Centrism: the problem, not the solution [feedly]

Centrism: the problem, not the solution
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2017/08/centrism-the-problem-not-the-solution.html

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There's talk, much of sceptical, of the formation of a new centre party. For me, this misses the point – that centrists are the problem, not the solution.

Owen Jones is bang right to say:

It is the economic order centrists defend that produced the insecurity and stagnation which, in turn, laid the foundations for both the ascendancy of the left and its antithesis, the xenophobic right.

This is true in two senses.

First, centrists contributed to the financial crisis by under-estimating the fragility of the system. They over-estimated market rationality. As Martin Sandbu says, the lie of capitalism is that "market values of financial and other assets accurately reflect the economic value they represent." They also failed to appreciate that top-down managementunconstrained by effective oversight is dangerous: the banking crisis wasn't just a market failure but also an organizational failure.

If that was an error of omission which is clearer with hindsight than it was at the time, centrists' second error is less forgivable: fiscal austerity. The Lib Dems supported this in government, and Labour's centre-right failed to oppose it vigorously enough.

These two errors have had disastrous effects. They have given us a decade of stagnant real wages. Not only is this terrible in itself, but it also led to Brexit. Stagnation bred discontent with the existing order and hence a demand for some sort of change, and also had the effect history told us it would – of increasing antipathy towards immigrants.

In this context, centrists made a third error. With a few exceptions, such as the heroic Jonathan Portes, they failed to make a robust case for immigration: remember Labour's shameful "controls on immigration" mug? This might be no accident. Blaming immigrants for poor public services and low wages helped to deflect blame from where it really lies – with austerity, crisis and capitalist stagnation.

Centrists are right to oppose Brexit. What they don't appreciate, however, is that they themselves helped to create the conditions which led to the vote to leave.

I don't think these were idiosyncratic failures of individual politicians. I suspect instead they arose from three systemic failures of centrism:-

 - Insufficient scepticism about capitalism. Centrists have failed to appreciate sufficiently that actually-existing capitalism has led to inequality, rent-seeking and stagnation. New Labour's deference to bosses fuelled their presumption that banks were in good hands and didn't need to be on a tight leash.

 - A blindness to the importance of inequalities of power. Centrists take it for granted that elites should be in control, even if they lack the capacity to be so. This left them vulnerable to Vote Leave's slogan, "take back control."

 - Excessive deference to the media. Centrists were for years obsessed with a form of "electability" which consisted in accommodating themselves to media lies about austerity and immigration.

In these senses, then, centrists' failure has been a structural one.

Which poses the question: why, then, does centrism seem so appealing?

I suspect the answer lies in the failure to appreciate the distinction between extremism and fanaticism. Centrism's intuitive appeal lies in the tendency to associate it with the virtues of moderation and empiricism.

Such an association, however, is at least partly unwarranted. In failing to appreciate sufficiently the flaws in capitalist hierarchy, centrists are being ideologues more than empiricists.

Trump and the Infrastructure of Fascism [feedly]

Trump and the Infrastructure of Fascism
http://triplecrisis.com/trump-and-the-infrastructure-of-fascism/

Gerald Epstein

Infrastructure investment: it's that economic policy sweet spot that everyone loves to love.

Fixing bridges, building roads, modernizing airports, improving mass transportation, keeping lead out of our water: nearly everyone can relate to the need for it and can imagine how much better their lives would be with more of it.  For years, most people have faced crazy-making delays in traffic, long lines at airports, and have seen pictures of bridges collapsing. And the experts agree. Economists and engineers have warned us about the problem for decades.  The most recent report by the American Society of Civil Engineers gave the U.S. a D+ on its infrastructure building and maintenance, which means that, overall, our infrastructure is in critical condition. These civil engineers estimate that over the next 10 years, the U.S. will have about a $1.2 trillion in infrastructure financing shortfall unless something dramatic is done. Studies have confirmed that, properly done, infrastructure investment can generate millions of jobs, create big time saving efficiencies, and keep people safer. These infrastructure shortfalls, fed by years of Republican austerity initiatives at the Federal and State levels, too often aided and abetted by Democratic bankers and other Democratic "deficit hawks," are much in the everyday texture of American life.

