Air pollution set to become biggest global killer

Increased greenhouse gases emissions are not only speeding up dangerous climate change –  they are creating a health crisis that will kill millions. Urban air pollution is set to become the top environmental cause of mortality worldwide by 2050, ahead of dirty water and lack of sanitation, a new report warns.

The Organisation for Economic Co-operation and Development in its environmental outlook up to 2050 forecasts that continuing along the present path could lead to a “doubling of deaths from exposure to particulate air pollutants leading to respiratory failure from current levels to 3.6 million every year globally, with most occurring in China and India".

The chart (below) shows the result if rising energy demand continues to be met by burning fossil fuel. As the OECD adds: “Progress on an incremental, piecemeal, business-as-usual basis in the coming decades will not be enough.”

China is in the front line of this epidemic and a report published in the Lancet says that in 2010 air pollution contributed to 1.2 million premature deaths in China, almost 40% of the global total related to this cause.

Shanghai is currently suffering air quality so bad that children and older people have been warned to stay indoors seven times this month. On December 6, the air quality index surged high above the level of dangerous health risk. There were over 360 micrograms of particles per cubic meter of air, 14 times higher than safe daily exposure levels, according to the World Health Organisation.

The situation was even worse a few weeks ago in the north-eastern city of Harbin, where particulate levels reached 40 times the WHO safe level. But whilst the young and the old were told to stay inside, workers were still expected to make their way through 10 metre visibility to work.

What the WHO levels count are very tiny particles, around 2.5 microns in diameter. These are more dangerous than larger particles which the body's defences can keep out. Smaller particles get through and embed themselves in vulnerable tissue.

Winter is smog time in China, just as it was formerly in industrial Britain. When the heating goes on, coal-fired power stations step up production, adding to what is already in the atmosphere from industrial production and year-round coal burning.

Just to underline the point, this picture shows last winter's smog in north-east China as seen from space.

Chinese premier Li Keqiang has promised his regime will cut coal consumption and control the number of cars. But local authorities are being told to make deep spending cuts and the cheapest way to run cities is on coal. The main reaction by local authorities has been to lie about the figures.

The government says it will take energy production out of government control and open it up to the market. On the basis of no evidence they claim that this, along with a carbon trading scheme, will ease the problem. But the corporations and big state-owned business are opposing the changes and there is no timescale for achieving them.

China has paid for double digit economic growth every year for two decades with an environment so degraded that the quality of people's lives is being wrecked. Shocking reports come in all the time, such as the recent discovery of 16,000 dead pigs in the river that supplies drinking water to Shanghai. Soil erosion and water pollution are damaging agricultural production.

To paraphrase the Roman historian Tacitus, they have ravaged and slaughtered and called it progress, and they have created a desert and called it growth.

But people in China are fighting back. Anger over the environment is said to be the single biggest cause of unrest in a country where mass demonstrations and resistance are happening more and more, even if the government tries to cover it up.

Penny Cole

Environment editor

Amazon and Google having a laugh at taxpayers' expense

Whatever angle you come at it from, the state at national level, as well as key global agencies, exist to make life easier for corporations like Amazon and Google when it comes to taxation.

States everywhere may be short of revenue as the worldwide recession continues to takes it toll. But instead of demanding more from the corporations, the very opposite is happening. 

The ConDems are telling business they can pay less. In the March budget, they cut corporation tax for the third time since 2010. It’s now fallen to 24% and will be reduced to just 21% next year. The cut will cost the Treasury about £400 million in 2015-16.

Where’s this shortfall to come from? Chancellor George Osborne is demanding £11 billion more in spending cuts in 2015-16, a level which has even frightened most of the cabinet into passive resistance. Front-line services like fire face draconian cuts and mass redundancies following today’s announcement by the government’s former chief fire and rescue officer.

Of course, global corporations do everything they can to avoid paying tax on their operations in Britain. Instead, companies like Amazon are registered in lower-tax territories like Luxembourg. They claim that although they employ thousands of workers in Britain, they are not actually based here!

MPs on the public accounts committee can rant and rage all they want – as they did yesterday when they had Google up before them – but the fact is that the UK tax authorities are pretty powerless to do anything about it. Moral pressure cuts no ice with the Googles of this world.

