US President Biden has called for ‘regime change’ in Russia, a statement that should recall previous US-led regime change crusades – in Chile (1973), Iraq and Afghanistan, among many. To put it mildly, they have not been unmitigated successes. But the regime change initiative that deserves our scrutiny today was the United States’ most ambitious and most relevant to the latest demand for change, which one would dearly like to see. This is because it embraced Russia and Ukraine thirty years ago.

Let me preface this article by saying that, fortuitously, I witnessed what the USA, the UK and others did on the ground. In 1990, on behalf of the International Labour Organisation (ILO), I organised an international conference on labour policy in Moscow, which emerged as a report just as the Soviet Union was dissolving. I was then appointed director of a programme set up by the ILO to advise governments in the region on social and labour policies in what was euphemistically called the ‘transition’ from ‘communist’ to a ‘market’ economy. 

Based in Budapest, for about four years I interacted with senior government ministers and officials of Russia, Ukraine and neighbouring countries while also having numerous meetings with economists and officials from the USA, other countries and international bodies such as the World Bank, the latter all committed to their version of regime change. It was a bizarre experience. I even met the Queen, the Duke of Edinburgh and the Queen of The Netherlands as they played walk-on parts in helping to legitimise the expensive regime change plans.

From the outset, I strongly opposed what was happening, and gave numerous speeches and published articles and several books to that effect. Today, I believe that the Russian invasion of Ukraine in 2022 is partly attributable to the neo-liberal strategy led by the USA in that period. The precise details of what has been happening were not predicted or predictable, but it was clear at the time that the fault lines leading to today’s quagmire lay in that strategy. One way of putting it is that it failed to lay the ghost of Stalinism, and created fertile ground for its resurgence. 

Shock doctrine

So, what was the foreign-directed strategy? Although different proponents had variants, it enshrined a doctrine fostered by economists at Harvard, LSE and elsewhere known as ‘shock therapy’, designed with one objective, turning Russia and Ukraine into capitalist economies. This was based on three premises. First, it was reasoned that pro-market reforms had to be introduced quickly, so that there was no time for ‘socialist’ forces to regroup and block reform. 

Second, a more technical premise was that priority had to be given to macro-economic policy, backed by aid conditionality to force the Russian (and Ukrainian) government to adhere to it, over and before micro-economic (structural) policy. This was based on the orthodox economic view that macro-stabilisation was a necessary prior for structural reform. This was the dominant reasoning of the International Monetary Fund. The third premise was that there had to be a particular sequencing of the macro-economic reforms. The combination of these three premises was literally the fatal, hubristic mistake.

Before describing what the shock therapy advisers prescribed in their frenzy of activities in Moscow, Kiev, St.Petersburg and elsewhere, I should mention that as soon as I was appointed to my ILO post we mobilised funds to conduct a series of detailed surveys of hundreds of industrial enterprises in Russia (1991-94) and in Ukraine (1992-96), and extensive household surveys covering many thousands of households in both countries. In effect, the data mapped the context and outcomes of the shock therapy doctrine. This seemed an essential task, but the shock therapy advisers charged ahead without worrying about evidence.   

Folly and hubris

It was an exercise of hubristic folly. The first set of reforms in the sequencing were price liberalisation, coupled with removal of price subsidies (except on energy). Bear in mind that production had collapsed, that strict price controls had existed for generations and that the production structure consisted of huge industrial enterprises with monopolistic characteristics, dominating whole sectors and regions. 

The effect of price liberalisation was thus an extraordinary burst of hyper-inflation. While we were working in Ukraine, in one year inflation was estimated at over 10,000%, and in Russia it was estimated at over 2,300%.^[1] The impoverishment was lethal. Millions died prematurely; male life expectancy in Russia fell from 65 to 58 years, female from 74 to 68; the national suicide rate jumped to over three times the high level of the USA. 

In a collective state of denial, the western economic ‘advisers’ were almost Stalinist in their zeal. Their second policy was to slash public spending, with the double objective of squeezing inflationary pressure by curbing monetary demand and weakening the state. This had the immediate consequence of intensifying the rising mortality and morbidity. But it did something else that is affecting the whole world today. Wages and salaries in the public sector fell so low that the state ceased to function. This created a vacuum in which the kleptocrats thrived. I recall government ministers asking for $50 bribes just so they could feed their family. They were easy prey to ruthless gangsters, who in turn were bedfellows with ex-KGB officers, led by the new First Deputy Mayor of St.Petersburg, a certain Vladimir Putin.

One cannot overemphasise the folly of the anti-state ideology, when what was needed desperately was the nucleus of a professional civil service, backed by a proper legal system. But all the RCAs wanted was full-blown capitalism, which they saw as leading to a ‘Russian Boom’, in which ‘democracy and free markets have taken root for good’.

Mass privatisation

The third plank of the shock therapy sequencing was mass privatisation. It began as a bit of a joke, with privatisation ‘shares’ being handed out like confetti. I still have one somewhere, given to me by the Mayor of St.Petersburg. But it soon became a wild-west plunder. The World Bank, USAID, the new European Bank for Reconstruction and Development (EBRD) in London and other foreign bodies allocated vast amounts to assist in speeding up the transfer to the new ‘entrepreneurs’. Over 15,000 state firms were sold off; kleptocrats became oligarchs overnight; their American and other foreign ‘advisers’ became multi-millionaires. This is when the criminality stretched across the Atlantic.

