IPR Blog

Expert analysis, debates and comments on topical policy-relevant issues

Topic: Economics

A weak UK government might do a better Brexit deal than a strong one

📥  Brexit, Economics, European politics

Professor Timo Kivimäki is Professor of International Relations and Director of Research in the University of Bath's Department of Politics, Languages & International Studies.

When Theresa May called her disastrous snap election, she justified it by saying she needed a longer and stronger mandate to negotiate a Brexit deal. Her campaign was based on the claim that she embodies strength and stability, and is therefore a better negotiator than her Labour rival, Jeremy Corbyn.

 

May’s much-derided “strong and stable” slogan boiled down to the idea that it was self-evident that Britain needs a strong domestic position to negotiate to its advantage, and to strongarm the EU into giving it concessions. Labour tried to convince the electorate that it could also offer a strong position if the voters backed it, but never challenged the assumption that a unified, internally strong Britain would be a better bargainer.

Yet strangely enough, when it comes to the way negotiation dynamics work, this “common sense” flies in the face of both theory and empirical research – both of which would have it that the UK’s messy political situation in fact puts it in a better position from which to get what it wants. When it comes to extracting concessions in negotiations, strength is weakness and weakness is strength.

This was famously suggested by John Nash, whose work on game theory won a Nobel Prize in economics (and whose life won an Oscar for best film). Nash’s mathematical bargaining formula holds that if one side in a negotiation is less than fully dependent on a deal being struck but more inflexible than the other side when it comes to the deal’s terms, then it will have to yield less than the opposing side.

While Nash’s bargaining theory is fully explained using highly complex mathematical proofs, the point that’s relevant to Brexit is relatively simple.

Imagine you visit a dealership to buy a car. If you were choosing a car completely independently and were dead set on buying one, you’d be less determined to negotiate a good price than you would be if you weren’t entirely sure you really needed a car, or if you had to justify your purchase to someone else – a sceptical spouse, say. If you’re less purely invested in the car no matter what and instead under pressure to justify the terms of the deal, you will need to get a better price. The dealer, meanwhile, just has to sell you the car.

Everyone’s watching

May’s government might now have a hazier vision of what it wants than it did headed into the election, but Nash’s theory would imply that since there are plenty of sceptical voices inside the Conservative party as well as outside it, the British team will now be better placed to get the best possible deal.

When a negotiator is vigilantly monitored rather than given freedom to make independent decisions with a clear mandate, it’s difficult for them to settle for the other side’s demands. According to Jean Bartunek’s research team, this gives one side a paradoxical sort of strength: to reach a negotiated solution, the “stronger” side ends up having to make more compromises than the weaker one.

A similar conclusion was reached by Helmuth Lamm and his co-researchers: if a negotiator is not only closely monitored but weakly positioned vis-à-vis the people monitoring them, they will be under even more pressure not to compromise. This might make the process messier and the agreement harder to reach – but it also means that if both sides want to reach one, the stronger side will be the one that needs to compromise.

This is the dynamic that may be about to play out. May is short of a working majority, and is having to make difficult deals in order to govern with any sort of confidence. Her government will directly depend on the support of MPs and parties who aren’t committed to its preferred form of Brexit. May has neither strength nor stability on her side, and her team have substantially less political capital than they thought; that means a show of steadfastness in the face of EU demands could be their best hope for being allowed to see the negotiations through.

As things stand, the EU and its member states want a negotiated solution with the UK rather than no deal at all. Faced with the tightrope-walking representatives of a weak, pressurised government, they’ll have to accept that unreasonable demands have little or no chance of making it into the deal.

This article originally appeared on The Conversation.

 

GE2017 and International Relations: The Mandate for Brexit Remains Unclear

📥  Brexit, Economics, European politics

Dr Maria Garcia is Senior Lecturer in the University of Bath's Department of Politics, Languages & International Studies.

This week – just under three months after Article 50 was triggered, announcing the UK’s decision to depart from the European Union – Brexit negotiations have commenced in Brussels. British negotiators led by David Davis, Secretary of State for Exiting the European Union, arrived in Brussels under very different circumstances than they had envisaged a couple of months ago. Prime Minister May’s gamble, calling an early election to bolster her parliamentary majority in the hope of gaining a robust mandate to conduct negotiations, has backfired spectacularly. If the outcome of the EU referendum divided the country (without clarifying what kind of trade-offs the population would be willing to accept in Brexit) the 2017 election again reflected the cacophony of views in the country. Nor have any of the acceptable trade-offs been clarified.

international

 

From the outset of her premiership Theresa May, as well as prominent Brexiteers like David Davis and Boris Johnson, have insisted on a leaving the EU but retaining a ‘deep and special relationship with allies and friends in Europe’ and trading freely. They have also reiterated the mantra of regaining border control, reducing immigration and escaping the authority of the European Court of Justice (ECJ), as well as enacting an independent trade policy. These aims featured prominently in PM May’s letter triggering Article 50, the White Paper on Brexit, various speeches and the Conservative Party Manifesto. Yet nowhere has there been any detailed explanation of how to bring about their vision. By the time the election was called it had become clear that their reassurances of economic ties remaining the same and enabling business to continue as they had until now – whilst also fulfilling the Leave campaign’s requirements of ending worker mobility and ECJ jurisdiction – were illusory. This is not surprising, given the constitutional constraints on the flexibility the EU has in negotiations; the single market is predicated on the four freedoms of movement (including labour mobility) and the ECJ as the overarching arbitrator and guarantor of the market. David Davis’ and Boris Johnson’s claims that there was no need to pay a Brexit bill (to settle financial commitments the UK has already made and payment of British EU civil servant pensions), which is in fact the initial part of Brexit negotiations, further added to speculation that the UK government’s preferred variety of Brexit would involve a complete break from Brussels – even though they constantly referred to a deep and special relationship and continued trade on the current basis. PM May did, however, present a more nuanced appraisal of the situation by accepting the commitment to pay a ‘reasonable’ bill and the possibility of paying for participation in certain EU projects (see White Paper and Manifesto). Senior members of the Conservative Government articulated different approaches to the negotiations, but coincided in putting forward an unrealistic vision of a future relationship with Europe. During the election campaign, a more realistic vision failed to materialise, with the Conservative Party Manifesto reiterating incompatible objectives, and campaign rhetoric focusing on personal character for engaging in challenging negotiations with the EU. During the campaign, the Conservatives failed to present what it was they actually planned to negotiate, and therefore what they were seeking a public mandate for through the election.