On the campaign trail, then-candidate Trump jumped on the bandwagon, decrying America's "Third World" infrastructure and touting his ability to fix it in short order—as "demonstrated" by his "building prowess "in New York City and "around the world." Trump promised to quickly fix the country's decaying infrastructure and generate millions of good paying job with a $1 trillion program that will "Make America Great Again."

That Trump had hit a political "sweet spot" was made clear early on by the number of prominent Democrats and labor leaders who announced not only an interest but real enthusiasm for cooperating with Trump on making a $ 1 trillion building-spree a reality. How could they resist? A true, well designed, well-implemented $1 Trillion government investment in infrastructure is a plan many Democrats, progressive economists and labor leaders had been promoting for years. As Richard Trumpka, President of the AFL-CIOexplained: "During my January meeting with President Trump, we identified a few important areas where compromise seemed possible. On manufacturing, infrastructure and especially trade, we were generally in agreement. Mr. Trump spoke of $1 trillion to rebuild our schools, roads and bridges. He challenged companies to keep jobs in the United States. He promoted 'Buy America.' He promised to renegotiate the North American Free Trade Agreement."

Of course, many Democrats and some economists  understood that  that Trump's infrastructure "sketch" (he has never come out with a true plan) was quite different from a genuine government-financed $1 trillion plan. From the beginning, Trump's team had made it clear that this was going to be a private-public partnership in which the government would put in significantly less than a trillion dollars—perhaps  $200 or $400 billion of corporate tax subsidies over 10 years—as a way to help facilitate a privatization of public assets. Think: turning public roads into privately owned toll roads and public tunnels into privately owned toll tunnels. This type of privatization, critics argued, would end up as a typical crony capitalist gold mine, giving away public assets to well-connected and politically pliant capitalists and maybe, just maybe, getting some improved but very expensive infrastructure and a few jobs in the process. But some Democrats and labor leaders were, perhaps understandably, desperate to engage in wishful thinking and tentative support—given the  apparent political pressure from their constituencies.

Still, some observers warned that the dangers of this infrastructure sweet spot were even greater than might at first appear. In an article in Challenge Magazine, "Trumponomics: Should We Just Say No?"  I argued that not only is the so-called "infrastructure" program mostly a thinly disguised privatization scam; it was also a sinister gambit to broaden the political support and therefore the power of Trump and  Trumpism, a proto-fascist regime and movement, whose goal is to undermine democracy, enrich those wealthy capitalists willing to play along, and divide and conquer the domestic population by sowing racial, gender, religious and national hatred and intolerance.

On August 15, this "infrastructure of fascism" came into clear focus in a bizarre and tragic way. Donald Trump marched into a conference room in Trump Tower on 5^th Avenue in Manhattan to hold a hastily arranged press briefing on the first formal unveiling of his "Infrastructure" plan. He had key members of his economic team in tow – most notably, Treasury Secretary Steve Mnuchin, Gary Cohn, head of Trump's National Economic Council—both former Goldman Sachs bankers—and Transportation Secretary Elaine Chao, former Bank of America and Citicorp banker. This announcement of Trump's "infrastructure plan," which took only a few minutes, presented even less of a true infrastructure plan than he had floated during the election campaign. This was simply yet another de-regulation plan dressed up as a plan for infrastructure investment. Effectively, this "executive order" served-up a wish list that would have been compiled by any real estate mogul who doesn't want any government agency or public group to come between him, his building, and his bottom line. In the name of building more useful infrastructure and generating more jobs, Trump's executive order is designed to let developers skirt environmental regulations, and most likely, labor, health, and safety regulations as well. The Executive Order will make it a lot easier to build more Trump towers in flood plains, but do little or nothing for the country's true infrastructure needs.