One still has to be circumspect in how one puts this. However, it was widely known that prominent economists in the ‘regime change’ community were linked to the rising oligarchy and making millions of dollars. Eventually, one case was brought to the Massachusetts High Court, where several professors pleaded guilty to insider trading. They paid modest fines, with Harvard paying much more, but the main one was allowed to continue his stellar career. Rest assured, he and others did very well.

Meanwhile, there was the awkward onset of the fourth phase of the sequencing, characterised as the ‘therapy’ after the ‘shock’. This was touted as building a new social policy system, based on standard neo-liberal lines, that is, a residual welfare state with as much privatisation as possible, beginning with pension systems and education. As some of us had argued from the outset, the erection of a universalistic social protection system should have been done before any ‘shock’ policies. Callously, implementing social policies was left to afterwards, and then only done patchily, with interminable delays.  

Carnage

The carnage was palpable. In this period, two personal events occurred that epitomised the madness of what was happening. In 1992, I was invited as a ‘labour market expert’ to give a lecture to Ministers of Finance and Ministers of Education from eastern European countries, organised by the World Bank in a Dutch castle, symbolically with its own moat. There I listened while the Ministers were told what policies they should be introducing if they wanted foreign loans or grants. 

The other event was even more bizarre. In 1993, I was chairing a small conference in France on minimum wages and basic income policies for eastern Europe when I received a phone call from a US Ambassador inviting me to Washington to give a briefing in the State Department. After doing background checks, I accepted and so found myself taken to the basement of the State Department. Sitting at a long table with a ‘minder’, I was surprised to find 12 men come in to sit on the other side. Chaired by an Under-Secretary of State, they identified themselves individually, and most said CIA.  

I told them that their policies were disastrous, that huge numbers of Russians and Ukrainians were dying as a result of shock therapy and that contrary to what they were reporting, real unemployment was about 25%, concealed by the fact that enterprises were retaining the work history books of workers to claim subsidies. I argued that the people with whom they were working at the political level were deeply corrupted, and that they should focus on providing direct aid to ordinary people if a lurch to neo-fascism was to be avoided.

I argued that restructuring of enterprises and the substitution of rules of regulation and law should take precedence over macro-economic reforms and privatisation. I poured as much scorn as I could on claims being made by the World Bank and prominent RCA economists that there was no unemployment, and argued that it was crazy for the Bank to withhold a large loan to aid the unemployed on the presumption that as one Bank report claimed, the unemployment rate was only 1%, backed by the statement, ‘Contrary to initial expectations, unemployment remains not only low but declining.’^[2]  

This was ridiculous. It was clear that the neo-liberal strategy was simply creating a kleptocratic capitalism, a virulent form of rentier capitalism that was taking shape globally. A new class structure emerged, with a plutocracy of oligarchs, a tiny salariat (including educated people trying to build a decent society), a lumpenised proletariat (ageing, atavistic) and a rapidly growing precariat. The oligarchs in Ukraine were split, with Russian-speaking heavies allied to their Russian counterparts in mafia-style conflict with Ukrainian-speaking oligarchs. There were also a few Bulgarians, Romanians and others in their orbit, and they all soon found they could mingle comfortably with the financial and other plutocrats in London, Wall Street and elsewhere. 

Venal kleptocracy

After the State Department meeting, I returned to Hungary. Several months later, I was invited back to Washington to brief the Department of Labor. Afterwards, they gave me a cocktail, and at the back I saw two of the CIA officers who had been in the State Department briefing. I asked them what had happened after the first briefing. One said to me, conspiratorially, ‘Quite frankly, it went right to the top….and he doesn’t believe you.’ He meant President Clinton. 

Several months after that, the Russian elections took place, and the new party of the neo-Stalinist ultra-nationalist Vladimir Zhirinovsky, who advocated invasion of Ukraine, gained 23% of the vote, with the US-backed neo-liberal party reduced to a rump. I sent a one-liner telegram to one of the CIA officers, ‘Does the State Department believe me now?’ I was told later that this caused some wry amusement.^[3]

In sum, the regime change strategy had generated a venal kleptocracy, and in line with that today we have globally a morally indefensible form of rentier capitalism where plutocrats are funding major political parties and politicians in their interest. It is the most unfree market economy ever conceived and it is not sufficient to see the UK as Butler to the World, however apt that description might be. The state is deeply corrupted, and we will not escape the quagmire until a new progressive, transformative politics emerges, one that could mobilise the precariat in all parts of the world. 

The evil being perpetrated by Russia will not be defeated by military means alone. Of course, we should all admire and support the incredibly courageous Ukrainians. But it is a transformation of our own societies that must be achieved. In response to the rush towards an ecological dystopia and a grotesquely unequal and insecure existence for so many, progressives in politics must have a coherent, well-articulated strategy for dismantling rentier capitalism.

Today, neo-liberalism is not the primary enemy. Today is the time for a new radicalism based on principled opposition to the global plutocracy and to the system of rentier capitalism that is based on rapacious plunder. We need a new Renaissance, to revive conviviality, commoning, republican freedom and equality. So far, in Britain and elsewhere, that transformative vision is being held back by excessive pragmatism by old-left parties. However, just as Nature abhors a vacuum, so does the human condition. We need a progressive revolt, one that crosses national boundaries and that is ecologically redistributive. One can see the green shoots, but must just hope there is time for them to grow. 

Guy Standing is Professorial Research Associate, SOAS University of London, a Fellow of the Royal Society of the Arts, and a councillor of the Progressive Economy Forum. His new book is entitled The Blue Commons: Rescuing the Economy of the Sea.

