internally and externally. In addition, Venezuela’s gas capabilities and the state of its gas pipeline have cast doubts around the viability of the project.11

    Meanwhile, Guyana’s recent oil discovery and growing oil production has intensified a long-winded territorial dispute between the two countries, specifically around the resource-rich region of Esequibo and its exclusive economic zone for offshore oilfields. While Guyana has moved forward in the exploitation of these oilfields with the backing of multinational corporations like ExxonMobil and Chevron, Venezuela has escalated its claims on the region. This is yet another source of regional instability and geopolitical risk. 

    For now, Maduro has continued to bet on oil. In a hostile international environment, the regime has viewed oil and PDVSA as means for survival, using these assets to maintain alliances and explore new markets that might allow it to generate wealth and sustain itself in the face of immense external pressure.

  2. Class Cleavages

    Comments Off on Class Cleavages

    On January 10, 2021, four days after the January 6 attack at the Capitol, Goldman Sachs, JPMorgan Chase, Citigroup, and Morgan Stanley—four of the six largest banks in the United States—suspended contributions to the Republican Party. The next day, the Chamber of Commerce declared that politicians who had voted against certifying the election would no longer receive its financial support. “The president’s conduct last week was absolutely unacceptable and completely inexcusable,” said Thomas Donahue, the Chamber’s CEO: “By his words and actions, he has undermined our democratic institutions and ideals.” Over 123 Fortune 500 firms—collectively accounting for a quarter of American GDP—eventually did the same.1

    American capital’s boycott against the Republican Party, signifying new heights of estrangement between organized business and what it saw as a dangerously anti-system conservative movement, lasted less than two months. By March, the Chamber had reversed course. “We do not believe it is appropriate to judge members of Congress solely based on their votes on the electoral certification,” explained Ashlee Rich Stephenson, the Chamber’s senior political strategist. Citi and JPMorgan Chase resumed their donations to the GOP in June, once a bipartisan group of senators emerged to separate infrastructure spending from the administration’s proposals for a tax increase. In the 2022 primaries, Republican members of Congress who refused to certify the 2020 election still faced an average fundraising penalty of $100,000 from Fortune 500 PACs; this penalty dropped in the 2022 general election, and once again in the 2024 primaries.2 Within two years, organized business’s opposition to the Republican Party had disintegrated.

    Within the American business lobby, it seems there is no consensus about the direction of the country’s future. The large blocs of organized money that found Trump a threat to democratic institutions in 2021 evidently no longer do—similarly, proposals once thought bad for American capitalism, such as a twenty-percent universal tariff and mass deportations, are no longer outside the realm of possibility. As a result, today, the American business class’s record of partisanship could best be described as incoherent. What accounts for business’s inability to challenge the Republican Party? And are there any patterns in the chaos?

    Trump and the capitalists

    Trump will return to office in January with an agenda of weakening the dollar, taxing all imported goods, deporting millions of migrant workers, and limiting the Federal Reserve’s independence. If confirmed, the vocally pro-tariff billionaire Howard Lutnick will oversee American trade policy alongside Jamieson Greer, a Robert Lighthizer protégé and Trump’s choice for US Trade Representative. And though markets cheered Trump’s selection of the hedge fund manager Scott Bessent to lead the Treasury—derided by Elon Musk as the “business-as-usual choice”—even Bessent favors a vastly expanded tariff regime. Trump himself declared his intent to impose across-the-board tariffs on Mexico, Canada, and China on day one, causing bond yields to sink the next day.3

    At best, Trump is begrudgingly tolerated by much of American capital. While elite consensus has turned against free trade over the past decade, its preferred trade restrictions are in “targeted, strategic” form largely limited to China, whether supposedly underpriced goods “dumped” in American markets or transfer of cutting-edge technology, rather than the President-elect’s strategy of across-the-board tariffs. Trump’s victory has therefore prompted widespread concern among American employers, particularly in the retail, agricultural, food processing, and manufacturing sectors. Business leaders still largely prefer the Obama-era immigration regime, despite the Republican Party’s opposition to the Biden administration’s border security bill, and their lack of advocacy on the issue, ProPublica reports, is due to a widespread sense of impotence in the face of a radicalized Republican party. 

    This isn’t new. The GOP has long embraced politics running directly counter to the American capitalist class’s policy preferences—such was the case during Republican obstruction of the Targeted Asset Relief Program (TARP) in 2008, the government shutdowns of 2013 and 2018–19, and the Tea Party’s crusade against the Export-Import Bank. 

    But, in 2024, an unprecedented amount of capitalists themselves openly tolerated these anti-systemic politics. Jamie Dimon publicly struck a position of ambivalence on who should occupy the White House, even while reportedly favoring Kamala Harris. The venture capitalist Tim Draper issued a widely ridiculed endorsement of both candidates. Larry Fink, who described the January 6 insurrection as “an assault on our nation, our democracy, and the will of the American people,” bluntly declared that the election’s outcome “really doesn’t matter.” Other financiers outwardly supported Trump’s re-election campaign. The GOP’s campaign against American higher education lured the hedge fund manager Bill Ackman, who had demanded Trump’s immediate resignation after the January 6 insurrection, back to the Trump campaign. Similar grievances lured Steve Schwarzman and Ken Griffin, both of whom previously rejected Trump, back into Team Trump’s orbit. The ownership class failed to discipline not only Trump, but also itself.

    Defensive unity

    Business organization in the United States has historically occurred only in response to challenges by organized labor and agrarian movements. American business’s recent political incoherence vis-a-vis Trump should be understood as reflecting these groups’ diminished ability to agree on what their common challenges are today. 

    The United States is unique among advanced capitalist countries in lacking a singular dominant national business organization. When these organizations appear, they are not organic phenomena emerging from within business itself: the first major representative organizations of American employers—the National Association of Manufacturers and the Chamber of Commerce—were organized by William McKinley’s 1896 presidential campaign and the Taft administration, respectively. As the political scientist Cathie J. Martin argues, it is thus “much harder for US employers to think about their collective long-term interests than their counterparts elsewhere.” Given the fractious nature of American capital, “they are very good at saying no to regulations that offend their narrow self-interests, and very bad at saying yes to policies that further their long-term, collective concerns”—such as free trade and finance versus protection, the level of demand in the domestic market, or the degree of income inequality.4

    The 1970s, like the 1890s, saw an exception to this tendency. As corporate profits declined amid the sustained full employment of the Vietnam War, American businesses raised prices to inflate margins and off-shored production to increasingly integrated global markets. This sparked an uptick in union activity, while Richard Nixon’s 1970 creation of the Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration (OSHA), and his infamous 1971 price freeze, further aggrieved American corporate managers. The American ownership class thus began organizing with unprecedented coordination. 

    In 1972, the Labor Law Study Committee and the Construction Users’ Anti-Inflation Roundtable—a lobbying organization dedicated to codifying union-busting strategies into law, and a group of corporate executives seeking to coordinate contractors’ resistance to union demands, respectively—merged to form the Business Roundtable. The Roundtable, Paul Heideman explains, was a “new kind of organization for American business.”5 Only the CEOs of the very largest American corporations were eligible for membership. Rather than directly endorsing candidates and hiring lobbyists, the Roundtable focused on building consensus within the capitalist class, put into action through its politically connected members’ personal interventions. The Roundtable, in this sense, was a project specifically dedicated to overcoming collective action problems among the capitalist class—choosing free trade over protection, the open shop over collective bargaining, and the strong dollar. 

    The Chamber of Commerce also rose to meet the moment. In 1975, the Chamber hired Robert Lesher, a management consultant and lobbyist, as its first full-time president. As inflation soared above its postwar baseline, Lesher’s wildly successful recruitment campaign revitalized the Chamber. In 1976, the Chamber had barely 50,000 corporate members; by 1980, it grew to nearly 250,000. A formerly stagnant organization had become, in Kim Philips-Fein’s words, the incubator of “a social movement for capitalism.”6

    The crucible of the seventies had forged a united voice for the once-fragmented American capitalist class. Unified in the Chamber and Roundtable, in Jacob Hacker and Paul Pierson’s words, “Corporate leaders became advocates not just for the narrow interests of their firms also but for the shared interests of business as a whole.”7 At the beginning of the decade, the American business community—if there even was one to speak of—had mostly focused on piecemeal fights over labor law and consumer protection. But by 1980, American capitalists had marshaled the collective strength to engage not only in short-term policy fights but also outline a long-term vision for the governance of American capitalism: a vision involving the rollback of the New Deal order.

    Ironically, Heideman argues, business mobilization’s very success produced the conditions for its downfall: the capitalist class had defeated its unifying enemy in organized labor, government regulation, and taxes. Profits appeared to be back on an upward trajectory, union density was in steep decline, and both parties had embraced variations of the Chamber and Roundtable’s neoliberalism of individual tax cuts, deregulation, and the strong dollar. The capacity for collective action forged in the years of crisis thus disintegrated. By 1985, Chamber membership had declined to 180,000. As Lawrence Kraus, a senior Chamber official, explained in 1987: “For the last six and a half years, you’ve had a President in the White House who said he’d veto anything anti-business. So why should business people bother to join?”8

    By the 1990s, the Business Roundtable was in severe organizational decline. Its income dwindling, the group’s president urged members to triple their membership dues to maintain its political advocacy. Consequently, the Roundtable lost a third of its membership.9 In 1993, Vernon Loucks, Jr., the CEO of the pharmaceuticals giant Baxter, bemoaned the state of business organization:

    While business may enjoy a measure of economic power, most businessmen don’t have true political power and don’t purport to understand it or use it. No change will come to our schools that isn’t approved in some form by our political processes. Yet put us in the political arena on a public policy question like education, and we in business are often totally in the dark.10

    The Chamber survived the period, but only by abandoning its mission of uniting the business lobby across sectional divides. Instead, the Chamber entered the business of “selling deniability” to its members, a model first piloted by the tobacco industry. Fearing that open advocacy against health regulations would tarnish their brands, tobacco companies secretly donate to the Chamber, which would then advocate against the industry’s desired regulations. This business model spread to the auto, pharmaceutical, and insurance sectors, each directing tidal waves of cash to the Chamber in hopes of obscuring their unpopular political interventions.

    Capitalist constituencies

    Without a strong national organization to coordinate political action among capitalists, fissures within American capital’s partisanship today fall largely along sectional lines, with political interventions generally made in favor of a business’s narrow sectoral interests. In total, Trump raised $1.1 billion this cycle, sourcing 69 percent from large contributors; Harris raised $1.7 billion, 58 percent of which came from large contributors.

    Trump’s primary base this cycle was, as ever, among traditional, “grittier” industries: manufacturing, energy, and logistics. Agribusiness—which benefits from low wages and loose chemical regulations—donated nearly $18 million to Trump, and only $4 million to Harris (as compiled in OpenSecrets data). Trump’s 20 percent universal tariff seems to have done little to deter the agricultural sector’s donations: in 2020, these donors gave Trump $16 million. The transportation sector gave nearly $97 million to Trump—nearly eighteen times the sum it gave to Harris. Likewise, the energy sector gave nearly six times as much to Trump ($31.1 million) as it did to Harris ($5.3 million). 

    The Democratic donor base is primarily post-industrial, largely focused on finance and tech. From the technology sector, Trump raised only one-seventh of Harris’s total, sourced largely from electronics manufacturers. As of October, donors in the internet industry had made 82 percent of their political contributions to Democrats; in the software industry, 72 percent of donations were made in support of Democrats. Concerns over the consequences of a Trump presidency on US-China trade appear to have influenced tech’s support.11

    The Democrats received exceptional support from electronics manufacturers, perhaps owing to subsidies from the CHIPS Act and the Inflation Reduction Act and to the party’s more explicit internationalism. Harris received $19.7 million in donations from the sector, nearly five times more than Trump’s collections. Even so, Biden’s subsidies to the renewable energy and electric vehicle sector appear to have won his party only minor monetary support: Harris received $6.9 million from the renewable energy and electric vehicle world, mainly from venture capitalists invested in the sector, to Trump’s $2.4 million. 

    Absent from Harris’s donor base were the oil and gas industry, which gave $20.4 million to Trump, tobacco, which gave $8.6 million to Trump, and waste management, which gave $8.2 million to Trump. Absent from Trump’s donor base were education and media. Strikingly, Harris received over twice as many contributions from the defense industry as Trump. The financial elite were divided but leaned red: Trump raised $234.9 million from the sector to Harris’s $117 million. Finance nonetheless constituted Harris’s main base of business support, giving more to the Harris campaign than any other sector. Doug Henwood’s analysis finds that, of the identifiable large contributors to Harris’s Future Forward PAC, 27 percent made their money in finance—more than any other industry. This likely reflects finance’s increasing estrangement from the Republican Party, though this estrangement is not severe or total enough to have any disciplining force.12

    Classwide disorder

    Barring moments of systemic crisis, like the congressional battles around TARP in 2008 or CARES in 2020, the American business lobby is characterized by what is arguably a lack of classwide rationality. American business simply never recognized positive economic restructuring as the necessary corrective to the systemic crisis they had briefly diagnosed in early 2021. Between the options of increased corporate taxes and public expenditure or a second Trump term, most big donors in finance, energy, agribusiness, and transportation perceived the former as the greater threat to the society they rule. High-technology, internet, and a (nonetheless substantial) minority within finance disagreed, but failed to mount a winning campaign. 

    Capital’s failed political interventions through the first Trump and Biden presidencies were therefore emblematic of its long-term inability to overcome collective action problems. Throughout the 2010s, the radicalizing Republican Party had come into escalating clashes with the business lobby—itself diminished in strength and the consensus it was capable of marshaling. Such was the case during the 2013 government shutdown, when the Tea Party wing of the GOP, demanding repeal of the Affordable Care Act (ACA), threatened to default on American debt. The Chamber of Commerce, Business Roundtable, and National Federation of Independent Business quickly condemned the GOP’s hostage-taking; the shutdown and its associated legislators were backed and funded by the Koch Brothers and allied capitalists, unified under the political advocacy group Americans for Prosperity (AFP). This equally powerful, diverse faction of capitalists favored all-out war on the Democratic Party, rather than the Chamber’s incrementalism—a sign of the multiplying divisions among Republican Party investors.

    In the 2024 American election, of particular note was the vocal support of hedge fund, venture capital, and private equity executives for Trump. Unlike their counterparts in traditional sectors, hedge funds are not employers in any serious sense of the word: Ackman, whose net worth is over three times greater than that of Jamie Dimon, employs fewer than 100 people. As such, their executives—themselves significantly wealthier than their counterparts in traditional industries—have tremendous liberty to make political interventions.

    These financiers are not uniformly aligned with the Republican Party. Venture capital made two-thirds of its contributions to the Democratic Party; hedge funds gave in the same proportion to Democrats; and private equity split its donations equally.13 Their political interventions, however, have a peculiar nature. They largely do not engage with organizations like the Chamber or Roundtable—nor do they attempt to build institutional infrastructure for their interventions like AFP or the now-defunct FreedomWorks. Instead, their political interventions take on a disorganized, individualized, and often erratic character: see, for instance, hedge-fund manager Tom Steyer’s 2020 Democratic presidential campaign, self-funded with $70 million of his own wealth. 