Brexit was clearly a crucial aspect of this election, but it is impossible to claim that Labour’s surprising improvement in votes was exclusively down to Brexit – not least because Labour’s position on the matter is vague too, despite a commitment to negotiate it. Now that the Conservatives have lost their parliamentary majority and need to rely on the support of the DUP to govern, their manifesto promises regarding avoiding a re-instatement of customs controls and borders between Northern Ireland and the Republic of Ireland become more significant – and may affect the choices available in the Brexit negotiations, since leaving the EU with no (temporary) deal in place would legally mandate a hard border. Moreover, the lack of majority means that as Brexit negotiations unfold, a greater proportion of views and positions will be discussed in Parliament. Whatever is agreed will have to be the result of consensual agreements. Considering the significance of Brexit and its effects on every person and economic activity in the country, a more negotiated and consensual outcome can only be welcomed, not least given the very narrow majority in favour of Leave in the 2016 referendum.

Initial statements from members of the new government are reflective of this situation. Andrea Leadsom, as new Leader of the Commons, announced over the weekend that the Government will not put forward a new legislative plan next year to leave space for Parliament to scrutinise and pass the necessary legislation around Brexit – and admitted the need to secure consensual support for Brexit plans. Departing from the David Davis, Theresa May and 2017 Conservative Party Manifesto line, Chancellor of the Exchequer Phil Hammond admitted in an interview on the Andrew Marr show that leaving the EU with ‘no deal would be a very, very bad outcome for Britain’; he also admitted the need to put in place a temporary agreement that ensures business continuity on current terms, extending beyond the end of the two-year Article 50 negotiations and providing support until a new long-term relationship can be agreed to. PM May’s new cabinet remains a mix of Leave and Remain campaigners, with notorious Leave supporter Michael Gove returning to the cabinet as Secretary for the Environment. Perhaps more reflective of the changed parliamentary situation, and May’s need for allies, was the appointment of Damien Green, a personal friend of the PM and pro-EU advocate who will take on the role of First Secretary. The election results, the support of the DUP, and the Exchequer’s public statements suggest that a more moderate tone will be taken in negotiations than indicated by some of the pre-election rhetoric.

However, critical questions remain unanswered. Leaving the EU, even if it is an orderly manner with intermediate stages aimed at minimising trade disruptions – as now appears to be more likely – means that the UK’s future relationship with the EU will of necessity be different. Consequently some sectors and groups that benefit from the current arrangements will find themselves in an inferior position to today (e.g. financial services). Others may well find that they benefit from different arrangements. A ‘Brexit that works for all’ is a fallacy, unless the government is finally willing to enlighten the population as to exactly what sectors it will prioritise in the negotiations and what sectors it will sacrifice, and what measures it will put in place to compensate sacrificed sectors. The same logic applies to any future post-Brexit UK trade agreements with the other states – especially the US, where Secretary for Trade Liam Fox is this week discussing post-Brexit possibilities.

All trade agreements have redistributive effects. The EU trade agreement with Canada (CETA), when it comes into effect later this year, will increase competition in the European market for European beef producers by allowing increased beef imports from Canada – where larger production facilities and the use of cheaper animal feed result in high production. By contrast, European speciality cheese producers are set to benefit from improved access to the Canadian market and the protection of some of their speciality names linked to specific locations – to the potential detriment of Canadian cheese producers.

Throughout the referendum campaign, the run-up to the triggering of Article 50, and even during the electoral campaign, open and frank discussion of which areas, economic sectors, societal groups and companies would be privileged in these challenging negotiations (and in future domestic and trade policies) was neglected. The government’s plans for an Industrial Policy, although still lacking in detail, are an important first step towards acknowledging the need to equip people with relevant skills, and to foster innovation in the country so that it can retain a competitive edge in global markets. In and of itself, however, it will not suffice – especially when in future negotiations with other states, they may press for their own interests (consider India’s pursuit of access for its IT workers to labour markets elsewhere as service providers, for example). Over the coming years, at a time of rising global tensions (geopolitical as well as economic), Brexit will be the overriding issue of UK foreign policy. A more subdued approach to Brexit, with intermediate steps, such as remaining in the European Economic Area or the customs union on a temporary basis as suggested by the Chancellor of the Exchequer, can curtail some of the economic shocks to various sectors – but the current Parliament, and society, would do well to insist that the Government reveal their longer-term plans regarding the relationship they hope to have with the EU and other markets. They should also be put under pressure to explicitly identify the winners and losers of such plans, as well as remediation measures. Without this information, manifesto promises to tackle inequality in the country (an obvious and pressing problem) may fall by the wayside in the re-crafting of the country’s socio-economic environment and its international position and relations.

 

GE2017 and Education: a policy ‘battle royale’

📥  Economics, Education, UK politics

Professor Hugh Lauder is Professor of Education and Political Economy at the University of Bath

The general election provided an opportunity for the political parties to demonstrate a vision for the future of education. In the recent past, more has united the parties than divided them, but this election there has been clear water between them – and as we enter an uncertain future, their manifestos signal very different understandings of the nature of the country and its future.

battleroyale

 

To say this much is already to court controversy. It’s not clear what ‘this country’ means, so we should be clear that the discussion will be about education policy in England. Despite an unexpected election result, it is worth analysing the Conservative and Labour manifestos because their respective policies on education may tell us much about their thinking and – particularly, in fact, in the context of the surprising election result. The Liberal Democrat manifesto does not provide the clear contrasts which illuminate the debate about the visions for this country.

Judgements about these manifestos will of course be coloured by evidence, but also by prognoses for the future. Here my colours need to be pinned to the mast. As a specialist on the education-labour market relationship, it is quite clear to me that the neo-liberal assumption that the primary aim of education is to provide skilled workers for the economy is now in question. It appears that we are now on the cusp of a new form of capitalism in relation to the labour market. Up until now, the prevailing policy assumption of all the political parties has been that there will be increasing demand for high-skilled work and that graduates will be appropriately rewarded for their productivity. It is for this reason that graduates have to pay high fees for what is perceived to be the advantage they gain from the graduate premium. The politicians have been supported in this view by human capital theories that cannot address current conditions: when we disaggregate the returns to graduates we find that it is only those in the top decile of earnings that conform to the profile assumed by human capital theorists.