^[1] These and following statistics were collated for two books at the time. See G.Standing (ed.), The Ukrainian Challenge: Reforming Labour Market and Social Policy (Budapest, ILO-UNDP, 1994); G.Standing, Russian Unemployment and Enterprise Restructuring: Reviving Dead Souls (London, Macmillan, 1996).

^[2] This view was backed by leading shock therapy advocates, such as Jeffrey Sachs and Anders Aslund. For references, see my book. 

^[3] [Zhirinovsky remained in the Duma until his death from Covid, ironically on April 6, 2022, with his dream of invasion of Ukraine realised. His original party had been funded by the right-wing French politician, Jean-Marie Le Pen, with whom he remained close.]

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The Financial Times front page this morning splashes on reports that China is dropping its studied neutrality over the Russian invasion of Ukraine:

China signalled it was ready to play a role in finding a ceasefire in Ukraine as it “deplored” the outbreak of conflict in its strongest comments yet on the war.

Beijing said it was “extremely concerned about the harm to civilians” in comments that came after a phone call between Chinese foreign minister Wang Yi and his Ukrainian counterpart Dmytro Kuleba.

“Ukraine is willing to strengthen communications with China and looks forward to China playing a role in realising a ceasefire,” the Chinese statement said on Tuesday.

It added that it respected “the territorial integrity of all countries”, without indicating whether Beijing accepted Russia’s claim to the Crimean peninsula or shared its recognition of separatists in the Donbas region of eastern Ukraine.

First signs of this emerged a few days ago, as China’s Ministry of Foreign Affairs shifted its neutral tone on the conflict to stress the importance of “sovereignty” in comments to foreign journalists.

China’s central role here shows the way in which power in the world has shifted over the last decade. The US, Canada and European countries, later joined by Japan, took exceptional economic measures against Russia over the last week. These have been described as unprecedented in their scope, taking action against oligarchs, banning some Russian banks from using the SWIFT banking service, and imposing restrictions on Bank of Russia, the Russian central bank.

But the real importance of these measures sometimes gets confused. Blocking SWIFT, the interbank messaging system, has been talked up as a deadly blow to the Russian economy. It certainly adds costs and difficulties to doing cross-border business with Russia and for Russian institutions, but it’s not an economic knockout. SWIFT isn’t a payments service – it’s a system designed for banks to communicate with each other about the payments they wish to make. It could be replaced with phone calls or faxes.: a nuisance, but not critical.

Jamie Dimon, chief executive of JP Morgan, made the same point in interview two days ago:

He said the move to limit Russian access to the Swift banking network might have a lot of workarounds, meaning it wouldn’t alone stop sanctioned parties or others from doing business. The Swift network is the main messaging system banks use around the globe to conduct cross-border transactions. Mr. Dimon said blocking it doesn’t mean alternative messaging systems are blocked as well.

“A sanction says I cannot do business with you,” Mr. Dimon said. “A Swift thing says I can’t use a communication [tool] to do business with you. I can still do business with you.”

Similarly, sanctions against oligarchs and the networks of criminal financing that they use – flowing in vast sums through London and its associated tax havens – will cause difficulty and nuisance, and plausibly could help turn those closest to Putin against him. But it’s in the category of nuisance – potentially serious nuisance – for the mega-rich, rather than a fundamental blow.

Central bank sanctions are decisive

The deadly warhead in the sanctions is the ban on trading Russia’s central bank reserves. The joint communique from the US, Canada and the European powers says:

[W]e commit to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.

Russia will be barred from selling its central bank assets on global markets, where those assets are held in a participating country, or are being traded by an institution or an individual in a participating country. This has left Bank of Russia unable to support the rouble by, for instance, selling those assets to buy roubles (as it was doing until the ban came in force).

And it means that many Russians will assume that both their roubles are worth less, and their banks are at risk of collapse, sparking bank runs – as we have seen. The response of the central bank has been to whack up interest rates to 20%, and to impose various restrictions on taking currency and assets out of the country  – most recently, it has banned moving more than $10,000 in foreign currency out of Russia.

Central banks are the lynch-pin of a modern economy, defending the stability of the banking system and (therefore) its currency. Control over a central bank gives a hostile power immense leverage. We saw this in the eurozone crisis, when both Ireland in 2010, and Greece in 2015 were threatened with the collapse of their national banking systems by the European Central Bank, if they did not sign up to stringent austerity measures. Both were brought rapidly to heel.

The sanctions being put in place today are an unprecedented economic weapon applied by the joint powers to the Russian economy. The chaos they have produced is all too evident, the rouble falling, for a while, to an all-time low against the rouble. There are suggestions that financial markets across the world are exposed to the risk of default and economic failure in Russia, but of course the people suffering their effects most right now are ordinary Russians. They are the most effective weapon in the joint powers’ economic armory.

Russian defences against economic sanctions

Crucially, however, the sanctions leave assets not held in the joint powers’ currencies, or in their jurisdictions, outside of their scope. The Bank of Russia’s reserves come to $640bn – a veritable war chest that has been built up, very deliberately, over the last decade or so. Russia squeezed its domestic economy and ran huge current account surpluses which, in turn, enable the central bank to acquire these reserves.

But at the same time, Bank of Russia has been getting our of dollar and dollar-denominated assets, precisely in anticipation of something like this ban being applied. It now holds only $bn of US Treasury bills, massively down from the all-time high of $176bn in October 2010.

