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Well, most of them, anyway.

ukraine-is-europe

Otherwise the prospects of Ukraine’s euroassociators don’t look all that good. Out of all the more than a dozen polls on this question done since December 2015, not a single one has been in Ukraine’s favor. The average gap between the share of people supporting and opposing the Ukraine–European Union Association Agreement has been 15%.

A majority of Dutch political parties have also agreed to treat the result as binding should there be higher than 30% turnout. Apathy is in fact the main hope of the Yes camp. The average expected turnout based on the polls is around 33%.

Ukraine’s Foreign Minister Klimkin was recently in Amsterdam to agitate for the Yes camp, along with a delegation of the country’s main religious figures.

“In the past two years not a single person has requested a bribe from me!” he introduced himself to Dutch viewers on a talk show, evidently looking to impress. “Before, the Ukraine was a deeply Orthodox country. And the latest anti-discrimination laws… about LGBT rights – you know, you couldn’t have imagined this 5-10 years ago.”

So apparently one of the main achievements of the Euromaidan as related by Klimkin to his progressive Dutch viewers has been that Ukraine has become less Orthodox. I wonder what the rest of his delegation made of that.

ukraine-delegation-to-amsterdam

Or for that even his main electoral constituents.

An LGBT festival in the Ukrainian city of Lviv had to be abandoned when the venue was surrounded by about 200 members of far-right groups shouting “Kill, kill, kill” on Saturday.

That is not very Yuropean of them either.

EDIT 2016/04/06: Via Ivan Katchanovski: “100% official vote count: 61% vote against Ukraine EU association, and 32% official turnout means valid vote. Exit Poll: 64% “No” vote in the Ukraine EU association referendum in the Netherlands. The 32% turnout in the final IPSOS exit poll reaches the 30% threshold but is close to statistical margin of error of 3%.The 29% turnout rate in the earlier IPSOS exit poll 30 minutes before the end of the vote is close to the 30% threshold and within statistical margin of error of 3%.

 
• Category: Foreign Policy • Tags: LGBT, Netherlands, Trade, Ukraine 
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Here it is:

(Republished from Da Russophile by permission of author or representative)
 
• Category: Foreign Policy • Tags: Politics, Trade, Ukraine, Video 
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“Imperialist Putin “Steals” Ukraine”… If only all those hysterical newspaper articles were true!

In reality, the only thing he stole was Ukraine’s credit card debt. He’s no idiot, of course, and is in no rush to pay it off. The drama certainly hasn’t ended. But a geopolitical pivot on the model of Khmelnitsky’s 1654 decision this is not.

Let me try to explain the actual motivations of everyone involved:

(1) The EU wants the Ukraine. No, have to be more precise. The Poles, Balts, Swedes, and Anglos want Ukraine in the EU, without Yanukovych. Scratch that. They want Russia without Ukraine without a Yanukovych. As long as Ukraine politely waits in the queue alongside Turkey and Egypt and all those other peripheral countries enjoying the glories of “European civilization” with Associate memberships, all is well.

(2) Putin wants a weak Yanukovych – because Yanukovych is loyal to his oligarchs, not Putin (duh!) – in control of Ukraine. He also wants Ukraine in the Customs Union. (But not its credit card debt). To do this he has been applying pressure, with Russia banning the import of Roshen chocolates, which belong to a particularly outspoken proponent of the EU, the oligarch Petroshenko. There are warning that EU Association will mean the setting up of tariffs on Ukrainian imports (Russia does not, after all, wish to have to compete with European goods on level territory at this stage). Russia’s long-term goal (with the Eurasian Union) is gradual convergence with EU standards, and eventually even integration. But that is very far off (2040′s maybe). The greater the scope of the Eurasian Union, the more advantageous the terms on which said integration can occur. There is no hurry.

(3) Yanukovych wants what the Donbass oligarchs want. The Donbass oligarchs want to legitimize and secure their wealth by integrating into Western institutions. But the Donbass oligarchs also want their main protector to remain in power. And unfortunately, things like raising gas prices by 40%, salary freezes, and big spending cuts – as demanded by the IMF in return for loans – is going to collapse whatever remains of Yanukovych’s support in the east and south. And why does the EU/IMF demand such stringent concessions? See above. They want a Ukraine without Yanukovych! It’s all logical.

Hence, when PM Azarov says that the decision to suspect the EU deal is “tactical,” he is in all likelihood saying the truth – as opposed to opposition claims that it is all some kind of elaborate conspiracy concocted with Putin to deny Ukraine its “European choice” and return it to imperial moskali domination.

It is also worth noting that during much of the summer, Ukrainian TV channels were propagandizing the benefits of EU association. This is presumably what caused support for the EU to start exceeding support for the Customs Union/Eurasian Union. It would have been exceedingly stupid and irrational to carry out this information campaign with the ultimate intention of performing a volte face and turning back to Russia. It would just piss off the Ukrainians who had become more energized about Europe. An own goal. Why would they possibly do it?

Now that we have a more realistic idea of how things actually work – as opposed to the fanciful tales that the Lithuanians are spinning of Russian blackmail towards Yanykovych, and its faithful repetition in the Western media – we can now look to the future.

That future revolves around February 26, 2015. That is when the next Ukrainian Presidential elections are going to take place. Yanukovych, presumably, wants to win them. But he is not very popular. He has a long-standing reputation as a thug, and a slightly less long-standing reputation as an idiot. Internet commentators frequently call him a “vegetable.”

But he does want to remain President. So Tymoshenko remains in prison, while a law is being introduced to make it illegal for Klitschko to run for the Presidency, seeing as he is a tax resident of Germany. (Aside: If I were Ukrainian, the fact that a tax resident of a foreign country is probably the most popular candidate for leadership would make me profoundly depressed).

The logical course, then, would be to sign up to the Russian deal, which could stave off what many in the financial community are considering to be imminent collapse. But EU membership remains a strategic goal for the Party of Regions and the oligarchs too. So we continue to observe very arduous attempts to have the cake and eat it too. I am talking about their pleas for a three-way trade commission between the EU, Ukraine, and Russia. But too bad for them, the EU isn’t interested. Because the EU doesn’t want Yanukovych. “Look soldier, you don’t like me, and I don’t like you.” “But I like you!” “Okay. You like me, but I don’t like you.” That’s the EU and Yanukovych, in a nutshell.

So that option is out of the window. The days of playing the EU off against Russia to extract concessions is drawing to a close.

What is going to happen now?

Sign up to the Customs Union and be done with all the rigmarole. This is not a choice: Extensive Russian support is predicated on joining the Customs Union.

This is what the opposition, the worshipers of the “European choice” and haters of “Aziopa,” so fervently fear. But I suspect those fears are misplaced. The Ukrainian population under 50 is more pro-EU than pro-Eurasia, and as older people die off, the balance of electoral (not to mention street) power is going to shift West. In this scenario, the Party of Regions will bear a mounting electoral toll for depriving Ukrainians of their “European choice.” The oligarchs will be none too happy either.

Incidentally, this puts the Party of Regions in a fundamental bind. Their core electorate is very slowly but surely dissipating. But should they try to tap the electoral power of younger age groups by signing the Association Agreement, the result would wreck eastern industry and collapse their existing electorate. So they would want to postpone this until after the Presidential elections if at all possible.

Another choice is to default now, devalue the currency, and hope for recovery to pick up in a year’s time, just in time for the elections. (This is what Belarus did in 2010, minus the elections). But this is very risky. Russian gas imports will become even more expensive, and crippling to the budget – and they would be loth to throw Yanukovych a lifeline. If they maintain pressure, Yanukovych would be truly doomed in 2015, even if Tymoshenko and Klitschko are both out of the game. The EU/IMF wouldn’t help either, of course (they don’t want Yanukovych). All they’d have to do is play the waiting game and just wait for a pro-European President to come to power in 2015.

Yanukovych has no good options, that much is clear. All are fraught with varying degrees of risk. But surprisingly enough, it actually appears that – in the absence of any further involvement with the EU, which has basically thrown a hissy fit and wants to have nothing more whatsoever to do with Yanukovych – the Customs Union path is the most promising one for him. Not a good one, mind. The younger people west of Donbass and north of Crimea are pissed off at him, and presumably the oligarchs are none too happy either. But unlike the alternatives – alienation of the core electorate – these are fundamentally manageable problems. Younger people are more active, sure, but the power of the street is overrated (it was a court decision, not the Maidan, that was central to the Orange Revolution); and elderly people are more likely to vote. And what other choice do the Donbass oligarchs have?

All in all, a carnival of errors. The Party of Regions making EU integration a core part of its platform to the extent of funding an information campaign in favor of it. The EU for being so hardline on fiscal matters, which was ultimately a threat to Yanukovych’s political survival and hence unacceptable. Putin is the only one who appears to have played all his cards right.

Well, this train of thought has come to a most unexpected point. I suppose the “hysterical” articles aren’t so hysterical after all… But the outcome is accidental, not having been intended by Yanukovych.

And it goes without saying that things remain very unpredictable. For instance, there’s also the Chinese variant.

(Republished from Da Russophile by permission of author or representative)
 
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The latest US-Russia.org Experts Panel discussion was about Russia’s burgeoning partnership with China. I especially recommend Mercouris’ contribution which – although unfortunately titled by VoR’s editorial staff)) – is otherwise quite brilliant. My own effort follows below:

First of all, let me preface that I’m one of the biggest China bulls around. Its economy in real terms will overtake that of the US by the mid-2010’s, if it hasn’t already. It’s already bigger in a range of industries, from traditional heavy industry (steel, coal) to consumption (car sales, e-commerce). Its manufacturing wages have caught up with Mexico’s, which is a quintessential middle-income country. If the average Chinese is now about as prosperous as the average Mexican, then the PRC’s total GDP – taking into account its vast population – is now well ahead of America’s.

Nor is it a house build on sand, as many Sino pessimists would have you believe, but on solid, steel-reinforced concrete. Its economic growth is NOT dependent on cheap exports. And fantasies about its “exploited” cheap labor force, which will become increasingly uncompetitive as it develops, belie the fact that the average Chinese now scores higher in international standardized tests than the OECD rich country average. Given the centrality of human capital to economic growth, China’s rise to the top tables of world power is all but assured.

