Food set to become a controversial geopolitical issue
‘Ne vous mêlez pas du pain’ – do not meddle with bread, is the sound advice that Anne Robert Turgot, the 18th century French economic thinker and administrator gave to Louis XVI. It was good advice, which the King did not heed.
Turgot knew better, he was Controller General of Finances in France between 1774-1776, a period marked by the ‘Flour Wars’ when bad harvests pushed up the price of grain, and consequently, bread. The riots were a precursor to the Revolution, at a time when nearly half of disposable income was spent on basic foods like bread (and salt).
The link between food prices and unrest has held since then (and has a pedigree going back to and beyond the Roman Empire). In 2007 as dollar and commodity price volatility marked the beginning of the global financial crisis, a spike in soft (agricultural) commodities led to unrest in countries as diverse as Haiti, Mozambique and Bangladesh.
Then four years later, a spike in grain and other food prices catalyzed the Arab Spring, markedly so in Egypt which is highly vulnerable from the point food security. Some countries in the region, notably Kuwait, ducked such unrest by introducing grants and subsidising food consumption for over a year.
The case of the Arab Spring underlines two other factors, both also found in the likes of Venezuela today. First, rising food prices are usually the ‘last straw’ for citizens in countries that are badly run, corrupt, suffer poor institutions and that are often also oppressive. Second, in many of these countries, as in pre-Revolutionary France, staple food stuffs like bread make up between one third to one half of discretionary spending.
This was the case in India in recent years, where spikes, or more appropriately bubbles in onion prices led to political agitation. For example, in mid 2013 there was fivefold spike in the price on onions, partly due to shortages, partly due to hoarding. Similar, dramatic spikes have occurred to garlic prices in China.
Since that period (2012-2013) world food prices have thankfully been stable, according to the UN FAO global food price index. One area of recent turbulence which is worth watching is pork prices in China. Swine fever has led to a sharp rise in the price of pork, which because foodstuffs account for some 30% of China’s inflation basket, has driven CPI (consumer price inflation) to 3%, close to its highs of the last eight years.
While China is not at all as fragile as Egypt, the spike in pork prices if it persists, will have a number of short and longer term macro impacts, one of which is that China may not have the demand for the 20 billion dollars or so of soya beans it has promised to purchase from the USA.
Chinese consumers will feel more constrained, and the rise in prices will, in the context of weaker property prices, contribute to a sense of ‘squeeze’ (recall the phrase ‘squeezed middle’ (class) in England). Relatedly, higher headline inflation makes it more difficult for the People’s Bank of China to cushion weakness in the economy with rate cuts.
The spike in pork prices is also a reminder of how food is at the centre of geopolitics. China, though vast, has a relatively constrained arable land mass, and will in the future have to import more food as well as try to buy land or crop facilities in other countries. Other food ‘vulnerable’ countries are India, Indonesia, the Democratic Republic of Congo (DRC), Bangladesh, Pakistan, and Ethiopia. Global warming and diminishing water supplies in many of these countries may mean that food security becomes an even more acute risk factor.
In contrast, the US has vast expanses of farmland, a good chunk of which could be used for food stuffs if it were not for ethanol subsidies. In the future, it may use food in an altogether more strategic way.
In the shorter term, the investment impact of higher pork prices is to make Chinese consumers nervier, to constrain policy makers there. That means that demand for hard commodities like oil and copper will be muted, Chinese interest rates volatile and overseas food producers more attractive.
Further out, trade wars may give way to food wars.
In
the past week a short video clip of Laurel and Hardy’s struggle to get away on
holiday, under the title ‘How England plan to leave the EU’, has gone viral (especially
so in the German speaking world). Whilst an uncharitable view, European leaders
are as I write, discussing a second Brexit extension, and the prospect of a
Christmas general election in Britain is now high.
In
my view the first part of Brexit is almost over, in the sense that terms now
seem to have been agreed between the EU and London. The potential scenarios are
now narrowing, and point towards a less disruptive form of Brexit in the near
future. Against that backdrop, where I caveat plenty can go wrong, it is time
to begin to draw some lessons from Brexit, especially as other parts of the
world become more agitated.
In
many respects Brexit is a global event because it was the first rupture in a
world where the liberal order is being levelled, and where a sense of the fractured
and chaos are now normal. The second such rupture was the election of Donald
Trump, and today events in Hong Kong, Chile and Syria illustrate the emerging
democratic, economic and geopolitical faultlines, where American policy in
particular will be tested.
The
savage and unpredictable political process that is Brexit has produced very few
winners, but for observers outside the UK there are clear lessons.
One,
which is ever important ahead of the 2020 election, is that unless issues like
immigration, national identity austerity, declining human development (think
education attainment and healthcare standards) are correctly channeled, they
will destroy a nation. Britain is bitterly divided because of Brexit, as is the
US by Donald Trump.
In
Britain, previously sacrosanct roles such as that of the Queen, the functioning
of Parliament and the Constitution has been pushed to breaking point, as it
should be said, has any sense of ‘truth’ in politics. Like America, Britain’s
checks and balances are just about holding up. That few political leaders today
could pen something like the Federalist Papers is just one reason for Americans
to revere its constitutional heritage. Hong Kong, and arguably the increasingly
‘managed democracies’ of Eastern Europe echo this tension.