The assumption has been that the new technological revolution will raise the demand for skilled workers. But if we look at the returns to graduates in the United States – considered the hothouse of the technological revolution – as I have done with Phillip Brown and Sin Yi Cheung, then two points stand out. Firstly, when we track graduate returns between 1970 and 2010, incomes declined for all except those in the top decile. Secondly, and significantly, those with postgraduate degrees, who we may expect to be at the cutting edge of the knowledge economy, have fared in the same way. The UK data from the Labour Force Survey also shows that there is a wide disparity in incomes according to education credentials; interestingly, top A-level students who have not attended university earn more than median graduates.

Craig Holmes and Ken Mayhew at Oxford have documented the increase in the proportion of graduates who now undertake what were formally non-graduate occupations – an indication that there is deficient demand for high-skilled work. At the present time, some 46% of graduates won’t pay back their loans because they won’t earn enough. When that figure reaches 48%, the government will gain no more from the £9,000 fees than when they were set at £3,000. It is clear that, in the light of these data, we need to re-evaluate the idea that technology will raise the demand for skills; it will for some, but it is more likely to re-stratify the occupational structure to reduce the costs of knowledge-based work. This is, of course, one reason why industrial policy is now back on the agenda: left to itself, the market cannot create enough good quality jobs.

In essence, the optimism which accompanies the dominant view has come face to face with new forms of predatory capitalism. Here the drive is to create cut-price brain power, leading to a situation where learning no longer equals earning. In this emerging form of capitalism, the role of education is wholly uncertain, since the rationale for education under neo-liberalism has been that it is an economic investment in which the relationship between education and wages is relatively straightforward. The case for education will now have to be re-stated in very different terms.

If this account is plausible then it speaks to the two most high-profile policies advanced by the Tory and Labour Parties. The most controversial policy in the Conservative manifesto is that of the promotion of grammar schools or, as it says in the manifesto, selective schools. Such a policy is a clear example of how individual biographies and anecdote have trumped evidence. The research evidence against selective education which led to the creation of the comprehensive system was led by Jean Floud and my friend and colleague A.H. Halsey in the 1950s. They demonstrated how inequitable the 11+ system was. Since then, with more developed databases, the early claims they made have been fully substantiated, notwithstanding the use of questionable data in the Conservative Manifesto. The purpose of the reintroduction of selectivity was ostensibly to promote social mobility; in Britain, as in other neo-liberal societies, destinations are indeed still determined by origins. The debate over this issue has been dismal because it has been assumed that education alone can promote social mobility, ignoring the labour market conditions necessary to turn educational credentials into opportunities. Indeed, data from the United States suggests that the demand for high-skilled work for the younger generation is now in decline. For those of us who have a commitment to evidence-led policy, such a manifesto pledge suggests that reason is not a dominant principle in education policy. It is probably the case that the election has put paid to this pledge, but it nonetheless tells us something about the nature of a party that aspires to turn the clock back.

A similar claim has been made with respect to the Labour mainfesto’s commitment to abolish tuition fees. Commentators on the left, including The Guardian, as well as those from the right have condemned this pledge as, at best, advantaging the already privileged among the younger generation. That would be a reasonable claim if the labour market reflected the assumptions of human capital theory: as we have seen, it doesn’t. In the light of the scenario I have sketched, this Labour policy looks enlightened. As the economic returns to education decline for many, we can expect a battle royale over the role and cost of education. Given the uncertainties that this generation are confronting, the best that our society can do is to provide young people with a good education, which gives them the mental flexibility to see that other worlds and other ways of doing things are possible. This, of course, is what lies behind the European states that do not charge fees and look upon our obsession with the private rates of return from a university education with a degree of curiosity, if not outright scepticism.

This not only applies to university education but to the kind of technical education that FE colleges can provide. It is almost impossible to understand the savage cuts to FE colleges that have taken place under austerity policies. Both parties have something to say on this matter. We see this in the Conservative Party’s aim of linking technical education to degree-level studies, a theme consistent with the idea of social mobility. But before we innovate further, we might do better to re-lay the foundations of what we have.

Here, it is important to examine lifelong learning. It has long been the ‘Cinderella’ in education policy and, indeed, under the period of austerity, education has been front-loaded so there are few second chances available for those in their mid-twenties and older. Now, in the light of radical labour market uncertainty it is needed to provide necessary social and economic support for workers. Singapore is already dipping its toes in this pool with Skills Future, which provides every Singaporean citizen with $500 for further education and skills upgrading. The Conservative manifesto is silent on the issue. Labour is committed to lifelong learning, which starts with a return in the early years to Sure Start, and this too is important for the age we are entering. It may create flexibility for parents, who will certainly need it in their paid working lives, as it will for those who have caring responsibilities that extend above and beyond their children.

When these two manifestos are compared, it is clear which one has the most comprehensive account of educational policy. Of course, those on the right will suggest that this judgement is based on sector self-interest, since I am a university professor – but that is too easy. The points I’ve raised need to be addressed rather than dismissed. It is unclear on what basis Labour have made these commitments and whether they can be paid for, given the straitening times we are entering. But the implications are clearly forward-looking.

For the Conservatives, all appears well with the education system we now have with some tinkering at the edges, mainly in terms – yet again – of qualifications. We might expect Labour’s manifesto to be more radical, but it is squarely in the social democratic tradition, as would be well understood in Germany, for example. There is no suggestion of integrating the public schools with the state sector. There is no attempt to abolish school choice, and there is only a mention of questioning the testing culture, which clearly benefits the political class but neither students nor schools. In these respects, whatever the merits of the debates that no doubt will be forthcoming, this is a moderate set of policies. They may have their roots in the 1980s, but – either by design or happy accident – they are relevant to our future.

 

Skills and global value chains: a story of winners and losers

📥  Business and the labour market, Economics, Education

Professor Hugh Lauder is Professor of Education and Political Economy at the University of Bath

Two weeks ago, the OECD launched the newest instalment in its biennial Skills Outlook series, which focusses on the impact of skills and education on economies and employment in OECD countries.