It would be very worrying if China’s ascent was accompanied by the bellicose rhetoric and militaristic posturing adopted by other rising Powers of the past, like the Kaiser’s Germany. But “yellow peril”-type hysteria aside, this does not seem to be the case. China spends a mere 2% of its GDP on its military, i.e. about twice less in proportional terms than both Russia and the US. This is a most fortunate confluence of events, especially for Russia, as competing with China is unrealistic in the long-term – not when its economy is an order of magnitude bigger. On the other hand, deep engagement with China hold out a number of benefits.

First, China gets access to Russian energy resources, bypassing the vulnerable routes past the Strait of Malacca (either overland via Siberia, or across the top of the world via the thawing Northern Sea Route), while Russia gets access to Chinese capital and technologies – much of the latter purloined from the West, true, but so what? Second, both countries secure their frontiers, allowing them to focus on more troubling security threats: The Islamic south and possibly NATO in Russia’s case, and disputes with Vietnam, Japan, and a USA that is “pivoting” to the Pacific in China’s case. Third, resources can be pooled to invest in Central Asia and root out Islamist militants and the drug trade – an issue that will assume greater pertinence as the US withdraws from Afghanistan.

Frankly, the West is too late to the party. It had an excellent chance to draw Russia into the Western economic and security orbit in the 1990’s, but instead it chose the road of alienation by pointedly welcoming in only the so-called “captive” nations of East-Central Europe. Putin’s reward for his post-9/11 outreach to the US was a series of foreign-sponsored “colored revolutions” in his own backyard. While in rhetoric both he and Medvedev continue to affirm that Russia is a European country, in practice attitudes towards them have come to be based on practicalities, not lofty “values” that they don’t even share. So it is only natural that with time Russia came to be more interested in pursuing a relation with the BRICS (“The Rest”) in general, and China in particular.

The West’s response hasn’t been enthusiastic. The BRICS are written off as a bunch of corrupt posers with divergent geopolitical ambitions that will stymie their ability to act as a coherent bloc. Russia and China come in for special opprobrium. While there’s a nugget of truth in this, it misses the main point: The BRICS might be poorer but by the same token they are growing faster and converging with the West, or at least China and Russia are; and while they don’t see eye to eye on all things, they agree on some fundamentals like multi-polarity, a greater say for developing nations in the IMF and World Bank, and the primacy of state sovereignty.

Here is a telling anecdote from an online acquaintance of his recent experiences with the European news channel, Euronews: “A feature of this site is that there’s a world map with happy and sad smileys on it to indicate good news and bad news. And there on Moscow I spotted a sad smiley, so I focused on it, thinking there would be a report on the already day-old and forecast to last another day blizzard that is raging right now across the Ukraine and European Russia… And the “bad news” that I read? The meeting between the Russian president and his Chinese counterpart together with a report and an analysis of the increase in trade between those two states. That’s really bad news, it seems, for some folk.”

And this is not so much an isolated incident, but a metaphor for the general state of West – Russia relations: While the former expects a certain degree of respect and even submission from the latter, it doesn’t tend to make reciprocal gestures, and then acts like a jilted lover when Russia gives up and goes to someone else’s bed. But that’s the reality of a globalized world, in which the West isn’t the be all and end all, and countries have choices. It is high time that the West mustered the humility to finally accept that it has been dumped.

(Republished from Da Russophile by permission of author or representative)
 
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Pomeranz, Kenneth – The Great Divergence: China, Europe, and the Making of the Modern World Economy (2001)
Category: economy, history, world systems; Rating: 5*/5
Summary: Brad DeLong’s review; The Bactra Review; Are Coal and Colonies Really Crucial?

great-divergence-pomeranz It’s a rare book that not only vastly informs you on a particular issue, but in so doing overturns many prior conceptions you had on the general subjects. Now, Pomeranz is not a good writer. The text is slow and turgid, and readable only by dint of my interest in the subject. Many potential counter-arguments go unanswered (which is not to say that they sink the overall theory, as I will try to prove in this review). All that said, I have little choice but to give it a 5*/5, as this a truly counter-intuitive and deeply contextualizing work that overturns many of the triumphalist post hoc narratives of Western chauvinism.

This book attempts to answer the big question of world economic history: Why Europe? It does this by systematically comparing Europe with other leading world regions in the pre-industrial age such as Qing China, Tokugawa Japan, and India. The first big finding is that – contrary to the conventional wisdom – there were far more similarities than differences, at least between Britain and the most advanced Chinese region, the Yangtze Delta.

Essential Similarities Between Old World Cores

It is sometimes argued that special European demographic patterns, such as marrying late and a celibate clergy, had the effect of lowering its fertility and mitigating the Malthusian impoverishment held to be prevalent elsewhere. Another, often complementary, view is that European consumption markets were already far more developed than in China, which allowed it to hit the ground running (so to speak) once the preconditions for industrial revolution were fulfilled. However, China also saw fertility postponement, and there is ample evidence that at least until the mid-19th century the average quality of life in China as measured by life expectancy, median incomes, availability of consumer goods, etc. was at least as good as in Europe, probably higher, and as good as Britain in its most advanced region, the Yangtze Delta.

Although Europe was technologically ahead in some spheres – most visibly, guns, clock making, optics – China had a clear lead in irrigation, soil preservation and land management, and medicine (yields per acre in Europe only approached Chinese levels by the late 19th century). This is of no small consequence in pre-industrial societies hewing to the laws of Malthus. As in China, per capita food and fuel availability declined in Europe up until the mid-19th century century; only in Britain was this in significant part mitigated from 1800 by the windfall of “coal and colonies” (much more on this later).

Finally, there’s the argument that European capitalist institutions and markets were better developed and thus kick-started its growth. But again, the evidence Pomeranz marshals convinces that, if anything, China was substantially more “capitalist” (in the laissez-faire sense) than Europe. There were far fewer monopolies, and no internal trade barriers – contrast this, for example, with ancient regime France – and as a consequence, the volume of trade flows (in grains, sugar, timber, etc) were far higher within China than in continental Europe. The civil service was professional and meritocratic, whereas in Europe this only came to be in the 19th century. Markets for labor and products were freer in China; guilds had much less political influence than in Europe. Bound labor and feudal obligations remained prevalent far longer in Europe (and India) than in China, where it had long ago become marginal; for instance, the settlement of Taiwan for the cultivation of sugar – China’s equivalent of the Caribbean islands – was done by free labor. Though credit was cheaper in Europe – or, at least, in Holland and Britain – but to cut a long story short, there is (1) no evidence that this made crucial industrial activities unprofitable or impeded further pro-industrial mechanization, and (2) the credit system was more developed in India relative to China and Japan, although it was far more backward in general.

One major factor that Pomeranz glosses over is the impact of the Scientific Revolution. Though Chinese scientific achievements are under-appreciated – for instance, it matched Western mathematical achievements up to and including those of 16th century Italy – it is undeniable that Europe took a commanding lead from about the mid-16th century. There was to be no Chinese Kepler or Newton. But impressive as it was, you do not need calculus or laws of planetary motion to produce coal and iron (“as late as 1827 and 1842, two separate British observers claimed that Indian bar iron was as good or betterthan English iron”), and you certainly don’t need them to more efficiently produce textiles. As first textiles, and then coal and iron, constituted the first stages of the Industrial Revolution – up to the 1860′s or so – the European scientific base was almost entirely incidental to the initial industrial takeoff. Now obviously this scientific base did become vastly more important by the late 19th century, which saw the flowering of the electric, chemical, and international combustion engine industries; and those countries with particularly powerful research establishments, such as the US and Germany, did very well, catching up to Britain. However, by then China was already hugely behind.

Addendum 7/31: I almost forgot to mention this. This is probably obvious, but Pomeranz says nary a word about the contribution of cultural differences to the Great Divergence (in contrast to people like Landes who make it a centerpiece of their analysis, waxing poetic on the influence of the Renaissance, the Reformation, distinctive Western values of separation of church and state, etc). And rightly so. Culture is an intangible, and has very little explanatory power; furthermore, such explanations are frequently contradictory in time and place (for instance, whereas “Confucian values” may be cited as holding Chinese society back, they are now frequently invoked to explain the meteoric rise of the Asian tigers; you can’t have it both ways, folks).

The European “Miracle”: Coal and Colonies

Why then did Europe, and more specifically Britain, industrialize while China fell into an ecological impasse in which food production barely kept up with population growth? Pomeranz argues (convincingly, IMO) that the crux of the matter was a fortunate conjunctures and contingencies that overwhelmingly favored Europe.

First, colonies. Many recent scholars have dismissed their contribution; according to one article, overseas coercion could not have been responsible for more than 7% of gross investment in late 18th century Britain (and far less in Europe). But this neglects the vital role of the New World colonies – with their near endless land and natural resources – at relieving ecological bottlenecks in Europe, and in particular Britain. These included sugar (which acted as an additional source of calories as well as a hunger suppressant) and cotton (for clothing, and indirectly relieving pressure on pastures and timber for heating), and later in the 19th century, massive grain exports. All this “ghost acreage” allowed the British isles to support a far larger population than its existing carrying capacity could have, a highly urbanized one and relatively comfortable too (hence no Malthusian stress as in late Qing China, with its debilitating effects on political and social cohesion).

(Furthermore, even the aforementioned 7% figure could have been significant in a pre-industrial world. Due to high rates of capital depreciation, the net accumulation in capital stock then was only a small fraction of the overall savings rate. For instance, according to one calculation, that hypothetical 7% in “super-profits” – an increment to gross savings not purchased at the expense of consumption – could have significantly increased an otherwise minimal rate of net capital accumulation.)

And these goods – cotton, sugar, etc. – could be imported at very favorable terms of trade, because of another set of favorable conjunctures. The decimation of Native Americans due to European epidemiological superiority cleared the way for settlers, who supplied the Caribbean colonies with food and Britain with timber (thus relieving its Malthusian stress). Furthermore, the slave labor on the Caribbean islands – apart from the implicit coercion (and “super-profits” it enabled) – prevented them from developing their own proto-industrial sectors that could undercut British exports.