    The phenomenon at play among finance’s support for Trump, then, is best understood not as a wholesale shift toward the Republican Party within the financial sector. Instead, it is symptomatic of the deep disorganization of the American capitalist class. The phenomenon within the hedge fund and private equity sectors is, above all, a lack of classwide organization. Without a national business organization to coordinate action among the business lobby—itself increasingly composed of spectacularly rich individuals with few stakeholders in their personal enterprises—individual capitalists are left largely to assess their interests alone. And without the perception among the ownership class of a credible threat to their way of life, there’s little need for such national organization to expand beyond its current sectoral and idiosyncratic short-term obsessions. American capitalists have thus not only lost the ability to discipline politicians, but also the ability to organize themselves. This is a measure of capital’s long-term success—business has largely lacked reason to organize as it did in the 1970s—but may soon prove problematic. The much-hoped-for business backlash to Trump simply never materialized during his first term, and there is little reason to expect it will during the second. When business leaders publicly bucked the Trump administration, they did so to avoid reputational damage from Trump’s most egregious antics rather than to shape specific matters of policy. Even their boldest attempt to rein in the Republican abandonment of Democratic commitments—the 2021 donor strike—lasted no more than a single year, and seems to have had no long-term consequences. Given these dynamics, the Republican Party’s radicalization will continue to be the defining feature of American politics.

  3. Labour’s Choices

    Comments Off on Labour’s Choices

    The threat of a return to the 1970s has long been a rhetorical feature of the British establishment. From the New Labour government’s Third Way reforms, to Jeremy Corbyn’s ambitious manifestos, and through to the current Labour Government’s rather modest spending increases, any prospects of redistributive taxation and spending, resurrection of trade union power, more worker-friendly policies, or state direction of industrial policy have been relentlessly attacked as a return to that dreaded decade.

    The accusations are peculiar because, on the face of it, recent years have been very different from the 1970s. Trade-union power and militancy in the UK remain far weaker than before, the state no longer controls capital flows as it did prior to 1979, and competing ideological systems no longer overlap with geopolitics as they did during the Cold War. 

    Talk about going back to the 1970s, then, isn’t prompted by any real prospect of returning to those years or the conditions that underpinned them. Rather the 1970s have come to stand as a kind of shorthand for catastrophe—a catastrophe that Labour governments are particularly prone to. It was in the 1970s—as few in Britain are allowed to forget—that the overwhelming power and intransigence of the unions paralyzed British life, crippled the economy, and fuelled uncontrollable inflation, while state control and ownership stifled innovation and created inefficiency. On both the left and the right,1 the crisis of the 1970s is perceived to have laid the ground for Thatcher’s rise; facing the spiralling crisis, the 1974–79 Labour Government—led first by Harold Wilson, then by Jim Callaghan—is either portrayed as having been helpless in the face of the economic crisis and union power, or as having advanced its own strand of neoliberal reform now seen as mostly indiscernible from Thatcherism. 

    The salient problem with these stock-standard readings is that the 1970s were not simply a time of crisis that led, automatically and inevitably, to Thatcherism. They were, in fact, a time of deep contestation over the future direction of economic policy in the UK. Far from being prisoners of a broken system, the Labour Party in this period debated and explored not one, but several, alternatives to the Thatcherite program then beginning to emerge. The Labour Party’s experimentation in these years was connected to the fact that the 1970s were, despite the difficulties and uncertainties that surrounded them, a time in which labor and other social movements were confident in their power and believed that the future belonged to them. Their failure reflected not historical necessity, but the changing composition of social pressures that Party leaders faced.

    What lessons does this tumultuous decade hold for the present? An accurate reading of the 1970s above all discredits a fatalistic reading of history. Instead, it encourages a rediscovery of policy experimentation and mass mobilization.

    “There is no other way”

    When Harold Wilson’s Labour Party entered government in March 1974, it did so amid deep domestic conflicts and uncertain international economic conditions. The 1973 “oil shock,” when the Organization of Petroleum Exporting Countries (OPEC) dramatically increased the price of oil, had exacerbated existing economic difficulties in the UK. By the end of 1973 the country was in recession, inflation was accelerating, and there was a growing current account deficit. The Conservative government had sought to bring down inflation through statutory controls on wages and prices. However, the price controls were full of loopholes and the government confronted a powerful trade union movement that rejected statutory control and wage increases that did not match the increase in prices. Industrial action by the National Union of Mineworkers led the Conservatives to declare a three-day work week to limit energy use, and then to call a general election in the hopes of securing a mandate for its policy of confrontation with the unions. To their surprise, they lost the election.

    Labour replaced the Conservatives, first as a minority government and then with a small majority after a second election in October. It was influenced not only by the difficult economic context, but by a wide range of new left groups and social movements that had been growing in size and influence since the late 1960s. Many new ideas were being developed within these movements, including ones for democratic control over companies and the state. While the Labour leadership resisted the more radical elements of these policies, it nevertheless entered the February 1974 election with the Party’s most radical manifesto since 1945, promising to “bring about a fundamental and irreversible shift in the balance of power and wealth in favour of working people and their families.”

    Labour’s strategy emphasised cultivating a close relationship with the unions and an economic strategy based upon cooperation with them. The failures of the Conservatives, in their efforts to confront the unions, appeared to confirm the realism of this approach. Indeed, Wilson’s insistence that “there [was] no other way to approach an economic strategy except based on the Social Contract with the trade unions” echoed Thatcher’s later argument that “there is no alternative” to her own policies.2

    The logic of this “Social Contract” was that unions agreed to cooperate with the government to restrain wage increases in exchange for policy concessions. These concessions included an extension of price controls, new rights for workers and unions in the workplace, increases in the “social wage” through higher benefits and subsidies for food and housing, and an industrial strategy that involved expanding the state’s powers to direct investment toward priority areas.

    As the government continued to face major economic challenges over the next five years, its emphasis in many of these areas would shift. The importance of cooperation with the unions, however, would remain central to how it approached economic policy.

    An ambivalent era

    The conservative historian Dominic Sandbrook has described 1974 as “the worst year in British political history.” Maintaining this claim in a recent podcast, he passively recognised the underlying class dimension to this appraisal. Sandbrook noted “an interesting divergence” in the experience of 1974: 

    If you were paying that 83 percent [marginal] rate of tax, or 98 percent on your ‘unearned income’….if you invest in property or any of these other markets that have collapsed, then you [were] sitting and saying ‘this is Weimar Germany.’ If you [were] not one of those people, [was] your life terrible? Arguably not. Especially if your income [was] protected by your union.

    While there was a great deal of wage volatility in the 1970s, real average weekly earnings grew by an average annual rate of 5.5 percent over the course of the decade. This contrasts with a stagnation in real wages in the UK since 2010, and an average rise of 1.6 percent and 1.7 percent in the 1990s and 2000s.

    These gains can be connected to the unprecedented degree of strength, mobilization, and radicalism within the British labor movement and wider social movements of the 1970s. The 1974–79 Labour government held an ambivalent position in regards to both the social movements and the neoliberal tendencies that emerged alongside and succeeded them. Real wages rose significantly in the first year of the Labour government, supported both by the government’s removal of statutory wage controls and extension of price controls and subsidies, and by a pre-established new phase in the incomes policy of the previous Conservative government. Labour also embarked on a dramatic range of redistributive measures: increasing pensions and food subsidies while raising taxes on higher incomes, while also extending the power of trade unions in the workplace.3

    After 1975, in a context of rising inflation, pressure on the UK’s balance of payments, and pressure on company profits, the Labour government shifted course. The “Social Contract” with the unions was renegotiated, with much greater focus now placed on wage restraint. The government also began to cut spending while providing new tax reliefs to corporations. The spending cuts agreed upon by the government in exchange for IMF support in 1976, often seen as the most significant turning point in economic policy in the 1970s, were largely a continuation of these policy shifts.  

    As a result of these shifts, and the cooperation of the unions, real wages fell for some time after 1975. Frustration with these constraints on wages, especially in the public sector, led unions to break from their cooperative relationship with the government’s wage policy at the end of 1978, leading to the wave of strikes known as the “Winter of Discontent.” 

    Labour and Thatcherism

    The mixed picture from this record provides material for the two most common narratives about the 1974–79 government: that it was doomed in helpless attempts to maintain the status quo amid the turbulence of economic crisis and union power, and that it anticipated Thatcher by embracing neoliberalism. But given the economic and political difficulties that it faced, the government’s efforts to manage the economic crisis had notable successes. Labour’s position in the polls improved from the second half of 1977 and it led the Conservatives in most surveys at the end of 1978, benefitting from a significant improvement in economic conditions, including a revival in real wages. Far from being hostage to the unions, the government’s close working relationship with union leadership had allowed it to pursue a relatively successful incomes policy until 1978. The explosion of strikes at the end of 1978 was not a manifestation of union leverage over government, but a backlash to the extent of union concessions in the previous three years. 

    To the chagrin of unions, the government had become overconfident in its ability to secure more concessions after several years of wage suppression. Indeed, those in agreement with the common assessment that the Callaghan government had embraced neoliberalism might point to the significant, though nuanced, shift in the distributional impact of government policies after 1975. The wage share of GDP fell and income inequality began to rise from historically low levels in the mid-1970s, at rates that would accelerate significantly under Thatcher from 1979. The government had also implicitly begun to prioritize reducing inflation over reducing unemployment, despite record levels of unemployment that would also, ironically, help fuel Thatcher’s victory in 1979. 

    However, the significance of these turns in government policy is often exaggerated. A year after the IMF crisis of 1976, the government returned to a policy of Keynesian-style reflation in an effort to maintain union cooperation and reduce unemployment, with budgets in 1977 and 1978 that introduced tax cuts in exchange for union wage restraint, and increased public spending in areas such as health, education, and pensions. This contradicts the supposedly historic nature of both the IMF crisis and Callaghan’s speech to the 1976 Labour Party conference, which has been seen as  a rejection of reflationary spending and historic turning to neoliberalism. Rather than a change in policy ideas, it more likely represented a short-term effort to appeal to financial markets, where neoliberal ideas about government spending were increasingly popular. 

    The same can be said of the government’s adoption of money supply targets, which have been seen as a sign of its conversion to “monetarism.” The Chancellor Denis Healey viewed these as largely symbolic concessions to “the monetarist mumbo-jumbo” that were, again, pursued in order to satisfy financial markets.4

    The distributional impact of the government’s policies was also mixed. While it maintained the high tax rates on the rich introduced in 1974, it expanded tax loopholes and did not adjust thresholds in line with inflation, while cutting public spending. But the public spending cuts did not extend to social security benefits, and the government oversaw substantial increases in areas such as health and pensions, while also introducing a new state system of supplementary pensions.5 The design of the incomes policies agreed with the unions, particularly between 1975 and 1977 when there was the highest level of overall wage suppression, was also focused on allowing higher wage rises for lower earners and reducing the level of wage inequality.6

    The 1974–1979 Labour government, then, was neither helpless nor entirely ineffective. Instead of conceptualizing the 1970s as a catastrophic period inevitably leading to Thatcherism, it is better understood as a period of rapid policy experimentation with mixed results.

    Three opportunities

    At least three responses to the crises of the period were on the table: a socialist one from the left of the labor movement, a corporatist one from the Labour leadership, and the Thatcherite one. 

    The socialist response was rooted in a criticism of the postwar system’s dysfunctions and a diagnosis of the 1970s crisis resembling that advanced by proponents of the neoliberal school. The left of the Labour Party embraced the proposals of Stuart Holland, a former advisor to Harold Wilson for the nationalization of a wide range of profitable companies and “planning agreements” that would give the state and unions far more extensive powers over the decisions of major companies.7 A major justification for this approach was that the internationalization of the economy rendered traditional “Keynesian” approaches based on demand management ineffective. Here, Holland and the Labour left argued against the more sanguine view of many on the Labour right, who argued that traditional policies based on redistribution and demand management could still work. 

    Arguments for expanding the state’s role in investment were given further impetus by rising inflation. Labour’s initial response to inflation was focussed on price controls. It was aware of price controls impacting profits, and that new measures would therefore be needed to support investment without depending on private-sector profits. Callaghan argued in 1972 that “if the key control of prices means that there are not sufficient funds available for investment, then we should expect the state to intervene with the necessary funds, perhaps in exchange for some holding—equity or otherwise—in the concern.”8

    This was not the approach that Callaghan would pursue in government. Ideas for an economic strategy based on an extension of state control over investment had essentially been discarded by 1975, and the government instead turned to a policy of seeking to boost private-sector profits. The socialist approach was undermined by its association with the left of the Labour Party—particularly with the personality of Tony Benn—and by a lack of interest from union leaders and members.

    But this does not mean that the Labour government was left with no alternative to Thatcherism. The policies that the Labour government pursued after 1975 did bear many resemblances to the neoliberal turn that took place on an international level in the early 1980s. In particular, they sought to boost profits at the expense of wage share, and retreated from much of the ambitious social agenda with which they came to power in 1974. But there were still very important differences between this agenda and the agenda pursued by Thatcher. 

    To start with, an economic strategy managed through the cooperation of the unions, rather than by crushing them, could not have been based upon the mass unemployment, legislative assault on workplace organization, and devastation of manufacturing through which Thatcherism transformed the structure of the UK economy and labor relations in the 1980s.  The union cooperation that remained central to Labour’s economic strategy would also have required ongoing government concessions in support of the “social wage.”

    Accounts of Thatcherism also often understate the extent to which it depended upon improved economic prospects that were already evident at the end of the 1974–79 government term. In particular, it benefited from increasing oil and gas extraction from the North Sea. Thatcher’s governments used North Sea oil to support tax revenues while overseeing tax cuts that were particularly favourable to the rich, and to maintain energy supplies while suppressing the 1984–5 miners’ strike. Thatcher would oversee the privatization of much of the UK’s energy sector. The 1979 manifesto of the Labour Party, strongly criticized by the left as a rightward turn in party policy enforced by Callaghan, presented a very different picture. It argued that North Sea oil provided an “advantage in securing full employment” and put forward a policy agenda, based on cooperation with the unions, that included higher spending in social services, an extension of public ownership, new training schemes, and moving to a thirty-five-hour work week.

    This approach also maintained within it the capacity for more socialist responses to the crisis, even if those were not pursued. Ideas that any “social contract” should include the democratization of the economy, by extending the role of workers in company decisions, investment, and economic policy, persisted in important parts of the labor movement throughout the 1974–79 government, and would be supported even within the right of the Labour Party until the second half of the 1980s. 

    If the path offered by the left of the labor movement was difficult and unlikely, the path pursued after 1975 by the Labour leadership with its union allies initially appeared much more plausible than the path advocated by Thatcher. If the Labour leadership had been more conscious of the sacrifices that it was demanding from workers during this period, or the trade unions more effective in securing greater concessions before 1978, this perception of the options facing the UK could have persisted into the 1980s.

    Labour governments then and now

    The story of the 1974–79 Labour government is an illustration of the starkly diverging political trajectories that can respond to the same economic pressures in the same moment. The implications of this can also be applied to the current era, and the UK’s new Labour government. 

    Policies now, as then, are likely to involve particularly strong distributional choices in a context of weak productivity growth and high international uncertainty. On top of this, both the current Labour leadership and the leadership of the 1970s seem to be characterized by a general preference for “muddling through” in economic policy rather than pursuing any dramatic new agendas, and an ambivalent position with respect to the distributional choices they face. It follows that, like the Labour leadership in 1974–79, Starmer’s Labour has claimed a rhetorical commitment to some limited forms of industrial policy and public ownership while rejecting more ambitious and strategic proposals for planning, public ownership, and public investment to pursue a comprehensive green transition. Starmer’s implicit promise of a more “normal” and “boring” politics has strong affinities with Wilson’s focus, in 1974, on appealing to the British public’s desire for a “quiet life.”9

    It is here, however, that important possible differences between the governments then and now emerge. For Wilson in 1974, a “quiet life” meant strong cooperation with a powerful trade union movement and with key figures on the Labour left. The 1970–4 Conservative government that it replaced had been undone by its inability to maintain good relations with the trade unions. By contrast, the most notorious moment for the reputation of the recent Conservative governments was not a confrontation with unions, but with the Bank of England and financial markets under Liz Truss. A government in search of a quiet life is most likely to make concessions to those making the most noise.