But this roll-out of a fake infrastructure plan was not the most interesting or  surprising thing about this event. It was the press conference Trump held afterwards. Using his Jewish and Asian-American economic team as a  photo-op backdrop and the creation of infrastructure and jobs as his bait, Trump took the occasion to assure his neo-fascist, white supremacist and nationalist base that, yes, he was still their man. The reporters at hand, having little interest in infrastructure, wanted to hear a clear statement from Trump decrying the violent and deadly acts committed over the weekend by Nazis and white supremacists in Charlottesville, Va. But instead Trump used his infrastructure plan and his promise of "millions of jobs" to rally his base supporters, all the while demonizing the counter-protestors (calling them violent members of "the alt-left" who were "at least" as responsible for the violence and mayhem as those on the right).

This event, then, tied, in a sinister but clear way, Trump's infrastructure plan with the racist, anti-Semitic, and neo-fascist members of Trump's base movement and linked them, in turn, to the bankers and policy makers like Gary Cohn and Steve Mnuchin who have so much to gain from the tax subsidies and privatization that are the essence of these plans. Gary Cohn was reportedly "furious" about what Trump said and did. But according to reporters, Cohn, like so many Republicans in Congress, will most likely remain quiet, and soldier on, presumably in the hope of getting a big payoff down the road. (Cohn reportedly wants to succeed Janet Yellen as Chair of the Federal Reserve; and his friends have millions to gain from the privatization schemes.)

Trump's response to the Charlottesville violence led numerous members of his two business councils to resign.   In resigning from Trump's "Manufacturing Council," AFL-CIO President Rich Trumpka explained in the New York Times: " Unfortunately, with each passing day, it has become clear that President Trump has no intention of following through on his commitments to working people. More worrisome, his actions and rhetoric threaten to leave America worse off and more divided. It is for these reasons that I resigned yesterday from the president's manufacturing council, which the president disbanded today after a string of resignations. To be clear, the council never lived up to its potential for delivering policies that lift up working families."

Let this be a warning to economists,  labor leaders, Democratic officials and all progressives fighting  for economic and social justice: "progressive-appearing" economic proposals from Trump  are likely to be thinly veiled attempts to suck in unsuspecting allies in support of a neo-fascist, authoritarian movement that is increasingly showing its true colors. They are designed, quite clearly, to build support for Trump and his business allies. Don't be fooled, don't be bought off, and be vigilant.

Trade policy and re-negotiating NAFTA are up next. As Robert Kuttner, Editor of The American Prospect told us after his astonishing telephone call from Steve Bannon, Bannon is looking for a "right-left" alliance on trade. We can be sure that, like Trump's "infrastructure plan,"  this trade alliance will all be in the service of Trump and Trumpism.

Triple Crisis welcomes your comments. Please share your thoughts below.

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Are trade deficits good or bad? It depends! [feedly]

Are trade deficits good or bad? It depends!
http://jaredbernsteinblog.com/reposting-are-trade-deficits-good-nor-bad-it-depends/

In light of this silliness in the WaPo today (which Dean Baker already jumped on), I'm compelled to repost this piece from a little while back, explaining why and when trade deficits are problematic and when they're not.

Summarizing, it's just as wrong to claim trade deficits of any magnitude are always a negative as that they're always a positive. Like Neil Irwin said, motivating my earlier piece, "they're not scorecards."

When are they problematic? In two situations: first, when we're not at full employment, and policy makers can't or won't make up the slack. The GDP identity–GDP=Cons + Inv + Gov't spending + Trade balance–provides a simple way to show that a negative trade balance drags down growth.

Other components can make up the difference. However, in recent years, in periods of slack, the monetary authorities–central banks–have been increasingly likely to be stuck at zero on their interest rate, undermining their contribution to offsetting a trade deficit. And the fiscal authorities have been either stuck in austerity ideology (Europe), dysfunction, or both (that would be us).

The figure below shows that, in fact, trade deficits have been the norm over the period when we've been at full employment less than 30 percent of the time, so in this regard, our persistent trade deficits have been problematic more often than not in recent years. Note that I'm not drawing any causality here between trade deficits and the absence of full employment. My point is that the former (trade deficits) are more of a problem when we're not at full employment and neither fiscal nor monetary policy is working to offset them.

Sources: BEA, BLS, CBO

The second way in which trade deficits are harmful is a bit more subtle. When we consume/invest more than we produce, we must borrow from abroad to make up the difference. On the other side of the ledger from the trade deficit is the "capital account surplus," which simply represents the flow of capital into deficit countries to finance their spending beyond production.