Geopolitically,
the European Union (EU) has emerged from Brexit with the lesson that when it is
united, its size and technocracy are formidable. For all the castigation of the
EU by British politicians, it has thoroughly outclassed London. The White House
should take notice of this in case it considers a trade war with the EU.
In
Brussels today, where a new Commission is soon to take office, Brexit is
becoming a side issue and there is more and more attention being paid to the
role that the EU needs to play in a multipolar world. Here it is stealing a
march on the US and China, in two respects. The values of liberal democracy are
more consistently being enunciated by European leaders, and the EU is fast
becoming the first mover in setting the rules and regulations that govern new
technologies.
More
locally, one of the dramatic side-effects of Brexit is the way it has detonated
the historic relationships between Ireland, England and Scotland. Scotland will
very likely become an independent state in five years time, there is growing
talk of a united Ireland, and Ireland itself will be the only EU country with
strong cultural ties to the USA.
What
happens to Scotland and Northern Ireland is a key part of the next chapter of
Brexit. Scotland will need to think more clearly about its economic model as an
independent country, and on the merits of being an EU member. Northern Ireland,
whose socio-economic problems have long been neglected by London, arguably
needs a Marshall style plan to transform its economy which is heavily dependent
on state disbursements, and that needs to follow the example of social
investment in countries like Sweden and Switzerland.
Then
finally, what Britain (effectively England) does next after Brexit will be a
vital lead indicator of where other countries can go in a world where
globalization is being levelled out. One avenue is a purgatory of post Brexit
recrimination, a lack of leadership to tackle underinvestment and a
susceptibility to nationalism.
Another,
more optimistic one that could reflect the best instincts of Britain is that a
new generation of political leaders comes through to replace the likes of Boris
Johnson and Jeremy Corbyn. They would then begin to tackle the many policy
issues that have been given little thought as Brexit has raged on – the need
for the UK to develop a new economic model especially one that focuses on the
potential of its regions, what role the UK plays as a mid-sized geo-political
power and the need to focus policy much more on human development issues like
mental health and education.
You never know, the same might just happen beyond the shores of the UK.
In an increasingly fractured world
there are still some things that unit the most disparate countries. In recent
years a trader, named ‘the Dude’, has popped up in Turkey’s financial markets. ‘The
Dude’ has been known to trade in huge volumes, on occasions boosting the
average volume of the Istanbul Exchange by up to 10%.
He came to mind last week after I read
William Cohan’s fascinating article in Vanity Fair where he detailed a range of
enormous trades in the S&P futures market that appear to have taken place
just before market moving tweets from the US President. Regular market
participants have been left flummoxed by the size and prescience of these
trades, and it is to be hoped that the market regulator will get to the bottom
of the matter. However, one cannot help pondering the identity of these ‘Dude’
like traders.
Beyond trading, there is oddly, much
ore that unites Turkey and the USA. Turkey has become the graveyard of US diplomacy
as the sanctioning of the Turkish army’s incursion into northern Syria by President
Trump arks the end of the moral, democratic and military backstop that American
has extended to the rest of the world for the past seventy years.
That Mikes Pence and Pompeo have only
managed to agree a stay of execution for the Kurds illustrates the atrophying
in American power, and the schoolboy-ish letter that President Trump sent to
his Turkish counterpart makes matters even worse.
Economically, Turkey has two interrelated
lessons for the USA and the rest of the world. First, Turkey is a salient tale
in the rise and fall of nations. Since the early 2000’s when Kemal Dervis had
righted the banking system and the prospect of membership of the EU was dangled
in front of it, Turkey made great progress. Lately this has come to a halt as
policy making, the quality of institutions and the rule of law have been
degraded.
It leads me to
think of Edward Gibbon’s ‘A History of the Decline and Fall of the Roman
Empire.’ Gibbon, who sought to explain why the Roman Empire disintegrated
believed that Rome became complacent, institutions weakened and the leaders in
Roman public life lost their sense of civic virtue (or what Machiavelli later
simply called ‘virtu’ – the good of the republic or common good).
The importance
of institutional quality and the need for a sense of civic ethic is evident in
other books that track the rise and fall of nations such as Acemoglu and
Robinson’s ‘Why Nation’s Fail?’.
Acemoglu, like
Dani Rodrik, is one of the leading economists in the world, and Turkish. Both
of them I am sure, lament the direction that their country has taken, and both
would have clear policy answers to set it back on course. Both are based in Boston,
and it is hard not to think that their work (Acemoglu and Robinson have a new
book out, ‘The Narrow Corridor’), as well of course as that of Gibbon, deserves
reading in Washington.
It might also be more widely read on
Wall Street, because as Turkey again shows, political risk is becoming a
greater force in markets. Typically, and doubly so in the age of quantitative
easing (QE), political and geopolitical risk have not played a significant role
in developed economy markets. The behavior
of the Turkish lira, its debt and equity markets in the past three years
suggests that for emerging markets at least, political risk is now a dominant market
factor.
The case of Brexit and sterling suggest
that developed markets are not immune. The perplexing issue however, is how
investors (at least those who, to go back to William Cohan’s article, do not have
premonitions of market turning tweets) can react to heightened policy
uncertainty.