    The trajectory of the 1974–79 government also reinforces this story. The government was at its most progressive at the start and end of its tenure, when it most strongly felt the need to make concessions to the labor movement. It was at its most regressive in the middle years, when the labor movement was more quiescent and the biggest threat to a “quiet life” was instead financial markets. But the nature of the concessions that it made also varied according to the issues in question. Particularly in the key 1974–5 period, the government was most willing to make concessions on areas that the unions were most concerned about, such as prices, pensions, and labor relations. When it came to extending control over ownership and investment, however, it faced far less pressure, and moved toward a moderate form of neoliberalism as the path of least resistance. 

    The implication of this history is that the direction of economic policy should not be seen as predetermined either by economic forces beyond the control of the UK government or by the ideological inclinations of the Labour leadership. Its distributional choices are crucially dependent upon the strength, engagement, and mobilization of the social and political movements that challenge and engage with it. Its strategic choices about economic policy are further dependent on the priorities of those movements.

  4. Beyond Growth

    Comments Off on Beyond Growth

    “At the election we promised there would be no return to austerity,” Chancellor of the Exchequer Rachel Reeves explained to the British Parliament on October 30. “Today we deliver on that promise.” The remark came halfway through the newly elected Labour Party’s budget message, a statement shaped around the government’s “mandate to restore stability to our economy.”  Prior to the budget, Reeves had been sending mixed messages about how this was to be done. In one keynote speech, she called for a new regime of investment-driven growth, quoting Joan Robinson and Karl Polanyi. Elsewhere, she stuck to platitudes that suggested anything but radicalism. “Just as we cannot tax and spend our way to prosperity,” she said in the message itself, “nor can we simply spend our way to better public services.”

    The headline measures announced by Reeves are encouraging: the Labour Party’s autumn budget is the biggest tax- and deficit-increasing budget outside of major crises for thirty years, comprising over £70 billion of new annual spending financed by £40 billion of tax increases and £35 billion (equivalent to around 1 percent of GDP) of new borrowing. Despite pre-election rhetoric about “black holes” in the public finances, Reeves made space for much-needed public investment by loosening rules limiting the issuance of public debt. The scale of the budget suggests that Reeves recognizes the magnitude of the UK’s problems and has the ambition to confront them—yet it remains unclear whether Labour is capable of reversing the decline of the last fifteen years. Aside from blaming the previous government, Labour have yet to articulate a clear diagnosis for the country’s predicament, let alone a set of solutions. There is little in the detail of the budget that sheds light on how Labour intends to restore the nation’s fortunes.

    Indeed, beneath the headline figures, problems quickly emerge. The bulk of revenue increases come from employers’ national insurance, which is essentially a payroll tax. This means higher costs and job losses for small businesses—not least the private contractors that provide general medical practice and social care to the public sector—unless exemptions are introduced or funding for public-sector providers increased. The bulk of spending hikes are concentrated in the first two years. Few think a return to cuts in the second half of the parliament is plausible, but avoiding these will require further increases in taxes or borrowing, both of which are politically difficult.

    These implementation problems point to deeper unresolved issues. Labour has limited room for maneuver either politically or economically. The electorate is disillusioned and distrusting; Labour’s commanding parliamentary majority masks the fragility of a historically low vote share and the threat of the far right as an emerging electoral force. Labour takes stewardship of an economy battered by fourteen years of Conservative mismanagement. The outgoing administration leaves an unenviable legacy of stagnant wages and productivity, crumbling infrastructure, and a badly underfunded health system. Indicators such as poverty, food insecurity, and even measures of life expectancy and stunting in children, are moving in the wrong direction. ​​The country’s non-fiction best-seller lists tell the story of decline: “How They Broke Britain,” “Failed State: Why Nothing Works and How We Fix It,” and “Great Britain? How We Get Our Future Back.” What are the Chancellor’s prospects of turning the tide?

    Demand deficiency

    Although the economic decline of recent years was driven by austerity, Brexit, and the pandemic, the last decade and a half represents an intensification of previous trends as much as a distinct period with its own set of problems: British economic history is defined by structural continuities dating back at least to the shift in policy that was initiated by Thatcher’s election as prime minister. Since the 1980s, capital investment has declined and, despite upticks, has never returned to post-war levels; income inequality has risen. Despite repeated attempts at deficit reduction since Thatcher, growth in public sector borrowing has persisted. Politicians and the media have repeatedly seized on the deficit as a political battleground, often as a proxy for wider ideological conflicts over the size and purpose of the state.

    In part, deficits are a symptom of demand deficiency: inadequate investment, high inequality, and labor weakness impose limits on private spending, leaving an underfunded and often unwilling public sector as the only buffer against recession and unemployment. Perhaps more so than a deficiency of demand, deficits represent repeated failed attempts to shrink the state via tax cuts: a continuity that, with the exception of the 1997–2010 New Labour era, runs through much of the post-1980 period.

    The ascendance of technocratic macroeconomic policy can also be traced to Thatcher’s era. Her Chancellor of the Exchequer (Treasury), Nigel Lawson, upended the post-war consensus by arguing that the primary objective of macroeconomic policy should be inflation control, while supply-side policies such as deregulation and privatization would ensure growth and employment. In practice, Lawson hitched monetary policy to Germany’s Bundesbank by first “shadowing” the German mark and then joining the European Exchange Rate Mechanism (ERM). Following the UK’s ignominious exit from the ERM in 1992, inflation targeting was introduced; since then, the Bank of England has been expected to respond to inflation by reducing demand and raising unemployment. One of New Labour’s earliest acts upon entering government in 1997 was to formalize this role: the Bank of England was given an explicit inflation-targeting remit and made independent of the Treasury. Gordon Brown, then Labour’s Chancellor, also introduced the UK’s first fiscal rules. Alongside a cap on total public-sector debt at 40 percent of GDP, Brown introduced a classic “golden rule” for fiscal policy—a stipulation that current spending should be matched by taxation over the business cycle.

    Poverty indicators moved in the right direction under New Labour. But the bargaining position of workers continued to deteriorate. Benefits erosion, means-testing, and conditionality—an approach known as “workfare” in the United States—replaced direct confrontation with organized labor. As deindustrialization took hold, weak demand and the absence of an industrial strategy left “flexible” labor markets to fill the gap, supplemented by a public sector whose revenues depended on the precarious growth of the financial sector.

    After fourteen years of Tory rule

    While New Labour repeatedly failed to meet their own public-debt targets, the practice of adjustment by shifting the goalposts on the state of the business cycle appeared sustainable until the cataclysm of 2008. The financial crisis forced the government to nationalize banks and extend broad fiscal support; the deficit quadrupled from 2.5 to over 10 percent of GDP. The national debt rapidly blew through Brown’s 40 percent ceiling, by 2010 reaching around 70 percent of GDP. Conservative politicians and media commentators invoked the example of Greece—then in the early stages of what would become a full-blown sovereign-debt crisis—as an example of what could befall the UK. By the time Brown’s term ended, both major political parties had adopted the position that large cuts in government spending were inevitable.

    The Conservative-Liberal Democrat coalition, with George Osborne as Chancellor, took power amid this torrent of deficit scaremongering. Instead of adhering to what had been conventional macroeconomic policy and allowing the deficit to take the strain until the economic recovery was established, Osborne introduced immediate cuts to government spending. Austerity snuffed out the recovery and the UK entered a long period of historically unprecedented stagnation. Median real wages were no higher in 2024 than they were in 2007. Between 2010 and 2019, productivity growth averaged close to zero. Osborne structured spending cuts so that the least well off (and the least likely to vote Conservative) bore the brunt. The Tories repeated a single message to justify their actions: the only economic indicator that matters is the public debt.

    Osborne also updated Brown’s fiscal rules. The debt-stock limit of 40 percent of GDP was replaced; instead of any particular limit to the government’s debt, there was now a requirement that debt-to-GDP fall within a fixed period of time. Parliament established an Office of Budget Responsibility (OBR) to forecast public borrowing and evaluate the government’s performance against this fiscal rule. Despite repeated Conservative failures to meet their own targets, their message about the importance of limiting the growth of public debt has remained one of few constants throughout the turmoil of recent British political history.

    The resignation of David Cameron following the Brexit referendum of 2016 began a tumultuous sequence which saw another four Conservative prime ministers in eight years: May, Johnson, Truss, and Sunak. Though Johnson moved to raise public investment and ease austerity in late 2019, these changes were overwhelmed in mere months by the onset of the pandemic and the massive fiscal support that it triggered. Debt surged again, now exceeding 90 percent of GDP. In the first budget of Truss’s premiership, with the post-pandemic public-sector deficit still in excess of 5 percent, and with inflation running at 10 percent, Chancellor Kwasi Kwarteng announced tax cuts worth around £45 billion alongside promises of more to come. As government debt markets briefly panicked, Labour took a leaf out of Osborne’s book and turned the tables on the Conservatives: Starmer’s team led with the inaccurate but effective claim that Truss had “crashed the economy.”

    How serious is renewal?

    Starmer’s Labour Party took power committed to an impossible policy offer. Pre-election pledges ruled out increased taxes on “working people”—widely interpreted to mean not only income tax, but also national insurance and VAT—as well as increases in corporation tax. This placed around 75 percent of the tax base out of reach. Labour retained fiscal rules inherited from the previous administration, including a commitment to ensure falling debt-to-GDP on a rolling five-year basis. Despite apparently ruling out increases in either taxes or borrowing, Labour were somehow adamant that there would be no return to austerity in the form of spending cuts.

    Reeves squared the circle with a flexible approach to definitions. Firstly, she argued that employers’ national insurance is a tax on corporations not on workers. This is technically true, but it does not obviate the problems that will be caused by leaning so heavily on this tax. A better option would have been to break an election pledge and reverse the £20 billion cut to employee national insurance implemented in the final Conservative budget. Secondly, Reeves adjusted the definition of public debt by netting off some financial assets, allowing her to spend tens of billions more on investment without breaching the letter of the fiscal rule. Public investment will now remain constant at around 2.5 percent of GDP, rather than declining steadily over the parliament as was the case in the plans Reeves inherited.

    Arresting the decline in public investment is essential to any economic renewal: a return to sustained growth in wages and productivity will be impossible without rebuilding public infrastructure. In isolation, however, public investment will not be sufficient. In that sense, the emerging consensus that higher public investment is the key to growth comes with the risk that this commitment will become an end in itself—as the destination rather than the starting point for public policy.

    One constituency of progressive thought sees persistent demand weakness as the root cause of the UK’s malaise. In this view, higher public investment and expansionary fiscal policy will return the UK to growth via demand-side stimulus. The experience of the US in the wake of Biden’s fiscal largesse provides some support: alongside measures of demand strength such as employment figures, the US has also seen a recovery in productivity. Another justification for public investment, emphasized by more mainstream economists, is that it will unlock growth via longer-run supply-side effects. While both mechanisms—short-run demand stimulus and longer-run supply response—provide important justifications for higher public investment, there are risks associated with each: demand stimulus risks inflationary pressure while the delayed gratification of a supply response may come too late for a weary electorate.

    In the case of demand stimulus, it is difficult to gauge how much supply-side slack remains. Headline unemployment is around 4 percent, a rate not seen since the early 1980s. Inactivity due to poor health has risen since the pandemic. How much can the government increase spending without inflationary pressure emerging? The unknowns are significant. The systematic dismantling of organized labor and the “flexible” UK labor market have ostensibly left workers with diminished bargaining power. Yet during the upheaval of the post-pandemic period, substantial pay rises were awarded in some sectors. If renewed inflation, driven by geopolitical events or climate-driven disruption, interacts with tight labor markets to induce wage and price pressure, Labour’s plans will be derailed.

    Trump’s victory increases this risk. A consensus is forming, perhaps prematurely, that inflation was the decisive factor in handing Trump a second term. Fear that inflation (and its potential electoral consequences) could be triggered by Biden-style investment projects could lead to the scaling back of public investment plans. This would be foolhardy. Nonetheless, Labour faces a difficult balancing act, not on account of the largely illusory threat of bond vigilantes—the much trailed post-election bond market rout failed to materialize—but because of the difficulties in calibrating macroeconomic policy in the presence of low unemployment and ongoing inflation risks.

    This problem will be exacerbated by Trump’s policies: tariffs, deficits from top-end tax cuts, and deportations will lower global growth and raise inflation and interest rates. Prior to Trump’s re-election, the OBR predicted the autumn budget would do little to raise growth, forecasting average real GDP growth rates of little over 1.5 percent annually. Even if, as some critics allege, the OBR has underestimated the effects of higher investment, this is well below the 2.5 percent target that Starmer unwisely selected as a headline policy. These forecasts are now more likely to be revised downwards than upwards. Trump’s election also raises the pressure for increased European defense spending. Lower growth alongside higher defense spending means that even loosened fiscal rules are likely to be breached.

    Safeguarding against inflation

    What should be done if inflationary pressure does emerge? The conventional answer is that the central bank should raise interest rates. The case for the superiority of monetary policy for managing demand was never compelling, but in a world in which inflation is increasingly driven by supply shocks it looks ever less so. High interest rates will constrain investment spending, particularly climate investment characterized by high upfront costs and a long payback period, as well as squeezing working families with mortgages.

    A range of fiscal demand-constraint policies are available, including the use of taxation and household saving incentives. How should these be structured? The progressive answer is that additional revenue should be generated by increasing the contributions of the most well off. However, the structure of tax in the UK is already highly progressive: the top 10 percent by income already provide over half of tax revenues. Thus, while the share of tax in national income is at a historically high level of around 36 percent of GDP, the effective personal tax rate for the average earner is at its lowest since 1975. Further tax increases on average earners will be increasingly hard to avoid if the intention is to raise growth and avoid inflation while sustaining tight labor markets.

    Another possibility, perennially popular among progressives, is that wealth could be taxed. But wealth taxes will do little to constrain demand: their effect is to adjust the relative balance sheet positions of the public and private sectors, as well as the distribution of wealth within the private sector. While wealth taxation could assist in countering the trend towards plutocracy and in fending off the bond vigilantes, its effectiveness as an inflation fighting tool is limited.

    This brings us to the issue of distribution. The UK’s stagnation is not simply the result of weak demand and low investment but also reflects deeper structural problems. The UK is one of the most geographically unequal countries in Europe. High income inequality, rising rentier incomes, and growing wealth concentration act as a drag on dynamism and growth. Debates about the details of Labour’s approach to economic policy—whether we get ten or twenty billion pounds of new investment, whether income tax bands adjust with inflation—currently ignore these underlying problems.

    Questions about the economy’s structure and the broader social contract that underpins it will be central to any serious program to accelerate and sustain British economic growth, or to any program enlightened enough to look beyond growth as a policy target. From this perspective, ambitious design of Britain’s economic policy should go beyond the technicalities of managing the public finances or maintaining stable inflation. Instead, it becomes a question of which groups face challenges to their wealth, power, and influence. Whose income and consumption will be restrained in order to free up resources for higher investment? Is Labour genuinely committed to rethinking the economic model that has held sway for the last forty years, or will it be more of the same but with somewhat higher taxes and spending?

    Perhaps the biggest problem for Labour lies in the fact there are no easy short-run solutions. National renewal takes time: the legacy of the last fourteen years will not be overcome in a single parliamentary term. With a restive electorate and a hostile media, it is not clear whether Labour will be allowed the time it deserves. If it is to win a second term, Labour needs a narrative about how it is improving peoples’ lives. Beyond a misguided freeze in fuel duty, there is little in Labour’s budget that can be sold as offering immediate relief from the cost of living crisis. Indeed it is hard to think what could be done, at least without more radical redistribution policies. Yet without such a narrative, Reeves’ efforts are likely to be in vain.