Take the example of Amazon. A Reuters investigation shows that over the past six years, Amazon has paid just £5.9 million in tax on over $23 billion of sales to British customers.  Yet Amazon claims it runs a single European business out of Luxembourg.

Reuters says, however, has gathered evidence which shows that Amazon’s UK operations have a high degree of autonomy, and while the corporation likes to identity itself as a virtual company, this is far from the case. Microsoft and Expedia are other firms that claim a similar position in order to minimise tax bills.

The investigation explains: “The practice is based on international tax rules which allow companies to conduct ‘preparatory and auxiliary’ activities in a country without creating a taxable presence there. The UK tax authority, Her Majesty's Revenue and Customs (HMRC), has never sought to define in court the limits of what an internet company can do in Britain before it is deemed to have a taxable presence.”

However, does such a limit actually exist? Not according to Jacques Sasseville, head of the tax treaty unit at the Organisation for Economic Co-operation and Development (OECD), which advises rich nations on tax policy. He said where sales were conducted online, it was almost “impossible to prove a taxable presence in a jurisdiction, irrespective of how much activity is conducted in that country.”

So with the tax authorities pretty much powerless in the face of transnational, internet-based operations, Osborne is playing along. The cut in corporation tax to 21% puts the rate on a par with Luxembourg’s, although well above Ireland’s 12.5%.

Corporations exist solely to maximise profits, minimise costs (including tax) and increase the market value of traded shares. This is a legal obligation, enforced by the same capitalist state that is at their beck and call. Herein lies the problem.

The state and its agencies through essentially political actions sustain the economic system. They are a perfect example of the division of labour first noted by the economist Adam Smith as capitalism established itself in Britain. That’s why we should never look to the present state to sort out the corporations. That’s not the job of what is now a market state.

Paul Feldman

Communications editor

Italy bosses call for 'shock therapy' as recession takes its toll

The south of Europe is fast becoming engulfed in political turmoil as the economic contraction deepens. After protests against soaring electricity prices, austerity and corruption turned violent Bulgaria’s government has collapsed. "I will not participate in a government under which police are beating people," says prime minister Boiko Borisov.

In Greece, Bulgaria’s southern neighbour, workers are once again taking to the streets in the first general strike against austerity for 2013, joining farmers who have been blocking roads for nearly a month, protesting at high production costs and fuel prices.

Despite more than 20 general strikes, economic conditions continue to deteriorate. Claims by the government of Antonis Samaras that the country has now turned the corner would be considered laughable if the situation wasn’t so serious.

Two-thirds of employees in the private sector no longer receive regular pay. Unemployment has passed 27% and is predicted to reach 30% this year. More than 60% of young people are without a job. Benefits run out after one year, so now only 225,000 jobless Greeks are currently receiving monthly state assistance.

Last summer, all but the lowest-paid employees were hit with an emergency bill in additional taxes, often for several thousand euros. Further charges were levied on electricity bills, with households that failed to pay disconnected from the power grid. And another round of tax increases took effect this year, the price of further bailout funds secured in December.

Savas Robolis, professor of economics and public policy at Panteion University in Athens, and the head of research at the General Confederation of Greek Workers says: "The standard of living of the average Greek worker between 2009 and 2012, in a span of 36 months, has declined by at least 50 percent."

GDP is expected to contract by a further 4.1% this year, and Robolis warns that that country is fast approaching a tipping point in which “Greek workers and unemployed people may soon not have enough money left to pay taxes while covering their basic needs. If that happens, it would be the worst possible outcome for the Greek economy and Greek society."

Figures show a sharp fall in the country’s trade deficit, but the published figures so far don’t tell us whether the fall in imports is due to a reduction in capital imports which would signal yet a further sharp contraction.

An election in Italy this weekend is set to replace the appointed technocratic government of Mario Monti. The new government which, amazingly, could see the return of Silvio Berlusconi, due back in court to face sex charges after the election, will take charge of what many call the sickest economy in Europe.

Italy, the eurozone's third-biggest economy, has been in recession since the second half of 2011. After 14 years of near-zero growth it is now smaller than in 2001 and shrank most out of the rich G7 countries last year, its GDP contracting by a bigger than expected 2.7%. 

