Trump, Iglesias and Boris: The new faces of evil in western democracies

In contrast with the usual faces of evil from non-democratic countries (e.g. Putin, Maduro or Kim Jong-un), the new faces of evil all come from democratic countries. So, what is wrong with western democracy? Can we no longer rely on a free press and democracy to prevent the election of evil leaders?

Although extremists have a right to express peacefully and freely their views in a democratic society, it is expected that electors are sufficiently educated to not elect them. Yet, opinion polls on next week’s election in Spain and the UK referendum on EU membership suggest that such radical candidates are not far from winning. Likewise, in the US presidential election later in the year. So, is this because such candidates are wolves in sheep’s clothing misleading the electors?

Clearly not! They do not hide their hideous ideas, as I explained in previous posts. For instance, Donald Trump’s xenophobic ideas and hate for migrants are clearly dispelled in his so-called program to Make America Great Again. Likewise, the program of the Spanish party Podemos led by Pablo Iglésias, is a crude restatement of the Trotskyist version of communism coloured with populist claims of direct democracy, regional separatism and a phony rebellious youth. Finally, the proponents of Brexit, whether they are represented by Nigel Farage leader of UKIP or by Boris Johnson the former populist Mayor of London, play on the fear of immigration and loss of sovereignty, in a manner reminiscent of the infamous 1968 Enoch Powell’s speech on the Rivers of Blood. They downplay the costs of protectionism and economic disintegration, while bullying voters by claiming that they will be sissies if they do not vote out of the EU.

So, are these evil leaders gaining followers because the moderate media and politicians have given up on fighting their populist and nationalistic propaganda? Partly, this is true and it is often fostered by a media willing to resort to the dodgiest forms of reporting as long as it increases their audiences.

However, in my view, there are more important and genuine reasons for dissatisfaction with the current political systems. First, there is an inevitable peace lethargy among the young generations who do not remember the two world wars nor have they lived the age of utopias in the turn of the XIX century and the 1960s. Second, this is compounded by a generalized low regard for professional politicians who rotate in power and corruption fighting for special interest groups with an evident lack of public service spirit.

This real crisis of representative democracy and the new forms of media have been exploited expertly by the new evil leaders to disseminate their reactionary ideas. So, unless new leaders rise, as Churchill did in the 1930s against the appeasers and the nationalistic rhetoric of Hitler, and fight these new evil leaders, the Western World, as we know it, is in serious danger. This week’s electoral results in Spain and Britain will give us a first outlook of how real such danger is.

Capitalism and international free trade

Free trade is a foundation of capitalism not only at the national level but also at the international level. However, while locally it is easy to understand why free competition protects the capitalist system from capitalists who acquired a dominant position, when dealing with foreigners nationalist sentiments often win. For instance, it is common to find many arguments in favor of domestic producers using the infant industry argument, the notion of national champions or even a mercantilist ideology.

Yet, it is at the international level that societies may achieve better levels of specialization based on relative comparative advantage. This can be confirmed by looking at the link between exports and economic growth in the follow up to major reductions in international trade barriers.

The reduction of tariffs and non-tariff barriers started in 1947 with the signing in Geneva of the General Agreement on Trade and Tariffs (GATT). It continued through subsequent rounds of negotiations and played an important role in the extraordinary growth of international trade. For instance, between 1948-1968 the total volume of merchandise exports from non-communist countries grew 290 percent. Moreover, it outpaced the growth of world output. For example, from 1953 to 1963, trade in manufactured products increased by 83 percent, while manufacturing output rose by only 54 percent.

International trade liberalization was certainly a major driver of economic growth during the so-called Golden Age (1950-1973). Yet, although there are two virtuous circles associated with export-led growth (Marques-Mendes, 1988), one should not confuse the rising share of international trade in GDP as the direct cause of economic growth, because a faster rise in trade is not always associated with accelerating economic growth.

This can be easily confirmed by looking at two countries with high degrees of openness but significant differences in growth performance. For instance, Singapore and Hong Kong, classified ex aequo by ICC as the two most open economies in the world, were reported by the World Bank to have grown between 1966-2013, at market prices and 2005 $US, at an average annual rate of 7.8% and 5.8%, respectively. Meanwhile, during the same period their exports as a percentage of GDP rose 67 and 154 percentage points to reach 191% and 230%, respectively. That is, Hong Kong’s GDP grew less than Singapore’s despite a much faster growth in exports.