Jon Sindreu, in the Wall Street Journal, has a breakdown of the Bank’s holdings today, in a piece noting the holes in the sanctions regime:

The two largest components are gold and renminbi-denominated assets. As the caption notes, both of these are “likely safe from being blocked by the West”. It’s difficult – arguably increasingly difficult – for even the Federal Reserve to try and bar sales of renminbi assets outside of US financial institutions. Gold, playing the role it has for millennia, is a uniquely tradeable store of value. Russia holds its gold physically inside the country, and – if it can arrange physical transportation, or offer credible guarantees of its future delivery (big ifs!) – this is a viable reserve for exchange.

That leaves China. And this is where the essential leverage of China comes in. Both countries have been building up trade and other economic relations for some time, agreeing a strategic cooperation with “friendship… that has no limits” just ahead of the Beijing Olympics. Since sanctions were imposed on Russia in 2014, trade between the two countries has grown more than 50% and China is now Russia’s biggest export destination. China and Russia agreed a thirty-year contract for gas supplies just ahead of the invasion.

This is a lifeline for Russia right now. But it is also a pressure point, and potentially a decisive one. Europe gets 40% of its natural gas from Russia. This is way the gas trade with Russia is not sanctioned. China’s demand has been growing, but Russia still supplies just 5% of its domestic consumption. China could apply leverage here. Russia’s remaining non-gold central bank assets are renminbi-denominated. China could try to control their use. Or, in both cases, plausibly threaten to do so.

We are a long way from the Cold War: the balance of the world does not hinge on decisions in Moscow and Washington, or even Paris and London. They depend on Beijing.

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An interesting debate was opened by Labour’s MP for Neath, Christina Rees, in Parliament’s Westminster Hall last week on Italy’s “Marcora Law”. This is the legislation introduced there in 1985 to allow workers’ threatened with redundancy the option of exercising a right to purchase the company. Two government-administered funds provide the loan capital needed to the workers, and the law has been credited with saving 13,000 jobs in the years after the financial crisis.

There are two points to note here. First, although co-operative and worker ownership sector in the UK is a fraction of those in Europe and North America, it has been growing rapidly in the last few years, helped along by some recent changes to legislation. 250 new employee-owned business have been established since 2019, taking the total to 720 across the UK: a fraction of the 2m or so registered businesses in the UK, but including at least one very large employer, John Lewis Partnership, and with notable growth in manufacturing firms in particular.

Second, there is a potential here for a government outside the EU to do something radical with this. The original Marcora Law provided for significant government support to those wanting to move a threatened firm into employee ownership, with the Italian state offering to put in up to three times as much additional start up capital as the workers. The European Commission ruled that this was in breach of EU competition law, handing (in its view) an unfair advantage to worker-owned businesses relative to more conventional ownership. But the reality is that this was a clash of two very different conceptions of what a business is. The Commission took (and takes) a pure neoliberal view: that a business is there to benefit its shareholders only, and any one kind of shareholder – someone’s granny with share certificates; your ISA; Black Rock – is much the same as any other. There is, in this view, no case for offering cheap loans to any one type of business over another, solely on the basis of its form of ownership.

That, of course, radically reduces the appeal of worker ownership, and opens up the standard neoliberal objection. If you are employed by a company, you are exposed only to one kind of risk – that the business could fail, and you lose your job. But if you are not only an employee, but a shareholder in the company, you face two kinds of risk: if the business fails, you lose your job – and also whatever capital you have invested. It’s this double risk that tends to weigh heavily against worker buyouts, particularly where employees also face having to borrow money at standard commercial rates.

But there is another way to view a business. Instead of seeing a firm as operating solely for the benefit of its shareholders, we could view it as a social institution in its own right: that whatever a business does includes not only the profit it makes, but the quantity and quality of the work it generates, its impact – good or ill – on the environment, the other businesses and employment it sustains through its purchases, and so on. The evidence that worker ownership performs better on these broader measures of successes is clear: worker-owned firms tend to be more productive, tend to create and sustain more and better jobs, and tend to act as better stewards for the environment.

In this view of a firm as a social institution, government could become a necessary partner, acting as guardian of the broader interests of society alongside those of the workers and any additional shareholders. It would be natural for this additional partner to also take a stake and offer support to a company working in this way. This would be a breach of the neoliberal conception of the company, but would be far closer to the actual

Neoliberalism in law

United Kingdom company law doesn’t think like this. The last major change was the Companies Act 2006, enacted by the Labour government, which did create a weak requirement for directors to “have regard to” environmental and social impacts, but left the basics of shareholder supremacy in place, turning existing common law practice into hard legislation. And for as long as the UK was in the EU, this neoliberal bias reinforced by the EU’s own strict laws and regulations around competition and ownership. Steering around them was possible, but would be an additional hurdle for an economy like the UK if it sought to significantly boost worker ownership.

But outside of the EU, and now subject only to the loose constraints of the EU-UK Trade and Cooperation Agreement, a UK government has more freedom to intervene in the domestic economy. Support for worker ownership could be radically improved, and with the option for further support for specific areas and regions of the country. Cheap capital could be provided at scale for employee ownership schemes; and the opportunity for major expansion is there, too, with potentially thousands of viable small businesses facing closure or sale as their baby-boomer owners approach retirement: nearly two-thirds of UK small business owners are over 50, and two-thirds of them have no succession plan for their businesses. It’s the sort of thing that might appeal to the supposedly “Brexity Hezza” in No.10, but if the government’s response to Rees is any guide, they’ll let it slip. Time for Labour to seize the moment?

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It was a lie. Packaging rules are solely a matter for national governments, and the Conservatives, which he had supported consistently, had done nothing over nine years in government to change them. It is far from the only lie that has been told about fishery policy by those supporting Brexit.    