The puzzle is deepened by the fact that
number of measures of policy uncertainty are at all time highs, while
volatility is close to its historic lows. Indeed, for most investors the
political risk they are most concerned about is the prospect of an Elizabeth
Warren Presidency, which whilst arguably good for American institutions could
be tough on corporate profits and taxes.
Back to the current incumbent of the
White House, who is attacking his country’s central bank and institutions with
nearly the same vigour that Mr Erdogan is employing in Turkey.
The reason that the dollar is not as
volatile as the lira is that it is the reserve currency in a reasonably healthy
economy in a world where most other large economies are weak. For dollar based
investors however, dollar strength is a good opportunity to diversify,
especially for those who think that the ‘American empire’ has peaked. In the
shorter term, hedges such as gold and equity volatility, are beginning to look
more attractive. If the ‘Dude’ sized trader in the S&P futures market is
found out, they may be doubly interesting.
The fracturing of the world order by events such as Brexit, and the growing consensus that we ‘live in interesting times’ mean that today is a busy and stimulating time for those who enjoy drawing historical comparisons with the present.
One
particular strand is the manner in which some have drawn upon America’s
Revolution as philosophical support for Britain taking back control from
Europe. Others have gone further. The former Tory minister and now Brexit Party
MEP Ann Widdicombe, in her maiden European Parliament speech cast Brexit as
‘oppressed people rising against oppressors, colonies rising against empires‘.
The
idea that Britain is emasculated by Brussels in the way a colonial vassal state
might be is scarcely believable, especially so when heard from Dublin, Belfast,
Edinburgh and likely much of the Commonwealth. Breaking free from Brussels will
not solve the many issues facing Britain, but it may eventually crystalize a
serious debate on the future.
When
this happens, the example of the Founding Fathers, and especially one of their
leading lights Alexander Hamilton, will be worth delving into. From this point,
Britons can choose between the purgatory of Brexit or alternatively they can
agree that a long period of rebuilding is called for. If this is the case,
Alexander Hamilton is very much the man to listen to.
Hamilton
was a man of many achievements – a talented military officer and aide to George
Washington, a driver and interpreter (through the Federalist Papers) of the US
Constitution and the first Secretary of the Treasury, to list just a few
accomplishments.
Today, interest in Hamilton
has undergone a revival, thanks in part to the musical bearing his name, even
if it does not reflect all of his achievements. Hamilton stands out as someone
who planned, established, and built many of the important institutions of the
United States.
He
had a hand in the creation of its currency framework; in the foundation of the
Treasury, a prototype central bank (the Bank of the United States), the Coast
Guard, and West Point; and in the structuring of the army. He was also a
mastermind of American foreign policy and its trade relationship with Britain.
He
was also one of the lead authors of the Federalist Papers, the collection of
essays that sought to clarify, strengthen, and promote the US Constitution. Few
men or women have had as enduring an impact on their nation. Brexit would be
easy if its proponents had the foresight to create their own ‘Federalist
Papers’, or ‘Brexit Papers’.
In my view, the many
achievements of Hamilton make him shorthand for the establishment of the
institutions, laws, and skill sets needed for countries and regions to be able
to thrive, in the sense of enjoying durable economic growth, high human development,
and a stable public life. All of these factors are on the wane in Britain and
the wider world today and need to be revived.
In
the last chapter of ‘The Levelling’ called ‘The Hamilton Project’ I ask a
notional Hamilton what advice he would give to the EU, the US and China in
order that each prospers in the 21st century. For instance, he would
advise the US to take the lead in crafting the laws and frameworks needed to marshal
new technologies like gene editing and cyberwarfare.
In
that context, there are a number of things that Britain can learn from Hamilton,
notably the way he conducted politics and the way he thought about
nation-states and government.
To
start with the conduct of public life, and mindful of the consequences of the
Johnson government’s approach to politics, the nascent democracy within which
Hamilton acted was a noisy, nasty and chaotic as the Brexit climate is today.
Hamilton’s enemies used the press ruthlessly against him. For his part he was
careful that the will of the people be channeled by institutions and laws, and
that ‘fake’ views of his policies be rebutted.
He
was diligent in seeking out political opponents and seeking to convince them of
his views. The conciliatory and relatively open way Hamilton and others built a
consensus over the Constitutional Convention is a model for relations across
the British political spectrum, as well as relations between London and
Brussels, should be handled.
That
they are not is in part a question of leadership, and the quality of this
particular political generation. Hamilton and the Founding Fathers are the
benchmark for political classes worldwide in terms of their vision, comportment
and the durability of their policies.
In
time, it may be that Brexit catalyses a new generation of politicians and
potentially parties and that this ‘next generation’ is the one to shape what
‘Global Britain’ becomes.
Here,
Hamilton would also be a useful guide. He might set the scene by counselling that,
as the trade war between the US and China is showing, a globalized world is
ceding to a multipolar one where Britain will simply be a mid-sized power like
South Korea and Australia.
The
notion of Global Britain will need to be conceived in the context of this
reality, with implications for corporate governance, tax laws, the legal system
and the City. It may also mean that Global Britain is founded on a meaningful
security and defence agreement between the UK and the EU.
Hamilton
would then focus on at least two other areas – both at the centre of the Brexit
vote. One is low, poorly distributed economic growth and the other is
immigration.