This is in contrast to what happened naturally in China, largely by dint of its free labor markets (as opposed to New World slavery or East European serfdom). The inner provinces began to expand their handicrafts and textiles industries, thus undercutting the (more advanced) proto-industrialization of the Yangtze Delta. This was a form of “import substitution,” and economically natural in those times because of far higher transport costs than is the case today. This was accompanied by a growing population in the inner regions. Unable to increase its industrial exports, and facing declining imports of rice, timber, etc., the most advanced Chinese regions, the Yangtze Delta and Lingnan, had to increase the labor intensity of their agriculture so as to keep food production abreast of their own population.

Obviously, the conditions did not exist for a Caribbean turn towards import substitution. The slaves themselves had no choice, and neither did the owners; they needed to produce commodities for export in order to pay for replacing slaves. And this all provided a growing (as opposed to declining) demand stimulus for British industry.

One additional New World advantage covered in some length by Pomeranz is the windfall of New World silver – which was, in large part, a free gift to Europe on account of the slave labor and monopolies used in its extraction. This allowed it to easily balance the books with trade in China for silk, porcelain, etc., which in turn could be used to pay for African slaves and New World resources. And Chinese demand for silver was huge, since it was remonetizing its economy to run on silver during the early modern period. Indirectly, it contributed to the formation of the Atlantic economy.

The second great British advantage was coal – that is, as an alternative to wood, located close to its main industrial centers (China too had coal, but it was far away from its main industrial centers, and transport costs were prohibitive). Coal relieved pressure on woodlands, which were in rapid decline, and – due to its virtually limitless nature – unbound the production possibilities of iron. Steam power was crucial to this expansion, not only by powering other processes but by permitting a huge expansion of coal-mining itself. “The Chinese had long understood the basic scientific principle involved – the existence of atmospheric pressure – and had long since mastered (as part of their “box bellows”) a double-acting piston/cylinder system much like Watt’s, as well as a system for transforming rotary motion to linear motion that was as good as any known anywhere before the twentieth century. ll that remained was to use the piston to turn the wheel rather than vice versa.” So the relevant technical skills were not unique to Europe. In fact, northern China had a huge coke and iron complex as early as the 11th century under the Song dynasty, though it was brought low by the multiple perturbations of the 12th-15th centuries (Jurchen and Mongol invasions, etc). The rest is worth quoting in extenso:

However, a number of factors militated against widespread Chinese (re)adoption of coal as a major fuel source. First, the reorientation of the center of Chinese development to the east and south meant by the Qing dynasty meant that its industrial cores were now located far from the big coal deposits in the north-west; the advantages of linking these regions by transport are only evident ex ante. Second, the best artisans were concentrated in the (low coal) Yangtze Delta or along the south-east coast, and serving a huge public demand for clocks and other mechanical toys. Third, “even if mine operators had seen how to improve their mining techniques, they had no reason to think that extracting more coal would allow them to capture a vastly expanded market.” Finally, and most importantly, the technical nature of extracting Chinese coal was profoundly different from that of extracting British coal; in fact, it made the deep extraction that enabled Britain to boost its output all but impossible.

English mines tended to fill with water, so a strong pump was needed to remove that water. Chinese coal mines had much less of a water problem; instead they were so arid that spontaneous combustion was a constant threat. It was this problem – one that required ventilation rather than powerful pumps – that preoccupied the compiler of the most important Chinese technical manual of the period… Even if still better ventilation had ameliorated this problem—or if people wanted coal badly enough to pay for this high level of danger – ventilation techniques would not have also helped solve the problem of transporting coal (and things in general) as the steam engines that pumped out Britain’s mines did. Thus, while overall skill, resource, and economic conditions in “China,” taken as an abstract whole, may not have been much less conducive to a coal/steam revolution than those in “Europe” as a whole, the distribution of those endowments made the chances of such a revolution much dimmer.

In contrast, some of Europe’s largest coal deposits were located in a much more promising area: in Britain. This placed them near excellent water transport, Europe’s most commercially dynamic economy, lots of skilled craftspeople in other areas, and – to give the problems of getting and using coal some additional urgency – a society that had faced a major shortage of firewood by 1600 if not before. And although timber and timber-based products were imported by sea, this was far more expensive than receiving logs floated down a river, as the Yangzi Delta did; the incentives to use (and learn more about) comparatively accessible coal were correspondingly greater.

Much of the knowledge about how to extract and use coal had been accumulated by craftsmen and was not written down even in the nineteenth century… Harris shows that French attempts to copy various coal-using processes foundered, even when they reproduced the equipment, because the production of, say, a heat-resistant crucible required very detailed knowledge and split-second timing acquired through experience – and the financial losses from making a mistake could be very large… Only when whole teams of English workers were brought over (mostly after 1830) was the necessary knowledge effectively transferred.

Thus we see that technological expertise was essential to Europe’s coalbreakthrough, but the development of that expertise depended on long experience (and many failures along the way) with abundant, cheap supplies. This experience was possible because artisan skill, consumer demand, and coal itselfwere all concentrated near each other. Without such geographic good luck, one could easily develop lots of expertise in an area with a limited future (e.g.,in using and improving wood furnaces) and not proceed along the track that eventually led to tapping vast new supplies of energy.

Furthermore, the adoption of the steam engine – whose synthesis with coal was what really generated the Industrial Revolution – was also highly contingent. It was the result of 200 years of use on British coal fields, which was both economical (free coal due to zero transport costs) and proximate to mechanics-minded artisans which could offer improvements. Nonetheless, it took until 1830 for the costs of energy per unit of power for steam-run textile machinery to decline precipitously; until then, water remained competitive with steam engines!

Take away some of the incremental advantage conferred by skill transfers from nearby artisans in other fields, the learning by doing made possible by the application to nearby coal fields, and the low cost of coal itself, and – as incredible as it seems to us today – the steam engine could have seemed not worth promoting.

So, in conclusion, Britain enjoyed two major advantages that the Yangtze Delta, the Lingnan region, and Japan did not: (1) a colonial system that allowed it to massively increase its effective carrying capacity while simultaneously stimulating its industrial production, and (2) conveniently located coal reserves in damp places.

Apart from Britain, Europe as a whole was nowhere close to an industrial takeoff at the dawn of the 19th century; and though the relative inefficiency of its land usage – and the gains from ameliorating that – allowed it to avoid a crisis for a few decades after 1800 (what Pomeranz calls the ecological “advantages of backwardness”), it was nonetheless approaching an an ecological bottleneck as in China (the 1840′s in particular are known as a time of dearth). This was at a time when the Industrial Revolution had scarcely began on the mainland, and if it had continued it would have required the diversion of more and more labor to working the land intensively, instead of industry. Could industrialization then have been sustained without coal, New World surpluses, and the already existing industrialization of Great Britain?

The general impression one gets is that not only was the “European miracle” in fact just a matter of fortunate conjunctures and contingencies, but that there was nothing especially preordained about the Industrial Revolution. No colonial surpluses; no easily-reachable coal or mechanical culture; perhaps, even no slavery (to enhance the efficiency with which colonial surpluses were extracted) – no industrial revolution. At least, not a few more centuries.

Additional Thoughts for Consideration

(1) Needless to say, I now largely reject my previous theory Walled Off By Complexity: Did China Stagnate Because Of Its Writing System? I don’t think the hieroglyphics system did China any good, but they certainly can’t explain The Great Divergence.

(2) One important factor that I didn’t see Pomeranz mention – the Atlantic is much narrower than the Pacific! China was building ships as advanced as that of the European Golden Age of Navigation as early as the 15th century, and in huge numbers far exceeding the capacity of any single European state. Navigation itself wasn’t a problem either (note that it was China that invented the compass, topographic maps, etc). But it didn’t practice overseas slave-trading, and those Chinese that settled new lands – be they in Taiwan, or the inner provinces – tended to develop their own proto-industrial economies, which in the presence of conditions of free trade and free markets for labor and products eventually undermined the volume of trade.

(3) The “rise of the West” was in large part built on systems – mercantilism, military-fiscal competition, etc. – that universal Western ideology now condemns. Ironically, the BRIC’s (including most prominently China) are the ones using mercantile strategies to catch up to the West.

(4) What’s even more curious is that it wasn’t only Britain, and then the rest of Western Europe that overtook China; so did Russia. Now Russia was undoubtedly far, far behind both China and the West practically since its inception until (relative to China) about the late 19th century. It had serfdom, very small urban class, a very de-commercialized economy, with luxury consumption being indulged in by a tiny elite, etc. Nonetheless, despite this backwardness – an inevitable one, due to ecological reasons I have written a lot on this blog about – the state did nonetheless successfully leverage what meager surpluses it had to maintain a rough military parity with the West and play the role of a Great Power. So, yet more evidence that strict adherence to neoclassical economic development isn’t all that it’s hyped up to be.

(5) An interesting counter-factual to consider – what if there had been no easily accessible coal in Britain or the Rhineland, and if Columbus had found no New World and instead sunk somewhere in the middle of a globe-spanning World Ocean? Could there have been an industrial revolution? Is industrial revolution contingent on “coal and colonies”?

Or would Europe instead have become something like Qing China in the 19th century, increasingly politically debilitated, and economically stagnant – any improvements in land management and increasing labor intensity swallowed up by an inexorably growing population? Could it, indeed, have collapsed, perhaps after it grew critically weak and was invaded by the Russian Army much like China was by the Jurchens, the Mongols, the Manchus, etc., and pillaged by British pirates much like Japanese pirates preyed on a weak China in the 17th century Ming twilight? Indeed, could it eventually have collapsed into yet another Dark Age as followed the Roman Empire, in which much of the vaunted knowledge of the Scientific Revolution would be lost to memory, with the 18th century to early 19th century coming to be seen as a bygone “Golden Age”?

PS. H/t to Doug M. for bringing this book to my attention in the first place.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Another Wikileaks cable – a secret one, not merely confidential – from our Caucasus ethnologist and bestest bud at the State Department, William Burns. Dated October 2007, it describes America’s perception of Russia’s global arms trade and emphasizes its concerns that many of its partners are “rogue” or “anti-American” states like Syria, Iran and Venezuela. However, Burns is intelligent enough to acknowledge that the Russians have their own economic, political and cultural reasons for doing things they way. Though obliged to provide suggestions on how to make Russian politicians see eye to eye with the US on the matter, it is likely a quixotic endevour.