It is well known that fishing communities voted overwhelmingly for Brexit, and that the Conservatives won seats in fishing areas of Scotland in 2017 because they were seen as the party of Brexit. The Conservatives are pitching the same line again. In response to a planted question in the House of Commons just before the General Election was called, asking for a ‘categorical assurance’ that the UK ‘will not use our fish stocks as a bargaining chip in future negotiations’, Boris Johnson asserted, ‘I can confirm that we will take back 100% control of the spectacular marine wealth of this country.’

In the Conservative Party manifesto for the General Election it is repeated:

Upon leaving the EU, we will leave the Common Fisheries Policy becoming an independent coastal state and taking back control of our waters;

You cannot take back control of something you have always controlled.  

Leaders of the fishery industry, who mainly represent the big trawlers not the small-scale fisheries, have long condemned the EU’s Common Fisheries Policy (CFP) for the industry’s woes, which include the collapse of cod and haddock stocks and depletion of many other species. Fishing and fish are emotive subjects in Britain, and even though those involved in fisheries comprise a tiny share of the labour force, they figure high in people’s imagination. So, the facts should matter.

The first fact is that the crisis has little to do with the CFP. Catches in UK waters have declined by over 94% in the past 130 years, and the decline long predated Britain joining the CFP. The CFP has at least slowed down the depletion of stocks, through its ‘total allowable catch’ rule. The UK’s fishing industry as a whole has been making big profits (a gross profit of over 30% in some years). The trouble is that only a few large-scale fishers have been making most of that, for reasons that will become clear later in this piece.  

Second, Britain has done well out of the CFP’s system. Of the six million tonnes of fish landed by EU countries, Britain is the second largest, with 700,000 tonnes from UK waters, with a further 52,000 tonnes from other EU waters. Brexiteers complain that the UK has received too little of the TAC. But the industry suffers from overfishing. If Brexit occurs, no sensible government would increase the TAC. If they did, they would be indicating they are in the thrall of the large-scale fisheries that gain from overfishing, through higher prices and consolidation of control, as marginal fisheries are driven into bankruptcy or decommissioning of boats.

So, the question voters should ask candidates is:

Would they impose more restrictions on EU fishing in UK waters, bearing in mind that this would lead to retaliation and the likelihood of rising tariffs that would hit the UK shellfish sector particularly hard?     

Third, Britain imports from the EU almost as much fish as it exports to it, and relies on the EU market. Many observers present an image of British fisheries as based on cod and haddock. This is not the case; most of these iconic fish consumed in the UK are imported, and are classified as having unsustainable stocks in the North Sea. Meanwhile, the mainstay of UK’s fisheries is shellfish, which comprise the main source of exports, most going to the EU.

Fourth, Britain receives considerable subsidies from the CFP, and provides its fisheries with more than most other EU countries; it could have handed out even more, although that would be unwise. The point is that it is Westminster that determines the amount and type of subsidies. Blaming the CFP is invalid.

The EU’s CFP has allocated the UK £243 million in fishing subsidies between 2014 and 2020. One would like to know from the parties whether that money will be replaced after Brexit. This economist, for one, predicts the fishing communities will not receive anything like that.

So, the questions voters should ask the politicians are as follows:   

Would they implement a ‘total allowable catch’ policy?

If so, would it be larger or smaller than the existing TAC under EU rules, and would they insist on having a social manager (government appointee) to enforce the rules, someone independent of fishery owners?[i]

So far, only the Green Party has a clear stance on fishing subsidies. As in the 2017 General Election, they are resolutely opposed to them. Evidence from around the world indicates that is roughly correct, if the collapse of fish stocks is to be avoided. The main exceptions are ‘research’ and ‘General Service and Management’ subsidies, which have beneficial effects if proper management rules are applied with adequate resources.

The Labour Party manifesto includes a mildly promising commitment:

We will set maximum sustainable yields for all shared fish stocks, redistribute fish quotas along social and environmental criteria and, if people vote to leave the EU, require the majority of fish caught under a UK quota to be landed in UK ports.

The Conservative Party manifesto includes a similar statement on maximum sustainable yields:

There will be a legal commitment to fish sustainably and a legal requirement for a plan to achieve maximum sustainable yield for each stock.

It also states:

We will maintain funding for fisheries across the UK’s nations throughout the Parliament and support the regeneration of our coastal communities;

The Conservatives say nothing about the level of funding, and fail to mention the need to cover for the lost income from the CFP subsidies. If they were intending to continue the £243 million gained through the CFP, that should have been in their Manifesto’s Costing document. But there is no mention of anything. There is no need for a statement in the Labour, Green or Liberal Democrat manifestos, since none of them plan on a certain Brexit. But any party promising Brexit should be required to say whether they would replace CFP subsidies fully or partially.

Then we come to the policy on which the most lies have been perpetrated. The CFP operates what is called a fixed quota system. Guided by scientific advice, ministers in charge of fishery policy of member states meet each year to decide on the ‘total allowable catch’ of major fish species, and then agree on quotas for each member state on a formula based on past practices and catches of those species.

One lie told by Brexiteers is that the CFP allocates the quotas. But the distribution is left entirely to national governments. Here is where the scandal begins. Under the Conservatives, over two-thirds of quotas have been given to just 25 companies, dubbed the ‘codfathers’ by Greenpeace, while under 2% has gone to small-scale fishers, even though they make up 79% of the fishing fleet. Worse, over a quarter (29%) have been quietly handed to just five families on the Sunday Times Rich List.

