Month: August 2018

Should we fear the robots? Automation, productivity and employment

Special session at the British Academy of Management conference

Monday 3 September, 12.30-14.00, Room 2X242

Bristol Business School, UWE, Coldharbour Lane, BS16 1QY

A panel discussion on productivity, automation and employment, with

Frances Coppola, Finance and Economics Writer

Daniel Davies, Investment Banking Analyst

Duncan Weldon, Head of Research, Resolution Group

Chaired by Jo Michell, UWE Bristol.

Since the 2008 crisis, UK productivity has stagnated. At the same time, fears are growing that robots will challenge humans for an ever wider range of jobs. This panel brings together leading economists to discuss these apparently contradictory trends – and what should be done about them.

This is a special session so all are welcome. Conference registration is not required.

The full conference programme can be downloaded here

For more details please contact Jo Michell on jo.michell@uwe.ac.uk

 

 

 

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Lira’s Downfall is a Symptom: the Political Economy of Turkey’s Crisis

Guest post by Ümit Akçay (Ph. D., Berlin School of Economic and Law) and Ali Rıza Güngen (Ph. D., Turkish Social Sciences Association)

Turkish Lira lost almost 45 per cent of its value against the U.S. Dollar in 2018. The losses accelerated notably in recent months and particularly in the second week of August, which included the two days in which Lira lost the most against USD since the 2001 crisis.

Suddenly, it became “all about Turkey” as the Bloomberg commentators said and many pundits expressed their opinions about the reasons as well as the dire consequences of a currency crisis.

The first stage of the international financial crisis in 2008-09 was followed by the Eurozone crisis (2010-12). Increasing volatility in the markets of global South, which began by 2014 can be seen as the third stage in such a periodization. We believe that the downfall of Turkish Lira against this background is a symptom of macroeconomic problems and the policy responses of the last decade. In other words, Turkey’s 2018 crisis occurred as a combination of the impact of the tightening global dollar liquidity conditions, the choices of policymakers particularly in recent years and the inability to formulate a new economic model to overcome the crisis of accumulation, unfolding right now in Turkey.

Impact of the financial tightening

The world’s biggest financial crash in the 21st century turned into then Eurozone crisis by 2010. In these years, the policy response by the Central Banks of the core capitalist countries helped periphery achieve high rates of growth. The capital inflows initiated a short-lived economic boom in Turkey and the country was the second fastest growing one in the world, following China during 2010-11. The AKP governments benefited from cheap credit period until 2013 and strived to spread further the financial modes of calculation among its electorate.[1]

A low interest rate policy was key to the neoliberal populist model of Erdoğan. Its limits were first tested with the end of Fed’s quantitative easing that marked the end of the capital bonanza. As economic growth slowed after 2013, throwing into question the model of neoliberal populism, the agenda of AKP shifted towards a new model with developmentalist elements.[2] The idea of transition to a presidential regime was put on hold, as economic policy makers started putting more effort in devising alternative mechanisms for finance and hybrid development strategies. Policy makers underlined the need to deepen Islamic bond markets and draw in the savings of households to the financial sector, by enabling the creation of new investment instruments. Islamic think tanks questioned central bank independence and targeted central bank’s sole objective of providing price stability. Accordingly, consultants of then Prime Minister (and President from 2014 onwards) and policy makers wanted to create deepener financial markets to help corporations with financing problems on the one hand and devised strategic incentives to key sectors producing intermediary goods in order to minimize current account deficit, on the other hand. This brand of import substitution lacked a detailed plan, but the idea behind the industrial policy by the AKP governments was related to enabling high value added production and minimizing import dependency in key sector. These attempts however, did not structurally transform the economy in a few years.

Thus, the recovery of advanced capitalist countries pushed Turkish authorities to pursue new bottles for putting their old wine. The tightening of financial conditions for periphery would make it harder for the Turkish firms to find cheap sources of finance. We see that the similar concerns are now voiced over the emerging market contagion, though the exposure to dollar drain by many peripheral countries are more manageable than Turkey. 

The causes of downfall

One narrative of the Turkish crisis attributes the chaos in the currency markets to the “one man rule” consolidated last year. Accordingly, Erdoğan’s grasp of absolute power, symbolized by the 2017 constitutional referendum and his electoral success in 2018 elections, made Turkey rely on one man’s decisions and skirmishes. New presidential powers of the President inevitably made things worse, suffering from democratic retrenchment during the state of emergency. The spat with Trump is well located in this narrative, as a final episode.

The mirror image of the dissident argument is voiced by the Islamo-fascist cadres. Using the escalation of tensions with the U.S. as an alibi, these policymakers portray the recent crisis as an extension of the “economic war” launched by the West. Otherwise, it is suggested Turkey is on its glorious path to become a leading economy in not only her region but also on the global stage.