The trade-deficits-are-always-and-everywhere-benign team argues that this is a feature, not a bug. Hey, if foreigners want to lend to us so we can spend more than we produce, that's great!

But it's only great if there are truly productive uses for the capital. If there aren't, those flows can inflate…oh, I dunno…let's say a real estate bubble. Or a dot.com bubble. See both Michael Pettis and Ben Bernanke on this point. No less a mainstream stalwart than the Lord Mervyn King, former governor of the Bank of England, recently held forth on the macroeconomic problems of persistent trade imbalances, linking them to countries that manipulate their exchange rates to preserve their trade surpluses (and therefore, other countries' trade deficits; the system has to balance).

I think both of these conditions at which trade deficits are problematic–labor markets that are slack more often than not and the absence of productive investments–can be hard for people to wrap their heads around. We're taught, against fact, that full employment is the natural state of affairs, and that productive investments are always there for the taking.

But especially in the age of financial engineering, where non-productive but potentially high ROI investment opportunities abound, that assumption just doesn't hold.

What about now? We're closing in on full employment so I wouldn't invoke the trade deficit as a negative in that regard, though it took us too long to get here, due to the combination of the zero lower bound at the Fed, inadequate fiscal policy, and yes, the trade deficit, which has averaged -3.1% of GDP in this expansion.

On the investment side, if you believe we're in a period of secular stagnation, which implies too much savings given desired investment (and remember, trade deficits occur when countries export their excess savings to us), then that's a problem right now, putting downward pressure on interest rates, inflation, and demand. BTW, the logic of this suggests a smart solution to this part of the problem: investment in public infrastructure. On that, see dysfunctional Congress.

Finally, of course, our trade deficits are always in manufactured goods, so they invoke a sectoral problem for communities and families that depend on factory jobs. It is left as an exercise for the reader to connect the dots between that problem and our current political sh__show.

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Paul Krugman: Trump Makes Caligula Look Pretty Good [feedly]

Paul Krugman: Trump Makes Caligula Look Pretty Good
http://economistsview.typepad.com/economistsview/2017/08/paul-krugman-trump-makes-caligula-look-pretty-good.html

"The Worst President Ever™":

Trump Makes Caligula Look Pretty Good, by Paul Krugman, NY Times: Even before the media obsession with Hillary Clinton's email server put The Worst President Ever™ in the White House, historians were comparing Donald Trump to Caligula, the cruel, depraved Roman emperor who delighted in humiliating others, especially members of the empire's elite. But seven months into the Trump administration, we can see that this comparison was unfair.

For one thing, Caligula did not, as far as we know, foment ethnic violence within the empire. For another ... Rome's government continued to function reasonably well despite his antics...

Finally, when his behavior became truly intolerable, Rome's elite did what the party now controlling Congress seems unable even to contemplate: It found a way to get rid of him.

Anyone with eyes — eyes not glued to Fox News, anyway — has long realized that Trump is utterly incapable, morally and intellectually, of filling the office he holds. But in the past few days things seem to have reached a critical mass. ...

Everyone in Washington now knows that we have a president who never meant itwhen he swore to defend the Constitution. He violates that oath just about every day and is never going to get any better.

The good news is that the founding fathers contemplated that possibility and offered a constitutional remedy: Unlike the senators of ancient Rome, who had to conspire with the Praetorian Guard to get Caligula assassinated, the U.S. Congress has the ability to remove a rogue president.

But ... all we get from the vast majority of elected Republicans are off-the-record expressions of "dismay" or denunciations of bigotry that somehow fail to name the bigot in chief. ...

The fact is that white supremacists have long been a key if unacknowledged part of the G.O.P. coalition, and Republicans need those votes to win general elections. Given the profiles in cowardice they've presented so far, it's hard to imagine anything — up to and including evidence of collusion with a foreign power — that would make them risk losing those voters' support.

So the odds are that we're stuck with a malevolent, incompetent president... If so, we have to hope that our country somehow stumbles through the next year and a half without catastrophe, and that the midterm elections transform the political calculus and make the Constitution great again.

