Europe’s next crisis

EU a beacon for the rest of the world

The decision of the German finance minister Olaf Scholz to acquiesce to a discussion on the creation of a euro-zone common deposit insurance scheme is welcome in the light of the half-baked nature of the euro-zone financial system. However, like the proverbial drunk searching for his keys under the streetlamp, it is also a case of tardy backwards looking, policy making.

For example, the facts that the market capitalization of Deutsche Bank trades at only one quarter of its book value and that the business model of Wirecard, Germany’s fintech leader, has been surgically dissected by the FT, suggest that reform of the domestic banking system is a more urgent and yet incomplete task for Germany (Mr Scholz may hope that one day Italian savers will bail out German banks).

While the ongoing focus on remedies to a future banking crisis is a reminder of Europe’s fragilities, the most damaging and alarming crises tend to strike in areas that policy makers have not yet tended to.

In that light, if Europe is going to have another crisis, it is much less likely to be economic in nature, such has been the develeraging of European economies and corporates in recent years, and such has been the focus on building new economic architecture in the euro-zone.

Rather as the new Commission takes office, their focus should be to look forward and grapple with the emerging debate in European values and identity, of which there are at least three strands.

The first of these relates to Europe’s place in the world. As globalization ebbs, and gives away to a multipolar world made up of at least three regions – US, China and Europe who do things increasingly distinctly, the organizing ethic of the EC must be to think of Europe as part of a system of great power rivalries as opposed to a cog in an integrated world. The weakening of the diplomatic ties and communications from Washington to Europe is just one sign of this.  The notion of a more singular EU points towards a deepening of efforts towards common European defence and security capabilities, a trade strategy that is prepared for ‘the worst’, and a greater effort to bolster Europe’s financial strength.

The second strand is that as the EU defines itself more clearly relative to the US, China and to a lesser extent Russia, individual member states will increasingly feel obliged or forced to take sides. Eastern European and Balkan countries, some of who enjoy investment flows from China and political support from Moscow will be the centre of attention here. Though there are few formal means of ‘bringing them onside’ there may soon be calls to curb EU aid to member states who are too closely aligned with China and Russia, or to change voting procedures to ensure that the likes of Hungary cannot sway or bloc EU wide votes.

Then, identity and the idea of European values crisis crosses country politics and has been brought to prominence with the clunky job description of ‘protecting our European way of life’ for Margaritis Schinas.

The recent rise of Vox in Spain is another example of the emergence of far-right wing political parties across Europe, and it is a possibility that we see a ‘Heimat’ coalition of such groups across the EU. Here, the EC can do several things, such as better defining what European values are in a practical sense that tallies with the everyday lives of Europeans and using social media to capture the values that resonate Europeans. Specifically, immigration is a policy area where the EC needs to have a much clearer and better organized approach, especially so in the case of refugees.

One additional factor worth highlighting, is that the generalized picture of the many protests around the world, from India, to Honduras to Lebanon, is that people want an end to inequality, corruption damage to the environment, and arguably, better democracy. The EU can take some comfort from the fact that, as a bloc, it is a leader in the field of liberal democracy, climate change and equality.

The final task for the new Commission is to dispel the sense that as Jean Monnet is reputed to have said, ‘Europe needs a crisis to move forward’. Brexit has shown how forcefully the EU can act when united and organized. Political chaos in Westminster and Washington makes Brussels look like a bastion of good sense.

Europe’s financial crisis has many lessons – the necessity to tackle emerging risks early and if anything to over rather than underreact, the need to coordinate well across countries, Commissioners and specialist areas, and the need to better communicate with Europeans as to what is being down in their name. The new Commission should internalize these lessons and move to pre-empt the ‘next’ crisis.

Have a great week ahead,

Mike

Demonstration contagion

Is this the beginning or end ?

In last week’s missive (link), I discussed the role of rising food prices as a trigger for public protest and I suspect, as a cause of future geopolitical strife. It is not a very happy topic but one that deserves some further analysis given that in recent weeks there has been a remarkable outbreak of protests across a range of countries – from riots in Honduras, to ongoing tension in Hong Kong to climate related demonstrations in India.