But as the latest snapshots from the OECD club of rich countries show, a return to growth in Italy or anywhere else is ruled out as the global capitalist recession deepens. Economic output across the OECD's 34 member states fell by 0.2% in the three months to the end of December, representing the first contraction since early 2009. The OECD said that the contraction was "particularly marked" in the European Union, where GDP fell by 0.5%  in the fourth quarter.

Marcella Panucci, director-general of Italy’s big employers’ federation, Confindustria, is pushing for a stable government, that she hopes will pursue “shock therapy” policies to restore growth. This open call to destroy living standards is a real sign of a deepening political and social crisis not just in Italy, but throughout Europe.

Gerry Gold

Economics editor

Welfare to profits as contractors cash in

That the results of the government’s welfare-to-work scheme have turned out to be worse than if it hadn’t existed at all is certain to be a disappointment for the ConDems, but for the rest of us it shouldn’t be a surprise.  

As most people are only too well aware, the economy is contracting, jobs are disappearing, real incomes declining. But the targets for the scheme were set in the run up to last year’s launch in the absurdly optimistic expectation that the economy would improve.

The target set for the 18 contractors  of getting 5.5% of the 2.4 million long-term unemployed and people on sickness benefits a job for at least six months was hardly going to make a dent in the jobless figures, but not one of them has achieved anything like it.

Only 3.5% - that’s one in every 28 - of the people referred to the Work Programme have found long-term jobs. In spite of this the work and pensions secretary Iain Duncan Smith defended the scheme, claiming that over 50% of those who have been referred to the scheme have been taken off benefits. 

Either somebody is not doing their sums, or there’s now an awful lot of people out there without jobs or benefits – just like in America.

And although the scheme is supposed to work on a payment-by-results basis, making the contractors’ profits dependent on forcing people off benefits, hundreds of millions of pounds have already passed into their hands.

They include A4e – the subject of systemic fraud accusations from its own internal auditor earlier this year, G4S - the company that failed to supply the promised Olympic security force – and Ingeus, part of a global corporation founded by the wife of Kevin Rudd, former Australian prime minister.  

There’s a group of voluntary sector groups also signed up to the scheme which includes Mencap, the Citizens Advice Bureau, the Prince's Trust and Action for Blind People. Well meaning? Maybe, but they’ve become willing accomplices to this £5 billion torment of the sick and unemployed. Even Charles Dickens would be appalled.

So what has gone wrong? The Employment Related Services Association (ERSA), the lobbying group for the array of predatory companies feeding off the unemployed and sick, claims that things are now getting into gear and are set to improve.

The latest World Economic Outlook from the Organisation for Economic Co-operation and Development promises something very different. Already in July they predicted that unemployment in advanced economies would remain high until at least the end of 2013, with young people and the low-skilled bearing the brunt of what they euphemistically termed “the weakest economic recovery in the past four decades”.

But four months later, things have got a whole lot worse. The OECD has slashed its forecast for next year’s growth in the world’s advanced economies from 2.2% to 1.4% and warned that the risk of a serious global recession cannot be ruled out.

The OECD expects the seriously troubled eurozone economy to contract further in 2013.  Growth in the US is forecast at 2% next year down from a May estimate of 2.6 per cent – but only if Obama can pull off a deal with the Republicans and prevent the country falling over the “fiscal cliff”. Japan’s economy is expected to expand 0.8%, little more than half the growth expected in May.

Greece is expected to be the worst performer among the membership, with the OECD expecting its economy to shrink 4.5% next year. The Spanish, Italian, Slovenian and Portuguese economies are also predicted to contract over the course of 2013.

And the UK? The OECD predicts an expansion of 0.9%. But as far as the budget deficit is concerned - the subject of all the austerity, and the welfare-to work programme in particular – the UK will be performing worse than every other member except Japan.

So, in effect, the contractors – private sector and charities alike – have really been contracted to manage the contraction. They get state funding and the unemployed get state harassment and benefit cuts. More like welfare to profits than welfare to work.

Gerry Gold

Economics editor

The biggest loophole is capitalism itself

As austerity deepens, with spending cuts stretching into the far horizon, there is a renewed focus on the tax that corporations pay, or rather don’t pay. Some argue that if they paid their “fair share”, cuts in services like health and care would not be so severe.

Others like Richard Murphy of Tax Research UK, go further, claiming that "if only more had been done to tackle rampant tax evasion, Europe would not be facing a crisis today."