If that doesn't happen, all one can say is God save America. Because all indications are that the Republicans won't.

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Beauty and Profit

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Beauty and Profit // Dollars & Sense Blog
http://dollarsandsense.org/blog/2017/08/beauty-and-profit.html

By Polly Cleveland

Beauty and Profit: The Evolution of Beauty (2017) by Richard O. Prum

In 1860 Charles Darwin wrote to his American colleague, Asa Gray: "The sight of a feather in a peacock's tail, whenever I gaze at it, makes me sick!" What was Darwin's problem?

Darwin (1809 – 1882) had just published his masterpiece On the Origin of Species (1859), in which he laid out his theory of evolution by natural selection. Darwin had rushed The Origin into print so as not to be beaten out by his co-discoverer, Alfred Russel Wallace (1823-1913). Unlike Wallace, Darwin worried about many seemingly maladaptive features of living organisms – like the male peacock's beautiful but cumbersome tail.

In 1871, Darwin published his second big book, The Descent of Man, and Selection in Relation to Sex. Here, Darwin argued that, besides natural selection, two sexual mechanisms were at work. Horns and other weapons as well as large body size of many males, he claimed, derived from the "Law of Battle"– the competition between males (mostly) for access to the opposite sex. He called the second mechanism "Taste for the Beautiful". This happened when one sex, usually female, selected mates by some arbitrary aesthetic criterion – like eye spots on a peacock's tail. Aesthetic selection could "run away": When females selected a male for his long tail or his red cockade, they would produce male offspring with long tails or red cockades and female offspring with a taste for males with long tails or red cockades.

In The Evolution of Beauty, Yale ornithologist Richard Prum picks up the story. The Victorians were quite content with the "Law of Battle", but "Taste for the Beautiful" – no way! The very idea that females could exercise active sexual choice appalled that prudish society. Wallace himself led the reaction, becoming more "Darwinian" than Darwin in his insistence that natural selection could account for all features of living things. As Prum details, Wallace's view dominates evolutionary science to this day. Natural scientists have twisted themselves into knots explaining peacocks' tails as somehow adaptive. A popular hypothesis is that the very burden of the tail indicates to a female that a male is extra fit and healthy.

Prum will have none of this. Of course, as he points out, there's a trade-off between ornament and fitness. A bird with too long a tail won't survive as well as one with only a moderately long tail. But nonetheless sexual selection can impair fitness*. He gives a telling example: the club-winged manakin. The male of this tiny neotropical bird makes a violin-like squeak by rubbing its wings together at high speed; to squeak, it has evolved distorted solid-boned wings that make it an inefficient flyer. Moreover, the female has the same wings, though hollow-boned and less extreme. (This happens because embryos start out identical and only later differentiate by sex; that's why males have nipples.)

Prum recognizes the parallel to economics. He reports a conversation with his Yale colleague, Robert Shiller, who complains about the "efficient market hypothesis," so popular before the crash of 2008. The "efficient market hypothesis" assumes that in the markets for stocks, bonds, other securities, and even land, the prices reasonably reflect future profitability. The hypothesis course turned out to be disastrously wrong in the stock market bubble of the roaring 20s, and in the world wide real estate bubble leading up to the crash of 2008. But I believe the problem goes deeper.

Conventional neoclassical economics assumes that in a capitalist society, competition forces all businesses to relentlessly maximize profit or fail. Marxian economics makes the same assumption. That's why conventional economists celebrate capitalism, because it supposedly leads to efficiency and innovation. That's why Marxists condemn capitalism, because it seems to require ruthless anti-social behavior. To me, the assumption that "cutthroat competition" alone shapes the economic world is equivalent to the "Darwinian" assumption that "survival of the fittest" alone shapes the natural world.