Trend
economic growth in the UK as proxied by productivity has slowed dramatically
and has become too financialized in the sense that it has increasingly relied
on the accumulation of debt and priming by central banks to keep it going. The
distraction of Brexit has meant that there has been too little attention paid
to the rattling engine room of the economy. It has been hollowed out by
austerity and the labour market has changed radically for the worse in terms of
the way workers have exchanged flexibility for security.
What
debate there has been so far has focused on redistributive measures, a
difficult policy to execute ahead of a likely world recession. What is much
more important is to rediscover the source of high, organic economic growth.
The
secret sauce of ‘growth’ lies in many of the things Hamilton developed and that
equally Britain is well known for – education, good institutions and laws. If
he were with us today, Hamilton would lay out a plan to boost human development
(education, longevity, mental health and equality), and to harness the parts of
‘intangible infrastructure’ (e.g. education, socially friendly use of
technology, rule of law) that Britain is good at.
Then
given the uncertainty, animosity and opportunity afforded by Brexit, Hamilton
might propose a very clear contract on immigration. The aim of this would be to
lay out the conditions that immigrants are welcomed into Britain, the help
given to them to settle, assimilate and find work, their rights in the UK and a
framework that would ensure they are respected and integrated into British
society.
Given
his aptitude for the infrastructure of state, Hamilton could not neglect
Scotland and Northern Ireland. He would recommend a Marshall style fund to help
reshape Northern Ireland’s economy and society, with the implementation of this
to be carried out by countries like Sweden and Switzerland who excel in public
policy. For Scotland Hamilton’s work on currencies and state banks will come in
handy as independence becomes a reality.
Much
if not all of the media is obsessed with the very short-term drama, and to an
extent who could blame them such is the entertainment value. However, attention
needs to be drawn to the deeper issues facing Britain and the potential
solutions to them if Britain is to truly prosper and be at peace with itself
after Brexit. Sometimes, history and historical figures can anchor and steer
these debates. I would urge Britons to look beyond usual historical references
like Churchill to Alexander Hamilton. He embodies the idea of nation building.
His
view would be that Brexit is simply a manifestation of decline and that this
can be reversed by honestly locating Britain’s place in the emerging multipolar
order of the 21st century, by developing a new ‘contract’ with
immigrants and most importantly by rediscovering the sources of organic
economic growth.
Donald
Trump’s reneging of the Kurds in northern Syria, his cynical treatment of
Ukraine and his weak ambivalence on the Hong Kong protest movement may fit the
pattern of his usual behavior, but to those outside the US these developments
cut away the moral, military and diplomatic backstops that the US has provided
to rest of the world for the last seventy years.
These
acts pull up the drawbridge on the old liberal order, and now set in motion a
fragmenting world of ‘patriots’, as he might put it. Another four years will
render this regression permanent, with many yet unseen, negative consequences.
While
many Americans will be happy that President Trump is committing fewer resources
to what are other people’s problems, they must also realize that the cost of
this is the end to American exceptionalism – this will have long lasting
implications for the dollar, US multinationals, the security of America and
Americans, for American culture and even for basketball.
For
those who care about these things there are several things that can be done.
To
start, technocrats, former public servants or even ‘experts’ from the military,
economic policy, diplomacy and human development led sectors like education,
need to speak loudly and clearly about the damage being done to America’s
credibility, its institutions and human capital. Jim Mattis for example, entirely
missed the opportunity to do this with his recent book.
Then,
moderate Republicans, who if they have a sliver of moral courage and an ounce
of sense, must start to put the future of the US – at home and abroad – ahead
of career expediency. As it stands, they are more supine than many of the
emerging nation governments they disdain. The very least they can do is stop
blocking the rule of law, and the cloaking of the transparency of government.
As
this occurs, the President will fight back. His greatest talents are his ability
as a gutter scrapper, and his instinct for how to caricature his opponent’s
weaknesses. He flatters and bullies, belying his own foibles. What no Democrat,
or Republican for that matter has done so far, is to match him in this respect.
Some might feel it is beneath them but it is the only way to loosen his
electoral base.
Whomever
succeeds in taking on the President will need to show that @DontheRobber is
robbing the future to prop up the scam that the present is ‘great’. Corporate
tax cuts, an alarming rise in corporate and government debt and a fiscal
deficit that is unusually large for an economy in expansion, have all boosted
the economy in the past three years, to cripple it in the future.
Record
levels of wealth inequality rob the public in general, and the next generation.
Equally, a short-term focus on a damaging trade war is disturbing corporate
investment and supply chains, while the lack of real investment in education
will rob the economy of a key source of productivity. Blindness to the
consequences of climate change will rob many of the President’s supporters of
their livelihoods as we move into the 2020’s.
The
trade agreement with China, yet to be finalized, is a fine case in point. It falls
far short of the terms that had initially been proposed, doesn’t at all tackle
the concerns corporate America had and leaves open too many points of
uncertainty. To their credit, the Chinese have done very well here.
In
politics, the modus operandi of the President and those who enable him is
robbing public life of any vestige of civility and fraternity, and risking
divisions that will carry through this century.