Russia is expanding arms exports, seeking ties beyond its traditional partners India and China. (Burns correctly predicted that the Russia – China arms relationship will wane due to Chinese reengineering, copying and reproduction of Russian military products). The capture of most NATO and former Soviet markets by US and European military companies is the primary economic agent behind Russia’s courting of states that Washington has bad relations with. In reply to Western objections, Russia tends to reference “multilateral arms controls regimes (e.g. Wassenaar Group, MTCR, etc.), UN resolutions, or Russian law” in justification; and US protests against its entertainment of “Chavez’s grandiose regional visions” are believed, by the RF Foreign Ministry and Russian defense experts, to spring from “a “Monroe doctrine” mentality, and not real concerns over regional stability.” Finally, a lack of economic diversification actively PUSHES Russia into the arms trade: as Anatoly Kulikov pithily notes, “Russia makes very bad cars, but very good weapons.”

Burns then notes that the Russian MIC is an “important trough at which senior officials feed”, citing as an example “Russia’s decision to sell weapons that the Venezuelan military objectively did not need.” If true, isn’t this just Venezuelan stupidity or corruption? But according to Burns, this is because it’s in the “interest of both Venezuelan and Russian government officials in skimming money off the top.” Color me skeptical. According to Burns’ own sources, the 2006 arms trade between Russia and Venezuela totaled more than $1.2bn, and included “24 Su-30MK2 fighter-bombers and 34 helicopters”; more recently, the two countries began to negotiate the “sale of three Amur class submarines” in a prospective deal worth $1bn. This implies price tags of c.$50mn per fighter and c.$350mn per sub. However, according to my calculations, despite having unit production costs similar to Russia’s, the prices of US gear sold to Arab states are several times higher – c.$170mn per F-16 fighter to Iraq and a cool $360mn per F-15 fighter to Saudi Arabia. This implies that the US sells fighter jets of 1970′s vintage to at least one country AT A HIGHER UNIT PRICE than at which Russia sells its most modern diesel SUBMARINES to Venezuela! So not much spare room at Russia’s side of the “feeding trough”, at any rate…

Then it’s argued there is also a cultural element to Russia’s arms trade policy, namely, an “inferiority complex” with respect to the US that translates into a kind of overcompensating need to prove itself as an independent Great Power in the eyes of the world and its own citizens. This is meant to explain its desire for the “thrill of causing the US discomfort by selling weapons to anti-American governments in Caracas and Damascus.” These arguments are mostly sociological truthiness that I think don’t merit detailed rejoinders.

The analytical decline towards the end is reflected in toothless recommendations, such as a more concerted policy by European, Sunni Arab and Latin American governments, as well as the US itself, to pressure and cajole Moscow into easing back on its weapons sales to “rogue” and US-unfriendly states. Whether or not the recommendation was followed, it is evident that it’d be destined for failure, and I think Burns himself acknowledged this in the cable (“American concerns are interpreted cynically, as the disgruntled complaints of a competitor, and viewed through the prism of a 1990′s story line in which the West seeks to keep Russia down”).

Ultimately, with today’s Russia, it is geopolitics and quid pro quo deals that influence its conduct. To take one germane and ongoing example: The US made concessions during the Reset, e.g. easing back on US companies getting involves with Russia’s modernization and even mooting selling Russia some of its military techs; in return, Russia formally declined to sell the S-300 air defense system to Iran, thus (ostensibly) losing a major lever against Washington. But with the recent Republican victory and rumors of covert US rearming of Georgia, there appeared countervailing rumors of S-300 radar parts making their way to Iran via Russia’s proxy states. The lesson is one that Burns no doubt understands, but cannot state forthright: one rarely gets a free geopolitical lunch.

Reference ID Created Released Classification Origin
07MOSCOW5154 2007-10-26 02:02 2010-12-01 23:11 SECRET Embassy Moscow
VZCZCXRO9740
PP RUEHDBU
DE RUEHMO #5154/01 2990225
ZNY SSSSS ZZH
P 260225Z OCT 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 4848
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEKJCS/SECDEF WASHDC PRIORITY

S E C R E T SECTION 01 OF 04 MOSCOW 005154

SIPDIS

SIPDIS

EO 12958 DECL: 10/09/2017
TAGS PREL, ECON, MARR, MASS, PARM, PINR, PINS, RS
SUBJECT: ADDRESSING RUSSIAN ARMS SALES
REF: A. STATE 137954 B. MOSCOW 3207 C. MOSCOW 3139 D. MOSCOW 3023 E. MOSCOW 557 F. MOSCOW 402

Classified By: Ambassador William J. Burns. Reasons 1.4 (b) and (d).

1. (C) Summary: FM Lavrov’s disinterest in establishing an expert level dialogue on arms sales begs the question of how best to address our concerns over Russia’s arms export policy. Russian officials are deeply cynical about our motives in seeking to curtail Russian arms exports to countries of concern and the threatened imposition of U.S. sanctions has not proven successful so far in modifying Russian behavior. Russia attaches importance to the volume of the arms export trade, to the diplomatic doors that weapon sales open, to the ill-gotten gains that these sales reap for corrupt senior officials, and to the lever it provides the Russian government in stymieing American interests. While Russia will reject out of hand arguments based on the extraterritorial application of American sanctions, Russian officials may be more receptive to a message couched in the context of Russian international obligations and domestic legislation, the reality of American casualties, and the backlash to Russian strategic interests among moderate Sunni governments. In making our argument, we should remember that Russian officialdom and the public have little, if any, moral compunction about the arms trade, seeing it instead as a welcome symbol of Russia’s resurgent power and strength in the world. End Summary

Russian Arms Sales Matter

2. (C) Russian arms sales are consequential, totaling approximately USD 6.7 billion in 2006, according to official figures. This amount reflects a 12 percent increase over 2005, and a 56 percent increase since 2003. Russian arms sales are expected to total at least USD 8 billion in 2007. Russia has made a conscious effort to improve after-sales customer service and warranties, which has added to the attractiveness of its weapons. As a result, Russian weapons command higher prices than previously. Russia is ranked second only to the United States in arms sales to the developing world, and a sizeable portion of its arms trade is with countries of concern to us.

3. (C) While no sales were reported in 2006 to Iran, Syria, or Sudan, in 2007 Iran reportedly paid Russia USD 700 million for TOR-M1 air defense missile systems. While Syrian economic conditions are a natural brake on trade with the Russians, as a matter of principle the GOR is prepared to sell “defensive” equipment such as anti-tank missiles and Strelets (SA-18) surface-to-air missiles, as well as upgrade MiG-23 fighters. The GOR barred the sale of Iskander-E tactical missiles to Syria only after intense international pressure. Venezuela remains a growth market, with arms transfers in 2006 totaling more than USD 1.2 billion, including 24 Su-30MK2 fighter-bombers and 34 helicopters. Russia has an “open arms” approach to Venezuela, and whether it’s the transfer of more than 72,000 AK-103 assault rifles or negotiations for the prospective sale of three Amur class submarines (valued at USD 1 billion), Russia is prepared to entertain Chavez’s grandiose regional visions.

4. (C) Defense experts emphasize that the American and European domination of traditional NATO markets and capture of new entrants (and old Soviet customers) from Central and Eastern Europe means that Russia must court buyers that fall outside the U.S. orbit. By definition, Iran, Syria, and Venezuela are good markets for Russia because we don’t compete there.

5. (C) While concrete numbers are hard to come by, our best figures indicate that Russian arms sales to its traditional big-ticket customers — China and India — are growing. Russian experts, however, predict a declining trajectory in the medium term. In 2006, Russia completed approximately USD 1.4 billion in sales to China, including eight diesel submarines and 88 MI-171’s, which means the PRC only narrowly edged out Chavez as Russia’s most important customer. Russian defense experts underscore that as China’s technological sufficiency and political influence grow, the PRC will develop increasing military self-sufficiency and greater ability to challenge Russia as a supplier. At the same time, sales to India totaled only USD 360 million. Russia and India, in fact, have signed arms deals worth USD 2.6 billion, but not all deliveries and payments have been made. While Russian experts still downplay the ability of the U.S. to displace Russia in the Indian arms market, for reasons of cost and the legacy of decades’ old dependence, they recognize increasing American inroads and growing influence. Other notable Russian markets include Algeria, Czech Republic, Vietnam, South Korea and Belarus.

A Legalistic World View

6. (S) As the recent 2 2 consultations confirmed, Russian officials defend arms sales to countries of concern in narrow legal terms. In answering our demarches, MFA officials always identify whether the transfer is regulated by one of the multilateral arms controls regimes (e.g. Wassenaar Group, MTCR, etc.), UN resolutions, or Russian law. Senior officials maintain that Russia does take into account the impact on the stability of the region in determining whether to sell weapons and shares our concern about weapons falling into terrorists’ hands. This Russian decision-making process has led to a defacto embargo on weapons transfers to Iraq, where Russia is concerned over leakages to Iraqi insurgents and Al-Qaida; to a hands-off policy towards Pakistan, the country Russia views as the greatest potential threat to regional stability (with then-Russian Foreign Minister Igor Ivanov ruling out weapons sales to Pakistan as far back as 2003); and to a moratorium on “offensive” systems to Iran and Syria. Concern over leakage has prompted Russia to tighten its export controls, with the recent institution of new provisions in arms sale contracts for Small Arms and Light Weapons (SALW) that require end-user certificates and provide Russia the right to inspect stockpiles of weapons sold.

7. (S) What Russia has not done is accept our strategic calculus and rule out the possibility of sales to Iran, Syria, Sudan, or Venezuela. The arguments made are broadly similar:

– With Iran, we are told that that Russia will not sell any weapon that violates a multilateral or domestic regime, nor transfer any item that could enhance Iranian WMD capabilities. Sales, such as the TOR-M1 air defense missile system, are justified as being defensive only, and limited by their range of 12 kilometers. While DFM Kislyak told us October 18 that he was unaware of any plans to sell Iran the S-300 long-range surface-to-air missile system, MFA officials previously told us that such sales, while under review, would not violate any Russian laws or international regimes.