Neither perspective underlines the impact of recent economic measures upon the Turkish turbulence. Since 2013, the Turkish economy has faced a bottleneck, which paralysed the top level AKP cadres. As we mentioned above, current account deficit continued to grow and the level of financial deepening was not enough to overcome the dependency of the economy to capital inflows for new investment as well as rolling over debt. The 2016 coup attempt and the contraction of the economy in the third quarter of the year added insult to the injury.

This bottleneck can be resumed as follows: attracting capital inflows requires increasing interest rates. This however would stifle domestic demand in medium term as well as result in economic activities further losing pace. One, albeit limited response, was the state-sponsored credit expansion of 2016-17. In turn, falling interest rates would provide an incentive for domestic consumption, but it will result in further depreciation of Lira. Depreciation of TL would also mean increased burden for corporations heavily indebted in foreign exchange. Thus, this bottleneck has also been a manifestation of a deep-rooted crisis of capital accumulation regime of Turkey.

The cost of postponing interest rate adjustment and renewing state sponsored credit expansion became much more notable in 2018, when TL continued to depreciate despite a 5 per cent interest rate hike (see Figure). The FX liabilities of the real sector reached 339 billion USD by May 2018. Before the elections in June 2018, current account deficit to the GDP ratio exceeded 6 per cent and the money needed to rollover private and public sector debt for the coming 12 months surpassed 180 billion USD. The desperate search for new funds did not yield any result and the portfolio flows financing the deficit economy of Turkey lost pace by 2018.

Screen Shot 2018-08-16 at 12.36.48

Turkish Lira gained some ground in the third week of August but the level of depreciation against USD from the 6th of August to the 14th was above 25 per cent. Stagflation is ahead and thousands of firm will go bankrupt as the FX liabilities cannot be managed against the backdrop of this depreciation.

What’s next?

We believe that the capital accumulation regime in Turkey, which benefited from capital inflows in 2002-07 and 2010-13 came to a definite end in 2018. AKP was successful in managing the ensuing social tensions by resorting to increasingly authoritarian techniques. By suppressing labour organizations, deferring strikes, assuming partial costs of the newly employed staff in particular and intervening into the economy via bypassing the parliament in general, policy makers served the major business groups as well as the SMEs under the state of emergency (July 2016 to July 2018). It seems that they can no longer go on as they used to.

Entertaining new-developmentalist ideas in the post-2013 era, such as selective incentives to the sectors producing intermediary goods did not result in a detailed road map for overcoming the crisis, which was then at the doorsteps. Since rapid growth continued thanks to capital inflows and the construction sector did not lose its steam, the policy makers relied on doing more of the same. It is partly because of the fact that the collapse of the economy in late 2008 was managed easily; the top level economic managers do not have a model or economic package for the coming months. They seem to rely on the regime’s tools to suppress mass discontent, praying that foreign capital will flow into wage-suppressed sectors and Turkish corporations will take huge steps in due course to produce technology intensive products. Keeping fingers crossed, however, will not be sufficient to have an easy access to a new path of prosperity and high economic growth.

In a nut shell, the recent currency crisis of Turkey clearly shows that Erdoğan government is at a crossroads now. Erdogan may choose the ‘more of the same’ option and implement a standard IMF type stabilization programme that has been demanded by the dominant capital fraction in the ruling block. This option requires elimination of the most ‘zombie firms’ that were bailed out by the government after 2016 contraction. Of course, it will come with a huge political cost in the wake of the local election that will be held in March 2019.

Alternatively, Erdoğan may follow a new-developmentalist framework and initiate a kind of import substitution industrialization strategy. We should underline that there is no clear blueprint or a concise plan for a new-developmentalist project, although there are some initial attempts and ad hoc initiatives of various ministries. A full-fledged transition to a new developmentalist path would require a more substantial change in the ruling block against the interest of currently dominant fraction of capital, and a change in the mode of integration of the Turkish economy in financialised globalisation which may necessitate to impose capital controls.

Thus, Turkey’s current problems are far more complicated than the increasing interest rates or Erdoğan’s ideological approach as suggested by the international media outlets. The currency crisis now set the country as a stage for further socioeconomic turbulences. The opposition in Turkey has to struggle not only against Erdogan’s authoritarian populist rule, but also technocratic neoliberal authoritarianism, creeping in IMF’s structural reform suggestions.

Ümit Akçay (Ph. D., Berlin School of Economic and Law) and Ali Rıza Güngen (Ph. D., Turkish Social Sciences Association)

 

[1] Güngen, Ali Rıza (2018) “Financial Inclusion and Policy-Making: Strategy, Campaigns and Microcredit a la Turca”, New Political Economy, 23 (3): 331-347.