Likewise, the next two most open economies, Luxembourg and Belgium, grew in the same period at 3.7% and 2.5%, respectively, but their exports as a percentage of GDP grew 124 and 39 percentage points to reach 203% and 83%, respectively. Overall, in terms of economic growth over the past 47 year period Singapore outperformed Hong Kong by 162% and Luxembourg outpaced Belgium by 75%.

There are many factors explaining such disparate performances, including geography and sector specialization (both Singapore and Luxembourg are regional low tax financial centers) as well as demand factors (see Marques Mendes, 2011 and 2014, on why not all exports are the same), but the type of capitalism pursued is also a driving factor.

To understand the relation between exports and GDP it is useful to breakdown the latter in relation to the three identities used in GDP estimation – expenditure, income and production. For instance, the condition required for exports to exceed GDP under the expenditure approach is that the foreign trade balance (in ratio form) exceeds the ratio between domestic absorption (consumption and investment) and imports. This is more easily achieved in smaller countries and/or in countries where exports have a larger import content.

Likewise, using the income identity, we can see that the excess of exports over GDP requires that exports exceed wages by a factor equal to the wages/profits ratio. Thus, assuming a normal capital share of 40%, exports must exceed wages by 66% which is more easily achieved in low wage countries.

Finally, taking a production approach and splitting it into tradable and non-tradable we need exports to exceed non-tradable by a factor bigger than the tradable/non-tradable ratio. Since many non-tradable are produced in the non-capitalist sectors, it is easier for countries with a smaller state sector to achieve a high export/GDP ratio.

To understand the great advantage of capitalism in terms of capital accumulation and the deepening of the division of labor, one must bear in mind that the later can be achieved through rotation or specialization. These two distinct ways have substantial differences in terms of productivity impact as can be illustrated through a domestic example.

For example, my wife is much better than me at both cooking and doing the dishes, but her greatest advantage is in cooking. So, following the rule of relative comparative advantage she does the cooking and I do the dishes and we both gain by spending less time in the kitchen and having better meals. However, we could share the chores of preparing meals by alternating so that one day I would prepare dinner and she would do it the following day. This seems a more egalitarian division of labor but it would be much less efficient. For one, half of the week we would eat lousy food because it was me cooking. But I would also spend more time in the kitchen.

Obviously, capitalism relies on the division of labor through specialization and has a much greater scope in pursuing it through joint ownership, which facilitates accumulation and the unbundling of the production process.

Nevertheless, imagine that a washing machine is invented that reduced by 2/3 the time and skills needed to do the washing. Who would benefit? We could benefit both by, for example, me using half of the time saved to set the table a task previously done by my wife. But, what if I were a selfish person and insisted in doing only the dishes in exchange for the meal. Now my wife would have to consider to either forego the benefit of technical progress or to divorce me and find a more obliging husband.

Fortunately, in non-domestic activities we would not have such a dilemma because there would be many other suppliers competing to do the washing and those doing the cooking could play them to share on the gains from technical progress. That is why capitalist principles are better suited for non-family activities because one can contract and re-contract frequently.

So, to understand which are the most important drivers for international specialization and trade, one must examine the role played by each foundation of capitalism.

Starting with private property it is evident that the more this is protected the greater will be the level of private investment which accounts for the largest relative share of tradable goods and services. The profit motive is needed to increase the return on capital in a context of high wages. Free markets are indispensable to have a country specialization driven by dynamic comparative advantages needed to foster the benefits of export growth. Meanwhile, joint ownership and limited liability are needed to foster risk sharing and mitigation in international business. Yet, to prevent that these advantages are seized by protectionist interest groups, it is indispensable that the rule of law prevails.

The fundamental principle of the rule of law is that all be treated equal, regardless of sector of nationality. For instance, preference for national suppliers, price controls and distortionary taxes or subsidies are all in flagrant violation of the fair treatment principle required for a level playing field whether at the national or international level.