– With Syria, Russia also argues that its transfers are defensive in nature, and points to its decision to halt the sale of MANPADS. The MFA maintains that Russian weapons used by Hizballah in 2006 were not a deliberate transfer by the Syrian government, but involved weapons left behind when Syrian forces withdrew from Lebanon. Russia argues that tightened end-user controls will prevent any future transfers.

– With Sudan, the GOR denies any current arms trade with the regime, and maintains that Russia has not violated UN sanctions or Putin-initiated decrees. However, based on our demarches, it is clear that — in contrast to Syria — Russia has adopted a “don’t ask, don’t tell” approach to Sudan’s adherence to its end-use requirements for its existing inventory of Russian/Soviet weapons.

– With Venezuela, both MFA officials and Russian experts believe that a “Monroe doctrine” mentality, and not real concerns over regional stability, is behind U.S. demarches.

What Is Behind the Russian Calculus

8. (C) A variety of factors drive Russian arms sales, but a compelling motivation is profit – both licit and illicit. As former Deputy Prime Minister and senior member of the Duma Defense Committee Anatoliy Kulikov told us, “Russia makes very bad cars, but very good weapons,” and he was among the majority of Russian defense experts who argued that the laws of comparative advantage would continue to propel an aggressive arms export policy. While Russian defense budgets have been increasing 25-30 per cent for the last three years, defense experts tell us that export earnings still matter. The recent creation of RosTechnologiya State Corporation, headed by Putin intimate Sergey Chemezov, which consolidates under state control RosOboronExport (arms exports), Oboronprom (defense systems), RusSpetsStal (specialized steel production), VSMPO (titanium producer), and Russian helicopter production, is further proof of the importance the Putin government places on the industry.

9. (C) Likewise, it is an open secret that the Russian defense industry is an important trough at which senior officials feed, and weapons sales continue to enrich many. Defense analysts attribute Russia’s decision to sell weapons that the Venezuelan military objectively did not need due to the interest of both Venezuelan and Russian government officials in skimming money off the top. The sale of Su-30MK2 fighter-bombers was cited as a specific example where corruption on both ends facilitated the off-loading of moth-balled planes that were inadequate for the Venezuelan Air Force’s needs.

10. (C) A second factor driving the Russian arms export policy is the desire to enhance Russia’s standing as a “player” in areas where Russia has a strategic interest, like the Middle East. Russian officials believe that building a defense relationship provides ingress and influence, and their terms are not constrained by conditionality. Exports to Syria and Iran are part of a broader strategy of distinguishing Russian policy from that of the United States, and strengthening Russian influence in international fora such as the Quartet or within the Security Council. With respect to Syria, Russian experts believe that Bashar’s regime is better than the perceived alternative of instability or an Islamist government, and argue against a U.S. policy of isolation. Russia has concluded that its arms sales are too insignificant to threaten Israel, or to disturb growing Israeli-Russian diplomatic engagement, but sufficient to maintain “special” relations with Damascus. Likewise, arms sales to Iran are part of a deep and multilayered bilateral relationship that serves to distinguish Moscow from Washington, and to provide Russian officials with a bargaining chip, both with the Ahmedinejad regime and its P5 1 partners. While, as a matter of practice, Russian arms sales have declined as international frustration has mounted over the Iranian regime, as a matter of policy, Russia does not support what it perceives as U.S. efforts to build an anti-Iranian coalition.

11. (C) A third and related factor lurking under the surface of these weapons sales is Russia’s inferiority complex with respect to the United States, and its quest to be taken seriously as a global partner. It is deeply satisfying to some Russian policy-makers to defy America, in the name of a multipolar world order, and to engage in zero-sum calculations. As U.S. relations with Georgia have strengthened, so too have nostalgic calls for Russian basing in Latin America (which Russian officials, including Putin, have swat down). While profit is still seen by experts as Russia’s primary goal, all note the secondary thrill of causing the U.S. discomfort by selling weapons to anti-American governments in Caracas and Damascus.

Taking Another Run At Russia

12. (C) As FM Lavrov made clear during the 2 2 consultations, Russia will not engage systematically at the expert level on its arms export regime. While the prospect of Russia changing its arms export policy in response to our concerns alone is slim, we can take steps to toughen our message and raise the costs for Russian strategic decisions:

– Although U.S. sanctions are broad brush, the more we can prioritize our concerns over weapons sales that pose the biggest threat to U.S. interests, the more persuasive our message will be. Demarches that iterate all transactions, including ammunitions sales, are less credible. Since Lavrov has rejected an experts-level dialogue on arms transfers, it is important to register our concerns at the highest level, and to ensure that messages delivered in Moscow are reiterated in Washington with visiting senior GOR officials.

– In the context of potential violations of international regimes and UNSCR resolutions, Russia needs to hear the concerns of key European partners, such as France and Germany. (In the wake of the Litvinenko murder and subsequent recriminations, UK influence is limited.) EU reinforcement is important for consistency (although Russia tends to downplay the “bad news” that European nations prefer to deliver in EU channels, rather than bilaterally).

– Regional actors should reinforce our message. Russian weapon sales that destabilize the Middle East should be protested by the Sunni Arab governments that have the most to lose. Given Russia’s competing interest in expanding sales to Saudi Arabia and the Gulf states, the protests of our moderate Arab partners could also carry a price tag for Russian defiance. The same is true for Latin America, whose leaders to date have not made sales to Chavez an issue on their bilateral agenda with the Russians.

– The appearance of Russian weapons in Iraq, presumably transferred by Syria, and the prospect of American and coalition casualties as a result could change the calculus of Russian sales to Damascus. The more evidence that we can provide, the more Russia may take steps to restrict the Asad regime. At the same time, we need to be prepared for the Russian countercharge that significant numbers of weapons delivered by the U.S. have fallen into insurgent hands.

– Finally, providing the Russians with better releasable intelligence when arguing against weapons transfers to rogue states is essential. Our Russian interlocutors are not always impressed by the evidence we use to prove that their arms are ending up in the wrong hands. While we doubt Russia will terminate all its problematic sales for the reasons described above, more compelling evidence could lead the GOR to reduce the scope of its arms transfers or tighten export controls.

Final Caveat

13. (C) There are few voices in Russia who protest the sale of weapons to countries of concern and no domestic political constraints that tie the hands of Russian policymakers on this score. The pride that Russian officialdom takes in the arms industry as a symbol of Russia’s resurgence is largely shared by average Russians. American concerns are interpreted cynically, as the disgruntled complaints of a competitor, and viewed through the prism of a 1990’s story line in which the West seeks to keep Russia down, including by depriving it of arms markets.

Burns

(Republished from Sublime Oblivion by permission of author or representative)
 
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Sorry for not posting on either of my blogs for almost a week now and being slow on responding to the emails. I’ve been rediscovering the pleasures of old-fashioned book reading after purchasing a Kindle. I’m very happy with it. When faced between the choice of surfing the interwebs or reading a paper book, the former has been winning almost all the time in the past two years (see here for why h/t Oscar). The Kindle has somewhat rebalanced the equation.

Never fear. I’ve got a whole lot of post ideas in the chute, which will be forthcoming in the days ahead. But for now, I want to draw attention to an interesting dynamic in the Persian Gulf region. The rich Arab oil states – the UAE, Iraq, and now Saudi Arabia – are buying huge American arms packages. What the media has failed to cover is that the sales are at what are almost certainly massively overinflated prices.

Under the threat of Iranian missile attacks in the event of war, the UAE “concluded a $3.3bn Patriot missiles arms deal with the US” in December 2008 and is now looking for a $9bn deal for more air defense and Black Hawk helicopters. As a major oil export hub, this is much in its interests.

Then, coinciding with the US withdrawal of most troops from Iraq, the country concluded a $13bn deal to purchase American arms and military equipment, including “18 F-16 Falcon fighter jets as part of a $3 billion program that also includes aircraft training and maintenance”. Two years ago, Romania bought 48 F-16s for $4.5bn (half new, half used and modernized). That comes out at $95mn for each plane, whose current unit cost is now about $45mn. Iraq is now buying 18 F-16′s for $3bn, or $170mn for each. Anyone care to guess what percentage of that are kickbacks to Iraqi officials?

But if you think that’s impressive price gouging, take a look at the recent $60bn deal with Saudi Arabia. A modernized F-15 for the USAF costs about $60mn, including spares & support. About double that for export customers. So 84 F-15′s are $10.1bn. 70 upgrades to existing Saudi F-15′s. Let’s be generous and say it costs $80mn per plane, or 2/3 the cost of a new one. That’s $5.6bn. The unit cost of a Black Hawk helicopter is $14mn and of an Apache is $15.4mn. Let’s assume it’s around $30mn for export customers. In that case, 72 Black Hawks and 70 Apaches cost 4.3bn. All together, that’s around $20bn.

Of the $60bn deal, half of that will go just for the 84 F-15′s. That’s a cool $360mn for each one. That’s more than twice the unit cost of the fifth-generation F-22 Raptor! More even than its prospective export cost, which is about $250mn!

(Furthermore, note that the F-15′s are “monkey model” exports: due to Israeli concerns, “advanced sensors on the new Saudi F-15s will have technology built in to prevent them being used against their Israeli equivalents.”)

So in effect, the Saudis are paying $60bn for a package whose stand export price should be about $20bn. Massive profits to the US MIC (which will help it remain in the black despite Gates’ planned procurement cuts for budget reasons). Brilliant!

It’s not as if both Iraq or Saudi Arabia couldn’t have gotten better deals by shopping around elsewhere. A quick Internet search would show that there are plenty of fourth-generation planes available for well under $100mn per unit. For instance, since 2005, Venezuela has bought 24 Sukhoi-30MK’s, modernized 4.5+ generation fighters, for $1.6bn, after the US refused to supply F-16 spares to Chavez. (The whole $4bn package also included 50+ helicopters and missile defense systems). And I very much doubt that the US reputation for good after-sales maintenance can explain this big of a chasm.

So there must be ulterior forces at work, though as in the case of Iceland’s mercenary army, I can’t say which. Simple corruption on the part of Iraqi and Saudi officials? The influence of an occupying power? (The US, with its heavy military and intelligence presence in the Middle East, can easily pressure its client states, and what better way than to get their oil rich members to subsidize its MIC?). Rational calculation of national interests, i.e. maintaining good relations with the US? Discuss.