It’s an attractive – but ultimately misleading – theory that would seem to solve the problem of public finances and the economic crisis at a stroke.

Tax avoidance by the major corporations is an obvious target, so much so that MPs last week called names like Starbucks and Amazon to explain themselves before the Commons public accounts committee.

Chancellor George Osborne has even dedicated some funding to allow Her Majesty’s Revenue and Customs to chase the worst abusers and close loopholes. He even described tax evasion as “morally repugnant”. But it’s making no impact.

While individuals and small firms are hounded by HMRC with some success, the major transnational corporations continue to run rings around the government, as the PAC found out.

Research based on data from 145 countries, shows that tax evasion schemes amount to $3.1 trillion annually. The Tax Justice Network says that the UK misses out on about £70 billion annually, which represents over half of the health budget. 

There are many devices in play. Corporations locate holding companies and assets in tax havens, where profits are declared even though the activities are located elsewhere. They also use “transfer pricing” – internal, cross-borders trading schemes that help to reduce the tax burden.  

Sol Picciotto and Nicholas Shaxson, respective authors of Regulating Global Corporate Capitalism and Treasure Islands, were given space in the Financial Times this week to make their case for change. Before suggesting a remedy, they rightly stated:

The international tax system in effect provides vast subsidies for multinationals, helping them outcompete local rivals on a factor – tax – that has nothing to do with economic productivity. They free-ride on tax-funded benefits – roads, educated workforces, reliable courts – provided by the countries where they do business, while others pay for those benefits.

Their appeal for change is based on the claim that the present system “corrupts the very fabric of markets”, which is a bit of a giveaway. Neither Picciotto nor Shaxson are against capitalism itself – just the ruthless way it operates. So they have come up with a counter-ruse which is known as the unitary tax. Put simply, corporations would be taxed according to the “genuine economic substance of what they do and where they do it”.  

Unfortunately for them, there is little support among policy-makers for such a change. They acknowledge that the OECD, which oversees the international tax system, has not even put the idea of a unitary tax on its agenda.

Picciotto and Shaxson argue that the tax system hasn’t kept pace with changes in the global economy. Quite the opposite. What they miss is that the corporations have become more powerful than governments and that international agencies are there to facilitate their operations.

Nation states have had to compete for inward investment through low tax rates while allowing the repatriation of profits and turning a blind eye to tax avoidance. For example, the world average corporation tax rate has fallen in each of the past 11 years, from 29.03% percent in 2000 to 22.96% in 2011, according to a KPMG survey.

As a result, the burden falling on wage earners rose while governments (and households) ran up budget deficits on the basis that the global economy would continue to grow ad infinitum. Well, it couldn’t and didn’t. With due respect to Murphy, the deepening recession is hardly the result of tax avoidance schemes which themselves reflect the power of globalised capital.

In that sense, the biggest loophole is capitalism itself.

Paul Feldman

Communications editor

Climate change window closing fast

The chance to prevent runaway climate change is slipping away. Global carbon dioxide (CO2) emissions from fossil-fuel combustion reached a record high in 2011 and there is nothing to suggest the trajectory will change this year or in the foreseeable future

A 6.1% increase in CO2 emissions in countries outside the economies within the Organisation for Economic Co-operation and Development (OECD) was only marginally offset by a 0.6% reduction inside the major economies,  according to estimates from the International Energy Agency.

The rise was driven by Chinese coal burning power stations which created a 9.3% increase, or 720 million tonnes more CO2 released into the atmosphere and by increased industrialisation in India where emissions rose by 8.7%. That makes India the fourth largest emitter behind China, the United States, and the European Union, overtaking Russia.

CO2 emissions in the United States fell by 1.7% due to a switch from coal to natural gas, an exceptionally mild winter, the recession alongside higher oil prices and fewer car journeys. The Obama government's rush to create new coal-fired power stations, to facilitate cheaper-than-oil energy generation, could quickly reverse that, however.

In the EU too there was a reduction of 1.9%, due to a cut in industrial production and a relatively warm winter. However, the EU is also set to turn this small reduction back by giving up on renewables and “rebranding” gas produced by fracking as “green fuel”. This is in spite of research showing that taking the production and burning process as a whole, fracking emits as much harmful greenhouse gas as coal, including large quantities of very harmful methane.