Even worse, 13 of the 25 companies that were given most of the quotas had directors or vessel partners convicted in an over-fishing scam in 2011-12 in Scotland. This is known as the ‘black fish’ scam. The companies clandestinely landed 170,000 tonnes of undeclared herring and mackerel, worth £63 million. Leaders in the fishing industry who claim that it can self-regulate should be reminded of that scam. Sadly, it did not stop the perpetrators continuing to receive the Government’s very large quotas.

The Conservatives and Liberal Democrats after 2010 and the Conservatives since 2015, have compounded the disastrous policy by continuing to allow quotas to be tradeable, as commodities, in spite of predictable and long-established consequences. The big companies have been buying quotas from smaller firms, and foreign firms have bought ‘British’ quotas by registering their boats in the UK, a trend dubbed ‘quota hoppng’. If you believe in the supremacy of private property rights and turn quotas into private property, do not be surprised at this outcome. There has been increasing monopolisation, associated with more intensive rentier capitalism in the industry, and self-induced colonisation.

The latter has been dramatic. One Dutch multinational, with a British subsidiary North Atlantic Fishing Company, owning a 114-metre long flagship fishing trawler, now possesses about a quarter of all the UK quota. With other ‘quota hoppers’ coming from Spain, Iceland and The Netherlands, foreign-owned boats now hold about half the UK’s quotas. 

The quota system has produced several ironies. In an orchestrated event that may have tipped the balance in favour of Brexit, in 2016 a flotilla of fishing boats went up the Thames. Nigel Farage was on the flagship, i.e., a foreign owned boat flying the UK flag. It belonged to one of the ten largest quota holders. The motto of the campaign was ‘Bring back control.’ One could be confident in thinking that the flagship would be a primary beneficiary.

Second, the Government’s White Paper on fishery policies post-Brexit, published in 2019, stated that there would be no change in the quota distribution after Brexit. That surely reflects the power structure in the fishing industry and the ideology of private property rights. Put bluntly, if the Conservatives are elected they have committed to channelling more rights and money to the codfathers and quota-hoppers, and practically nothing to small-scale fisheries, the latter should not complain if they vote Conservative and that is what happens. In the circumstances, every voter concerned with fisheries should ask all candidates the following:

Do you agree with the Conservatives’ White Paper statement, ‘We do not intend to change the method for allocating existing quota.’

In a related policy, the government has claimed it wishes to support ‘discard-free fisheries’. This is significant because of the quota system. It has been common for fishers worried about exceeding their quotas to discard fish caught that are less valuable, notably juveniles and species not valued much in the UK. This has been a cause of declining fish stocks.

If there is a market for species not valued by UK consumers but valued in the EU, the tendency to discard good edible fish is held in check. But if the UK is cut off from the EU market, discarding will grow. The government and industry representatives may huff and puff and say that will be controlled. The reality is that, whereas with the CFP there is an EU-level inspection system, the UK has only 12 vessels for monitoring fishing practices for all UK waters up to 200 nautical miles from its coasts. Research has shown that without strong regulation through diligent monitoring, a quota system, as operating in the UK, will lead to rapid fish stock depletion.

So, voters in fishing communities should ask candidates what policy would they favour to minimise discard practice and whether that would be as good as exists in the EU today.

Confusion in the Conservative leadership has been intensified by the statement of Minister in charge of fishery policy, Michael Gove, that the UK would also leave the London Fisheries Convention of 1964, which predates the EU, and which allows vessels from the UK, France, Belgium, Germany, Ireland and the Netherlands to fish within six and twelve miles of each other’s coastline. He then admitted that British fisheries did not have the capacity to take over and so EU nations would continue to have access to UK waters. To talk grandiosely about ‘regaining sovereignty’ in such circumstances is ludicrous.

Voters in fishing communities should demand that Conservative candidates explain how claims of 100% sovereignty can be credible in view of those statements by their responsible minister.

There is one devastating point. International research has shown that the full privatisation of fisheries, as wanted by the Conservatives and the Brexit Party, can drive fish stocks down to extinction. Welcome to full sovereignty.

Finally, if Brexit occurs, the part of the UK that would benefit most in terms of fisheries is Scotland, but only if it had jurisdiction over its fisheries. Thus, post-Brexit fishery policy may push Scotland to want to leave the UK, something many Brexiteers may not have factored into account.

Photo credit: Flickr/Chris Bentley.

[i] International research has shown that private self-regulation leads to fishing to a level below recovery, even if there are barriers to entry by ‘foreigners’.

The post The Fishing Industry: Lies, Codfathers and Brexit: Questions voters should ask appeared first on The Progressive Economy Forum.

Over the last few weeks, two narratives seemed to dominate the economic news: 1) the gathering economic disaster caused by a feared “no-deal” in Brexit negotiations, and 2) a slowdown in the global economy that threatens recession or worse. To an extent the two narratives pass like ships in the night. The first narrative is presented as the reason of the low growth of the UK economy, while the second is mustered to explain recessions or near-recessions in France and Germany.

What the two narratives share is a strong element of helpless resignation. If “no-deal” transpires, no one can prevent the economic consequences.  Similarly a downturn in the global economy arises from quasi-natural causes beyond human agency. Both narratives tend to ignore or deny the principle cause of our economic woes, which predates Brexit by several years and largely accounts for the global slowdown: austerity policies by the governments of most of the G7 countries, whose economies together account for over half of global output.