How might Darwin's two alternative mechanisms show up in the economic world? The "Law of Battle" evokes vast advertising campaigns, often misleading, wasteful and ineffective. Or legal battles over patents and copyrights. But, like the giant horns on a bull elk, blowing money on such activities could signal corporate "fitness." What about a "Taste for the Beautiful"? That evokes monumental, luxurious corporate headquarters, private planes, eye-popping salaries and other perks for corporate management. Do such features aid or hinder corporate profitability? The Wall Street Journal and the Financial Times overflow with accounts of executives pursuing their self-interest at the expense of the bottom line—even when the value of their stock is falling. Corporations are of course a modern invention; a few generations ago, when businesses were mostly run by families, it would have been laughable to deem the "conspicuous consumption" of wealthy owners as profit-maximizing behavior.

The same fallacy underlies both the theory of "survival of the fittest" and the theory of "cutthroat competition". That's the assumption that living species and economic organizations eternally teeter on the razor edge of survival. Put like that, it's obviously nonsense. In the natural world, saying that a species occupies an ecological "niche" suggests there's a particular location in which it has enough of an advantage to thrive in good times and survive in bad ones. That location might be a zebra's gut for botfly larvae or New York City for Norway rats. Businesses have niches too: spots where they enjoy a little—or a lot—of monopoly power. Sr. Perez's corner bodega enjoys a bit of monopoly power by being the most convenient shopping location at the most convenient hours in the immediate neighborhood. At the other end of the scale, there's Exxon-Mobil. Monopoly can provide Sr. Perez a small cushion when bad weather keeps customers indoors; international monopoly provides a tempting slush fund for Exxon execs.

Prum reminds us we need to challenge rigid doctrines and follow Darwin's open-minded investigation of the natural or economic world around us. (Of course, if the central problem of capitalism is monopoly instead of cutthroat competition, we must look for alternative solutions.)

* By "fitness", Darwin meant adaptation to the environment, or ability to survive—an objective characteristic. Modern evolutionary scientists, to Prum's infinite annoyance, have redefined "fitness" as relative success in passing on one's genes. This circular definition—success as its own measure—makes Darwin's ideas of sexual selection meaningless.


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An important fact check on manufacturing value-added and employment

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An important fact check on manufacturing value-added and employment // Jared Bernstein | On the Economy
http://jaredbernsteinblog.com/an-important-fact-check-on-manufacturing-value-added-and-employment/

So, I'm driving around doing errands this past weekend when I hear former Secretary of Commerce Carlos Gutierrez (in GW Bush's cabinet) interviewed about renegotiating NAFTA. He's a big booster of the trade deal and wanted to make the point that any job loss in manufacturing was a result of faster productivity growth, not imbalanced trade. His evidence was as follows (my bold):

One of the things I go back to very often is our manufacturing as a percent of GDP. Our manufacturing output is pretty stable, pretty flat. If you go back 10, 15 years, it's between 12 and 14 percent. But our manufacturing workforce has been declining steadily. So we're producing the same output with fewer people. What that tells me is that technology is more of a threat to American jobs than trade.

Stable manufacturing output share of GDP?! I practically dropped the dry cleaning!

The first figure shows that, in fact, manufacturing's share of output (blue line) has been falling since I was born in the mid-1950s. It was 11.7% in 2016, 13% in 2006, and 13.9% in the 2001. OK, that's roughly between 12 and 14 percent, but it ain't stable. It's falling, and pretty steadily. In fact, Louis Uchitelle just published an important book on this long-term trend.

Sources: BEA, BLS

The red line shows the decline in manufacturing employment, which is also steadily declining, such that the most we can determine from these trends is that we're creating a smaller share of output with a smaller share of workers, as the scatterplot of the data in the two figures clearly reveals.

Sources: BEA, BLS

The employment share falls faster than the output share, so sure, there's been productivity growth in manufacturing (though as I show here, not so much of late; see also Sue Houseman's important work on this point). But this endless drumbeat about manufacturing jobs falling prey to automation seems at least woefully incomplete, if not non-economic.

First, trade and automation interact and are thus not clearly separable forces. Technological advances in communication and transportation interact with globalization to facilitate offshoring and deeper global supply chains. Nor should anyone convince themselves that it matters to workers which force is displacing them. Gutierrez implicitly argues that because it's automation, not trade, displaced workers should somehow be assuaged. Hey, all they need to do is go from running a drill press to designing, building and programming drill-press-running robots!