Per capita CO2 emissions in China and India still remain just 63% and 15% of the average within the advanced capitalist economies. The argument runs that, to achieve so-called climate justice, they must be allowed to increase emissions until they reach average levels.

Per capita increases do not, however, translate into higher energy use for the poorest people, who continue to struggle with light and heat. They represent rather the transfer of emissions from the consumer economies of the West to the manufacturing base in the East. The poorest in Asia and Africa will be the greatest sufferers from the impacts of climate change, as the elites in those countries grow richer.

However it is achieved, the science shows that to limit global temperature rise to 2°C above pre-industrial levels (a scenario that will itself bring dramatic changes to world climate) emissions must peak in 2017. IEA Chief Economist Faith Birol said the 2011 data provides “further evidence that the door to a 2°C trajectory is about to close".

China had made significant progress in slowing the rate of its increase, but this was not neither sufficient nor a quick enough reduction.

Coal accounted for 45% of total energy-related CO2 emissions in 2011, followed by oil (35%) and natural gas (20%).Therefore the way to achieve a rapid reduction is to cut use of ALL these fossil fuels, not only the most harmful. This could be achieved by a massive energy efficiency and energy saving programme, and by switching to renewables.  

There is no political will on the part of any governments to take the measures needed to achieve peak emissions in 2017. The drive to industrialise and ferocious competition in world markets, makes it impossible for them to co-operate to achieve it. A transformation in politics and democracy so that decisions are made on behalf of people and planet as a whole, rather than in the interests of “growth” and profits, is absolutely necessary. Without it, runaway climate change become unstoppable.  

Penny Cole

Environment editor

“Double meltdown” warning for Europe

Today the leaders of the 27 countries that make up the European Union meet in Brussels. Their desperate aim is to keep the debt crisis in Europe from spiralling out of control and ‘promote jobs and growth’.

On Tuesday, the Organization for Economic Cooperation and Development warned that the 17 countries that use the euro risk falling into a "severe recession." It called on governments and Europe's central bank to act quickly to keep the slowdown from dragging down the global economy.

After three years of pushing for ‘austerity’ to reduce debts accumulated by governments as they shored up the bankrupt banks, cuts in public expenditure have wrecked services, driven unemployment levels beyond anything seen in the 1930s, and triggered a political revolt – certainly in Greece. In a sharply polarised Greece polls indicate that the left-wing coalition Syriza is likely to win the election being held on June 17.

The French elections brought a new government committed to abandoning austerity in favour of growth, which is also the International Monetary Fund’s perspective. So the long-term pact between Sarkozy and Germany’s Chancellor Merkel is broken. 

The financial columns are full of doomsday scenarios assessing the consequences if an anti-austerity government results from a second election in Greece on June 17th and defaults on its debts.

But the impact would be small compared to the spectre of a ‘double meltdown’ which could see the simultaneous departure of Greece from the eurozone and a Spanish banking implosion, warned former IMF economist, now hedge fund manager, Stephen Jen, after credit rating agency Moody’s downgraded the entire Spanish banking sector.

Stephane Deo, an economist at UBS, says the slow-motion collapse of Spanish banks from toxic real estate loans could suddenly turn into a fast-moving bank run, as depositors accelerate the withdrawal of their deposits.

In the UK, the insults in the Coalition’s camp are flying back and forth between a previously unknown advisor - venture capitalist, Adrian Beecroft, and Business Secretary Vince Cable. Beecroft’s proposals to enable growth would remove protections for workers - allowing employers to sack them virtually at will. Cable says the idea is ‘bonkers’ because Britain’s workers are already amongst the least protected. Beecroft says Cable is a socialist.

But this renewed assault on workers’ rights and living standards throughout the world is the real meaning of all the talk of ‘restructuring’ and ‘rebalancing’.   

Today, as the discussion in Brussels reaches fever pitch the main idea is for Europe to move to a stronger, more mutual common defence by issuing ‘eurobonds’, in which the European Central Bank would raise loans from investors to be used wherever they might be needed. Eurobonds would protect weaker countries, like Spain and Italy, for example by insulating them from the impossibly high interest rates they now face when they raise money on bond markets.

But, also today, in a direct challenge to a more united Europe, Germany’s federal government is strengthening its national interest, holding an auction for some new bonds, borrowing money from investors in the way that governments do.  Only there’s something new about this auction. The relative strength of the German economy is so attractive to investors desperate for a safe haven, that the Germans have set the interest rate they’ll be paying at zero – 0%.