Were I one of the many apocalyptic writers who seize upon every misfortune as confirmation of their worldview I would tell you that this is the start of ‘The Levelling’, and that the ‘end’ will follow shortly.

Though I will spare my readers such a gloomy outlook, there is nonetheless a ‘Levelling’ like narrative that unites the motivation for the many international protests in the sense that most of them are provoked by factors that are associated with globalization (though in reality not usually caused by it).

For example, climate change has spurred Extinction Rebellion movements in Europe and environmental protesters in India. Factors that are associated with a lack of what I call ‘country strength’, such as corruption and weak institutions have been amongst the triggers for protests in Lebanon and Iraq, whilst the cost of living and rising fuel costs have brought people out onto the streets in Chile, Egypt, Ecuador and France. Inequality is also a driver, especially so in Chile, Mexico and Turkey.

Together these protests (by the way the number of Google searches on the world ‘protest’ is at a five year high) point to a world where there is limited patience for policy negligence and it negative socio-economic effects. I’ve had a look across the IMF and World Bank databases to find countries that are exposed to corruption, indebtedness, inequality and climate change. Many ‘candidates’ if I can put it like that are in Africa. One country worth watching – where inequality and indebtedness are high (as high as Jamaica), and where climate change is having a growing impact, is the US.  It still has strong institutions but consider what might happen in the context of a deep recession (with no fiscal buffer).

While there is no sense that the various protest movements are in anyway coordinated, they may still be contagious within and across countries.

Within countries, social media makes protests easier to organize at short notice, easier to spread (dis)information and easier to bring to the attention of the wider public. It was no surprise that in the aftermath of the Arab Spring, protestors faced massive social media and cyber counterattacks from the Egyptian and Syrian authorities.

Protests are contagious across countries to the extent that social media can heighten sensitivity to issues and spread the ‘methodology’ of either violent or peaceful protest. For example, one image that crops up in protests around the world is the clenched fist of the Serbian peaceful protest group Otpor. There is also increasing contagion in financial markets in the sense that in emerging markets at least investors are reacting negatively to signs of political strife.

The troubling thought for the outlook is that the economic stresses underlying these protests will not go away anytime soon – inequality takes time to tackle, most governments are fiscally constrained, and many have high debt levels (i.e. Lebanon). To make matters worse, climate change points towards a more radically stressed environment.

However, the positive reading from all of this, at a time when it should be said that the quality of democracy and the rule of law internationally are deteriorating (according to the latest Freedom House ‘Freedom in the World’ report and the Rule of Law indicators in the World Justice Project dataset) is that people want less corruption, more equal societies and better balanced growth.

In that context, what is to be done? There are specific actions that can help, such as the relocation of the World Bank to Africa to act as an anchor against corruption and to spread best practice in institution building.

More broadly, I see a lot of space opening up for new political parties and movements, some that are interlinked across countries and others that are connected by their political methodology (i.e. use of social media). Then, eventually I see the such protests leading to efforts to remake social and political contracts along the lines of the Levellers’ Agreement of the People’, at least in democratic countries, so that policy issues such as climate change, inequality and corruption are more formally recognized and curbed at a policy level.

It will be a bumpy road politically, but the flourishing of protests around the world shows that something profound is occurring.

Have a great week ahead,

Mike

Ne vous mêlez pas du pain

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.

Have a great week ahead,
Mike

Lessons from Brexit, so far

Brexit, washed away

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.

Have a great week ahead,

Mike

The Dude, Don and the dollar

Diplomacy, Trump style

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.  

Have a great week ahead,

Mike

Hamilton would have a plan for Brexit

Neither Leave nor Remain, but go forward

This article is published by the excellent UnHerd.com, https://unherd.com/2019/10/alexander-hamilton-rap-star-nation-builder/

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.

@Donthe Robber

Watch out

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.

Have a great week ahead,

Mike

Open economics and hard decisions

Ada Smith would know what to do

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?

Have a great week ahead,

Mike

A World of Patriots and Dreamers

China marching on, obstacles ahead

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.

Have a great week ahead,

Mike

Beyond Brexit – a plan for Northern Ireland

Light ahead for Northern Ireland?

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.