The sense that America, its social fabric and its economy, are being robbed is just one, clear way of encapsulating the consequences of current policy making from the White House. It is now breaking old conventions, alliances and economic relationships on a nearly daily basis, and the cost of this needs to be made tangibly clear to Americans, lest the country, like a real estate speculation gone wrong, is sold away to opportunists.
Two
related stories from the engine room of economics struck me this week. One was
the underlining by members of the European Parliament of the lack of female
representation on the ECB Governing Council and the other was the news that the
Federal Reserve is broadening its hiring process to recruit more women and people
with more ethnically diverse backgrounds, though disappointingly this initiative
seems only to be focused only on research assistant roles.
Both
stories tell us much about gender, diversity and decision making and the direction
of the economics profession.
On
gender, all of the research I have been involved in this area underlines a
couple of themes, that good data on gender representation is still hard to get
(my friend Richard Kersley’s ‘Gender 3000’ database is one of the leading datasets),
and that better (gender) balanced teams and boards make better decisions (or is
it that men only ones make more bad decisions?).
In
that way it makes great sense for organizations and institutions to recruit women
to professional roles, but these institutions also need to facilitate the
upward progress of women. I have known many female colleagues who have suffered
the tyranny of ‘flexi-time’ – working a four day week, suffering career ‘stigma’
for doing so, and ultimately having to work 20% harder.
As
it concerns central banking specifically, there is a much broader question of
diversity of thought. By the time a man or women, from any given nationality has
made it through an economics PhD programme of a major US university (Handelsblatt
carried a news item last week which showed that only 4 of the top 30 German
speaking economists are employed in German universities), published in leading
economics journals, gained a faculty place or worked in the Fed/IMF/World Bank
system, they have become creatures of the system, increasingly losing the incentive
and ability to question the status quo.
Very
few have the courage to challenge orthodoxy. A good example was the address
that Rajan Raghuram gave to the Jackson Hole Symposium in 2005 (‘Has financial
development made the world riskier?’) where (as later outlined in his book ‘Faultlines’)
he warned of the dangers posed by the mountain of derivatives that had been
built upon the US housing market. The response to his speech was frosty to say
the least, and for a time many leading economists castigated him (Larry Summers
called him a Luddite).
The
tendency of major academic economics departments to ‘form’ economists is
dangerous because the creation of group think in central banking has produced a
habitual, backward looking approach to monetary policy that usually ends up
producing asset price bubbles and economic imbalances (e.g. negative yields,
broken banks).
One
response to this is to call for ‘new economics’. A recent example is
entrepreneur Nick Hanauer’s impassioned TED Talk on the need to change
capitalism. While I have sympathy for this view, I do not think that we need
new economic theories but rather a better mix of formal economic theory with
other sciences, and generally a much greater focus on the science of decision
making (the US military and many sports teams such as the leading teams in the
Rugby World Cup are innovators here).
One
avenue is to pursue much more of a ‘Santa Fe’ approach to economics (I am
thinking of the Santa Fe Institute which fosters a cross disciplinary approach
to policy and science problems). Within economics, economists and analysts may
in the future be better served by taking more the approach of a sleuth than of
an econometric modeler.
Specifically,
they should employ a wider variety of skills, ferret out facts and use
firsthand experience to better understand them, and be more wide-ranging in
their choice of the factors they choose to study. For instance, anthropology
and sociology can sometimes better help understand the behavior of bankers and
markets than can finance theory. If the pendulum of the economics profession is
swinging away from a modeling-based approach, better that it swings toward
development economics, for instance, which very often requires a more granular
appreciation of how policy formulation works in practice.
Development
economics is also the field where can be studied the impact on economic growth
of a relative change in the quality of institutions or in rule of law, simply
by virtue of the fact that the potential incremental change in both variables
is much larger in developing than developed countries. I
In more detail, the
policies, actions, and actors that affect development in emerging nations are
complex, both individually and in the ways they interact with each other. In
the Trump/Brexit/ Macron age, politics and institutional quality are exerting a
very significant role on markets and economies, and a multipronged, more bottom
up approach may be required to open the black box of how policy decision making
is undertaken, how it might be improved, and, as I discuss in The Levelling how
politicians can make good use of it.
In
that respect the ECB and Fed should focus on hiring more senior female experts,
in areas like law, banking, psychology as well as those with experience working
in large organisations. Christine Lagarde is both the exception and the role model
here.
The
last issue is decision making. Surely, with debt levels growing, human
development levels receding and the climate warming, we need to better understand
why policymakers are so prone to avoiding big decisions?
Last
week’s UN General Assembly reflected a number of emerging trends – the miring
of public life in older democracies (US and the UK) in banality and controversy,
and the flourishing of climate change as a mainstream political issue, are just
two.
These
trends are part of the fracturing of the old-world order, and pointers as to
where the new order may lie. Underlying each of them is the contentious issue
of how political debate is conducted.
One striking
statement at the UN was President Trump’s remark that ‘The future does not
belong to globalists. The future belongs to patriots’. Practically, coming from
the leader of the world’s superpower it is another nail in the coffin of globalization,
in addition to being an embarrassing conflation of the meaning of nationalism
with patriotism.
One of the
ironies in Trump’s many grand statements is the way they echo in China. In
fact, China is well ahead of Trump in conceiving of how to put the ‘country
ahead of the global’. A memorable example was the 2017 World Economic Forum
when the Chinese leader Xi Jinping made a speech that claimed the mantle of globalization
for China (from the USA).