  5. The Florida Frontier

    Comments Off on The Florida Frontier

    In the evolving lexicon of the 2024 US Presidential election, Florida has stood for the ultimate “weird” of American politics—a place where legislation and executive action revolve around book banning; state protection of embryonic heartbeats, rather than Medicaid expansion; the growth of private education at the expense of public-school enrollments; and allegations of cultural subversion against not only the public school districts but even the Walt Disney Corporation. Under Ron DeSantis, a contender for the 2024 presidential nomination, Florida has presented a cohesive political identity—one which has oriented the Republican Party nationally in recent years.

    In 2023, DeSantis tasked Christopher Rufo, a right-wing political operative, with reforming the state’s higher education system against the “woke” ideologies of critical race theory (CRT), diversity, equity, and inclusion (DEI), and “gender insanity.” Rufo was notably one of the masterminds behind the 1776 Commission, the Trump White House’s attempt to reinstitute a “patriotic education” in response to the growing popularity of critical history along with the Black Lives Matter movement. “This malign ideology is now migrating from the fringes of American society and threatens to infect the core institutions of our country,” reads one of the Trump Administration’s executive orders on education from 2020. 

    Thus far, the right’s war on “woke” ideology has found its greatest success in Florida, and it is again contesting power at the national level under a reinvigorated Trump campaign. The state has emerged ahead of the rest in offering a new vision of capitalist society—one that, at the state level, can serve either a second Trump administration or launch a vision of defiant independence following a second Trump defeat. 

    In Florida, “the last frontier state East of the Mississippi,” DeSantis’s right-wing ideological project is intertwined materially with the private economic interests ultimately buoyed by state finances. Dominated since the Second World War by a latifundia of large landowners, the structure of Florida’s economy today is a hypertrophied version of national growth patterns: real estate, leisure, hospitality, and healthcare.1 Low-wage employment in these industries, funded by inflated assets and out-of-state incomes, characterizes the state economy and explains its highly unequal growth. The Economic Policy Institute found that the top 1 percent captured 77.5 percent of all income growth in the state between 2009 and 2015. Since the pandemic, the state has been the largest recipient of US internal capital flight: oligarch donors, including Jeff Bezos, Ken Griffin, Carl Icahn, have fled Chicago, San Francisco, and New York. Unlike Texas, its sister state across the Gulf of Mexico, Florida’s internal power structure appears unusually united in its common project to gain power through appealing to international flight capital and to hold it through the ideological content of public education. 

    Culture and education are integral to this beacon of financial and real-estate power, something that the Italian theorist of fascism Antonio Gramsci understood exceptionally well. As the culture wars have grabbed national and international headlines, the rapid growth of government-funded private and religious schools has transferred vast amounts of public money into corporate hands, further consolidating the state’s project of education reform. 

    Both the southernmost continental state in the United States and the last to be inhabited en masse, Florida is, in Gramsci’s terms, a classic example of the “Southern Question.” It represents capitalism’s great anti-revolutionary puzzle—a political and economic location where landowners, rentier capitalists, and organic intellectuals play an outsized role in support of right-wing projects. In the case of the US, this southern state may well be a harbinger of what’s to come elsewhere. 

    The FIRE economy

    Historically an Elba of disgraced and exiled politicians, Florida is and has always been a hub of vice dollars. Until the mid-twentieth century, Florida’s economy was seasonal, barely industrialized, and based on a relatively recent expansion of agriculture and other transient service transactions, such as tourism. As in all southern economies, integrated into the world economy via primary commodity trade, Florida agriculture was hit hard by late-twentieth century expansion of world trade and NAFTA. By the early 2000s, the Florida sugar industry was exposed to a dual crisis: sugar cultivation was causing a massive environmental disaster in Florida’s main supplier of drinking water—the Everglades—while simultaneously experiencing potential reduction in prices. Federal subsidies enabled sugar agriculture to survive, but it was increasingly perceived as an economic albatross by Florida politicians of both major parties. Today, agriculture contributes to the state’s GDP just slightly more than 0.5 percent (see below) and the loss of agricultural land to real-estate development is estimated at 120 acres a day. 

    At the same time, Florida has experienced massive population growth, especially since the 1990s, to become the fastest growing US state in 2022. Driven by snowbirds, immigration, and plentiful low-entry jobs, the demographic expansion has profoundly transformed the structure of Florida’s economy, shifting emphasis from agriculture and tourism to finance, insurance, and real estate (FIRE). At the same time, employment is concentrated in low-wage sectors (see chart below). While the global financial crisis of 2008 had devastating effects in the last of these—Florida had the second most home foreclosures among all American states—the hit to residential real estate became an opportunity for global capital, primarily from Brazil and Russia. Outside state investment accelerated during the coronavirus pandemic, as Florida received nearly four times more in the value ($39.2 billion) from within the US than Texas ($10.9 billion), which ranked second. Most of that capital came from New York, leading to forecasts that Miami might eventually emerge as the US’s largest and most important financial center. 

    However, the resilience of Florida’s real-estate market in the face of frequent natural disasters reveals that its public sector is something more than a passive night watchman. With 76.5 percent of its population in coastal areas, Florida is exceptionally exposed to the rising sea levels. Miami is expected to become “the most vulnerable major coastal city in the world,” with billions of dollars in property at risk. One study estimates that a predicted increase in wind speeds may cause $200 million annually in storm damage alone in Miami-Dade County by 2035. Yet rather than flee this imperiled property, passive investors swarmed Florida real estate: it has by far the highest number of properties in real estate investment trusts (REIT) in the United States—more than 60,000. FIRE industries now account for 25 percent of Florida’s GDP, whereas the national share is 20 percent. The sector has been able to expand thanks, in large part, to federal and state subsidies for the insurance industry. Thus Florida’s most valuable real estate continues to be concentrated and built in coastal regions. 

    There are no state capital gains taxes on property sales, because there is no individual income tax. Now, in addition, Florida’s financial sector has formal legal protection against any shareholder claims that could be construed as being motivated by the “environmental, social, and governance” (ESG) movement. DeSantis was one of the Republicans who promoted the narrative that the collapse of the 2023 Silicon Valley Bank was due to its preoccupation with diversity and social responsibility. This in turn helped him to push through a new law in May 2023 “barring state officials from investing public money to promote environmental, social, and governance goals, and prohibiting ESG bond sales.” The bill that “de-banked woke capitalism” prohibited financial institutions from making economic decisions on the basis of “the corporatist environmental, social, and corporate governance (ESG) movement,” which he described as “a worldwide effort to inject woke political ideology across the [normally apolitical] financial sector.” “Florida will continue to lead the nation against big banks and corporate activists,” DeSantis said signing the bill, pledging to combat those who “inject woke ideology into the global marketplace, regardless of the financial interests of beneficiaries.”

    Finally, Florida’s healthcare industry, which in 2021 contributed 9.7 percent of the state’s GDP, is heavily dependent on federal dollars. Florida had the highest Medicare expenditures per beneficiary in the United States in 2020. This is in part due to the industry’s lax standards: Florida’s hospital chains are notorious for excessive and unnecessary medical testing. The money flows from the state to private providers in other nefarious ways, too. Florida’s former Governor and current US Senator Rick Scott, for example, was fined in 1997 for Medicare fraud when he ran a privately-owned for-profit chain of hospitals. Once in office as Governor, Scott pushed for mandatory drug-testing, introducing by law a permanent increase in demand for the medical product provided by, among others, his wife’s company Solantic. (The Scott family eventually sold their shares of Solantic).

    From battleground to Red state

    Talk of protecting Floridians from the “woke ideology” of the liberal-corporate alliance is now commonplace among figures like DeSantis and Scott. What exactly is it that needs protection? Ever since the disputed US Presidential election of 2000, when the Supreme Court decision halted an electoral recount in Florida and delivered victory to the Republican nominee George W. Bush, Florida has been on the trajectory toward one-party domination.

    Its politics are intimate and cliquish. Jeb Bush, George W. Bush’s brother, was famously Florida’s Governor at the time of the contentious 2000 election. The Bush family’s ties to Florida ran deep within its fragmented, fluid polity and small elite circles. As New England Brahmins, the Bushes were at home in frontier states, whether Texas or Florida, where they spun public-private partnerships bridging state and personal interests: defense and oil, national intelligence and special operations, agriculture and finance. Their family fortunes and political careers exemplified the way American capital, which had been concentrated in the East and Midwest, post-1960s latched onto the Sunbelt states to secure its reproduction in times of crises. 

    Thus, in 2000, Katherine Harris, Jeb Bush’s Secretary of State, a daughter and granddaughter of Florida’s most influential agribusiness families, oversaw the election and the recount. While the recount was underway, Roger Stone, an infamous Republican operative, staged the so-called “Brooks Brothers Riot” in Miami: a group of sharply dressed protestors, all men, broke into the election office, where they screamed, shouted, and jostled, demanding to stop the recount in Miami-Dade County. Twenty years later, political observers would draw parallels between the election chaos of 2000 and the January 6, 2021 insurrection, which was again directed by Stone, but this time with the aid of his old friend and new client, the forty-fifth US President Donald Trump. Florida’s GOP donors, militants, and extreme-right wing organizations played an important role in that attempted coup. Subsequently, the defeated Trump returned to his Palm Beach residence Mar-a-Lago, a “Winter White House” willed to the US government by the heiress to the Post Cereals fortune during the Nixon administration and accepted a month before his resignation. 

    In the decades since 2000, Florida politics shifted from an important “battleground state,” to a “swing state,” to a “red state.” In the electoral season of 2018, when all major political offices—state and federal—were won by the Republican party, Florida became a de facto one-party state with a disproportionate influence on American politics. This was the year when DeSantis won the governorship with the narrowest of the margins. 

    Christopher Rufo, ideologue of the current Republican assault on higher education and DeSantis’s associate, readily acknowledges explicit influence of interwar theories of fascism, specifically Gramsci’s, on his own political thought and actions. A son of an Italian immigrant to the United States, Rufo spent years in a left-wing village his father had grown up in. His understanding of the Gramscian left, he says, may be a “part of the way I’ve been able to kind of flummox some of my critics, and some of my opponents. In a lot of ways, I know their own language better than they do, and so I bring a different sensibility.” DeSantis’s re-election campaign in 2022, accordingly, built on decades of racism, gender-discrimination, conservatism, and anti-Communism in Florida to define what he called an “anti-woke” platform. In his acceptance speech, DeSantis declared to the cheering audience that “Florida is where woke goes to die.” 

    A cornerstone of this politics has been the legal division of the labor market to preserve employer power over a largely immigrant workforce. In 2023, this reached a national milestone with DeSantis’s signing of an E-Verify law to require registration of employment to prevent the hiring of undocumented immigrants. It is on the basis of this apartheid labor market that Florida is consistently ranked as the “top state for construction” by American Builders and Contractors’ Meritshop Scorecard, exceeding both by value and growth rates the US averages. Residential construction is the most significant contributor to that growth, hovering at around 5.6 percent of the state’s GDP and close to $90 billion annually.

    Education as the new frontier

    In this constellation of political and economic power, public education plays an exceptionally important role. It is a material and ideological nerve of the state. The education sector enables not just ideological repositioning of the state and its capital, but also the siphoning of tax-dollars and their redistribution to private interests, from charter schools to construction industry and real-estate developers who benefit from capital investment projects and housing projects near colleges and universities. This, it is important to note, is not simply a multiplier effect: rather, education serves as a vehicle for other profit-making enterprises. 

    After general government, education is the second largest public sector in Florida by the number of employees and budget size. State expenditures on K–12 education are twice the size of expenditures on higher education, which remains more dependent on state funding than comparable state university systems in the US. Tuition rates in Florida are the lowest in the country. The top 10 percent of high school students are also eligible for Bright Futures Scholarships, funded by the Florida Lottery. Since Bright Futures also cover tuition, the state has vested interest in keeping tuition rates low and graduation times short. The symbiotic relationship between K–12 and the university system ensures that local governments provide significant contributions to higher-education budgets by providing college credits via AP, IB, and Cambridge programs, which the university system is obliged to recognize. Since high-school students can use these credits toward their college degree, that too is a way to cut down on their time in college.

    Jeb Bush, who led the state from 1999 to 2007, laid the groundwork for major educational reforms and the state takeover of public education seen today. Self-described as the “Education Governor,” Bush pursued the centralization of higher education, now entirely controlled by the Governor’s Office. He championed high-stakes testing in public schools, performance-based pay for K–12 teachers, and a vast expansion of the charter school system. In higher education, Bush and his appointees amplified attacks on the tenure system and perpetually underfunded the university state system, excluding its employees from pay raises granted to other state employees. The practice has been carried on by all Florida Republican governors ever since.

    Florida was also one of the early adopters of “performance funding,” which has gained national importance over time. The state university system’s Board of Governors distributes hundreds of millions of dollars to its universities based on the “measurable outcomes, ”including the percent of bachelor’s graduates employed, average wages of graduates, degree costs, and the six-year graduation rate. The metrics do not include any of the usual assessments of faculty research productivity—grants, publications, or reputation. Instead, they reward “diploma mills” and potentially work against research universities, which often have higher degree costs. Indeed, in Florida performance evaluations, the highest ranked institutions are often Tier 2 schools rarely mentioned in other national rankings.

    The push to online teaching after 2008 demonstrates how public money is transferred into private hands. In 2013, the University of Florida (UF), the state flagship university, was required by state legislators to trade its hard-fought pre-eminence status for a commitment to establish a series of low-cost and strictly online baccalaureate programs. The reorientation to online education was propelled by what Diane Ravitch has called the “Educational-Industrial Complex”: a mix of Silicon Valley start-ups, venture capitalists, tech giants, and textbook publishing behemoths looking to profit from the sale of educational hardware and software, as well as state legislators interested in slashing budgets for public education. The legislature mandated that the Advisory Board for UF Online also include one member with “expertise in disruptive innovation” appointed by the state Speaker of the House. 

    Allegedly forced into a corner by pressing deadlines, the university contracted with Embanet, an Orlando-Florida based subsidiary of Pearson, to create online majors and boost recruitment. Though the contract was terminated in 2015, had it been seen through, it would have earned Pearson-Embanet as much as $186 million over ten years. Fast-forward to 2020, when instead of promoting online education amid the coronavirus pandemic, the Board of Governors ordered a return to in-person teaching. This shift was likely driven in part by the concerns of real-estate developers, over-represented on university boards, that their housing units near colleges and universities would be left empty if online instruction continued for too long.

    Revelations that Ben Sasse, DeSantis’s pick as the former UF President and former Republican Senator from Nebraska, spent nearly four times more public dollars in his eighteen months in office than his predecessor shocked even the Governor’s office. According to the UF student newspaper, Sasse “channeled millions to GOP allies,” hiring his former staffers from Washington, doubling their salaries, and allowing them to work remotely. But in the context of Florida politics, Sasse’s extravagance may be just the tip of an iceberg. Indeed, says the latest Florida TaxWatch Budget Turkey Report, “any sheepishness about attempting to ‘bring home the bacon’ seems to have disappeared in the last legislative session.” Meanwhile, state and local contributions—despite buoyant revenues due to the booming economy—have dwindled to just 6.5 percent of the GDP.

    The Florida model

    The past two decades of state economic transformation have put forward the notion of a distinct “Florida model”: the FIRE economy anchored via healthcare and education, with continuing growth dependent on population expansion. But this model may be starting to crack. Miami is now one of the least affordable cities in the United States, and Miami-Dade County is only second to New York in terms of the gap between the haves and have-nots. According to the Tax Inequality Index, Florida has the most regressive tax system in the United States. This may be a magnet for the rich—Florida is now home to 10 percent of US households worth $30 million or more—but it is also a major driver of inequality, which is further compounded by gender and race: an already low labor participation rate in Florida is even lower for women and African American workers.

    The state’s own Office of Economic and Demographic Research fears that the population growth will slow down. Boomers are retiring, birth rates are declining. Climate change, despite denials, is driving insurance prices through the roof. Since 2017, Florida has been hit by no less than 10 catastrophic hurricanes, prompting even Florida Republicans to consider them the focus of their future politics. The state’s wager that Florida will always be a safe haven for fleeing capital may not continue in perpetuity. 