OECD Skills Outlook 2017: Skills and Global Value Chains broke new ground for the OECD in that it reported the relationship of skills to the global economy. This is the first time that the organisation has extended its analysis of skills to the global economy: in the past, it has focussed on national competitiveness through education and skills, but here the focus was on the role of skills in the development of global value chains.

OECD1

 

There were two key messages to the report: firstly, that a skilled workforce enables countries to compete for work in global value chains and, secondly, that there would be winners and losers in that competition – workers who are less skilled, in particular, are likely to remain excluded from the global economy.

Policy challenges

There are a number of problems that national governments have to confront when thinking of policies that relate to global value chains. The primary problem is that, in many sectors, global value chains are footloose: transnational companies will always shift their supply chains to wherever they can find a cost advantage – and where technology can be substituted for workers, however skilled, technology appears to win. Two good examples of this come from the manufacturing and service sectors, respectively. First, much of East Asian manufacturing is based on low-skilled assembly work – but with the advent of smart factories, workers are no longer needed; they can be replaced by robots. The announcement by Adidas that it will establish such a smart factory in Germany is a straw in the wind, and will raise fundamental problems for the strategies of developing countries. An example from the service sector concerns the discovery work that was once undertaken in London and New York by young lawyers, who were paid high salaries. That work was subsequently offshored to lawyers in developing countries where it could be done at a fraction of the price the same work would cost in Western capitals. Now, that work is undertaken by the use of algorithms.

As Phil Brown, David Ashton and I argued in our book The Global Auction, employers do not wish to pay for brain power and skill if they do not have to; it is too expensive. The error here is to believe that we live in a knowledge economy, when it is actually knowledge capitalism that drives the strategies of cost reduction.

This is not to reject the importance of education and skills, which we should avoid doing for two reasons. Firstly, without skilled workers, small and medium enterprises that may become corporations in the future will not be able to enter the market. In emphasising skills, therefore, we need to build industrial policies within countries that enable fledgling enterprises to flourish. Skills may also be needed as an insurance policy, however, a form of resilience when transnational companies decamp from one country to another in the search for cost advantage, or when new forms of technology make firms unviable. Costa Rica developed a skilled workforce to attract Intel, for example, and for a while the strategy worked – but then Intel exited to Vietnam, where labour was cheaper. In Finland new technology from Microsoft made the Nokia phone redundant, with resultant job losses – although the company is now seeking a comeback. In both cases, the host countries were hit hard. What we don’t know is whether having skilled workforces will enable these economies to be resilient in recovering from these meteorite-like shocks.

A timely report

The OECD’s new report has involved considerable cooperation between Andreas Schleicher, Director of Education and Skills, and Andy Wyckoff, Director of Science, Technology and Innovation – as well as their respective teams. The extension of skills analysis to global value chains is a major breakthrough for the OECD and for the international research and policy community.

The report was launched at an event in London with support from the Institute for Policy Research (IPR), and included a panel discussion in which I participated, alongside Torsten Bell of the Resolution Foundation, Toni Fazaeli of the Institute for Learning and both Wyckoff and Schleicher. It was a productive discussion, and touched on many of the points raised above.

But there were some important concerns that weren’t discussed explicitly at the launch, although their shadows loomed large over the debate. The political implications of the role of global value chains are a crucial consideration, particularly in the context of Brexit and the rise of nationalist parties across the Western world. It is not only the attempts of transnational companies to cut costs that pose a threat to policymakers: economic nationalism can do the same, and a hard Brexit may see the breakup of global value chains in motor manufacturing as well as in services.

In this respect, the OECD report could not be more timely. To undertake research of such complexity required an organisation with the resources of the OECD and this report is, therefore, to be welcomed.

You can read more about the launch event in the IPR's coverage here, and the OECD report can be downloaded here.

 

Spring Budget 2017: T-levels, apprenticeships and industrial strategy

📥  Business and the labour market, Economics, Education

Dr Felicia Fai is Senior Lecturer in Business Economics and Director of Widening Participation and Outreach at the University of Bath's School of Management

In many ways, there were no real surprises in the Spring Budget, with many of the initiatives having been announced in the Autumn Statement, which focussed more specifically on science and industry. The point of greatest novelty (although still not a complete surprise) was the focus on the longer-term future pipeline of talent in the workforce and the need to raise productivity in the UK. There is some attempt on the government’s part to more comprehensively approach the issue of the future workforce, and to provide an alternative but equally prestigious and valuable route into education and careers to the standard ‘A-level + Bachelor’s degree’ route. The government will create the ‘T-level’ for 16-19 year-olds, in which formal training hours will be increased by 50% over existing options and include a minimum 3-month placement in industry to ensure school leavers are ‘workplace ready’. This is in addition to other vocational initiatives that the previous parliament established, such as the creation of 1,000 degree apprenticeships, plus implementation of the new apprenticeship levy that will commence in April 2017. Beyond the 16-19 T-levels, loans are to be made available on a similar basis to existing support for university degrees to study at the new institutes and technical colleges the government intends to create. Further, at the highest educational levels, there is £300m funding support for 1,000 PhDs across all STEM areas.

vocation

 

The announcement of T-levels and a commitment to apprenticeships is welcome. The UK has long suffered from having too few clear and well-recognised (by both applicants and employers) alternative routes into skilled and high-paid work except for university degrees – and it is clear to me, as a university lecturer, that a degree structure and the forms of learning and knowledge testing used as standard forms of engagement in degree-level programmes do not suit all learners; nor is it always the most appropriate way to develop skills. As a senior admissions tutor for undergraduate programmes, I consider applications from mature applicants in their early- to mid-20s who state that, whilst they have progressed in their careers since leaving school, they now realise their ability to advance in their careers further is blocked by not having a formally recognised degree. I do wonder whether the decision to attend HE is the right one for them.