The curious
aspect of this is that while China is a large spigot in the world economy, it
is one of the least globalized countries in the world (it ranks in the bottom
quarter of nations according to my own measure of globalization). In his own
way, Trump is reacting to this, but his crude view of China does not do justice
to its history nor the amplitude of its ambition.
Well before MAGA
(Make America Great Again) Xi Jinping coined the term ‘China Dream’ in a speech when
visiting the National Museum of China in November 2012, having taken the office
of general secretary of the Communist Party. The 70th
anniversary of the founding
of the People’s Republic which occurs next Tuesday 1st October, will bring this
into sharper focus.
China’s
view of itself in the future, or the Chinese Dream, is colored by past
generations of economic and cultural greatness. Recall that at the time of the
Founding Fathers, the United States was but an emerging, even frontier economy
and that at that time China accounted for nearly 40 percent of the world
economy. By 1950, 150 years later, America made up a third of world economy,
and China’s share had shrunk to 10 percent.
Given
this backdrop China wants to elevate itself to a position of economic power
(perhaps regional dominance) and of policy power in Asia with its own
regionally relevant rule-based order so that it is, at the very least, not
subject to the domination of Western countries and institutions (the film Amazing China,
to be found on Youtube,gives a sense of this and of what is ahead).
China’s
rise over the past thirty years has not been given enough credit by
commentators and politicians in the West. Few of them are really curious about
Chinese history and the Chinese approach to economics, politics and society. Mike
Pence’s speech to the Hudson Institute last October was a sign of this, and one
of the great challenges China will face in coming years is the realization in
Washington and Brussels that China is pulling level with them in some domains.
Looking
ahead, the great risk for China is that the ‘Dream’ runs out of momentum,
economically in that growth slows, and politically in that people in China
question a model that exchanges liberty for stability. The underlying risk is
that not having experienced a formal recession in close to twenty years there
is a great deal of inefficient capacity built up in China and that a downturn will
expose this. If it does, rising unemployment will create a new political
challenge for the all-powerful Xi Jinping.
In
this respect, the manner in which China manages the protests in Hong Kong will
provide a clue as to how the Communist Party will manage emerging political
challenges. A physical, confrontational approach will open up many risks –
political contagion, sanctions on the Hong Kong economy and a loss of soft
power. A more drawn out approach that contests the legitimacy of the ‘two
systems’ and that penalizes locals in Hong Kong by slowing the local economy may
well dampen the crisis from a Chinese perspective. It must then confront the tenor
of elections in Taiwan in early 2020.
Political
volatility is thought to be the preserve of the West. One of the great
surprises of the early 2020’s may be the way it spreads across emerging countries,
with China as no exception.
I am trying hard not to write about Brexit,
partly because it is so unpredictable and partly because so much else has been
written and said about it. There are however two economics related angles that
are worth mentioning. The first relates to the challenge of reviving the
British economy after Brexit, and I covered this in a Times oped earlier this
week (Times.html). The other is the longer socio-economic
future of Northern-Ireland.
One of the frustrating and revealing aspects
of Brexit is the way it has shown a lack of real interest in the North from some
British politicians. For instance, in the recent past Boris Johnson has
compared the border between Ireland and Northern Ireland to the boundaries of
London’s congestion charge zone.
This
level of ignorance is a pity because the reality is that Northern
Ireland is one of the poorest economic regions of the UK, falls well behind the
level and rate of growth of Ireland the Irish Republic and continues
to suffer social, political and economic rigidities. Social divisions are being
mended all too slowly, local politics at Stormont is inadequate and the economy
remains embarrassingly overdependent on government spending.
Brexit has shone a light on many of these
issues and has illuminated the lack of appreciation many in Westminster have
for Northern Ireland in particular and Irish history in general. Arguably, a
film (‘Titanic’) and tv series (‘Game of Thrones’) have done more for Northern
Ireland’s fortunes than its local and London based leaders.
In particular Theresa May’s Brexit strategy
was fatally snared by a shoddy understanding of the complexities presented by the
border between Northern Ireland and the Republic. Indeed, there is a risk for
Britain that Brexit is replaying the divisions and debilitating bitterness
of the Ireland’s separation from Britain in the 1921 Anglo-Irish treaty.
Yet, while there have been very few if any
winners in the Brexit process so far, it does represent a valuable opportunity
for London, Washington, Dublin and Brussels to recognize that Northern Ireland
needs a second wind in terms of its socioeconomic development. Irish America can
add an important voice of support here. Northern Ireland should not be parked
as a political issue but should be cultivated economically and socially.
A provocative but potentially fruitful
suggestion is that a portion of Britain’s Brexit exit ‘settlement’
to the European Union be set aside as the basis or seed capital for a
Marshall Plan–type fund for Northern Ireland. This could then become a joint
UK-EU financed fund with further funding from the UK, the EU and its
institutions like the European Investment Bank. The fund would not substitute
for spending in Northern Ireland by London but would have the long-term aims of
increasing socio-cultural harmony, human development and the economic potential
of Northern Ireland’s economy.
Another interesting source of funding is the
growing appetite in capital market for social impact investment opportunities.