(Republished from Sublime Oblivion by permission of author or representative)
 
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It is now nearly 20 years since market reformers began liberalizing the economies of Eastern Europe, or as some smart-ass put it, trying to revive the fish in the centrally planned fish stews. These stews, cooked to diverse recipes from goulash socialism to Soviet “structural militarization“, were subjected to a wide spectrum of overlapping treatments ranging neoliberalism (the Baltics), market socialism (Belarus), and mercantile corporatism (Russia). Other fish stews just stagnated in anarchic stasis (Ukraine). Twenty years on, it is time to observe the oft-surprising results.

I used Angus Maddison’s historical statistics, CIA figures for 2009 growth except where available the results from national statistical services (Belarus & Russia), and the IMF projections for 2010 (adjusted upwards for non-Baltic nations with sharp recent falls in GDP to account for their stronger-than-expected recoveries) to create GDP (PPP) per capita indices for post-Soviet nations and Poland (generally representative of Visegrad) where the output levels of 1989 – the year of peak Soviet GDP – are set to 100.

So which national ponds look like they’ve been subjected to grenade fishing, and which ones have the liveliest fish? Drumroll…

Belarus! At least amongst the industrialized nations, this market socialist economy – mocked and despised by proponents of the Washington consensus – is now substantially more productive than it was in 1989, beating out all its peer competitors. Furthermore, unlike the Baltics or Russia, it remains one of the most equal societies on Earth. Belarus suffered less of the “catabolic collapse” observed in neighboring Russia and Ukraine in the 1990′s, and strong growth resumed earlier. This included growth in manufacturing – Belarus did not suffer from the widespread deindustrialization from which Russia has only recently, and just barely, recovered from in 2007 (and then lost again in 2009!) – and the country even developed a competitive micro-electronics industry. Interestingly, Belarus is also the only CIS nations with whom Russia had a negative migration balance (until 2005). It seems that the stability and benefits offered by Bat’ka outweighed his collective-farm-boss chique.

That said, Belarus’ relative success – shocking as it would be to neoliberal ideologues – should not be overstated. First, in 1989 it was one of the poorer members of the “industrialized nations”, and in standard macroeconomic theory, faster economic growth is, ceteris paribus, easier when you are further behind. Second, whereas Belarus is great for ordinary workers and pensioners, the more talented find it unpromising, even oppressive. Intertwined with an authoritarian political structure, the economic system is largely closed to those who don’t like toeing the party line.

Despite its economic depression from 2007, Estonia seems to have performed very well too. Enfused with post-independence optimism, it carried out its liberal reforms earlier and more completely than any other post-Soviet nation. As a result, it enjoyed a fast revival of growth from 1993, giving it a 2-year head start over Belarus and a 5-year one over Russia. Estonia is far richer and more transparent than Belarus, has a vibrant hi-tech sector, and more political freedoms (with the important exception of disenfranchised Russophones). Latvia has been somewhat less of a miracle economy. After the recent economic collapse, its economic output is now little bigger than the Soviet-era peak, and is much less equitably distributed.

In the bubbly days of 2006-2007 (and by bubbly, I do mean bubble), these economies became known as Baltic Tigers. Their liberal economic policies, balanced budgets, favorable geography, and low-wage skilled labor attracted huge credit inflows. This enabled a debt-fueled consumerist orgy, resulting in awning current account deficits. As the 2008 global credit crisis unfolded, investors took fright and capital inflows turned into capital flight. The house of cards fell down. The Baltics embarked on brutal wage deflation and budget cuts, especially in the worst-hit Latvia, to maintain their currency pegs against the Euro, acquire much-needed IMF financing, and reattain competitiveness. This is projected to take years – and that’s discounting both further shocks to the global financial system and political discontinuities (e.g. after the last Great Depression the Baltic nations became soft dictatorships).

The Balts cannot rely on a renewal of the old bubble, rising foreign protectionism precludes an export-led recovery, and the prospects for strong domestic consumption are dim because of the huge rise in debt levels. The IMF now forecasts prolonged below-trend growth, with GDP per capita only approaching their 2007 peaks by 2014 for all three Baltic nations (the same projections show Russia and Belarus converging to or overtaking the Baltic economies by that date). Just as for the old chasm between Marxism and “actually existing socialism”, whatever the merits of neoliberalism as a theoretical construct – its proponents will have to answer for its real-world disappointments.

Now we come to Russia, which has the region’s biggest and most important economy by far. It’s post-transition history is also highly complex. First, it cannot be stressed enough that the USSR did not collapse economically because of its inherent internal contradictions. It collapsed because Gorbachev aborted central planning, or more accurately ditched the coercive mechanisms that made central planning work (though granted the observable evidence of worker unrest and economic stagnation may have tipped his hand). In the absence of evolved market mechanisms, the “dictator’s surrender” only led to ruinous insider plunder, asset stripping and managerial misappropriation, all under the slogan of “liberalization” (true liberalizing reforms were far less wide-raging and generally implemented much later than in the Baltics). Output plummetted as barter arrangements replaced late Soviet scientific socialism.

As a result, Russia’s new capitalism developed in the most anarchic and perverse ways; indeed, it arguably had a greater resemblance to old Muscovite patrimonialism. A weak Tsar (President Yeltsin) bestowed rent-gathering rights unto his new boyars (the oligarchs) in exchange for their political support – a compromise he was driven to by the combination of 1) state weakness and 2) the perceived need to prevent the Communists coming to power at all costs. Putin’s cardinal achievement in his first term was to decisively shift the balance of power between Tsar and boyars back to the former, a fact confirmed by the arbitrary arrest and imprisonment of Khodorkovsky – the power-hungry robber baron who didn’t realize that the days of oligarch rule had passed. The economic crisis of 2008 led to the further reassertion of Kremlin power over the oligarchs – bailed out by a Russian state grown cash-rich from foreign energy sales, many are now little more than its glorified, well-compensated servants.

In the past decade, Russia has been in flux, metamorphosing from the chaotic, boyar-dominated, “appanage” atmosphere of the 1990′s, to the brave new world of Kremlin modernization dreams that are opening up the 2010′s. Three trends are now becoming dominant: 1) the state is becoming much more central in pushing Russia’s modernization through mercantilism (e.g. industrial tariffs), industrial policy (e.g. economic zones), and targeted investments in strategic and “sunrise” economic sectors (e.g. nanotechnology), 2) there is a concurrent, measured economic liberalization – from the 2001 flat tax reform to the raising of internal energy prices, and 3) there is a renewed attempt at social mobilization to fulfill the state’s development plans. In sum, a latter-day replay of the Petrine “revolution from above” (albeit one altered with the benefit of hindsight – Putin is careful to emphasize, even exaggerate, his Russian cultural patriotism, so as to avoid recreating the social divisions and unrest that tends to occur when a ruler is popularly seen as being in thrall to foreigners).

Russia’s post-1990 performance was far from stellar, though it should be noted that in overall per capita welfare it is still comparable to Belarus and only slightly behind Latvia (possibly ahead now) – not that much changed from the late Soviet period. Russia essentially lost two decades, like Latvia or Lithuania – and performed worse than Belarus, Estonia, and Poland (included in the graph for comparison).

This is not too surprising, since 1) Russia spent much of the 1990′s in “anarchic stasis”, a semi-failed state that had trouble maintaining any meaningful monopoly on violence, tax collection, and monetary emissions (the three vital functions of a state), 2) like the Baltics, Russia started from a relatively high base (it was already an industrialized nation), so it could hardly expect particularly rapid growth, and 3) the Kremlin only really began to focus on modernization as a priority in the mid-2000′s, as before it had been too preoccupied with consolidating the Russian state.

As I wrote in an earlier post on the Russian economy at the dawn of its late-2008 crisis (which was basically correct with the exception of the far too optimistic 2009 GDP forecast), Russia’s greatest weakness during the credit crunch was that its major corporations, the vast majority of them state or quasi-state, had come to rely on Western intermediation for accessing cheap credit. When the global credit wheel ground to a halt in late 2008, the first countries to be cut off were the emerging markets. (Having access to deep indigenous credit systems, nations like Brazil and China weathered the storm far better than Russian corporations and consumers who were suddenly cut off from cheap credit). Though the initial economic collapse was steep, Russia does not possess the long-term ailments of the Baltic states – debt has nowhere near the same level of penetration, the state remains incredibly cash-rich, and its strategic depth makes it largely invulnerable to any further retreat of globalization. Many forecasts now say that Russia will grow by 4% to 6% in 2010. In the longer-term, it has a comprehensive development plan and arguably good prospects for effecting an economic catch-up to the West.

Finally, far and away the worst post-Soviet performer amongst the industrialized nations is Ukraine. It never managed to reattain its Soviet-era level of per capita output, and that goal is now further away than ever. Comparable in its level of economic development to Belarus, Poland, and Russia in the late 1980′s, it is now far behind all three. Why? True, Russia had the gas reserves, but until the mid-2000′s Ukraine received vastly subsidized gas anyway. Furthermore, unlike Russia, Ukraine was nowhere near as burdened by “structural militarization” at the time of the collapse of the Soviet Union, nor did it retain prodigally expensive military forces or Great Power ambitions. It was also closer to Europe, directly bordering Poland. And besides, Belarus was in a similar position to Ukraine, but landlocked and shunned by the West to boot; but it nonetheless managed to do incomparably better.

I think the only good explanation for this retrogression is that Ukraine simply never left its 1990′s conditions of anarchic stasis. Its Tsar (or Hetman?) was always weak, Ukraine’s cultural cleft between Russian Orthodox East and Uniate West putting a glass ceiling to any ruler’s level of popular support at around 50% of the population. This constant problem with political legitimacy, experienced by both pro-Western and pro-Russian Presidents, stymied reform efforts and attempts to reign in oligarch power. Ukraine lagged well behind Russia, not to even mention the Baltics, in its economic liberalization, and its politicians remain representatives of oligarchic clans, not their puppet-masters as in Russia. Any sustained state-backed modernization scheme (e.g. on Putin’s Russia model) is doomed from the outset, while private investors and entrepreneurs are scared off by the unending political instability and lack of liberalization (in this respect, if Russia or Belarus is purgatory, Ukraine is hell). Long-term development is thus impossible under Ukraine’s conditions of anarchic stasis.