Sometimes, people are not ready emotionally or intellectually to deal with university-level education at 18, so choose not to apply for entry straight after school. Coming in later would seem appropriate, and we welcome them as they are more likely to succeed now than they would have been had they tried to come earlier. Others may have avoided university because they recognised early on that they did not want to, or were not able to, think in the particular ways in which we require students to think in order to achieve good marks in academic institutions driven by a strong research culture. For example, a recurring weakness in exam performance is the failure of students to answer the specifics of the question set – as opposed to displaying the general breadth of their knowledge – and an ability to make connections between the content they experienced on one subject and the content in the subject the specific exam is testing. The latter is looked for more generally in coursework or dissertations, but is not always appropriate in examination settings. There have been times in my career when I have seen the promise of an individual in the workplace setting and known that they will be a truly amazing employee, manager or future leader precisely because of their ability to see the ‘bigger picture’; yet, in the classroom and in written coursework and exams, they do not reveal the academic skills and precision that would get them the marks which signal their potential. Being ‘book smart’ is different to ‘street smart’, but our current system of HE is highly skewed towards the former.

The T-levels will offer a more streamlined pathway, with focused routes into 15 different areas, and have the potential to offer a different and equally valued and prestigious route into a career; but will their potential be realised? Leaving specific content aside, one of the key problems is the low profile, poor advertising and opacity associated with alternative routes into a career. The most well-established path is GCSEs, A-levels then university degrees. Chancellor Philip Hammond noted in his speech that 13,000 vocational and technical qualifications exist. How many of these are well-recognised and valued by HE institutions and employers? How much advice can cash-strapped schools and colleges provide on these qualifications to individuals looking for a career path that does not involve attending university for a bachelor’s degree? Arguably among the most well-established and widely recognised vocational qualifications are HNDs, NVQs and BTECs; how will these fair with the introduction of the new T-levels? Will the T-levels be a complementary or alternative offering to these existing qualifications, and, again, how will under-funded schools and FE colleges cope in terms of resourcing them? Whilst the Chancellor is keen to maintain choice, in reality will this mean cutting back on the provision of existing vocational qualifications?

Even if there could be a smooth introduction for T-levels, there is the question of how they would lead to more training and qualifications. One can envisage that T-levels could lead either directly to an apprenticeship, or to a place on one of the new degree apprenticeships that should emerge in the next few years, much like A-levels are the most commonly accepted way of accessing bachelor degree programmes. However, again, the pathway of this route is not as smooth as the one into existing degrees.

Whilst the government proudly announces its claim about 1,000 new degree apprenticeships being formed, the system that alerts people to these opportunities is hard to find and tricky to navigate. The chances of a person finding the right degree apprenticeship for them is remote – at least without a significant personal investment of time and research effort trolling through university or employer websites. The UCAS website provides basic information about apprenticeships, questions to consider and how to apply. It also lists employers with current schemes and links through to the government’s apprenticeship website – but from there the application process proceeds on a case-by-case basis because applicants are considered to be applying for jobs. Degree apprenticeships should grow quickly in the next few years, given the compulsory levy, and assessing these entirely on a case-by case basis is likely to become increasingly bureaucratic and cumbersome for both the employer and the university partner – who both need to be satisfied the applicant meets their respective requirements. The T-levels, alongside the better-recognised and better-established vocational qualifications, could be used as publicly available entry criteria by the universities providing the degree apprenticeships on the UCAS website. The applications should be made through an expanded UCAS service so that one application could be sent to multiple degree apprenticeships. From there, universities could select applicants who meet their academic requirements in a first round of consideration, and then this subset could be forwarded for consideration by the employing organisational partner in a second stage of the selection process; together, these actors could make a decision as to the suitability of the applicant. This would streamline the process for applicants, universities and employers alike, reducing the opacity and confusion of a currently complex pathway between school, post-16-19, further education, higher education and beyond.

The announcement of T-levels is an interesting proposal, and a welcome one at that – but there needs to be deeper and more systemic policy-thinking about how its introduction and implementation, as well as that of the apprenticeship levy, will lead to a greater proportion of the future workforce having the requisite skills to raise UK productivity.

 

How could a global public database help to tackle corporate tax avoidance?

📥  Data, politics and policy, Economics

Dr Jonathan Gray is Prize Fellow at the IPR. This post is based on a newly published research report which he contributed to.

The multinational corporation has become one of the most powerful and influential forms of economic organisation in the modern world. Emerging at the bleeding edge of colonial expansion in the seventeenth century, entities such as the Dutch and British East India Companies required novel kinds of legal, political, economic and administrative work to hold their sprawling networks of people, objects, resources, activities and information together across borders. Today it is estimated that over two thirds of the world’s biggest economic entities are corporations rather than countries.

shutterstock_403395004 [Converted]

 

Our lives are permeated by and entangled with the activities and fruits of these multinationals. We are surrounded by their products, technologies, platforms, apps, logos, retailers, advertisements, publications, packaging, supply chains, infrastructures, furnishings and fashions. In many countries they have assumed the task of supplying societies with water, food, heat, clothing, transport, electricity, connectivity, information, entertainment and sociality. We carry their trackers and technologies in our pockets and on our screens. They provide us not only with luxuries and frivolities, but the means to get by and to flourish as human beings in the contemporary world. They guide us through our lives, both figuratively and literally. The rise of new technologies means that corporations may often have more data about us than states do – and more data than we have about ourselves.

Pasted Graphic 1

Shipyard of the Dutch East India Company in Amsterdam, 1750. Wikipedia.

But what do we know about them? What are these multinational entities – and where are they? What do they bring together? What role do they play in our economies and societies? Are their tax contributions commensurate with their profits and activities? Where should we look to inform legal, economic and policy measures to shape their activities for the benefit of society, not just shareholders?  At the moment these questions are surprisingly difficult to answer – at least in part due to a lack of publicly available information. We are currently on the brink of a number of important policy decisions which will have a lasting effect on what we are able to know and how we are able to respond to these mysterious multinational giants.A wave of high-profile public controversies, mobilisations and interventions around the tax affairs of multinationals followed in the wake of the 2007-2008 financial crisis. Tax justice and anti-austerity activists have occupied high street stores in order to protest multinational tax avoidance. A group of local traders in Wales sought to move their town offshore in order to publicise and critique the legal and accountancy practices used by multinationals. One artist issued fake certificates of incorporation for Cayman Island companies to highlight the social costs of tax avoidance. Corporate tax avoidance came to epitomise economic globalisation with an absence of corresponding democratic societal controls.

Screenshot 2017-02-13 21.03.13

Image from report on IKEA’s tax planning strategies. Greens/EFA Group in European Parliament.