The IMF is also pushing the Bank of England to reduce its base rate below the half per cent it has been at for more than three years.

So, at its moment of sharpening crisis, the capitalist system has arrived at a new contradiction: competing to save the for-profit system means issuing credit at a not-for-profit 0%.  And with inflation above zero, investors will be inverting the essence of finance - paying to lend money.

The declining value of money reflects and can only accelerate the contraction in the real economy, bringing a global slump into view. The system is definitely broken. How to bring into being a needs-based, co-operatively run economy based on people’s assemblies is the issue of the day.

Gerry Gold

Economics Editor

Supermarkets cash in as food prices soar

Food price inflation is running at a faster rate in Britain than in the rest of Europe – and supermarkets, which control around three quarters of grocery sales, are accused of driving prices up faster than is justified by rising costs, to protect their profits.

According to the Organisation for Economic Co-operation and Development, food prices rose 6.3% in the year to the end of January, compared with an average of 2.8% for the EU and 2.6% across the 34 countries that make up the OECD.

Strangely enough, investment bank UBS says said UK consumers are suffering most from the pressures of food inflation. "Prices are rising in excess of justifiable cost increases," said Paul Donovan and Larry Hatheway, co-authors of a recent report. "The UK stands out as having the broadest range of food price increases."

World prices are also soaring. The UN Food and Agriculture Organisation's (FAO's) food price index averaged 236 points in February, a record, up 2.2% from January and rising for the eighth month in a row. The index highlights how food prices have taken off in alarming fashion in the last three years. In 2000 the index stood at 90 and did not break through 100 until 2004.

As one analyst put it: “What is extraordinary about this trend is that for more than two decades before 2008, there were no spikes of this magnitude. To be entering a second such spike within three years suggests that something has fundamentally changed in the global food situation.”

It was a more than doubling in the price of bread that put food beyond reach for many that helped trigger the wave of revolts in the Middle East and North Africa. Fearful that they will spread, governments around the world are assessing the likely political impact of food prices.

Campaigning organisations like the World Development Movement have joined the simplistic “blame the bankers” chorus, accusing them and hedge funds of speculating in food. But this is just one of the many interacting factors involved in the global crisis which can be summarised as peak soil and peak oil:

- thirty years of credit-financed rapid growth of global corporations have transformed much of agriculture into a destructive industrial process. Land, seed, machinery, oil-based fertilisers and pesticides are now subject to transnational corporate ownership and control

- exhaustion of the soil intensifies the demand for fossil-fuel based inputs and has accelerated the depletion of resources

- rapid depletion of the world’s supply of oil combined with concerns for the climate change it has produced has increased demand for alternatives. Profits from the production of biofuels now outcompetes the production of food

- Crop losses associated with weather extremes are increasing because of climate change

- the constant demand for consumption to absorb the products of economic growth has increased the standard of living in places like India and China

- capital’s need for unlimited quantities of cheap labour has driven population levels to rise to an estimated 9 billion in 2050-60.

The FAO is organising a series of seminars in an attempt to keep the lid on the rising anger. “FAO feels it is essential that countries consider their policy options and steer away from decisions that might exacerbate the situation," said deputy director-general Changchui He. "During the last food crisis, the situation was aggravated when some countries imposed export restrictions or engaged in panic buying."

But their solution is for more of the same. "Governments should focus on mitigating the impact of high food prices on the poor and at the same time need to take steps that favour investment in agriculture," he added. But the present framework is clearly unsustainable. A global network of farmers, processors, and distributors, planning the sustainable production of food according to the needs of the population and not profit has to be the way forward.

Gerry Gold

Economics editor

Mind the gap

Despite an agreement to swap half of the 1,200 threatened jobs for a two-year pay freeze and lower pensions, Vauxhall workers in the UK should be warned against welcoming their prospective new Canadian and Russian employers too early.

Massive overcapacity persists in car production as well as the economy in general and no jobs are safe. Last night, for example, the Chinese government set out its detailed plans to deal with overcapacity throughout the huge country’s economy.

China has provided massive support for its major industries in the face of the shutdown of activity in the labour-intensive cities that served the needs of global corporations producing for the now dormant Western consumer markets.