Below is a graph plotting the economic fortunes of the USSR’s less-developed nations (again per capita).

Azerbaijan‘s success is almost entirely tied up with the massive expansion of its oil production, especially from the mid-2000′s. Azerbaijan’s oil output rose from 0.2mn barrels a day between 1992 and 1998, to 0.4mn in 2005, and skyrocketed to 1.0mn by 2009, and as shown in the graph, the years of rapid increase were accompanied by amazingly high rates of GDP growth (up to 20-30% in a couple of years). A similar explanation would probably hold for why Kazakhstan‘s post-Soviet performance was substantially better than Russia’s, despite the many similarities between their economic systems – Kazakh oil production was 0.4mn barrels from 1992-95, 0.6mn in 1999, and 1.5mn by 2008.

(Russia produced only 22.6% more fuel energy in 2008 than in 1992. Its oil production went from an all-time peak of 11.5mn barrels in 1988, to 7.9mn in 1992, 6.0-6.5mn during 1994-99, 9.3mn in 2004, and 9.8mn by 2008 – i.e., correlated with general growth trends in its real GDP. Whereas the recovery in oil production accounted for a very substantial share of its GDP growth / recovery from 1999 to 2004, these effects became small after increases in oil production flattened out post-2004 due to geological factors (i.e. peak oil) and the political factors (the YUKOS affair); from the mid-2000′s, the main drivers of growth became retail, construction, transportation, manufacturing, and finance.)

Summation – Russia was recovering lost ground in oil production; Kazakhstan and Azerbaijan were gaining massive new ground. Translated into GDP growth over the entire transition period, Kazakh and Azeri growth appears much more impressive, even though it was much more narrowly based on increasing resource extraction.

Armenia showed impressive growth, despite that it has no such resource windfall and is a mountanous, landlocked nation bordered by unfriendly Turks to the west, the hostile Azeris to the east who are closely related to Turks (with whom it fought a war in the early 1990′s), a Georgia up north that dislikes its alliance with Russia, and with Iran to the south, which is friendly, but is an international pariah. How the Armenians managed this I don’t know, but kudos to them!

Despite the pro-Saakashvili rhetoric, Georgia is not that impressive on objective terms. The average, post-Rose Revolution 2004-2008 growth was 8%, which although ostensibly impressive was not exceptional by regional standards. Furthermore, it doesn’t mean very much for a nation 1) starting from a low economic base and 2) recovering from a massive prior GDP collapse. True, somewhat better than trainwreck Moldova, but left in the dust by its Caucasian neighbor Armenia (likewise wracked by blockade and the occasional war), and only slightly better than Russia – a nation that has a GDP per capita that is three times bigger than Georgia’s.

According to an alternate, non-rosy view, The Georgian Economy Under Saakashvili (Irakli Rukhadze and Mark Hauf), much of Georgia’s recent growth was one-off, being based on state asset sales and government lay-offs. This was accompanied by accelerating deindustrialization, continued emigration and poverty, and the destruction of all remaining safety nets. The authors say the government acquired the habit of pressuring independent businesses to provide “voluntary contributions” in return for not bankrupting them under corruption prosecutions. This is not to singularly condemn Georgia’s weak rule of law. After all, politicized interference in the economy, widespread corruption, and corporate raiding are the rule rather than the exception throughout the former USSR. The only thing that’s special about the Georgian economy is the chasm between the gushing, star-speckled rhetoric emanating from Saakashvili and his neocon cheerleaders – and the actually existing reality.

Finally, we can note that Uzbekistan saw much better growth than Tajikistan. Uzbekistan is an unreformed economy, as well as land-locked, poor, and truly authoritarian (i.e. an extreme version of Belarus). But starting from a low base really helps, I guess. On the other hand, Tajikistan saw a devastating civil war between Communists and Islamists that killed 100,00 people during the early 1990′s, and it is the post-Soviet republic that is least advanced in the demographic transition (capital diverted to sustain new mouths and remember that we are measuring GDP per capita in this post). Growth performance in Kyzgyzstan was in between Uzbekistan and Tajikistan, whereas Turkmenistan’s was as good as Uzbekistan’s.

What to Expect?

Russia has a comprehensive modernization plan, the human, administrative, and financial resources needed to implement it, and the Kremlin’s siege mentality should give it the impetus to force it through. Thus, I am reasonably confident that Russia, Belarus, and Kazakhstan will continue to see relatively fast growth. These countries have relatively high human capital (a necessary prerequisite for economic catch-up), and their recent customs union will enable bigger economies of scale. As I said before, there are many reasons to suppose that Ukraine will (re)join this Eurasian space within the next few years, at which point its anarchic stasis will finally end.

As I observed above, economic openness and transparency are not as important to economic catch-up as they are sometimes made out to be (this is NOT to imply they’re bad, however – obviously, imitating North Korea’s Juche principle or Equatorial Guinea’s kleptocracy is not the way forwards). However, they shouldn’t be treated as the be all and end all of things either. Moderate levels of corruption are nothing more than an additional tax, and it is even possible to think of situations where it can be positive (for instance, nations with impossible, idiotic regulations). Meanwhile, excessive economic openness can leave one too open to the vagaries of global casino capitalism – observe Latvia today, or Argentina 2001, for good examples. Furthermore, the next decade will likely see the retreat of globalization in tandem with peak oil and the waning of Pax Americana. In this new environment of “scarcity industrialism“, states that carve out self-sufficient dominions will fare best. Russia is aware of this, and has begun to regather its former Empire, and so is China with its fevered buyout of mines, land, and political elites around the world.

The Baltics may slowly recover under business-as-usual, though in the more globally pessimistic scenarios favored by S/O the general pattern will be stagnation, political unrest, and authoritarian reaction (especially possible in the most vulnerable member, Latvia). Central Asia does not really have the capacity for generating its own sustainable development. Far from potential markets and tyrannized by extreme climes and distances, the region is doomed to perpetual backwardness, except in so far as outside Powers like Russia or China find it in their interests to subsidize their development. In the Caucasus, the threat of instability and violence hangs permanently in the air, making any attempts at prediction even more of a futile endeavor.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Chang, Ha-JoonKicking Away the Ladder: Development Strategy in Historical Perspective (2002)
Category: economy; history; industrial policy; Rating: 5/5
Summary: Kicking Away the Ladder:How the Economic and Intellectual Histories of Capitalism Have Been Re-Written to Justify Neo-Liberal Capitalism (Ha-Joon Chang)

Much has been said of the smug arrogance, cultural aloofness and end-of-history conceit characterizing the neoliberal Washington Consensus, the philosophy that a one-size-fits-all set of “good policies” (e.g. privatization, liberalization, deregulation) and “good institutions” (e.g. patent and IP protection system, etc) can – and must – be transplanted onto any country, irrespective of its historical or cultural traditions, if it were to ever join the developed “international community’. The general bankruptcy of this approach is evident from the facts on the growth, with global GDP growth during the 1960-1980 period of “bad policies” substantially higher than during the “good policies” 1980-2000 period. After seeing high growth during the earlier period, Latin America stagnated, and Africa and Eastern Europe declined during the latter; the major exception was mercantilist China.

Though always disabused by reality, from 1998 Russia to the 2008 crisis, the neoliberals retain their intellectual underpinnings by continuing to claim, like Marxists, that history itself is ultimately on their side – after all, did not Britain and the United States, the world’s greatest economic successes, rise to global preeminence through the virtues of minimal government and free trade? Not at all, argues Ha-Joon Chang in this excellent book.

Britain: From Mercantile Struggle to Kicking Away the Ladder

Take the example of Britain, alleged to be the historical laissez-faire state par excellence, in stark contrast to the stultifying dirigisme of Colbertist France. This is actually an inversion of the truth, for the French state was generally laissez-faire and backward-looking in the period between the end of Napoleon’s Continental System and the post-WW2 years (after which the state began large-scale interventions in the French economy, which experienced burgeoning growth that saw it overtake Britain’s GDP by the 1970′s). On the other hand, Britain was highly protectionist up until it established and cemented its global industrial predominance by the middle of the 19th century.

British protectionism has a long history, stretching back to medieval import substitution designed to foster an indigenous wool manufacturing industry, instead of being reliant on raw wool exports to Europe. Henry VII tried to change this by taxing raw wool exports and poaching skilled workers from the Low Countries. This kick-started the industry that would come to constitute the key element of British industrial supremacy in the 19th C.

In 1721, Walpole expanded on previous Navigation Acts to encompass mercantile measures like lower tariffs on raw materials imports, duty drawbacks on the imported raw materials used for exports, the removal of export duties, the raising of duties in imported manufactures, export subsidies and a system of quality control to maintain the reputation of British exports. The colonies were treated as captive markets and resource appendages to fuel the commerce and industry of the mother country, by measures such as the 1700 ban on (better-quality) Indian calicos, which (possibly) stifled an incipient Indian industrialization. Britain fine-tuned the terms of trade between the US colonies itself to discourage industrialization in the latter, even resorting to overt illiberal measures like outlawing rolling and slitting steel mills on the American continent.

This is how Friedrich List, a leading economist of the German Historical School, described Britain’s rise to industrial dominance in his The National System of Political Economy in 1841:

Having attained to a certain grade of development by means of free trade, the great monarchies [of Britain] perceived that the higher degree of civilization, power, and wealth can only be attained by a combination of manufactures and commerce with agriculture. They perceived that their newly established native manufactures could never hope to succeed in free competition with the old and long-established manufactures of foreigners… Hence they sought, by a system of restrictions, privileges, and encouragements, to transplant on to their native soil the wealth, the talents, and the spirit of enterprise of foreigners. …

It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations.

Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development than no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she ha hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.

Even the 1846 repeal of the Corn Laws protecting domestic agriculture were justified by its British supporters on protectionist terms, e.g. Robert Cobden of the Board of Trade:

The factory system would, in all probability, not have taken place in America and Germany. It most certainly could not have flourished, as it has done, both in these states, and in France, Belgium, and Switzerland, through the fostering bounties which the high-priced food of the British artisan has offered to the cheaper fed manufacturer of those countries.