This public concern after the crisis prompted a succession of projects from various transnational groups and institutions. The then-G8 and G20 committed to reducing the “misalignment” between the activities and profits of multinationals. The G20 tasked the OECD with launching an initiative dedicated to tackling tax “Base Erosion and Profit Shifting” (BEPS). The OECD BEPS project surfaced different ways of understanding and accounting for multinational companies – including questions such as what they are, where they are, how to calculate where they should pay money, and by whom they should be governed.

For example, many industry associations, companies, institutions and audit firms advocated sticking to the “arms length principle” which would treat multinationals as a group of effectively independent legal entities. On the other hand, civil society groups and researchers called for “unitary taxation”, which would treat multinationals as a single entity with operations in multiple countries. The consultation also raised questions about the governance of transnational tax policy, with some groups arguing that responsibility should shift from the OECD to the United Nations to ensure that all countries have a say – especially those in the Global South.

While many civil society actors highlighted the shortcomings and limitations of the OECD BEPS process, they acknowledged that one of its main coups was to obtain global institutional recognition for a proposal which had central to the “tax justice” agenda for the previous decade: “Country by Country Reporting” (CBCR), which would require multinationals to produce comprehensive, global reports on their economic activities and tax contributions, broken down by country. But there was one major drawback: it was suggested that this information should be shared between tax authorities, rather than being made public. Since the release of the the OECD BEPS final reports in 2015, a loose-knit network of campaigners have been busy working to make this data public.

Today we are publishing a new research report looking at the current state and future prospects of a global database on the economic activities and tax contributions of multinationals – including who might use it and how, what it could and should contain, the extent to which one could already start building such a database using publicly available sources, and next steps for policy, advocacy and technical work. It also highlights what is involved in making of data about multinationals, including social and political processes of classification and standardisation that this data depends on.

Pasted Graphic

Exhibition of Paolo Cirio’s “Loophole for All” in Basel, 2015. Paolo Cirio.

The report reviews several public sources of CBCR data – including from legislation introduced in the wake of the financial crisis. Under the Trump administration, the US is currently in the process of repealing and dismantling key parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including Section 1504 on transparency in the extractive industry, which Oxfam recently described as the “brutal loss of 10 years of work”. Some of the best available public CBCR data is generated as a result of the European Capital Requirements Directive IV (CRD IV), which gives us an unprecedented (albeit often imperfect) series of snapshots of multinational financial institutions with operations in Europe.

The longer-term dream for many is a global public database housed at the United Nations, but until this is realised civil society groups may build their own. As well as being used as an informational resource in itself, such a database could be seen as form of “data activism” to change what public institutions count – taking a cue from citizen and civil society data projects to take measure of issues they care about from migrant deaths to police killings, literacy rates, water access or fracking pollution.

A civil society database could play another important role: it could be a means to facilitate the assembly and coordination of different actors who share an interest in the economic activities of multinationals. It would thus be not only a source of information, but also a mechanism for organisation – allowing journalists, researchers, civil society organisations and others to collaborate around the collection, verification, analysis and interpretation of this data. In parallel to ongoing campaigns for public data, a civil society database could thus be viewed as a kind of democratic experiment opening up space for public engagement, deliberation and imagination around how the global economy is organised, and how it might be organised differently.

In the face of an onslaught of nationalist challenges to the political and economic world-making projects of the previous century – not least through the “neoliberal protectionism” of the Trump administration – supporting the development of transnational democratic publics with an interest in understanding and responding to some of the world’s biggest economic actors is surely an urgent task.

This piece also appeared on openDemocracy.

UK Industrial Strategy – Mirage or Destination?

📥  Economics, UK politics

Dr Felicia Fai is Senior Lecturer in Business Economics and Director of Widening Participation and Outreach at the University of Bath's School of Management

The UK’s Industrial strategy green paper was released on Monday 23rd January 2017. It is founded on 10 pillars that the government predicts will drive productivity and balanced economic growth – but its reception has been mixed, with some business leaders giving a lukewarm and others a more resounding welcome.

A dirty term

To reiterate what Carolyn Fairbairn, Director-General of the CBI said, it is better to have an industrial strategy than not, so it is good to see the UK government explicitly embracing an industrial strategy – something of a dirty term in previous governments of the last 3 decades, among whom a non-interventionist philosophy has prevailed. If we look at emerging economy challengers such as China and India, however, it is common to have 5-year plans and to prioritise the industries that will receive investment and support – automotive and aerospace, pharmaceuticals, etc. Furthermore, as an academic working out of a Management School, I know that no organisation operates without a strategy; thus it seems strange to observe previous governments’ aversion to the term.

oasismall

 

The reluctance to embrace industrial strategy proceeds, in the case of the UK, from having been burnt by such an approach in the 1970s – when the government attempted to ‘pick winners’ and failed miserably. However, modern academic definitions of the policies arising out of industrial strategy are much broader and more comprehensive:

“[Industrial strategy] comprises policies affecting ‘‘infant industry’’ support of various kinds, but also trade policies, science and technology policies, public procurement, policies affecting foreign direct investments, intellectual property rights, and the allocation of financial resources. Industrial policies, in this broad sense, come together with processes of ‘‘institutional engineering’’ shaping the very nature of the economic actors, the market mechanisms and rules under which they operate, and the boundaries between what is governed by market transactions, and what is not”[1].

This contrasts with a definition provided in a recent House of Commons Library Briefing Paper[2]:

“’Industrial strategy’ refers to government intervention which seeks to support or develop some industries to enhance economic growth”.

The latter definition appears to prevail in the minds of the public, and explains the rather mixed reception of the green paper. If our understanding of the purpose of industrial strategy is to support some industries, then it is unsurprising that industries which are specifically mentioned – such as the creative industries and aerospace – have welcomed it, whereas others perceive the green paper as merely reiterating what the government is already doing with little added that is new. It has also been criticised for being a broad, discursive paper with little insightful direction. To be fair, it is a green paper, not a white one – and in that sense fulfils its purpose: to engage discussion and seek feedback from those potentially affected by its proposals, and to inform future policy formulations. However, it seems that the government has moved to a definition of industrial strategy that is closer to the broader definition. What if we interpret its breadth and apparent reiteration of existing policies and initiatives as deliberate? How do we assess it then?