The state has funded infrastructure projects and underwritten production and consumption in the hope that overseas demand for the commodities produced within its borders would recover. But now that hope has evaporated, even though China’s domestic market for cars continues to grow.

Alongside its plans to reduce capacity in traditional industries such as steel, aluminium and cement, China is forced to act on silicon, the key input to the electronics industry, and wind power generation.

In bowing to the logic that follows the credit crunch, China’s State Council said meeting the government's long-standing goal of reducing overcapacity was urgent. Factory closures, job losses and rising bad bank loans would result from inaction.

At the same time the council admitted that the crisis had already spun out of control. Some 58 million tonnes of crude steel capacity under construction is “illegitimate”, and would bring the surplus to 700 million tonnes.

During the globalisation decades that saw it emerge as a major source of profitable cheap labour China grew to become the world’s top producer and consumer of cement. But the global slump has sharply reversed its fortunes. China's cement production capacity will rise to 2.7 billion tonnes per year if all approved projects start operation, and market demand totals only 1.6 billion tonnes. With capitalist-style competition dominating the economy, in 2010 Chinese companies in the wind power industry are expected to produce equipment equivalent to 20 million kilowatts of capacity, double the 10 million kilowatts of actual capacity likely to be installed in the country.

To tackle this oversupply, and in a blow to those in the West who favour a move to localised production, the cabinet said it would refuse approval for the construction of complete wind-power equipment factories. It also banned investors in the sector from using locally-produced equipment, aiming to prevent local governments from building their own equipment plants.

China’s predicament expresses the collapse in demand throughout the major capitalist economies because consumers, all maxed out on credit card and other debt, have stopped spending in the way they did before. And in an economy actually fuelled by debt, this is bad new for capitalism.

Despite aggressive “downsizing” by manufacturing since the recession began, leading to the loss of tens of millions of jobs worldwide, there is still vast overcapacity as shown in the "output gap". This is defined by analysts as the difference between the potential output of a given economy and what is actually being produced (including services).

The Organisation for Economic Cooperation and Development (OECD) is projecting that the situation will actually deteriorate. Next year, the OECD says the output gap among in the advanced economies will widen to -5.7% — the biggest number seen since the 1930s.

HSBC's China economist, Qu Hongbin told Time magazine: "There still is hope that we'll go back to the old days but demand in the future will be lower than in the past. That means the factory owners have to face reality."

That “reality” is that the global recession is heading inexorably towards outright slump and talk of a “recovery” in the near future is delusional. A new economic model is needed to replace a capitalist system that is clearly unsustainable and beyond repair.

Gerry Gold
Economics editor

If it can't be fixed, scrap it!

At the end of last week, Lord Mandelson, the authentic, unelected voice of global capital within the New Labour government, stated what he saw as the “simple problem”. He was making a bid for supranational influence in Washington, in a speech entitled “Can we fix globalisation?".

He put it like this: “The stability of the global economy is the sum of sovereign national macroeconomic policies on interest rates, currency levels, domestic spending and demand. There is no mechanism to mediate between these policies or enforce action that would counter systemic risk, in financial markets or at the general level of the global economy.”

Mandelson, who is now effectively deputy prime minister after saving Gordon Brown’s skin, couldn’t have put it clearer: the whole thing is beyond control. Capital does what it has to do, regardless of what policymakers and wonks want. Take pensions, for example. Employers now see their contributions as a major cost to be cut at a time of crisis.

Yesterday, the Organisation for Economic Cooperation and Development warned that the destruction of the value of both private and public pensions threatened to turn the two year financial crisis into a “social crisis lasting decades”. An OECD survey found that private pension plans lost 23% of their value last year, while higher unemployment “leaves little room for more generous public pensions”. At the same time, accountancy firm PricewaterhouseCoopers revealed that for the first time many firms are planning to end their final-salary pension schemes for existing staff as well as new entrants.

What, you may ask, about the total of $5,000bn (about £3,000bn or £3 trillion) already pumped into banks and pledged by governments to stimulate their own economies? Even if you discount the fact, according to Kroll, the world’s leading risk consultancy, in the rush to spend the money, more than $500 billion – at least a tenth of the total - will be lost to fraud and bribery it’s still a load of cash. Surely all that money is doing its job, freeing the credit markets and restarting investment? Surely the upturn is on the way?

No, it isn’t.