[2] Akçay, Ümit (2018) “Neoliberal Populism in Turkey and Its Crisis”, Institute for International Political Economy Berlin, Working Paper No: 100/2018, http://www.ipe-berlin.org/fileadmin/downloads/working_paper/IPE_WP_100.pdf

 

Graph showing UK public sector net borrowing

Labour’s economic policy is not neoliberal

At what point does over-use of a term as an insult render it meaningless? Richard Murphy tested the boundary yesterday when he accused John McDonnell’s economic advisor James Meadway of delivering “deeply neoliberal, and profoundly conventional thinking”. This was prompted by a negative comment James made about Modern Monetary Theory (MMT).

In response, Richard posted a list of MMT-inspired leading questions which, wisely in my opinion, James declined to answer. Richard then accused James – and by implication Labour – of not standing up to “the bankers” (including Mark Carney) and remaining wedded to conventional/mainstream/neoclassical/neoliberal thinking (Richard seems to regard these as equivalent terms). Labour is therefore signed up, in Richard’s view, to deliver “more Tory economic policy” and “more austerity”.

This is, to put it politely, nonsense.

At the heart of the debate is the decision taken by Labour, early in Corbyn’s leadership, to adopt a fiscal rule. This commits a Labour government to balancing the books on current spending with a rolling five year target, subject to a “knockout” when interest rates are close to zero. The rule has been a source of contention since it was announced. (I expressed misgivings about its announcement.)

My preference would be for a bit more wriggle room. The two dangers that must be balanced when setting fiscal policy are insufficient demand and private sector unwillingness to finance public deficits. Insufficient demand results in unemployment or underemployment, weak wage and productivity growth, and inadequate social provision. The dangers on the flipside are unsustainable borrowing costs and, particularly if this is countered using the power of the central bank, inflation. The relative weighting given to financial market conditions and inflation in the UK is almost always too high. But this doesn’t mean the correct weight is zero, as less-sophisticated advocates of MMT sometimes appear to think.

The first danger arises when the desired saving of the private sector exceeds private sector investment. In such a situation, achievement of “full employment output” requires a government deficit – give or take the current account. Standard macroeconomics largely assumes this problem away by arguing that, outside of the zero lower bound, interest rates can always be set at a level which will induce the optimal level of demand. Consequently, monetary policy is the only tool required. I disagree with this view: I think it’s quite possible for economies to be demand-constrained and thus require fiscal demand management across a range of possible interest rates.

But on balance I think the fiscal rule has enough flexibility to allow a Labour government to maintain sensible levels of aggregate demand. In any recession in the foreseeable medium-term future it is hard to imagine that interest rates will not be cut to near zero. In this case the rule will be suspended and fiscal policy can be used “with all means necessary”. Second, the rule doesn’t preclude significant increases in government investment spending – a central part of the Labour policy programme. Government investment spending is likely to have strong multiplier effects and should help to rebalance demand in the UK’s consumption-driven economy. Finally, the rolling five year window allows for adapting the pace of current spending to negative economic shocks.

I can also see good political reasons for the rule. It provides an immediate rebuttal to those who try to perpetuate the deeply dishonest but highly successful Tory strategy of depicting Labour as the party of fiscal irresponsibility. As I understand it, the rule was formulated by Simon Wren-Lewis and Jonathan Portes, two highly credible progressive economists. Simon has been one of the most consistent and articulate critics of Tory austerity. To accuse them, as Richard is doing, of “delivering neoliberal thinking” is ludicrous.

Aside from the straightforward inaccuracies, there is a deeper problem with Richard’s argument. He equates, as do some MMT advocates, radical or progressive policy with fiscal policy. There is no question that Labour’s economic programme would mark a decisive shift in macro management: it would be the end of austerity. (Austerity was never really about managing demand and debt, in my opinion: it was cover for the ideological aim of shrinking the state.) But the truly radical aims in Labour’s programme – although not yet fully fleshed out – are on the supply side: structural reforms, but not of the sort pushed by the IMF.

There is merit to this approach, in my view. Yes, the UK economy is demand-constrained. Aside from the direct human costs, austerity has almost certainly done long-run damage to the supply-side. It must end. But over the longer run the UK faces profound challenges from an ageing population, wide geographical disparities, and the potential risks and benefits of automation. It makes sense to focus on the supply side: to have an industrial strategy. A progressive supply-side policy is not an oxymoron. (I remain concerned about how such a programme can be reconciled with a hard Brexit, as some on the Left advocate.)

I have more sympathy with MMT than James. I see it essentially as a US-focused political campaign based around a single policy: the job guarantee. I am not convinced by the policy, but it is the focus of progressive economic and political action in the US. Stephanie Kelton has done an excellent job of debunking simple deficit scaremongering. But to claim, as Richard is doing, that rejecting MMT means accepting wholesale neoliberal orthodoxy is silly – as are several of the views that Richard attributes, without justification, to James.

The left deserves a better standard of economics debate.