Safeguarding innovation

As an academic with a background in evolutionary economics and an interest in the role of systems, the fact that much of the content looks familiar is comforting to me, not disappointing. Most innovation is incremental rather than radical; knowledge progresses cumulatively. Radical shifts in policy are disturbing to industry, not reassuring (although maintaining stubborn adherence to an inappropriate path would be irresponsible). The ‘exogenous shock’ is of course Brexit, which does require a strong response from UK industries who look to the government for guidance. The steer the government has given in its proposed industrial strategy is not radical in itself, but the methods by which it will be pursued are more multifaceted than they have been in the past two decades – and their delineation clearer.

The green paper might be called ‘broad’, but a kinder interpretation is that it is seeking to be ‘comprehensive’. Much of it is encouraging. It continues with the horizontal support that has proven popular in the last three decades (albeit with some new initiatives – the Industrial Strategy Challenge Fund, for example), potentially allowing all industries to benefit. Importantly, however, the paper also signals a willingness to re-engage in vertical support for some industries, so far identified as ultra-low emission vehicles, life sciences, industrial digitalisation, nuclear energy and the creative industries. The paper recognises the need to increase productivity and the quality of human resources with improved basic education in STEM and more business-led vocational routes. It also recognises the role of capital in raising productivity – both physical capital investment in infrastructure for transport (rail, road and air) and digital infrastructure. Further, in its identification of the need for ‘patient capital’, it acknowledges the importance of financial infrastructure – particularly that targeted towards the commercialisation stage of innovation processes.

While the UK has always been a great trading nation, the pillar ‘encouraging trade and inward investment’ takes on particular significance in the Brexit and post-Brexit era. Addressing the gap in basic skills to raise productivity, thereby driving our comparative advantages in science and innovation, is critical if we are to ensure that our capabilities are augmented to the point that they compensate for any higher costs companies might face when trading from the UK with the EU in their international value chains. In this way, the UK can remain attractive as a location for inward direct investment. Simultaneously, the government is using industrial strategy as a tool to address the underlying reasons behind Brexit – inequity in wealth creation and disparities in regional growth. The pillars on ‘developing skills’, ‘upgrading infrastructure’ and particularly ‘driving growth across the whole country’ resonate with earlier rhetoric to improve the UK economy for all and achieve more balanced growth across regions.

The move to devolved regions makes sense. Regional economic geographers and scholars of innovative clusters all find the formation of relationships and knowledge creation, diffusion and transfer operate best when there is physical proximity between different organisational players. The emphasis on regions also reflects influences from EU policy based on the SMART specialisation of regions. Having conducted the first Science and Innovation Audit in 2016, the government’s understanding of the industrial basis upon which various UK regions might build industrial strength is much clearer and the variance highlights why a one-size-fits-all approach will not work.

At the same time, clusters – when completely localised – can lose their energy, inspiration and relevance. They need to be connected to other clusters and the wider global economy. These connections can be created through the presence of multinationals in the economy. These are often, but not always, large corporates – academic work on international new ventures and born-global companies attest to the rise of technology-based SMEs which operate globally. Therefore, the sections in the green paper stressing the importance of anchor organisations and the supporting role they play, the importance of supporting start-up businesses, and, crucially, the importance of encouraging trade and inward investment are integral. Anchor firms have the capability to embed local SMEs into their global supply chains. The small firms can be supported by anchor firms through their growth stages via mentoring support, and their financial security ensured through procurement contracts – but this requires the UK to have strong SMEs with ambitions to be international in the first place.

Policy to practice

Nevertheless, as managers are well aware, strategy – while useful as a broad plan of action – is one thing, its implementation and the fulfilment of strategic objectives another. So whilst the outline proposals for UK industrial strategy are reassuring, it is still an open question as to whether this strategy will come to fruition.

In part, it depends on how the 10 identified pillars will influence the UK, as well as its regions and industries, as systems (national, regional and sectoral innovation systems). In the evolutionary economic perspective, systems consist of both ‘nodes’ and, critically, their relationships. Indeed, within the green paper there are lots of ‘nodes’ – the involvement of private firms (large and small, manufacturing and service based), universities, colleges and schools, government departments and supporting institutions. They are each being asked to undertake multiple tasks, roles and responsibilities which may be challenging for some. The role of relationships between the nodes seems to be recognised in several ways. For example, creating the right institutional support that helps the sharing of knowledge, establishing contacts for businesses and representing their collective views, encouraging organisations to come together to seek support from the government to ease the regulatory environment and so on.

The importance of relationships is also reflected in the green paper’s emphasis on the regions, and this is perhaps the greatest novelty in the proposed industrial strategy. Whilst we know the benefits and potential pitfalls of localised economic activity from regional economic geography and innovative cluster research, these agglomerated effects have emerged rather organically. How to purposively foment these same changes by implementing a place-based strategy within devolved government is a new challenge of which the UK has little experience beyond the level of the four nations within the UK. You can create the institutions to support the growth of industries, small businesses and regions, but whether they operate effectively to raise productivity and economic growth is another matter.

Financial commitment from the government will also affect its ability to deliver the strategy. Whilst big announcements about increased investment for UK science and technology and the establishment of various funds for horizontal support are welcome, local governments and LEPs face tight budgetary constraints – so although it would be politically popular, giving greater autonomy at the regional level might put additional strain on resources.

Another significant challenge is the timeframe. To implement this proposed industrial strategy requires a long-term commitment from the government – and successive governments. Political challengers to the incumbent government may not look substantial at present, but there must be a degree of continued support for these various initiatives in future.

Overall, this green paper is a stage in a process. The government appears to be genuinely seeking a coherent and consistent strategy which will led to the formulation of a set of policies that are designed to improve the performance of the economy. Time will tell whether this stronger embracing of industrial strategy is any more successful than its predecessors.

The green paper is open for consultation until 17 April 2017.

[1] Cimoli, M. Dosi, G. and Stiglitz, J. E. 2009. Industrial Policy and Development: The Political Economy of Capabilities Accumulation, Oxford, Oxford University Press, pp1-2.

[2] Rhodes, C. (2016) “Industrial strategy”, House of Commons Library Briefing Paper, Number 07682, 14 October 2016.