It was only in 1860, by which time Britain’s status as the workshop of the world was unquestioned, that it truly transitioned to a free-trade regime with the Cobden-Chevalier Treaty with France. Yet during the next fifty years it was undermined by German technological prowess and American economies of scale, and was obliged to reintroduce substantial tariffs in 1932 under the stress of the Depression-era protectionism scramble.

[International tariff rates 1820-1950, taken from Google Books].

The Protectionist Roots of Pax Americana

What about the US, then, today’s champion of free trade? This is an ironic position for it to take up, given that in the years after the Civil War and prior to the Second World War, America was the protectionist nation par excellence.

The “infant industry” theory was invented by Alexander Hamilton, the first Treasury Secretary, and the American economist Daniel Raymond. With its history of being held as a resource appendage and captive market by the British and spurred on by the War of 1812, protectionism was firmly established from 1816. A US Congressman, a contemporary of Friedrich List, said of British liberal trade theory, “like most English manufactured goods, [it] is intended for export, not for consumption at home”. President Ulysses Grant, a Civil War hero, remarked of it, “within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade”. So the populist right-wing politician Pat Buchanan makes a perfectly valid point when he condemns free trade as being un-American.

Ha-Joon Chang stresses the importance disputes over the proper level of tariffs played over the start of the US Civil War. The crux of the matter was that northern industrial interests wanted high tariffs to protect themselves from British competition, whereas the South, which had no industries of its own and an idle, rapacious elite, wanted lower tariffs to make British goods more affordable. There were frequent spats on this matter from the 1830′s; slavery only provided the fuse. (Chang points out that Lincoln was deeply racist by modern standards and only emancipated the northern slaves in 1862 as a strategic move against the South). Lincoln’s top economic advisor, Henry Carey (described by Marx as the only American economist of any significance), argued that British free trade was an imperialist ploy to consign the US to a future of primary production.

Following the North’s political and military triumph, US tariffs between the Civil War and World War Two remained the highest amongst those of any industrial power, with the sole exception of Russia. As with its British imperial predecessor, the American superpower only ditched free trade once it achieved a global industrial dominance made possible by the wartime devastation of its European competitors. Though tariff rates are now very low, the US somewhat compensates with voluntary export constraints, (textiles) quotas, agricultural subsidies, and unilateral sanctions against countries suspected of dumping, so it remains far more protected than Britain was during the Victorian Golden Age of globalization. Likewise there is extensive state support for R&D, which enabled US success in hi-tech areas like computers, the Internet, aerospace, and biotech.

State Intervention Critical to Economic Sovereignty

The vast majority of other now-developed countries (NDCs) also employed extensive protectionism and state intervention during their periods of successful economic convergence. Though Germany eschewed the kind of “blanket protectionism” used in mercantile Britain and the pre-superpower US, the state was far more active in promoting modern technology, industrial espionage, technological “demonstrations”, teaching science at its world-class universities, and pioneering social welfare by the late 19th C to defuse social tensions. Though Japan was actually forbidden from raising its tariff rates above 5% in the first decades following the Meiji Restoration, it compensated by investing heavily in infrastructure, education, and the acquisition of foreign technologies and institutions. Sweden had high tariff rates (especially in the early 20th C), an unrivaled record in public-private cooperation, and “strategically used tariffs, subsidies, cartels, and state support for R&D to develop key industries, especially textile, steel, and engineering”. It also preserved social harmony through the Saltsjöbaden agreements of 1936, in which labor committed to restraining wage demands in return for the employers committing to building one of the world’s most comprehensive welfare states. As for some of the smaller nations:

There were some exceptions like the Netherlands and Switzerland that have maintained free trade since the late 18th century. However, these were countries that were already on the frontier of technological development by the 18th centuries and therefore did not need much protection. Also, it should be noted that the Netherlands deployed an impressive range of interventionist measures up till the 17th century in order to build up its maritime and commercial supremacy. Moreover, Switzerland did not have a patent law until 1907, flying directly against the emphasis that today’s orthodoxy puts on the protection of intellectual property rights (see below). More interestingly, the Netherlands abolished its 1817 patent law in 1869 on the ground that patents are politically-created monopolies inconsistent with its free-market principles – a position that seems to elude most of today’s free-market economists – and did not introduce another patent law until 1912.

Contrary to the conventional wisdom, it was the open economies that failed to develop rapidly. Not much chance for European colonies / captive markets to develop an indigenous industrial base under the constant, unchecked pressure of superior European competition. Semi-independent countries like China and the Ottoman Empire were paralyzed by “unequal treaties” capping tariffs at a 5% flat rate and loss of tariff autonomy (Ha-Joon Chang points out that today the World Bank recommends a maximum 15-25% tariff rate, low and uniform, despite that the development differential between today’s poor and rich countries are vastly greater than they were a century ago). Finally, industrial leader nations (like Britain) tried to stymie the growth of competitors by preventing the outflow of skilled workers in the 18th century, machines in the 19th century, and enforcing intellectual property rights in the 20th century.

Institutions aren’t Everything

The author also points out that institutions today are far better in the developing world today, in most cases, than of NCDs at an an equivalent stage of development. For instance, despite the fact that Britain in 1820 had a similar level of development to India in 2000:

[Britain] did not have universal suffrage (it did not even have universal male suffrage), a central bank, income tax, generalised limited liability, a generalised bankruptcy law, a professional bureaucracy, meaningful securities regulations, and even minimal labour regulations (except for a couple of minimal and hardly-enforced regulations on child labour).

As such, the rich would should moderate their unrealistic demands for the developing nations to instantaneously reform their institutions to world standards. It is a difficult process that took centuries in the NDCs themselves, and besides in some cases the poor countries would be better off spending that money on other things. For instance, would it be better for Gabon to spend its (very limited) resources on hiring legions of (foreign) intellectual property lawyers to ensure a modern IP environment, or should it spend them on training its own primary school teachers? Tough choice, right?

As Tainter teaches us in The Collapse of Complex Societies, complexity isn’t always all it’s cracked up to be.

Conclusions & Lessons for the Present

The “official history” of capitalism has been highly distorted by neoliberals with little appreciation of economic history, either maliciously, or because of their ideological blinkers. The reality is that even today’s stalwarts of free trade and liberalization only got to the top though blanket protectionism and intelligent state intervention, a tradition that has been carried on by the East Asian tigers (Korea, Taiwan, etc) – the only major non-Western nations to successfully industrialize after Japan. After they had industrialized, the new leader nation – in modern times, the US – has an interest in creating a global free trade system which could reinforce its hegemony. The poachers become the gamekeepers. The climbing followers become leaders kicking away the ladder.

However, uninterrupted free trade does eventually undermine even its guarantors. Last century, it was Germany challenging Britain. Today, it is China challenging the US.

Leveraging its cheap, docile and decently-educated labor force, China used the window of opportunity thrown open by US trade policy to build up the world’s premier industrial base – as of now, it produced around half the world’s steel and cement. Though it’s economy is ostensibly relatively free-wheeling, China having ditched central planning three decades ago, in practice the state remains extremely active in building up infrastructure, improving human capital and industrial espionage. It couldn’t care less about intellectual property rights, given that it has almost none of its own to protect (you don’t need innovation when you’re at the point when you can just buy or steal the next technological levels), giving it a further competitive advantage. The sheer comparative advantage it has built up in manufacturing means that overt protectionism is simply unnecessary for it.

Open trade has led to the steady deindustrialization and “hallowing out” of the US industrial base, which no longer maintains a positive balance of trade in any manufactured goods category, with the marginal exception of (heavily-subsidized) aerospace. (The effects in some European countries have been as bad, e.g. Italy’s traditional artisanal manufacturing destroyed by cheaper Chinese competition). The US machine tool industry, the heart of any industrial ecosystem, has been decisively buried by European and Asian competition. From 1999 to 2008, US automobile production declined from 13.0mn to 8.7mn units, while in the same period this figure rose amongst its main competitors like Japan (9.9mn to 11.6mn), Germany (5.7mn to 6.0mn), Korea (2.8mn to 3.8mn), and China (1.8mn to 9.3mn).

The shifting winds of history are steadily unraveling Pax Americana‘s center of gravity, threatening to send the global system into a chaotic tailspin. The paradox is that though globalization sustained US hegemony, it also contained within it the seeds of its own destruction. America has overstayed in laissez-faire land, blinded by its own instruments of success to the dangers they pose to itself.

Russia has an exceptionally strong need for protectionism and state intervention, on account of its traditional economic backwardness, highly unfavorable geography, and innate tendencies towards illiberal anarchy (in which nothing gets done at all). Hence the reason for the forward-looking, dirigiste industrial policy pursued under the Putin administration (special economic zones, clauses obligating foreign automobile companies to source a percentage of their parts from Russian suppliers, nanotechnology, etc) – and the likelihood that the state will resume its old rule as the main driver of the Russian economy in the unstable decades to come.

A few criticisms of the book. It makes the blanket statement that growth was higher during the “statist” 1960-1980 period than the “open” 1980-2000 period, but fails to consider other possible factors behind it, such as: a) the end of hyperbolic growth in oil extraction, and more generally, energy production (energy and natural resources are indispensable and highly-neglected factors of economic growth) – i.e. the appearance of limits to growth to the global economy, b) the ebbing of the electro-mechanical / petrochemical cycle and c) the end of the Flynn effect (end of IQ rise), especially pertinent given that education is the elixir of growth. In other words, the scope of the book is rather narrow – state industrial policy as the be all and end all of economic development. That said, his arguments are intuitive and convincing, if not fully complete; though then again, I doubt comprehensiveness would have been one of his aims in a book of just 140 pages.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Anatoly Karlin
About Anatoly Karlin

I am a blogger, thinker, and businessman in the SF Bay Area. I’m originally from Russia, spent many years in Britain, and studied at U.C. Berkeley.

One of my tenets is that ideologies tend to suck. As such, I hesitate about attaching labels to myself. That said, if it’s really necessary, I suppose “liberal-conservative neoreactionary” would be close enough.

Though I consider myself part of the Orthodox Church, my philosophy and spiritual views are more influenced by digital physics, Gnosticism, and Russian cosmism than anything specifically Judeo-Christian.