This potential supply of funding is not yet met with a large, coherent supply
of impact investment projects, partly because this kind of investing is not yet
well understood and partly because it is difficult to create large scale
projects here. Northern Ireland could be a model for doing social impact
investing in a meaningful way.
The really interesting part of the proposal is
that neither London, Dublin, Brussels or even Washington would be involved in
planning and running such a program. This would be done by a group of small,
advanced economies – the likes of Sweden, Singapore and Switzerland.
This approach would have political and economic
attractions. The first is that few if any of these small, advanced countries
has political ‘baggage’ with respect to Northern Ireland and would be therefore
less likely to fall foul of the distrust that bedevils politics in the North
(for example, the advice of New Zealand technocrats might be easier to take,
and more credible than policies crafted in London or Washington).
Secondly,
and more tellingly, small advanced countries are the source of the secret sauce
of economic, social and human development. They tend to dominate the league
tables of socio-economic success, from ‘most globalized’ to “most innovative
nation” or most “prosperous nation.” Indeed, the small advanced country model
is acknowledged in Northern Ireland’s ‘Economy 2030’ plan.
What
small, advanced and open economies have in common are drivers like education,
strong institutions, the rule of law, and the deployment of technology—their
intangible infrastructure. Northern Ireland needs better ‘intangible
infrastructure’, applied in an imaginative and constructive way.
A few examples of what a small state led fund
might tangibly focus on include the kind of skill-based apprentice schemes
found in Austria and Switzerland, rezoning of housing from deeply politically
entrenched areas using the social-impact-investing model found in Belgium,
investment in cultural projects that are common to all communities (such as is
done in Scandinavia and Switzerland), and the establishment of poles of
excellence in certain professions, such as legal financial services.
Such a fund might draw on the expertise and
governance capabilities of small states. This might well add energy and
transparency to policy decisions and the employment of detailed rolling
five-year plans might help speed up what is at times a sclerotic policy
process.
Given the frequent and urgent manner in which
parties to the Brexit process annunciate the risks to Northern Ireland in
general and the Peace Process in particular, it is time they do something to
set it on a positive course. It is also high time that Brexit produces at least
one good news story.
Regular
readers, especially those toiling away in dusty cities will be less than amused
that I have written this note in the beautiful setting of Nafplio, in south
west Greece, whilst attending the excellent Eliamep/JeanMonnet30 seminar.
That
the Greek stock market is up 35% this year and its bond yields trade some 33
percentage points below their levels of five years ago suggests some closure on
the euro-zone crisis.
Another
sign of this came in the market reaction to additional stimulus from the ECB.
Effectively European asset prices did nothing, which I hope will persuade the
ECB to move on to other policy aspects of the euro-zone system such as the need
to properly regulate Europe’s fintech and payments sector.
Another
important milestone in the ‘story for Europe’ came with the announcement of the
composition of the von der Leyen Commission. In a previous Sunday note I have mentioned
the method behind the creation of European Commissions found in the tale of
political ‘three cushion billiards’ recounted by the late Wilfried Martens,
formerly Belgian Prime Minister, in his 2009 book ‘I Struggle, I Overcome’.
The
Commission has done well this time, though it was not always the case. One of
the first books I read that helped to explain how Brussels worked was Bernard
Connolly’s ‘The Rotten Heart of Europe’. It was a huge hit (in the UK) and
hugely controversial. Indeed, a second edition came with a cover recommendation
from the then editor of the Spectator Boris Johnson (‘one wanted to stand on
the desk and cheer’).
The
book did much to propagate Euroscepticism in British politics, and I suppose we
might trace some of the roots of Brexit to it. With some irony, Brexit has however
shown that the Commission can function in a forceful way. The challenge for the
EC is to now step up a level and reinforce itself for a multipolar world where
it will compete more acutely with China and the US, with at the same time
Russia snapping at its heels.
Perhaps
for this reason the new EU President referred to her Commission as a ‘geopolitical
one’. It is welcome that there is a growing realization in Brussels of the
implications of the emerging multipolar world, but for my liking, Europe-Brussels
does not yet have a strategic mindset, and does not fully have a sense of its
power and identity in the world.
There
has already been some controversy over the designation of a Commissioner with
responsibility for migration as one who would ‘Protect our European way of Life’.
This clumsy effort at communication is likely a nod to right wing parties
across Europe, the kind of people who ‘value the Church and families as opposed
to bike riding vegetarians’ as one person put it to me.
What
this incident should do, is spark a serious debate on what the core values of
the EU are, and in ‘The Levelling’ I invoke Alexander Hamilton to do this. The
more public life in the US and the UK disintegrates, and the more heavy-handed
China is in Hong Kong, the more we are reminded that liberal democracy is at
the core of Europe’s value system. One of the challenges is to make the
benefits of this clear to people in Poland and Hungary whose leaders contest
such a view of the world.
Back
to the Commission, where several appointments will have macro and investment implications.
Overall, the Commissioners are less wealthy than the Trump cabinet, better organized
than the Johnson government and more colourful than the Xi Jinping administration.
Trade
first. The appointment of Irishman Phil Hogan as trade commissioner means the EC
will hold a firm negotiating line on Brexit, and that it is increasingly
focused on the risk that President Trump might open up a trade war with the EU.