    None of this, however, means that the state’s attempt to mold education to the ideological and material needs of speculative capital will come to an end. Education remains central to elite and capital reproduction. The interventions by investors and hedge-fund managers into Ivy League institutions clearly demonstrate that once heralded pillars of the knowledge economy are now perceived as woke enemies, far beyond Florida. Education will remain a key frontier for the Right in years to come. 

    Big capital has publicly proclaimed its future in the Florida model. Regardless of the election results, the new Right in Florida has planted a flag signaling the future direction of US politics and business. This is a future in which the private oligarchies of corporate America and speculative capital will be unencumbered from public authority, which they have maligned as a “woke” attack on the white middle-class, a progressive and radical “anti-family” ideology.

  6. Debt’s Political Fix

    Comments Off on Debt’s Political Fix

    The victory of Anura Kumara Dissanayake in September’s Sri Lankan presidential election shocked the world. Dissanayake comes from the Janatha Vimukthi Peramuna (JVP)—the party of the rural poor youth behind two bloody insurrections in 1971 and 1988–1989, the latter of which led to the deaths of between 40,000 and 70,000 people. The JVP’s leadership was physically destroyed in the last insurrection, but over the past few decades, the party has rebranded itself in the political mainstream by forming a broader coalition, the National People’s Power (NPP), consisting of fragments of other left parties and professionals. The NPP wooed the middle classes with promises to end the corruption of previous administrations, blaming them for Sri Lanka’s first and only default on external debt. After an unprecedented external debt crisis, the resultant shortage of imported essential goods, and tremendous protests two years ago, the NPP won its historic bid to capture state power.

    Unlike his predecessors Gotabaya Rajapaksa and Ranil Wickremesinghe, Dissanayake does not belong to a known political family, and his party does not come from a lineage of ruling parties. Having campaigned and failed with a meager 3 percent of the vote in 2019, Dissanayake’s rapid accession to power from obscurity has generated a wave of great expectations for reform in the island nation. Despite its popularity, the NPP has yet to deliver a clear economic platform; the party’s success was mainly borne from anti-corruption discourse and an anti-incumbent call for change. Therein lies the NPP’s political challenge: the new government must meet voters’ economic aspirations without having prepared them for the country’s economic trajectory, with an ongoing depression likely to last for years.  

    A stealthy maneuver led by the International Monetary Fund (IMF) and the creditors has further imperiled these aspirations. Days before the election, Wickremesinghe entered into two agreements to restructure a portion of Sri Lanka’s $37 billion in external debt: $12.5 billion with private bondholders and $3.3 billion with the China Development Bank. Before the new government had even fully formed, the hopes of a more just and sustainable resolution to the ongoing debt crisis were dashed—the IMF and the creditors insisted that Dissanayake accept an unfair bond deal. The Finance Ministry has announced that the deal would be finalized within two months, and Dissanayake’s publicized efforts to renegotiate the terms has since shaped the early days of his government. This politically brokered debt resolution is not only likely to lead Sri Lanka to another default, but it also constrains future development and growth, not to mention the hope of social improvement.

    Sri Lanka provides many lessons for similar small states swayed by the glacial shift of a mounting debt crisis in the 2020s. The unfolding consequences of the long drawn financial crisis of 2008 and the post-pandemic years of global unraveling with wars and economic volatility have undermined financial stability, while nonetheless prolonging the hegemony of finance capital. The 2020s are proving to be the decade in which the lethal power of great nations is destabilizing the international order. The architecture of elite financial extraction is now showing signs of stress. 

    It is amid these geopolitical tensions and conflicts in places as far as the Middle East, Africa, and the Indian Ocean that a broken financial order finds political fixes against the desperate resistance of people long trammeled by its exploitation. In these moves to reassert dominance, the main protagonist is now again the IMF. The Fund has managed to muscle smaller states—whether it be Ghana, Zambia, Kenya, or Sri Lanka—into its programs of further liberalization.

    The IMF claims that the debt crisis is one of liquidity, requiring money thrown at the problem, rather than one of solvency, compelling debt forgiveness that should be absorbed by losses to the financiers. In Sri Lanka, this political fix is forcing a new government elected on the promise of change to accept the IMF’s debt restructuring program. A country that two years ago defaulted on its debt for the first time in its seventy-year history has now been set on a path of repeated debt crises. 

    Crisis and the IMF

    Sri Lanka’s economic crisis had been long in the making, going back to liberalization policies in the late 1970s, and accelerated by a second wave of neoliberal policies after the end of its civil war in 2009. During the pandemic, foreign remittances and tourist earnings came to a halt, depleting Sri Lanka’s foreign reserves. In early 2022, commodity prices rose with the war in Ukraine, and the Sri Lankan government, unable to roll-over its external loans, defaulted on its sovereign-debt payments. Fuel and food shortages due to lack of foreign exchange for imports, as well as anger at the Rajapaksa government’s corruption scandals, sparked sustained protests. President Gotabaya Rajapaksa appointed Ranil Wickremesinghe as Prime Minister in May 2022 to distance himself from his family in power. When protestors finally chased away Rajapaksa, the parliament dominated by his party appointed Ranil Wickremesinghe as President in July 2022.

    In early 2022, amid this political and economic crisis, Sri Lanka turned to the IMF and began implementing its recommendations. Following an unprecedented default in April 2022, the government publicly called for immediate IMF support including debt restructuring, but it was only in March 2023 that the Executive Board of the IMF approved the Extended Fund Facility (EFF). The IMF claims that the EFF program is meant to encourage growth and debt sustainability, but the measures imposed are familiar: they prioritize repayments to creditors and placate international financial capital. In order to reach the IMF’s goals, the EFF program set two major targets. 

    The first target is a high Primary Budget Surplus—government revenues minus expenditures excluding debt payments—of 2.3 percent of GDP. This encourages high taxation, including on essentials, to raise revenue, in addition to austerity measures that burden those already reeling under an economic crisis. This high budget surplus target does not allow stimulus for growth during a devastating economic depression. Many prominent economists have vehemently criticized this target, which is 3 percentage points higher than Sri Lanka’s best-performing peer countries.1

    In effect, the IMF demands that the Sri Lankan people tighten their belts to be able to repay private creditors. This comes at a time when households are spending more than 60 percent of their total expenditure on food, resulting in insufficient funds to cover other essentials, including healthcare, education, and utilities.2 IMF conditionalities have introduced market pricing for energy, leading 1.3 million households to suffer cuts to electricity service and reducing the country’s fuel consumption by 50 percent. Total cement consumption dropped by 32.5 percent, evidence of the contraction in the construction sector.3 This sector typically employs informal workers, particularly during the off-seasons in agriculture and fisheries, providing much needed household income. Amid this severe economic contraction,4 the IMF also expects the government to reduce public spending necessary to provide relief to the people.5 

    Secondly, the IMF demands debt restructuring with creditors to achieve debt sustainability. The IMF’s Debt Sustainability Analysis (DSA) combines both external and domestic debt, even though it is external debt that Sri Lanka defaulted on due to lack of foreign exchange. If domestic debt were considered separately, the government would have room for deficit financing by borrowing locally in rupees. Indeed, such domestic borrowing is necessary to stimulate growth through state investment. The domestic debt restructuring process, pressured by the powerful international creditors, will dispossess working people of close to half their retirement funds over the next decade and a half. 

    The IMF’s analysis assumes that the country can spend 4.5 percent of GDP in external debt servicing each year after the end of the IMF program in 2027. This could be as high as $4.5 billion in 2027 and greater each year following, equivalent to 30 percent of government revenues and utilizing 30 percent of export earnings for payments in foreign currency. Furthermore, the IMF has set the goal of borrowing from the international capital markets, the equivalent of 1.8 percent of GDP in new International Sovereign Bonds each year after the program. That means about 40 percent of the external debt servicing will depend on new bonds, which are likely to be extremely high interest loans—given the high level of total debt stock at that time amounting to 95 percent of GDP and given the recent history of default. The reality is that Sri Lanka may not be able to float such new bonds at repayable interest rates. If another global shock increases the import prices of essentials such as fuel, Sri Lanka is likely to default again in the years following the IMF program.

    Regime change and the bond deal

    The IMF program worked through its logic of austerity and dispossession under the authoritarian regime of President Ranil Wickremesinghe, which unleashed tremendous repression against protestors to push through stabilization policies. For two years afterwards, Sri Lankans waited patiently to bring about change through the presidential elections. The election of President Dissanayake signals that the country’s working people are demanding an end to their hardship.  

    In the weeks before Dissanayake’s election, the international press had labeled him a Marxist, even though his party had moved to the center since the 1990s. Western discourse claiming that a Marxist could not run an economy or work with the IMF placed political pressure on Dissanayake to embrace the Western view and swallow the IMF program. After his inauguration, diplomats and international officials meeting the newly elected President, among them representatives of international financial institutions like the Asian Development Bank (ADB) and the World Bank, conveyed the same message. During these visits, Krishna Srinivasan, Director for the IMF’s Asia Pacific Department, emphasized that Sri Lanka needed to protect its “hard-won gains” through the IMF program in order to gain further funding. 

    In parallel to such discourse around the elections, a more sinister process of negotiations was underway between bondholders and the previous government. Desperate to win the election, the Wickremesinghe government reached an Agreement in Principle with bondholders just two days before the presidential election. Wickremesinghe’s gamble was that the triumphant claim of lifting the country out of bankruptcy would draw votes.

    The election thus worked in favor of the creditors, if not for Wickremesinghe. The IMF succeeded in extracting obligations—high external debt servicing and total public debt to GDP targets—from Sri Lanka’s weak negotiating position before its own political process could reflect public opinion. Although Sri Lanka is currently in default and will not be repaying debt to private and bilateral creditors, as per the current IMF program, the recent deal will lead to issuing bonds to cover past due interest with repayment during 2024–2028.6 There is only a small reduction in the debt stock, from $12.55 billion to $11.83 billion.7 In addition, a consent fee of 1.8 percent is also set to be paid up-front. With interest payments of $1.7 billion on overdue bonds over the next three years, the bond deal burdens Sri Lanka with a future of unsustainable debt. 

    Yet most egregious are the instruments that will lock Sri Lanka into this future: “Macro-Linked Bonds” (MLBs). This external debt restructuring agreement arbitrated by the IMF and championed by countries such as India, which early on provided financial support to Sri Lanka for the purchase of essentials during the foreign exchange crisis,8 ensures that the bondholders earn much higher profits when the performance of the economy improves: payments of additional or less principal and interest based on indicators such as GDP growth. For Sri Lanka, the MLBs will require more in principal and interest payments to the bondholders over the next decade if the GDP in dollar terms grows higher than the IMF set targets during 2025–2027. The country will be punished if rapid growth or local currency appreciation lead to a higher dollar GDP. 

    Myth of the IMF bailout

    This shameful bond deal has been characterized as a necessary step of the IMF “bailout,” which would ultimately lead Sri Lanka on the path of prosperity. In almost every developing country, an IMF program is dubbed as a “bailout.” But what does such a bailout entail? 

    Firstly, under the EFF program, the IMF is providing Sri Lanka with $3 billion—peanuts compared to the foreign earnings of the country. On monthly terms, the so-called bailout amounts to just $60 million until 2027. Meanwhile, Sri Lanka’s foreign earnings every month now amount to around $1.8 billion, accruing from exploited workers generating foreign earnings through garments and tea exports, migrant remittances, and tourism. Clearly, this is not a bailout! 

    Secondly, the interest Sri Lanka will be paying to the IMF in the next ten years amounts to $2 billion.9 The IMF’s annual interest rates until recently for a country like Sri Lanka was a minimum of 5.104 percent and can go as high as 8.604 percent with disbursements.10 In October 2024, in response to sustained campaigns by progressive economists and international actors, the IMF announced a reduction to some of its surcharges, meaning that interest rates are likely to come down in the future.11

    While the bondholders, made up of the hedge funds and other financial institutions, have shafted Sri Lanka with extractive annual interest rates on the order of 6 percent to 9 percent, the IMF is also culpable, as the Fund’s support is contingent on Sri Lanka capitulating to international bondholders’ proposals for debt restructuring. Furthermore, as an arbiter of debt restructuring, the IMF refuses to restructure sovereign debt owed to it. There is clearly a conflict of interest in the IMF’s role as a lender and an arbiter. Indeed, there are few checks and balances in existing global institutions controlled by the US.

    With austerity measures undermining production and growth, the IMF’s proposal to exit the crisis is also flawed. These powerful economic actors argue that the fickle tourism sector is the remedy for economic misery. When all other forms of economic development fail, tourism—dependent on both imports and patrons from wealthy countries—is the catch-all solution. 

    Those in favor of the IMF program argue that it will unlock funds from other multilateral institutions, such as the World Bank and the ADB, as well as other bilateral creditors. However, such funds are often tied to infrastructure, including tourism-centered development, as well as other projects that in Sri Lanka’s recent history have failed to provide returns. Major projects, including highways and ports, characteristic of the high growth and debt-splurge years a decade back, have not led to the promised increase in production, but rather economic trouble. 

    Widespread debt distress and alternatives

    Sri Lanka is one of over seventy developing countries currently in debt distress. In the late 2000s, many countries in the global South were enticed into borrowing from the international capital markets where, like in Sri Lanka, they began floating high interest International Sovereign Bonds. This was a time when global financiers needed markets to provide high returns with near zero interest rates in the West due to the Global Financial Crisis. In Africa, for example, the 2014 Africa Rising conference between the Government of Mozambique and the IMF, with its exuberant projections of high growth in the continent, led to a spree of borrowing. In countries like Sri Lanka, the IMF encouraged commercial borrowing, with their DSAs warning nothing about the consequences. 

    When countries become entrapped by such borrowing, bondholders—alongside a complicit IMF—find innovative ways to avoid debt relief. The MLB experiment in Sri Lanka may become the norm in future debt resolutions, ensuring accelerated repayment to the creditors. Sri Lanka’s recent Agreement in Principle also allows for the law underlying the contracts to be moved to another jurisdiction to avoid constraints by legislators to ensure debt restructuring in favor of the debtors. While 50 percent of sovereign commercial borrowing is under New York law, and with moves towards a new Sovereign Debt Stability Act to restrain bondholders, the Sri Lankan agreement provides for change of jurisdiction to Delaware or English law.12

    Repeated defaults across the world have instilled little confidence in the IMF approach to debt resolution. The current wave of debt distress in the 2020s is now being dismissed as one of a liquidity crisis as opposed to a deep-seated solvency crisis that requires extensive debt forgiveness. Amid periods of social uprising and political strife that often are the result of the IMF’s own policies, political fixes like the one seen in Sri Lanka are being deployed across the global South, delaying a long-term remedy. The burden is ultimately transferred to the working people and concealed by a “bailout.” Backed by the IMF, bondholders, and domestic elites, these political fixes push democratically elected governments to accept regressive deals, locking them into a future of external constraints undermining national economic policy-making.  

    To avoid repeated debt crises, a reformed global financial system must adopt new avenues for development financing. Will regime changes in countries like Sri Lanka result in more political fixes, with powerful international actors ganging up against smaller states? Or could such democratically elected progressive regimes finally form a global South debtor’s coalition to challenge the IMF and the creditors?

  7. “Greenwashing” Structural Adjustment

    Comments Off on “Greenwashing” Structural Adjustment

    In a global financial system underpinned by the US dollar, the Federal Reserve’s interest rate hikes can push much of the global South to the brink of a full-blown debt crisis. The exposure of Southern countries to such external risks, as well as their need to incur dollar-denominated debts, result from an uneven and broken international financial architecture. How this crisis unfolds could have lasting consequences for the global energy transition. Not only does debt limit a country’s ability to finance an ambitious climate agenda, but now, it also makes the institution often at the center of debt negotiations—the International Monetary Fund (IMF)—increasingly relevant for global climate policy. 