The implementation of austerity policies in Britain is well known, where central government expenditures have remained approximately constant over the last five years when we adjust for inflation. This constancy hides the severe reduction in local government spending over that time period. So inculcated are the media in austerity ideology that the announcement of a budget surplus as the economy stagnates is reported as good news.  In an earlier, more rational era most journalists would have realized that the surplus is one of the causes of the stagnation, a problem not a benefit.

Austerity policies within the EU – especially within the Eurozone – have been more severe than in the UK, as the chart below shows. Aside from the notorious case of Greece, this is not widely known in Britain. The chart shows changes in public expenditure in constant prices for 15 of the countries using the euro (no statistics for Cyprus and the Slovak Republic) and nine EU non-euro countries (including the UK) over the eight years, 2010-2017.

For the eurozone countries, five of the 17 show real expenditure declines. The five with declines include two of the four largest economies in the eurozone, Italy (minus 3.4%) and Spain (minus 3.5%). When we include France and Germany, the simple average for the four largest EU countries was plus 3.5% or 0.5% per year, close to the 17 country euro area average of 0.6%. For the 9 non-euro countries the average was higher, but still quite austere at slightly less than 1% a year.

The second chart shows the consequence on economic growth of almost a decade of EU austerity. As the Office of National Statistics documented and PEF Council member Geoff Tily has elaborated, the post-2008 recovery of the UK economy has been the slowest on recorded.

Not withstanding that dismal performance, in the era of fiscal austerity the UK recovery surpassed that of all four of the large euro zone countries. At the end of 2018 the UK reached a meagre 17% above the second quarter of 2010 when George Osborne initiated fiscal austerity.  The stumbling German recovery comes a close second at 16%, with France well below at 11%, Spain at 9 and Italy barely qualifying for stagnation at plus one percent.  By comparison, the US 21 percent at the end of 2018 appears as prosperity.

Further evidence of the austerity induced stagnation of EU economies comes in trade statistics. Prosperous, growing economies draw in imports and export robustly.  Stagnating economies do not. According to Eurostat, during 2010-2017 exports among euro zone countries grew in nominal prices at 3.2% per year, while euro zone exports to non-EU countries grew at 4.3% (Weeks & Smith 2018, 18). That is, exports of the 19 euro countries grew faster with other countries than among themselves.

An obvious inference is that lack of eurozone demand due to fiscal austerity outweighed three well-known benefits of the currency group, 1) use of the same currency brings lower transactions costs; 2) geographical proximity means lower transport costs; and 3) has the much-cited advantage of “frictionless trade”. Fiscal austerity undermined the eurozone as an engine of trade generation, forcing producers to seek more economically robust markets.

Domestic politics overwhelmingly determined the outcome of the 2016 referendum on EU membership. However, if after 2010 had the governments of the largest countries chosen expansionary policies and provided a prosperous contrast to the Conservative government’s growth depressing austerity, it might  have prompted more citizens to vote Remain.

Why is the world economy slowing down? The reason lies partly in the macroeconomic austerity policies of the European Commission and the major EU countries.  By changing policies the slowdown can be reversed.  Economic stagnation is a policy issue, not a natural phenomenon.

Photo credit from previous page: Flickr / Des Byrne

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Since 2000, broadly corresponding to the Euro era, real GDP per head has declined by 0.2% per year on average. And over the last decade, i.e. since the Global Financial and Euro zone crises from 2008, the decline has been severe, as this chart (comparing 10 “developed economies”) shows.

Unemployment exceeded 10% from early 2012 until very recently (latest figure, 9.7%).

So something has to be done to get the economy moving. In March of this year, a new coalition government was sworn in, composed of two non-establishment parties. The unlikely coalition consisted of the Lega, a far right nationalist party strong in the north, and the 5 Star Movement concentrated in the south. The latter has a rather eccentric, even muddled ideology, with some left of centre policies. Together, the parties scored around 50% of the votes cast, of which around 33% were for 5 Star. Seven months later in October, opinion polls show support for the coalition of around 60%, with La Lega (under its Alt-Right leader Salvini) leaping ahead to 31%, and 5 Star slipping back to 29%.

One of the less noticed and perhaps unexpected effects of the rise of right-wing “populist” governments across Europe has been that – alongside nasty anti-immigrant, socially conservative and authoritarian policies and rhetoric – their economic policies tend to be more geared towards protection of poorer citizens. By supporting austerity programmes and a dominant focus on “competitiveness”, European social democratic parties have failed to offer policies of economic protection to less well-off communities, and in Italy and elsewhere are paying the political price.

This is the backdrop to the latest very public “bar-room budget brawl” between the Italian government and the European Commission. It has quickly become clear that the Commission has demonstrated a lack of political wisdom by entering into this fight.

The European Treaties contain fiscal ‘rules’ that are contractionary – i.e. they tend to exacerbate economic downturns. Article 126 of the Treaty on the Functioning of the EU instructs member states to “avoid excessive government deficits”. The treaty requires the Commission to “examine compliance with budgetary discipline” in relation to two criteria: a deficit below 3%, and a government-debt-to-GDP ratio of less than 60%. For outcomes inconsistent with these levels, and not moving towards them “at a satisfactory pace”, the Commission is required to issue a report on non-compliance.

Not so much heeded, Article 126 requires the Commission to “also take into account whether the government deficit exceeds government investment expenditure”, as well as “the medium-term economic and budgetary position of the Member State.”

A labyrinthine set of EU legislative regulations buttresses these fiscal Treaty provisions, mainly developed in response to the Euro zone crisis. The effect has been to create an ever-more intrusive process of budget monitoring.