The appointment of Sabine Weyand to the trade team reinforces this view.
Then,
the re-appointment of Margaret Vestager as EU Competition Commissioner underlines
the fact that a growing market trend will be regulatory risk to large US tech
companies. Europe has already taxed and fined the FAANG companies and some Democrats
increasingly agree with this stance. As the 2020 election approaches, tech will
be increasingly under regulatory scrutiny and like it or not Europe will lead
the way.
The
final point worth waking here is the emphasis that the EC is putting on green investment,
on governance in Eastern European countries and on socially responsible
finance. This all adds up to a much greater emphasis role for ESG (Environment,
Social and Governance) in investing and markets, not just in Europe but further
afield.
So,
the EC is moving away from ‘Rotten Heart’ but is not yet ‘Braveheart’!
In
chapter five (page 127 to be exact) of The Levelling I wrote about the apparently
growing tendency for some politicians to be self-centered and incompetent, and
drew a contrasting portrait of Boris Johnson MP and the late Peter Carrington. It
went as follows…
‘A
further contrast in political types might help illustrate this point further.
In July 2018 Boris Johnson resigned as British foreign secretary. Britain no
longer has an empire, but the office of foreign secretary is still respected.
During his tenure, however, Johnson made a number of gaffes and was generally
seen to have damaged rather than advanced Britain’s interests. Similarly, in
the aftermath of the Brexit referendum, he was also seen as a natural leader of
the Tory Party, but the way he has conducted himself since then has led many
party colleagues to the view that, even by the standards of politicians, he is
too self-serving, and he has lost support within his party.
The
day after Johnson resigned as foreign secretary, the death of Lord Carrington
(at the age of ninety-nine) was announced. Carrington had been British foreign
secretary from 1979 to 1982. He was generally recognized as an exemplar of
integrity in public life. Early in his political life, he had served in Winston
Churchill’s cabinet of the early 1950s; later he was defense secretary for
Edward Heath and then foreign secretary to Margaret Thatcher. To cut a long and
good story (of his life) short, he resigned as foreign secretary three days
after the Argentine invasion of the Falkland Islands on the grounds that the
invasion happened on his watch and was therefore his fault.
As
political resignations go, this one was seen to be selfless and principled and
stands in contrast to the tactical maneuvering of some politicians today.
Carrington, along with many contemporary central bankers (Paul Volcker, Ben
Bernanke, Janet Yellen, and Mario Draghi, for instance), is a good example of
sincere public service and his behavior stands in contrast to that of
successors like Boris Johnson.
The
distinction I wish to draw is to have policy makers who are more responsible
for and focused on policy making than on their own personal advancement.
Advancing oneself is, of course, prevalent across all organizations and
institutions, but the difference with politics is that people’s lives are
affected by bad policy making’.
At
the time, I did not think Boris Johnson would become Prime Minister, though
there was a good chance that this might happen. Further, given everything that
has happened with Brexit so far, it was still hard to imagine that in a few
weeks his government has managed to effectively destroy the Tory Party, the
Union and the very large stock of goodwill that Britain has built up with
neighbouring countries like Ireland.
I
believe that the Tory Party will soon formally split, and that the nucleus of a
new centrist party in British politics will be formed around the twenty one MP’s
who were expelled from the Conservatives.
Another
consequence is that the barriers to Scottish independence are falling. Most of
the arguments deployed by Brexiteers for ‘taking back control’ appear logical
in the case of Scottish independence. Everything the Johnson government does
shears away at the moral and emotional ties between London and Scotland. Moreover,
the departure of Ruth Davidson as head of the Scottish tory Party will hand
back a number of seats to the SNP. The challenge for Nicola Sturgeon now is to
convince Scots that the SNP can execute new policy ideas that will make
Scotland more stable economically, and richer in terms of human development.
Then,
both the Irish government and the EC will feel that their opposite numbers in
London have no credibility and no sincerity. Whereas they were often puzzled by
Theresa May, Boris Johnson has done nothing to encourage Brussels to trust him.
That is a pity because once Britain leaves the EU, the truly complex business
of negotiating its future relationship with the EU will only begin. This is
apparently lost on the Johnson government.
To
return to the distinction I drew between Johnson and Carrington, there is an
emerging theme in public life that the consequences of bad behavior are in many
cases low. There are many instances, Jeffrey Epstein is the latest, where
individuals have engaged in enabled, persistent abuse. Politics is sadly
becoming similar. The world stage is increasingly replete with examples, with
little distinction between leaders in emerging or developed countries.
In
time, very bad, divisive behavior in politics hits its limits and is sanctioned.
What is disappointing is that those limits are being stretched to breaking point.
At times, markets can sanction bad
policy by politicians, but bad personal behavior is seemingly harder to check. Infuriatingly,
social media seems to amplify and reward bad behavior in politics.
A
more profound policy issue is that the lack of real economic growth, and the
poor distribution of its benefits (in countries like the US) means that voters
will look beyond reckless policy in search of economic rewards. In the US specifically,
few on the right are prepared to stand up to the President. They might do well
to look at the example set by the likes of Ken Clarke, Jo Johnson and Rory
Stewart last week. Boris Johnson himself might do well to look at the example
set by Peter Carrington.
The Levelling 