    Countries of the global South have few options for dealing with debt distress. Seeking relief generally means that the debtor nation must enter into an IMF agreement, and most negotiations around restructuring rely heavily on the IMF’s debt sustainability assessments. Support from the IMF comes with strings attached. Its programs carry strict policy conditionality and impose harsh austerity measures, demanding its borrowers undergo “structural adjustments.”

    At this time, forty-four countries have an IMF program in place. Many more could follow soon, given that roughly two-thirds of low- and middle-income countries are at risk of debt distress. This could expand the influence of the IMF on the policy agendas and economic frameworks across the global South to levels not seen in decades. The IMF’s inclusion of climate-related conditionality and policy advice could cement its new role at the forefront of global climate policy, dictating the course of the green transition for its borrowers and beyond. 

    The global debt crisis of the 1980s, which followed the Volcker shocks, created the conditions for the IMF to usher in an era of structural adjustment programs and impose the “Washington Consensus” policy package onto large parts of the world, severely hampering long-term development prospects. Though in recent years there have been shifts in the IMF’s rhetoric, little has changed in terms of the policies imposed through its lending programs and the frameworks that underpin them. Rather than acting as a fair arbiter in a debt-resolution mechanism, the IMF is an enforcer on behalf of creditors, with its adjustment programs prioritizing debt repayment over the welfare of the population. 

    When it comes to the IMF’s climate agenda, those calling the shots represent the same group of countries that bear the responsibility for causing the climate crisis. The policy agenda put forward risks allowing large, historical polluters to eschew accountability, thus dashing the hopes for a just energy transition. Without other reforms to its governance structures and frameworks, how can the IMF’s climate agenda move beyond “greenwashing” its austerity framework? 

    Financial subordination and debt traps

    The build-up of unsustainable debts in the global South is a core feature of the uneven international financial architecture. In a system that operates mostly in US dollars, and where most trade and cross-border transactions take place in dollars, many countries in the global South are forced to take on dollar-denominated loans from northern creditors. Shifts in financial flows, generally triggered by events outside the control of borrowers can result in solvency issues and debt crises. In 2022, external debt service costs for developing countries exceeded $443 billion, doubling from the previous year due to higher interest costs triggered by the Federal Reserve’s monetary tightening. 

    Over 3 billion people live in countries that spend more on interest payments to their foreign creditors than on health and education. Yet so far, only a handful of countries have formally sought to restructure their debts, as the rest continue to service debts, often long after it becomes clear that doing so is unsustainable. For countries that can no longer keep up with their debt payments, turning to the IMF is generally the only option. Countries often delay this step—even when it means they might be unable to pay salaries, as was the case in Kenya and in Nigeria, where in 2022 almost all government revenues were being spent on debt service.

    The imbalance of power within global governance structures has enshrined a system that severely limits the fiscal and policy space for countries in the global South. The climate crisis further compounds these problems. The growing debt burdens of countries in the global South make it difficult for these countries to prioritize investments in support of their climate and development goals, as well as to finance necessary public services.

    The climate finance provided by countries in the North primarily comprises additional loans. Of the $100 billion yearly that wealthy countries committed to “mobilize” for climate finance in 2020, 73 percent has been delivered in the form of additional debt. At the same time, financing gaps to meet climate targets and achieve the Sustainable Development Goals (SDGs) continue to widen.

    Countries become trapped in a vicious cycle that keeps them indebted, perpetuates underdevelopment, and increases vulnerability in the face of shocks. Growing debt burdens—which force an even larger share of revenue to be directed toward debt service—erode governments’ capacity to invest in resilience. The cycle becomes difficult to break, as has been the case in Chad, Suriname, and Ecuador, which have become reliant on extraction and fossil-fuel exports in order to earn the hard currency needed to service their dollar-denominated debts. In Argentina, the IMF is encouraging an expansion of fracking to create more revenue for debt repayment.

    While international forums have acknowledged that the countries least responsible for the climate crisis should not shoulder the cost of its effects, financial support for countries in the South to address losses and damages from more frequent and severe climate-related disasters has yet to materialize. Instead, countries affected by climate disasters must often borrow funds to deal with the aftermath. When Pakistan, already struggling with an economic crisis and debt distress, was hit by record-setting floods in 2022, headlines emphasized the international community’s pledges for support. Again, most of that support came in the form of additional loans. 

    Likewise, the Covid-19 pandemic shed light on the inequalities that underlie the financial architecture. Wealthy countries, which are issuers of hard currencies, responded to the shock by increasing their discretionary spending to about 10 percent of their GDP. Developing countries, while starting with lower overall debt levels than their wealthier counterparts, increased their discretionary spending to only around 3–4 percent of GDP. In most cases, wealthy countries also enjoyed access to liquidity support through a network of swap arrangements between central banks, which carry low costs and no conditionality. 

    “Greenwashing” structural adjustment

    In recent years, the IMF has publicly recognized climate change as a threat to livelihoods and economic stability. It was not until 2021 that the institution adopted a climate strategy—a positive step in the sense that it raises awareness about the need for policymakers to address climate risks. But given the IMF’s role as a global lender of last resort for developing countries, combined with its conditionality-driven approach, the Fund has gained outsized influence in the design and implementation of climate policies on a global scale. The question remains: should the IMF be the institution leading climate policy, particularly in developing countries? 

    The IMF has made efforts to soften its image, expanding the topics covered by its research department and publishing critiques of its own structural reforms and austerity measures. It has also adopted a gender strategy and engaged with questions about social protection and inequality. Its rhetoric, however, does not reflect its policies. 

    Countries’ reluctance to seek IMF support speaks to the institution’s unpopularity among borrowers. Prolonged economic downturns, civil unrest, and sharp increases in poverty are the norm among IMF borrowers. The IMF’s climate policy cannot be separated from this track record. Structural adjustment programs remain the norm for IMF lending, with no plans to overhaul this framework or move away from the combination of austerity measures and market reforms. 

    The IMF’s climate strategy and its climate-related guidance show cause for concern. The documents offer suggestions on repackaging its policy agenda with climate-related language. The approach to climate policy centers on price-based and market mechanisms, namely global carbon pricing. The logic is that by “getting the price right,” and “creating an enabling environment for investors” markets will respond accordingly and take the necessary steps to address climate change.

    However, the IMF’s own modeling exercises suggest that the benefits of carbon pricing are limited to certain scenarios—specifically when the revenue generated is reinvested in climate and social programs to mitigate the regressive effects of introducing carbon taxes. The reality, however, is that the IMF primarily wields its influence over developing countries that are already implementing austerity programs, which implies less investment, not more. Furthermore, the IMF’s influence over large, wealthy countries is minimal. Without significant emission reductions in these economies, the contributions of developing countries to global emission reductions will remain insufficient for a global energy transition. 

    The overall green reform agenda is eerily similar to the old Washington Consensus package—where austerity measures were paired with a push for deregulation of labor markets and product markets, alongside the liberalization of trade and finance. This approach reflects the IMF’s vision for what constitutes the most efficient growth strategy, with a more recent acknowledgement that some trade-offs to mitigate negative social effects should be considered. The belief in this investor-friendly environment was supported by neoclassical economists and validated through modeling exercises set on growth targets. But such models rely on flawed assumptions about how an economy operates, many of which are not backed by empirical evidence. 

    The IMF provides all members with country-level advice on a regular basis through its surveillance reports, known as Article IV consultations. These reports often lay the groundwork for loan programs, where the IMF’s advice takes the form of conditionalities for the borrower. A recent report on South Africa illustrates how climate language can reframe traditional structural adjustment measures in a more favorable light.

    The report proposes a path for a “just transition” away from fossil fuels that suggests labor reforms to promote labor market flexibility, erode protections for workers, and reduce wages. Such measures directly undermine the rights of workers and lean on questionable analyses of labor markets. The document also recommends privatizing utilities and for deregulating product and labor markets on the basis that these measures would increase growth, a prerequisite for a “green and climate-resilient future.”

    The IMF has also launched a new lending facility, the Resilience and Sustainability Facility (RSF), as part of its climate engagement. It aims to offer loans with longer maturities for countries to implement reforms that strengthen their resilience to long-term risks such as climate change. There is one big caveat: only countries with a concurrent regular IMF loan can access this facility. Pairing the RSF to the standard austerity-minded IMF programs renders it ineffective, as governments remain incapable of meeting the financing challenges of the energy transition.  

    Even if the IMF were to tweak climate-related advice and move away from the carbon pricing model, traditional IMF conditionalities would continue to undermine a just transition. The IMF’s climate policy allows it to brand its programs as “green” and deflect criticism, but it still pursues business as usual.

    Systemic change

    The structures of the IMF and World Bank are remnants of the world order established at the Bretton Woods Conference eighty years ago. While these institutions were created to promote global stability, this “rules-based” multilateral system has excluded developing countries from having a meaningful voice in shaping those rules. The track record of the IMF and World Bank, and their reluctance to change, is rooted in the fundamental governance of the international financial system. These institutions are thus shielded from accountability to their borrowers. 

    For instance, the UN Framework Convention on Climate Change (UNFCCC) holds historical polluters responsible for providing financial support to developing countries for the energy transition—the financial burden is meant to be distributed across countries in proportion to their historical contributions to climate change. The countries classified by the IMF as “advanced economies”—a group that significantly overlaps with the countries classified as large historical emitters under the UNFCCC—control nearly 60 percent of the IMF’s voting power, allowing them to make the decisions on climate policy. 

    The allocation of $650 billion worth of Special Drawing Rights (SDRs) by the IMF in 2021 proves that it is possible to provide financial support without strings attached. This allocation can serve as the starting point for a global mechanism to provide liquidity and scale up financing available to developing countries. But again, the trajectory of SDRs demonstrates that governance reforms are imperative. Thus far, the United States alone has been able to veto calls for an additional SDRs allocation, as well as block efforts for improving their distribution mechanism. 

    Ultimately, the IMF’s elusive goal of “catalyzing” private investment warrants skepticism. Reforms centered on deregulation, liberalization, and privatization, paired with an austerity framework, severely limit the policy space for developing countries. Green industrial policy and public sector-led transitions remain out of reach. Recent development success stories, such as the “Asian Tigers” in the 1980s and more recently China, have a common theme: these countries moved up the income ladder through industrial-policy strategies and successfully avoided the prescriptions of structural adjustment. 

    Countries of the global South understand the need for systemic reform. The Group of 77 (a group that currently includes 134 developing countries) has convened a “Fourth Financing for Development Conference” (FfD 4) at the UN, scheduled for 2025. At the heart of the agenda are systemic reforms of the international financial architecture, curbs on global tax evasion, necessary technology transfers for the energy transition, and changes to trade agreements. 

    The agenda seeks a multilateral framework for debt relief through the UN, ensuring that countries with unsustainable debt burdens can seek relief outside of the IMF, with a process less biased towards creditors. FfD 4 also proposes long-term and affordable financing sources on terms similar to those available to wealthy countries. With these changes, alongside a rebalanced governance structure, the IMF can reprise its original role of offering emergency liquidity support and shed the conditionality framework it adopted in the 1980s. 

    FfD 4 is a viable alternative to the IMF’s “green” structural adjustments, but it will test the global North’s rhetorical commitment to multilateralism and the rules-based order. Addressing these systemic problems within the global financial architecture is a prerequisite for any future climate-related action. 

  8. Breaking Up Google

    Comments Off on Breaking Up Google

    In late August, Judge Amit P. Mehta of US District Court for the District of Columbia found Google guilty of maintaining an illegal monopoly in online search. Google had paid billions to device manufacturers and browser developers—including Apple, Samsung, and Mozilla—to set its search engine as the default in web browsers and smartphones, enabling the company to hinder competition and dominate the market. This landmark ruling was followed by a Virginia judge formally initiating the trial of a second US Department of Justice (DOJ) antitrust suit against Google in September. This second lawsuit, originally filled in January 2023, denounced Google’s acquisitions related to its monopolistic digital ad technology.

    The case demonstrates a transformation in the US government’s approach to antitrust. Since the late 1970s, US lawmakers have reduced  antitrust policy to a minimum, using it to guarantee “consumer welfare via prices.” This made it almost impossible to prevent any merger or acquisition—including the 1999 merger of Exxon and Mobil, which the US Federal Trade Commission (FTC) approved despite predicting that the merger between the second and fourth largest corporations in the energy market would increase concentration. The next year, the pharmaceutical giant Pfizer acquired Warner-Lambert for $90 million and became the world’s second largest drug company. Once more, the US FTC cleared the deal. Permissive antitrust policy arrived at a climax during Trump’s presidency, with fewer criminal antitrust cases brought to courts than any administration since the 1970s. 

    Biden’s appointment of Lina Khan as the US FTC Commissioner signaled the start of the turn against this permissive regime. Khan is part of a collective of antitrust lawyers that define themselves as the “New Brandeis Movement,” aiming to retrofit antitrust by returning to a more comprehensive antimonopoly ruling that sees the concentration of economic power as a basis for the concentration of political power—thereby shrinking democracy. Instead of focusing on consumer welfare, the New Brandeis Movement proposes to look broadly at the effects of market power on workers, suppliers, and innovators. 

    The August ruling against Google’s illegal monopoly in search and ads is an outcome of this policy shift. It took four years for the DOJ to gather the evidence to win the case, and it may take much longer to actually terminate Google’s monopoly. The DOJ’s proposed solutions,  from fines on Google to forcing the company to divest from its search engine tools, are insufficient to resolving the problem at hand. This is because they are rooted in a fundamental mischaracterization of the issue: Google’s search engine is not just a monopoly, but a natural monopoly underpinned by an intellectual monopoly.

    Natural monopoly

    Contemporary understandings of antitrust closely link it to the promotion of market competition. In fact, in many parts of the world, from the UK to Argentina, antitrust agencies are called competition authorities. Even within neoclassical theory, however, natural monopolies are an exception to this framework. In a natural monopoly,  a single company is more efficient than two or more offering the same product. These are generally markets with economies of scale due to high fixed costs. 

    Google’s search engine constitutes a natural monopoly. Multiple search engines would be less efficient than one, particularly given that the engine improves with additional searches. Far beyond the illegal contracts with device manufacturers and browsers that the DOJ antitrust case found, the company’s success depends on social data and is powered by deep learning artificial intelligence (AI) algorithms that become better the more data they process. Google’s search results are the social outcome of our collective use of the same AI model. If searches had been scattered in a dozen search engines, these algorithms would be significantly poorer.

    There is yet another peculiarity of search engines. Drawing on the work of Vilfredo Pareto, advocates of perfect market competition define maximum social welfare through the pursuit of an equilibrium in which no agent can be better off unless someone else is worse off. The very idea of maximization of social welfare in the competitive market, however, says nothing about how that welfare is distributed. If a company could spot the maximum willingness to pay of each consumer, it could charge differentiated prices so that it extracts the most from everyone. Social welfare would be at its maximum, but it would lie in the exclusive hands of one actor: the perfectly discriminating monopolist. This strategy is presented in the most used microeconomics textbooks, authored by Hal Varian, who became Google’s chief economist in 2002. 

    Unsurprisingly, Google operates as a perfectly discriminating monopolist. Because Google knows exactly which ad a user will most likely select, it can run its ads market as a live auction in which each appropriated piece of the online space is charged at the maximum price that clients are willing to pay. The effect is the full extraction of social welfare in Google’s hands as it not only charges the maximum price to its clients in the ads markets, but operates in the same way with users, maximizing the extraction of data and time—attention—from each individual.

    Intellectual monopoly

    Intellectual monopolies pose another challenge to the neoclassical framework. They systematically capture intangibles and turn them into assets, accumulating at the expense of socially produced knowledge.