The World Bank, another global agency with no power at all to fix the crisis, projects that the world economy will now contract 2.9%, seriously worse than its forecast of a minus 1.75% just three months ago in March.

Capital inflows to developing countries will turn sharply down, says the report, falling by a shocking 75%, leading to a 50% contraction in industrial outputs. Germany, Japan and South Korea are heavily dependent on capital intensive exports to economies like Russia, China and Hungary, so will suffer badly from the reciprocal effect of the accelerating downturn. Shares in Russia have crashed 20% this month already, and its banking system has all but ceased lending due to growing fears about a second wave of financial crisis that could hit the banking sector later this year.

Meanwhile, back in the UK, 16 weeks have passed since the Bank of England began “quantitative easing” after Alistair Darling authorised the creation of £150 billion of new money, widely trumpeted as the last throw of the financial dice. So far, £96 billion has been spent, of which £93.5 billion was used to buy “gilts”, which means it was not lent to industry for capital investment but lent to the government.

But it isn’t working. Overall, lending to private, non-financial companies fell by an average of £1 billion over each of the past six months. It’s OK though, Alistair’s capitalist friends haven’t gone empty-handed. They’ve had £750 million in the form of corporate bonds. It’s amazing how they’ve got away with it for so long, and it’s high time they were stopped. The simple truth is that the capitalist system cannot be “fixed” and instead would benefit from a unique scrappage project much more radical than the one introduced to try and boost car sales.

Gerry Gold
Economics editor

'Green shoots' fantasy world

From international speculator George Soros, to the Organisation for Economic Co-operation and Development (OECD), to global stock markets, there is a concerted attempt to declare that the worst of the economic crisis is over. That’ll be no comfort for 244,000 in the UK who have joined the ranks of the unemployed and the thousands of school and university leavers this summer, whose job prospects are the worst for a generation.

The unemployment rate reached 7.1% by the end of March, rising from 6.3% at the end of December, the Office of National Statistics has reported. Unemployment in the first quarter of 2009 rose by the biggest amount since 1981 and the total of 2.22 million without work is the highest since 1996, the year before Labour came to power and will pass 3 million within a year.

One in six 18- to 24-year-olds is now out of work. At 676,000 (16.1% ) the level of youth unemployment is as high as in the mid-1990s. It is up almost one-third on last year; 227,000 under-25s have been without work for over six months. Professor John Philpott, the chief economist at the Chartered Institute of Personnel and Development (CIPD), described the data as "truly appalling". He said: "Youth employment prospects are crumbling. With the toll of job losses falling most heavily on the under-25s it will be a bleak summer and autumn for this year's crop of young talent."

So what is this “green shoots of recovery” nonsense all about? Actually, says the OECD, “the pace of the deterioration is easing” and “severe declines in economic output across the world are moderating”. In plain English, the crisis in the major economies is deepening – but at a slower pace!

Not in China, the world’s third largest economy, however. Exports continue to collapse, while imports of raw materials are in steep decline. Hao Daming, analyst at Galaxy Securities in Beijing weighed in with this: “The trade figures are worse than we expected. We will see exports dropping by at least 20% for the rest of 2009 as uncertain world demand will remain a drag.”

The slump in exports and imports, which has been mirrored across Asia, underscores the dramatic downturn in Western consumer demand. Chinese officials estimate 23 million migrant workers have lost their jobs because of the closure of thousands of export-oriented factories, undermining the hope that domestic demand can reverse the downward trend.

The real story is that the global capitalist economy is on a state-funded life support system. Central Banks in the United States, Europe and Britain are printing money like there is no tomorrow in a desperate bid to keep the financial system alive. With untold sums in toxic, worthless assets still overhanging the financial system, there is still no sign of an end to the credit freeze, however.

Only last week, the Bank of England announced another £50 billion injection in freshly printed money, leading some analysts to suggest that a third wave of bank crashes was on the horizon. A number of mutual building societies are also said to be in trouble because of falling house prices and repossessions.

Meanwhile, large sections of industrial capacity are being wiped out throughout the world, from the Corus steelworks on Teesside to car factories in Detroit as demand melts away. All talk of the “green shoots of recovery” is strictly for the birds and a further indication that capitalist policy makers and politicians inhabit a fantasy world all of their own.

Gerry Gold
Economics editor