Second, if productivity killed jobs, full stop, unemployment would typically be through the roof. The intervening variable has always been demand, as productivity growth generates rising real incomes that supports stronger demand and higher living standards, at least on average (if not "on median").

We thus must ask ourselves what happened to diminish the demand for American manufactured goods such that employment in the sector fell, both in absolute terms since 2000, and as a share of total employment for decades, as shown in the figure? The answer is, of course, import substitution. American consumers have increasingly met their demand for manufactured goods through imports.

That has its pluses, as Gutierrez points out, but also its minuses: it has certainly hurt vulnerable manufacturing communities, in no small part because policymakers refused to help them adapt to the change. Moreover, this import substitution was much exacerbated, especially in the GW Bush years, by persistently large trade deficits in manufactured goods.

What does any of this hafta do with NAFTA? It's just way too simple to brush people's discontents about trade deals like NAFTA to automation or their failure to side with elites on how benign globalization has been (Hey, it's reduced prices! Cheap stuff, everybody! Stop complaining!).

On what to do next, read Lori Wallach and I here for ways to make trade work better for workers, and read Dean Baker here for a highly efficient read on at the costs of ignoring the downsides of globalization (of which the steepest is President Trump).


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Chart of the Week: The Potential for Growth and Africa’s Informal Economy

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Chart of the Week: The Potential for Growth and Africa's Informal Economy // IMF Blog
https://blogs.imf.org/2017/08/08/chart-of-the-week-the-potential-for-growth-and-africas-informal-economy/amp/

By IMFBlog

August 8, 2017

A street vendor sells roasted corn in Tanzania: Unregistered household enterprises comprise a significant portion of sub-Saharan Africa's economy (photo: Ton Koene/VWPics/Newscom)

By 2035, sub-Saharan Africa will have added more working-age people to their workforce than the rest of the world's regions combined. And this growing workforce will have to be met with jobs. In the region, up to 90 percent of jobs outside agriculture are in the informal sector. This includes household enterprises that are not formally registered, like street vendors or domestic workers. It also includes off-the-books activities by registered firms—for example, the taxi driver who offers a discount if the meter is not turned on.

As our Chart of the Week shows, the informal economy in sub-Saharan Africa is the second-largest in the world, after Latin America and the Caribbean. From 2010 to 2014, sub-Saharan Africa's informal economy accounted for 38 percent of GDP to the region.

Within the region, however, there is significant variation in the size of informal economies. They range from a low of 20 to 25 percent of GDP in Mauritius, South Africa, and Namibia, to a high of 50 to 65 percent in Tanzania and Nigeria. As the chart shows, informality persists even in advanced economies, which means that the shift from informal to formal will take many years.


What drives informality in the region? Survey data show that the primary motivation for starting an informal business is to fulfil an aspiration for the future. A third of new entrepreneurs in sub-Saharan Africa, however, report choosing this path out of necessity—most would prefer a job in the formal sector, but don't have that option.

The informal sector presents both opportunities and challenges: 

It acts as a social safety net. The informal sector provides employment and income to many people who might otherwise be unemployed in the absence of sufficient opportunities in the formal sector. Household survey data suggest that people working in the informal sector consume more goods and services than those in the agricultural sector in many countries.

But productivity levels are low. Firms in the informal sector tend to suffer from low productivity. In sub-Saharan Africa, on average, the productivity of informal firms is only one-fifth to one-quarter that of formal firms. These differences likely reflect a combination of lower skill levels among workers, and a lower level of physical capital. In a country where the informal sector is large, the rate of economic growth is reduced.

The informal economy provides much-needed jobs to a growing working-age population, but also constrains growth.

Countries need to adopt a balanced approach in the design of policies to grow to formal sector. This means focusing on ways to increase the productivity of the informal sector, while working to support the expansion of formal businesses.

Policies that improve access to finance, make it easier for small firms to enter the market, and increase access to electricity could go a long way in formalizing the informal sector. This will be key to creating the types of jobs that are most desirable among sub-Saharan Africa's expanding workforce.

To learn more, read the latest Regional Economic Outlook for sub-Saharan Africa and listen to a podcast featuring Ali Mansoor, one of the authors of the report.


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