    The US antitrust case against Google recognized that its technology is extraordinarily good. Yet Google’s frontier machine learning algorithms are co-created with a global network of thousands of organizations including universities and start-ups. Google is an intellectual monopoly because it coproduces its technology with thousands of others while keeping most of the associated and skyrocketing rents. Google has published thousands of scientific articles on AI. These articles rarely disclose the models but instead only summarize the findings, signaling Google’s central role in the field while preventing society from the spillovers of shared knowledge. Not even Google’s direct collaborators can profit. While over 80 percent of this research had at least one non-Google coauthor, only 0.3 percent of Google’s patents are co-owned with another organization.

    Google has acquired over 200 companies, thus acquiring their talent and intangible assets. DeepMind, Google’s AI heart, was acquired in 2014. Yet, at least as important for perpetuating its intellectual monopoly are the thousands of firms that it nurtures with venture capital funds. In 2023, Microsoft, Google, and Amazon invested two-thirds of the $27 billion raised by generative AI start-ups. By February 2024, Google ranked as the third-largest funder of AI companies, in terms of the number of AI companies that had received its funding. Only two venture capital firms, Techstars and Y Combinator, were investing in more AI start-ups. Expanding the analysis to the whole start-up universe, the relevance of corporate venture capital becomes all the more apparent. The practice has spread among Big Tech, and Google is at the forefront: 2,445 active start-ups have Google among their top five investors by the same date.

    Corporate venture capital is a form of control with partial ownership that distracts regulators while Big Tech companies steer start-ups’ development and gain privileged access to their technologies. A recent example is the generative AI start-up Anthropic, founded by former OpenAI employees that left the company once Microsoft started investing in it. Only three months after the release of ChatGPT, Google decided to invest $300 million in Anthropic (Anthropic was ultimately unable to develop and train frontier AI models without a Big Tech sponsor, given high costs and a lack of access to key pieces of the computing stack, which are monopolized by Big Tech).

    A network of start-ups and other firms that do not receive Google funding are equally controlled. They work on different steps of the AI value chain that are offered as services on Google’s cloud. Just like in the case of Google Pay—Google’s platform app, which has also been subjected to legal scrutiny—Google gets a cut from every computing service sold on its cloud.

    The open-source community also benefits Google’s accumulation. One key example is TensorFlow, a  software library for machine learning open sourced by Google. Software libraries are sets of predefined tools that perform common or repetitive tasks for software development. Around one third of the contributors to improve TensorFlow are not from Google. Open sourcing TensorFlow has made it the industry standard: everyone uses TensorFlow for machine learning models. This leads to more tutorials and discussion forums explaining how to use it or how to solve common errors. More shared knowledge further incentivizes its use and creates network effects. As more developers produce applications and other complementary products using TensorFlow, the better these solutions will work as complements to Google technologies. The result is a structure in which the whole industry sooner or later depends on Google technologies or produces technology for Google, sometimes without even realizing it. Other cloud giants like Amazon or Microsoft similarly take advantage of blind knowledge transfers. Google profits from developers’ free labor, as open-sourced technologies receive thousands of contributions from outside of the company. Improved technologies are then refined with other pieces of software and models kept secret by Google, allowing the technology to become economically useful. Microsoft and, more recently, Meta have actively used this strategy. 

    Tracing these links offers a panopticon view of the AI value chain. Just like Microsoft and Amazon, Google weaponizes this interdependence, setting the rules of the whole network from AI research to applications. Traditional ways to dismantle illegal market behaviors will not affect its stranglehold on the AI value chain.

    Competition is not the solution

    Precisely because Google is a natural and an intellectual monopoly, the remedies for its excessive market power ought to be different from those applied to a regular market monopoly. Under a natural monopoly, boosting competition would come at the expense of efficiency and worsen search results. Moreover, increasing competition in this market would not make it free or fair. The winners would be Apple and Microsoft, whose search engines would receive more traffic. A far cry from Robin Hood, this solution would be taking from the rich to give it to the other rich. Even if Google were forced to divest and disaggregate, the new companies could still share databases and research results to maximize extracted rents, leaving the intellectual monopoly untouched. In China, Alibaba is legally separated from Ant Group, but they still cross-reference datasets to boost each business and each of the companies equally relies on knowledge captured from other organizations as a basis of their intellectual monopoly. 

    The problem of the DOJ’s potential divestment remedy—which would require Google to divest from parts of its search engine tools—is that companies share information on a need-to-know basis both inside the firm and within their networks. Microsoft and OpenAI share intangibles as part of their agreement. The same could happen with the resulting new firms from a carved-up Google. These mid-size Googles could still sign strategic partnership agreements to codevelop solutions and collaborate in research and development while continuing knowledge and data extraction from their ecosystems, cross-fertilizing and perpetuating their intellectual monopolies. Such strategic agreements are often signed between Google’s strategic solutions teams and other leading corporations. Many are kept secret to avoid antitrust scrutiny.

    If the harms of natural and intellectual monopolies cannot be mitigated through the imposition of competition or their disaggregation, what can  prevent a giant corporation from amassing billions by controlling the organization and classification of the Internet’s information?

    State-run companies often provide public utilities that would otherwise create natural monopolies. One step forward could be to treat Google like the private companies that offer public utilities at regulated prices. Setting maximum prices for ads and limiting ad space would reduce the price—in attention and data—that users pay for Google searches. An international agreement among states would be required to enforce such a regulation. Indeed, online search engines should be seen as a public utility not only because they are part of our everyday life, but also because they are endlessly improved with our queries. 

    Google should additionally pay withholding taxes country by country for its monetization of freely harvested data. Such a tax could consider the percentage of the population with internet connectivity and the number of hours that people spend on the internet. But the disagreements concerning a digital tax levied on Big Tech suggests that the US state would reject such an initiative. Nonetheless, we should aim to build international cooperation around such a proposal. 

    Taxing data and enacting price controls will pierce Google’s main profit source. But Google would keep profiting from society’s data and knowledge. To break the company’s intellectual monopoly, we must first recognize that the world’s largest companies are robbing us all. International organizations should defend the control of our data and publicly funded knowledge, moving us towards a society that democratically determines what data is collected, who can access it, and for what purpose.

  9. Marshall Plans

    Comments Off on Marshall Plans

    At September’s UN General Assembly in New York, Brazil’s President Lula described the international financial system as a “Marshall Plan in reverse” in which the poorest countries finance the richest. Driving the point home, Lula thundered, “African countries borrow at rates up to eight times higher than Germany and four times higher than the United States.”

    Lula is not alone in this diagnosis. Centrist technocrats par excellence Larry Summers & NK Singh coauthored a report earlier this year arguing that the development world’s mantra to scale up direct financing to the global South—from “billions to trillions”—has failed. Instead, global finance seems to be running in the opposite direction, from poor to rich countries, as was the case last year. Summers and Singh summarize the arrangement thusly: “millions in, billions out.” Added to this is the great global shift to austerity that makes a mockery of climate and development goals.

    It’s in this context that talk of “green Marshall Plans”—proposed by Huang Yiping in China and Brian Deese in the US—must be received. Negotiations over technology transfer, market access, and finance deals are a permanent feature of the new cold war: call it strategic green industrial diplomacy.

    Both the American and Chinese proposals, such as they exist, aim to subsidize the export markets of allied countries to build foreign support for domestic industries. For developing countries, this could mean manufacturing green goods to grab a slice of the trillions of future green economic output and develop themselves, and a policy choice to meet their development goals by either making or buying cheap, clean energy generation, electricity storage, and transport.

    Putting aside the dubiousness of the historical analogy to the United States’ postwar aid program to Europe, the critical element—and the one that seems least likely for either China or the US to pursue in earnest given their domestic political obstacles—is the provision of the kind of financial and industrial support that low- and middle-income countries need. The geoeconomic contest between the US and China rests on which of the two can forge domestic political coalitions that meet the demand of developing countries for local manufacturing value add in green value chains, without which the South will remain merely an export market or a resource colony.

    China, Europe, and the US hold more than the lion’s share of the world’s knowledge and capital intensive clean technology capacity (IEA Energy Technologies Perspective)

    The reason developing countries want local clean industries is clear. They could significantly boost profits, tax revenues, create higher-skilled jobs, and raise economy-wide productivity spillovers.

    Two plans

    China’s Belt and Road Initiative has long been the subject of Marshall Plan comparisons . The military-strategic core of the analogy has only become more relevant since the turn to war footing, as well as more recent concerns about overcapacity in Chinese renewable energy tech. Huang Yiping, a prominent economics professor at Peking University and a former PBOC official, picked up the analogy in May and spoke of a “Global South Green Development Plan.” He proposed establishing “an economic community with a shared future,” so that “China can help developing countries make these transitions, encourage them to buy China’s products, introduce China’s technologies, and even encourage some of Chinese enterprises to go abroad.”

    Such a plan, Huang explained, would entail the internationalization of the renminbi, which could be advanced by denominating support for clean importers in Chinese currency. With China’s two large trade partners—the US and Europe—shunning green goods with tariff walls, the idea is for China to seek out markets with some form of vendor financing for debt-stressed countries so they can purchase affordable Chinese green goods. The outbound gear shift is real. China “appears to be undergoing a significant shift, from capital importer to capital exporter,” wrote FDI Intelligence in June.

    Stateside, Brian Deese—formerly Joe Biden’s National Economic Council director and current Kamala Harris campaign advisor—penned an August essay in Foreign Affairs calling for a “Clean Energy Marshall Plan,” with the aim of extending Bidenomics to the international arena. For Deese, climate is all dollar signs, nothing less than the “largest capital formation event in human history.”

    But dollars for what? Deese’s idea is to scale up US industries to meet global needs, winning greater influence in the process. The vision relies on US technical superiority in carbon capture and storage (CCS), hydrogen, nuclear, geothermal, and also on utilizing the US Treasury’s Exchange Stability Fund to deploy new international policy financing without running into Congressional hurdles.

    The optimistic Marshall Plan proposals are not entirely hot air; each attempts to extend aggressive domestic policies globally. China and the US have both made bids on an investment-led partial solution to their respective domestic political and economic challenges, with a focus on clean-energy industries. Their shared formula can be summarized as national strength through industrial renewal. In both countries, domestic industries have been offered ample fiscal support; Biden’s suite of tax credits and subsidies has already spurred more than $400 billion in investment in clean energy and clean-tech manufacturing and generation, and China’s central government, already dominant in clean tech manufacturing, is now concentrating its efforts on next-generation technologies and economic self-reliance.

    Domestically, US is playing catchup to China’s green industrial policy

    Both countries’ investment policies are intended foremost for domestic economic goals. China’s domestic growth is trending green; per the IEA, China is expected to account for nearly 60 percent of all renewable energy capacity installed worldwide between now and 2030.

    The relationship between China’s dominance in renewables capacity and its designs for international influence is not yet clear. (Xi grandly proclaims that there are moments in time when “major technological breakthroughs” greatly enhance “humanity’s ability to understand and utilize nature” and enhance “social productivity.”) But even less certain is whether those new grand designs will adequately address the climate and development challenges faced by most global South countries.

    Shortcomings

    What is the likelihood that either Chinese or American governments will use their industrial policy to meet those challenges, which have come under increased pressure due to new geopolitical tensions and the climate crisis? For years now, developing countries have been telegraphing their development priorities. (These needs are contingent and specific to each domestic and regional context, short of any unified framework for a new international economic order.) Back in 2022, surveying the new China–US competition from the point of view of the “non-aligned” South, we outlined the following pragmatic goals:

    1. Core technologies to power future growth;

    2. Advanced military hardware for enhanced security;

    3. The upper hand in trade negotiations with Europe, the US, and the new Russia-China bloc;

    4. Essential commodities like food, energy, metals and fertilizers from the new Russian-Chinese bloc;

    5. Better terms to restructure their debt to Western and Chinese creditors during a punishing global dollar debt crisis that threatens their sovereignty.

    Neither the US nor China appears willing to meet many of these requirements.

    Deese’s proposal has already been criticized for its disconnect from what global South partner countries actually want; for misunderstanding the original Marshall Plan’s financial agenda, and—most cuttingly—for a deluded view of American clean-power manufacturing prowess. This was a chief criticism from Alan Beattie at the FT, who underscored that the US lacks the internal political coherence it had during the first Marshall Plan. (Adam Tooze noted that many of the technologies Deese identified are also the preferred “solutions” of the dominant US fossil-fuel industry, and are overall marginal to the actual energy needs of the world’s majority; this is particularly so with the expensive, technically difficult, and emissions-ambiguous CCS and hydrogen.)

    Deese’s article is representative of a Washington-wide reluctance to acknowledge, let alone address, the actual substance and scale of our global challenge. No poor nation is satisfied by becoming an export market for American clean tech. No nation besides the US is going to reject building a transformative base of clean cheap energy with imported Chinese solar panels.

    There are further limitations in White House foreign-policy leadership. A new essay by Anthony Blinken exalts the administration’s global achievements while remaining mostly concerned with G-7 and other wealthy allies; security and trade alliances such as AUKUS, the Quad, the US–EU Trade and Technology Council, and the Indo-Pacific Economic Framework are the focus.  America’s “strategic fitness,” he argues, “rests in large measure on its economic competitiveness.” If some allies had first worried about the Biden administration’s domestic investments, they have, “with time,” come to see how  “American renewal can redound in their favor. It has boosted demand for their goods and services and catalyzed their own investments in chips, clean tech, and more resilient supply chains.” This  may well be the case for wealthy allies with monetary and fiscal agency; the EU is embracing industrial policy and tariffs (German opposition notwithstanding); Japan and South Korea never really abandoned it. For low-income countries spending almost a quarter of their external revenue on debt servicing, American industrial renewal holds less promise.

    Blinken is self-congratulatory on the 2021 distribution of $650 billion worth of Special Drawing Rights, the IMF reserve currency; an African Union seat at the G20; and World Bank reforms as major Biden administration contributions to Global South countries. But the key promise is the Partnership for Global Investment and Infrastructure—a US-led Western response to the BRI—which will rely on mobilizing hundreds of billions of dollars of private capital, despite decades of evidence of failure. The much smaller Just Energy Transition Plans, or JET-Ps, have failed to deliver—or even to launch—in large part due to their reliance on the same.

    US Government Accountability Office compared US and China’s foreign infrastructure investments 2013-2021 within the same five sectors: transportation; energy; industry, mining and construction; communications; and water supply and sanitation

    Scale and self-interest

    The US knows it is far behind China in terms of gross finance flows for infrastructure in developing countries. A report from the US Government Accountability Office in September finds that China outspent the US by almost nine-to-one on foreign infrastructure finance between 2013 and 2021—$679 billion compared with $76 billion. Leading Chinese recipients were Russia ($104 billion), Malaysia ($36 billion), Pakistan ($34 billion), Nigeria ($29 billion), Angola ($29 billion), and Indonesia ($28 billion).

    But China’s outbound investments in highways, power plants and rail projects have been pared back—a decline that began in 2018 and plummeted in the 2020s. Last year, China’s loans to Africa totalled $4.6bn—the first annual increase in years—but were still far off the over $10bn per year of the early BRI era. China also resumed lending for energy projects in 2023 after a two year hiatus, but at a tiny quantum, which Carbon Brief explains reflects both a shift away from big fossil-fuel projects and increasing African preference for equity investments, rather than being saddled with more debt:

    As the Chinese leadership pricks the country’s dangerous real estate bubble, exporting high-value clean tech is a key part of the government’s strategy for maintaining growth.

    The Forum on China-Africa Cooperation (FOCAC) last month yielded stirring words of Third World solidarity from President Xi, but the headline commitment to the continent of Rmb360 billion over three years was in line with financial flows of recent years; and removal of tariffs for the Lesser Developed Countries represented only a small change to the existing system. The action plan announced by Beijing also included promises to “develop local value chains, manufacturing and deep processing of critical minerals”, “30 clean energy and green development projects” and a “Special Fund for China-Africa Green Industrial Chain.”