No penal process against Italy has yet been triggered under Article 126, nor is this likely in the near future. On 18th October, the Commission wrote to Italy’s Finance Minister

“to consult you on the reasons why Italy plans ‘an obvious significant deviation of the recommendations adopted by the Council under the Stability and Growth Pact’ for 2019, which is a source of serious concern for the European Commission.”

The main complaint is that the Italian government’s new budget for 2019 would increase the projected deficit to 2.4%, representing, according to the Commission, “a fiscal expansion of close to 1% of GDP, while the Council has recommended a fiscal adjustment” [i.e. cuts].  Both this proposed expansion, and the size of the deviation from the Council’s recommendations (around 1.5% of GDP), are “unprecedented in the history of the Stability and Growth Pact”, the Commission contends.

The Commission’s comparison is to the budget for 2019 proposed back in March this year by the outgoing centre-left government, which claimed that the deficit should fall from (estimated) 1.6% in 2018, to just 0.8% in 2019, and “a broadly balanced budgetary position by 2020”. The Commission recommended that an increase in government spending in 2019 should not exceed a minuscule 0.1%, an insignificant increase implying in real terms a significant cut.

With unemployment still projected to be above 9% in 2020, and an employment rate well below other major EU countries, it seems extraordinary that Italy should be required to reduce public spending, even if there are legitimate arguments around the actual content of that spending. One weakness that Italy shares with the UK is the low overall level of investment. Public investment is particularly low, at around 2% of GDP. But if one assumes it to be reasonable to borrow for investment, then of the new proposed deficit level of 2.4%, the majority relates in fact to capital investment.

The real concern for the Italian government is not the actual level of the deficit, but of the public debt, which is around 130% of GDP. Rogoff and Reinhart, two US economists, in 2010 implied (wrongly as later evidence showed) that debt levels in excess of a 90% of GDP threshold tend to depress growth and create financial instability. This view was enthusiastically taken up by the then Commissioner for Economic Affairs, Olli Rehn. But certainly, 130% is high, and if interest rates rise rapidly, this would add to the budgetary pressures on the Italian government.

However, unless there is a political fracas on this issue between the EU and Italian government, which would be unnecessary, no reason based on economic analysis presents itself as to why the debt to GDP level would rise more than marginally as the result of a deficit of 2.4% instead of 0.8%.

In our view, there is no merit in the argument that an Italian budget deficit in 2019 of 2.4% of GDP is wrong in principle or itself a danger to the Stability and Growth Pact, let alone to the Monetary Union. As recently as May, in its Spring 2018 European Economic Forecast, the Commission was forecasting this (page 97):

“In 2019, the headline deficit is set to remain constant at 1.7% of GDP, under the assumption of unchanged policies and excluding the legislated hike in VAT rates.”

On this as well as other assumptions,

“the debt-to-GDP ratio is expected to have peaked in 2017 at 131.8%… and to progressively decline to 130.7% in 2018 and 129.7% in 2019, mainly as a result of stronger nominal GDP growth”.

So the Italian government’s proposed deficit for 2019 is only 0.7% of GDP higher than this May 2018 estimate.

If the level of deficit is unremarkable, it is of course possible to be critical of the composition of the measures in terms of their expansionary potential – even though they reflect election commitments. There is little in the spending package for increased government investment, for example, despite its low level and the urgent need for infrastructure improvements.

But while the Commission could reasonably offer advice to governments on the content of their budgets, it is surely on dangerous ground to threaten penal sanctions because of disagreement over the policy mix.

Another recent criticism is that the putative stimulus package is actually not a stimulus. This comes from Olivier Blanchard, ex-IMF Chief Economist, and Jeromin Zettelmeyer, both now of the Peterson Institute for International Economics. Despite inclusion of a multiplier effect of 1.5%, they contend that the overall impact of the budget is likely to be contractionary, because the increase in interest rates it provokes will outweigh the (assumed) benefits.

But this raises a deeper issue. Is the increase in interest rates, if this occurs, a function of the package itself, or rather of a reaction to the expressed opposition of the European Commission and other institutions? In other words, would the interest rate rise reflect economic uncertainty in money markets, or political uncertainty caused by Commission opposition to the budget? It is hard to judge with certainty, but we feel it is likely that this public opposition to an objectively modest proposed expansion at a time of high unemployment has greatly exacerbated the market reaction.

We have elsewhere expressed concern over the EU’s lack of true democratic space in the economic sphere:

“Despite its commitment to democratic values, in one key area the European Union does not permit legitimate democratic choice, and that is the economic sphere. Because so much of the economic policy of the EU is embedded in its Treaties…there is a growing frustration that the democratic will of Europe’s people simply cannot be expressed if on any point it differs from that set out in the Treaties.”

These concerns are all the greater when, as we believe, a wrong-footed political response by the Commission is almost certain to strengthen a government of which the stronger component (la Lega) promotes reactionary policies that truly breach our shared democratic norms.

The European Union has a genuine interest in ensuring that no state undertakes economic policies that seriously damage its monetary union. But even if it is not perfect, the current Italian budget package comes nowhere near to doing so. It is a reaction to decades of decline and years of searing unemployment. To prevent a new wave of fascism or ultra-nationalism, the EU needs to respond by ditching its bias to austerity.

As a final comment, we note that the tension over the new Italian budget exposes the lack of political judgment by the centre-right parties throughout the European Union for at least two decades. The EU fiscal rules are dysfunctional. Long ago the progressive parties should have opposed them. They failed to do so. Now it is the right, the far-right in some cases, that may harvest the popular outrage against the budgets adhering to those rules.

Photo credit: Flickr / Ministero Difesa

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