    As for the challenge of enabling countries to move up the chain, escaping the fate of being simply sources of raw commodities, the only clear success is in South East Asia. In South Africa, Latin America, and South Asia, China’s clean-tech manufacturing collaborations have so far amounted to producing final assembly plants for “knockdown kits,” with the value-added components imported from China and assembled locally. The recently announced BYD plant in Pakistan, the SAIC plant in South Africa, the BYD, Great Wall Motors plant in Brazil, all look less than promising for domestic firms integrating and developing with Chinese know-how.

    Finance

    Adequate finance remains the most necessary component for most countries, and is the most glaring shortcoming in US & Chinese offers. The US is constrained by politics, including an obstinate Congress, while Beijing’s provision of finance has waned since 2019 amid slowing growth. Increasing debt distress among its own provinces is one barrier to its granting debt relief internationally. There are political obstacles in China, too. “Why give free money to foreigners when we are suffering?” is a potent cry on both sides of the Pacific.

    The “modality” of financial flows out of both the US and China is complex; it entails concessional debt, commercial debt, grants, equity.  A simple test is provided by Gandhi’s talisman: recall the face of the poorest person you have seen, and ask if this action will be of any use to him or her.

    So, how do the planet’s two superpowers contribute to the International Development Association—the World Bank’s facility for the poorest countries?

    Source: “U.S. Leadership in Scaling Capital for Multilateral Clean
    Energy Finance,” by Lily Bermel, Brian Deese, Brad Setser, Tess Turner, and Michael Weilandt

    High and dry in Angola

    The challenges faced by developing nations with regard to international financing, clean tech, and raw materials, are well-illustrated by recent events in Angola.

    The southern African country was the biggest recipient of Chinese finance in the BRI lending surge and is almost completely dependent on oil export revenues. It quit OPEC last year as the cartel squeezed its smaller members’ quota allocations in the face of softening oil prices. The country has been deepening its relations with the US—Biden was slated to make the only African trip of his presidency there this month—but also maintaining good relations with China, obtaining upgraded diplomatic ties and cuts in debt repayments earlier this year.

    Ahead of the FOCAC summit, finance minister Vera Daves De Sousa told Reuters that whichever country provided financing could expect to be able to sell more of its own products—whether or not they were the ideal provider. If China does  not provide the finance and support needed to grow Angolan industries, it could expect to lose out. “We will buy more solar panels from Europe because the financing is coming from there,” Daves de Sousa said. Germany for example is providing Angola with 62,250 home solar systems.

    From the US perspective, the main focus in Angola is the Lobito Corridor railway, which is shaping up to be a test of Western and Chinese commitments to African development. If fully realized, it would massively expand and speed up the transport of minerals from the “Copperbelt” of Zambia and the DRC to Angola’s Port of Lobito.

    The Western parties have to contend, however, with China’s deeply established minerals and mining supply chains in the region, as well as with China’s superior technical expertise in the clean-tech manufacturing that resource-rich African countries would require to add more domestic value to their commodities. China is also supporting a $1 billion upgrade of the Tazara railway—an almost 2,000km line supported by Mao during the poverty-stricken 1970s. Like the Lobito Corridor, Tazara also taps the Copperbelt around Zambia and the DRC, but it carries transition minerals in high demand for electrification and clean technology eastwards, for export via the port at Dar es Salaam.

    Both China and the US are, of course, doing what serves their immediate economic and  political needs. Marshall Plans continue to be a mirage; the marriage of decarbonization and development requires far more internationalism than political coalitions in either great power are currently willing or able to underwrite.

  10. Adaptation in the Sanctioned Economy

    Comments Off on Adaptation in the Sanctioned Economy

    The oil boom of the late 2000s created significant headwinds for Iranian manufacturers. As the value of oil exports surged, the Iranian rial appreciated, real wages rose, and foreign goods flooded the Iranian market. Middle-class families relished in their newfound purchasing power, gladly buying French cosmetics, Korean appliances, and Turkish clothing while shunning domestic brands. This is how Iran caught a textbook case of “Dutch disease”—the oil bonanza undermined Iran’s manufacturing base. Given the strong rial, programs initiated by populist president Mahmoud Ahmadinejad redistributing wealth to Iran’s lower classes widened the trade deficit and set off an inflationary boom in housing and services. But when the Obama administration hit the financial and energy sector with heavy sanctions in 2012, thrusting Iran into a recession, things changed course. 

    Sanctions hit an already weakened manufacturing sector, precipitating a stagnation in Iranian industrial output that persists until today. But the volatility of US diplomacy—relief from sanctions following the 2015 Iran Nuclear Deal, reimposition of sanctions under the Trump administration in 2017—has also produced uneven effects for Iranian manufacturers. Some major players have experienced significant drops in production. Iranian automakers produced around 1.5 million vehicles in 2017, when the country was still enjoying the benefits of sanctions relief. Last year, they produced just 1.2 million vehicles. In the case of the auto sector, sanctions have constrained access to key manufacturing inputs, reducing both the quantity and quality of Iranian cars and trucks produced each year.

    Other manufacturers have bucked sanctions by taking advantage of their macroeconomic effects, including currency devaluation and diminished imports. This has paradoxically enabled domestic Iranian capital to reverse the effects of “Dutch disease.” A closer examination of the home appliances sector in Iran reveals the significant degree to which firms can adapt to sanctions, creating new economic value in economies otherwise encumbered by the coercive measures. These adaptations contradict the commonly held view that resilience to sanctions arises from the allocation of state investment and top-down industrial policy. On the contrary, in Iran, resilience appears to be a bottom-up phenomenon, led by opportunistic private capital. In fact, how firms adapt to sanctions can influence both domestic economic policy and the international sanctions regime in unexpected ways. Today, the Iranian home appliances industry is being held back not by the effects of sanctions on production, but by the effects of overcapacity on price competition. Many Iranian manufacturers can only survive in a protected market, meaning these firms may actively oppose the kind of market liberalization inherent to sanctions relief.

    Domestic manufacturing

    The Iranian home appliances industry emerged during the first industrialization wave in the 1960s. By the mid-1970s, domestic brands like Arj and Azmayesh had become staples of Iranian homes, and, given decent quality and competitive features, were even exported to regional markets. After the Islamic Revolution in 1979, these factories were nationalized. Soon after, the outbreak of the Iran-Iraq war prevented further investment and modernization. Domestic brands became the low-price, low-quality option for Iranian consumers. By the mid-2000s, as Iran’s economic growth accelerated, foreign brands entered an increasingly segmented Iranian market. High-income families would outfit their homes with appliances from brands like Germany’s Bosch and Italy’s De’Longhi. Middle-income families became loyal to imported Korean brands LG and Samsung. Low-income families would choose Iranian brands, whose appliances could not compete on features, but could compete on price. By 2017, the major Korean brands had come to dominate the Iranian market, accounting for 65 percent of the refrigerator market and 77 percent of washing machine sales, according to market data compiled by GfK. The Korean market share ballooned following the intensification of Western sanctions on Iran, particular after 2012, which saw European brands reduce their footprint in the country.

    Then, in 2018, everything changed. The Trump administration withdrew from the Iran nuclear deal, reimposing US secondary sanctions on Iran. Trump’s “maximum pressure” policies had a dramatic impact on the Iranian economy. Among the first effects was a steep devaluation of the Iranian rial, as Trump froze Iran’s access to its foreign exchange reserves and throttled oil exports, the primary source of hard currency revenues. In an effort to ration hard currency and defend the new exchange rate, the Iranian government introduced a ban on the importation of over 1,300 goods, including home appliances, effectively closing the market to foreign brands. Even before the protectionist measure from Iranian authorities, these brands had already faced difficulties in maintaining their Iran sales operations as international banks began to cut ties to Iranian counterparts.

    The combination of protectionist policies and intensifying sanctions squeezed foreign brands out of the Iranian home appliances market, reversing two decades of market consolidation. Iranian home appliance manufacturers, as well as opportunistic investors with no experience in the sector, quickly recognized the opportunity. The return of sanctions would no doubt slow Iran’s economic growth and high inflation would erode household purchasing power. But the demand for appliances—a household essential—is stubborn. Suddenly three-fourths of the Iranian home appliances market was up for grabs, representing a $12 billion opportunity.

    Iranian home appliance manufacturers began to invest heavily in new production capacity. To meet the needs of Iranian consumers that had been purchasing imported brands, appliance manufacturers also added new features. The investment was not limited to incumbent players. The home appliances market saw many new entrants, leading to a dramatically fragmented landscape. Today, there are 140 firms producing refrigerators in Iran and 100 firms producing washing machines, according to figures compiled by the Ministry of Industry, Mine, and Trade. Domestic firms now dominate the home appliances market. Foreign brands continue to be available in Iran, but products arrive as parallel imports. These imports tend to be more expensive than locally produced brands because of ongoing currency devaluation. Moreover, products imported unofficially lack the warranties and after-sales support now offered by Iranian producers. These factors have crushed the share of the once dominant foreign players. In 2022, the combined share of LG and Samsung in Iran’s refrigerator market was just 8 percent. The two Korean brands accounted for just 13 percent of washing machine sales. 

    Alongside the fragmentation of the market caused by the dramatic increase in the number of domestic home appliances manufacturers, data from the Ministry of Industry, Mine, and Trade shows that production capacity has also exploded. The home appliances sector is now the second largest contributor to manufacturing value-add, surpassed only by the automobile sector. For both refrigerators and washing machines, total production volume was flat in the years leading up to 2018. But after an initial drop in output owing to supply chain disruptions, the sanctions shock spurred significant growth in production volumes. Iranian firms produced 2.7 million refrigerators in 2022, double the 2017 total of 1.35 million. Washing machine production totaled 1.6 million in 2022, up from about 900,000 in 2017. Iranian officials have heralded the home appliances sector for adding jobs in an otherwise soft labor market.

    If there has been one winner in Iran’s otherwise fragmented home appliances market, it is Entekhab, which accounts for 40 percent of the washing machine market and 27 percent of the refrigerator market. The company, which produces mid-price appliances, was well-positioned to expand production after sanctions were reimposed on Iran. For decades, Entekhab produced South Korean Daewoo appliances under license. In 2018, it even attempted to acquire Daewoo’s home appliances division for the second time (a first attempt was made in 2010). The deal eventually fell through, but it was a marker of Entekhab’s ambition and its desire to access valuable intellectual property.

    Entekhab also has a partnership with Haier, a Chinese appliance manufacturer. It was this partnership that positioned the firm for growth after sanctions pushed the likes of LG and Samsung out of the Iranian market. Entekhab could tap its Chinese supply chain as it sought to boost production. Meanwhile, its competitors were scrambling to shift away from European, Japanese, and Korean suppliers, who largely stopped exporting to Iran due to sanctions risks. More importantly, Entekhab was an experienced company with a track record of supply chain localization and cash to invest. There have been many entrants into the Iranian home appliances market, but most lack these important competitive advantages. As such, no other Iranian firm in the home appliances market has achieved similar scale.

    Overcapacity and industrial policy

    While Iranian authorities might have at one time worried that sanctions would hobble the production capacity of home appliances manufacturers, the rapid and uncoordinated growth of the sector has instead led to overcapacity. The Majles Research Center, which is affiliated with the Iranian parliament, estimates that the current total annual production capacity for refrigerators is around 10.5 million units. Meanwhile, maximum domestic demand is less than 3 million units per year. As sanctions have constrained exports, the significant unused production capacity represents wasted resources.

    In a recent report on the sector, the Majles Research Center warns that Iranian home appliances manufacturers are engaged in a race to the bottom. “Free entry into the home appliance industry has led to many operating licenses over recent decades. Yet, this freedom of entry has not allowed firms to benefit from economies of scale. Exploiting economies of scale is necessary to achieve competitive production with high localization,” the report finds. In other words, Iranian firms succeeded in increasing production capacity under sanctions. But the mobilization of private capital under sanctions reflects a partial success. In the aggregate, record high production volumes could indicate that Iran’s home appliances market has shrugged-off sanctions disruptions. But at the firm level, many home appliances manufacturers are contending with negative cash margins as they face intense competition in a fragmented market. Firms in a sector where production has surged can lose money much like firms in sectors where sanctions have constrained production or sales. In this way, overcapacity has become an unexpected headache for Iranian policymakers.

    Whereas in many countries, industrial policy entails the use of subsidies to “crowd-in” private capital in strategic sectors where investment has been lacking, Iran has struggled to maintain government spending due to sanctions pressures. In a context where government investment is inherently constrained, efficient allocation of private investment is critical, and industrial policy should focus on addressing coordination failures in those sectors where private capital has been opportunistically deployed. The coordination failures evident in the Iranian home appliances industry also make clear how, despite calls to create a “resistance economy” in the face of sanctions, Iranian economic policymakers have failed to harness industrial policy to reign in and direct the adaptive behavior of private sector firms. This failure also has also created constituencies among various types of domestic manufacturers opposed to the kind of market liberalization inherent to sanctions relief—undermining a core belief held by Western policymakers that sanctions can spur behavior changes in countries like Iran through bottom-up pressure, including from business lobbies. 

    When rumors first emerged in 2021 that Iran might agree to a prisoner deal with the United States that would also result in the release of frozen reserves held in South Korean banks, a dozen home appliance manufacturers wrote an unprecedented open letter to the Supreme Leader Ali Khamenei, asking him to ensure that any such deal would not lead to the repeal of the import bans keeping the likes of LG and Samsung out of the market. The signatories opposed “the importation of international brands when local production meets the domestic market’s quantitative and qualitative needs.” Bizarrely, their letter name-checked Richard Nephew, an Obama administration official. Nephew is widely seen in Iran as the key architect of the US sanctions program, a reputation he earned after his book The Art of Sanctions was translated into Persian. The group of home appliance manufacturers claimed that “saturating the domestic market with Korean and Japanese brands aligns with Richard Nephew’s objectives,” presumably because it would lead to the underdevelopment of Iran’s manufacturing base. As the debate over the import ban continued, key officials, including Abbas Aliabadi, the industry minister, expressed support for its repeal, spurred by public anger at the letter. Aliabadi has noted that “in a perfectly competitive market, there is no need to impose such physical restrictions.” But for now, the policy remains in place.

    Whether Iranian policymakers can turn Iran’s fragmented home appliances market into a competitive market remains to be seen. Policymakers could launch a rationalization program to enhance the capabilities of domestic manufacturers and prepare them for competition with foreign brands, including in export markets. Recent appraisals of industrial policy and its applicability of today’s economic challenges note the potential value of “entry control” measures that ensure only qualified firms are allowed to operate in strategic sectors. The Majles Research Center report notes that the “absence of effective industrial policies in the home appliance industry has led to a large number of issued licenses, many of which result in firms operating as assemblers with minimal localization.” That such measures have not been adopted indicates the limits of state capacity in Iran. 

    In their studies of the economic resilience of sanctioned economies like Iran and Russia, Western policymakers mistakenly see resilience as an outcome of policies enacted by centralized states that boast significant control over the economy. The Iranian economy has not been felled by sanctions. But its resilience, which is largely centered on the manufacturing sector, has been generated by firm-level adaptations, rather than state-led directives. In Iran, economic output has been sustained by opportunistic firms that took advantage of the conditions created by the sanctions and the kneejerk protectionist policies those sanctions elicited. But these firm-level adaptations have largely reached their limits in Iran’s sanctioned economy, and Iranian policymakers have been thus far unable to put forward a responsive industrial policy. The consequences of these developments for future sanctions negotiations should not be overlooked—a crucial segment of Iran’s business lobby has become the unexpected beneficiary of global economic warfare.