 

Abolishing the Autumn Statement, Sticking with the Treasury View

📥  Economics

If the Autumn Statement was meant to deliver on the Prime Minister’s Chamberlainite ambitions for improving working class living standards while intervening to restructure the economy towards higher productivity, investment and exports, it has disappointed. Post-Brexit referendum downgrades to growth forecasts have increased borrowing and forced the Chancellor to push deficit reduction further out into the future. But there was very little in the way of extra support for low-income families and no increase in planned public spending on the NHS, social care or childcare. Meanwhile, tax changes – increases in the Personal Tax Allowance and higher rate income tax threshold – favour households in the top half of the income distribution.

shutterstock_308291120

 

The new National Productivity Investment Fund is the biggest spending item in the Autumn Statement, but at less than an average £5 billion a year, it is small beer when compared to the scale of the challenges the UK faces. The UK’s business investment is falling, productivity is catastrophically low, and we are not paying our way in the world. Huge regional disparities persist.

This is what the Office for Budget Responsibility report has to say on a number of these key issues. On business investment:

“The latest data show that business investment in the first half of 2016 was down 1.4 per cent on a year earlier. We expect that weakness to continue, with heightened uncertainty following the EU referendum causing investment to fall further in the second half of 2016 and for growth to remain subdued in 2017. Overall, we expect business investment to fall 2.2 per cent in 2016 and 0.3 per cent in 2017, before annual growth returns in 2018.”

On productivity:

“In March we revised down our productivity growth assumption, as we put slightly more weight on the post-crisis period of weak productivity growth relative to the pre-crisis historical average. Nothing in the recent data would lead us to change that judgement about the rate of trend productivity growth that the economy can ultimately return to. But we do expect uncertainty to reduce investment and productivity growth in the run-up to – and in the transition phase after – the UK’s exit from the EU. We have therefore made a further downward adjustment to trend productivity growth over the next five years.”

On the UK’s twin deficits:

“the concurrence of large fiscal and current account deficits has been a feature of the UK economy in recent years. This means that overseas investors are ultimately – if not directly – financing the UK’s budget deficit. This could pose risks if those investors’ confidence in the UK economy was damaged by uncertainty or changes in policy. That could lead to a sharper fall in sterling and a more abrupt demand-led narrowing of the current account deficit”

On household deficits:

“The persistence of a household deficit of the magnitude implied by our forecast would be unprecedented in the latest available historical data, which extend back to 1987. Other datasets extending back to 1963 also suggest little evidence of large and persistent household deficits, with the household surplus negative in only one year between 1963 and 1987. A household deficit of the size and persistence we expect over the forecast period might be considered consistent with the unprecedented scale of the fiscal consolidation and the extremely accommodative monetary policy upon which our forecast is conditioned. It nevertheless demonstrates that the adjustment to the fiscal consolidation is subject to very significant uncertainty, and alternative adjustment paths are quite possible.”

The Brexit vote could have led to a more substantial reckoning with these persistent weaknesses in the British economy. So far, it has not done so. A slow decline, rather than a sudden crisis, means that dominant orthodoxies in the Treasury have not been dislodged. The Chancellor may have abolished the Autumn Statement, but he has not changed the Treasury view.

 

Three Facts about Debt and Deficits

📥  Economics

Professor Roger Farmer is Distinguished Professor of Economics at the University of California, Los Angeles (UCLA) and Research Director at the National Institute for Economic and Social Research (NIESR). 

The Chancellor of the Exchequer, Philip Hammond, will present his Autumn Statement to Parliament on Wednesday. In the heated debate over austerity, this piece offers three facts about debt and deficits which, I hope, will help shed light on the issues he will face.

shutterstock_91129013

 

Fact Number 1: UK Public Sector Debt is Not Large

The UK public debt is equal to £1.7 trillion and it is increasing at a rate of £5,170 per second (National Debt Clock UK). But although government debt is increasing at a rapid rate, that fact does not pose a threat to the solvency of the UK Treasury.  Government debt should not be measured in pounds; it should be measured in GDPs. When GDP is high, so are tax revenues, and so is the ability of the government to repay.

Chart 1 shows the ratio of government debt to GDP for every year beginning in 1692. Notably, this ratio has been as high as 250% – during the Napoleonic War – and almost as high again at the end of WWII.

Chart 1: UK Public Sector Debt

Chart 1: UK Public Sector Debt

Fact Number 2: Governments Do Not Repay Debt: They Grow Out of It

Chart 2 reproduces the debt-to-GDP ratio from Chart 1, but the time scale is limited to the years from 1920 to 2015.  Public sector debt is the upper solid line, measured on the right scale as a percentage of GDP.  The line marked by circles, measured on the left scale, also as a percentage of GDP, is the value of the public sector deficit, smoothed by averaging adjacent values. A positive number indicates that the public sector spent more than it received in revenue.

On average, the public sector borrowed more in every year from 1920 to 2015. Nevertheless, the debt-to-GDP ratio fell continuously from the end of WWII to the early noughties. The public sector borrowed more – but its debt, properly measured, fell.

Chart 2: Debt, Deficits and Interest Rates Net of NGDP Growth

Chart 2: Debt, Deficits and Interest Rates Net of NGDP Growth

George Osborne, former Chancellor of the Exchequer, planned to bring the government budget into surplus by the year 2020. That plan represented a break from UK post-WWII policy. A surplus of public sector borrowing is neither necessary nor sufficient to reduce government debt when debt is measured as a fraction of the government’s ability to repay.

Fact Number 3: Government Debt Should Not Be Zero. Ever!

Nation states borrow to provide public capital: rail networks, road systems, airports and bridges, for example. These are examples of large-expenditure items that are more efficiently provided by government than by private companies.

The benefits of public capital expenditures are enjoyed not only by the current generation of people, who must sacrifice consumption to pay for them, but also by future generations who will travel on the rail networks, drive on the roads, fly to and from the airports and drive over the bridges that were built by previous generations. Interest on the government debt is a payment from current taxpayers, who enjoy the fruits of public capital, to past generations, who sacrificed consumption to provide that capital.

To maintain the roads, railways, airports and bridges, the government must continue to invest in public infrastructure. And public investment should be financed by borrowing, not from current tax revenues.

Chart 3 shows that investment in public infrastructure was, on average, equal to 4.3% of GDP in the period from 1948 through 1983. It has since fallen to 1.6% of GDP. There is a strong case to be made for increasing investment in public infrastructure. First, the public capital that was constructed in the post WWII period must be maintained in order to allow the private sector to function effectively. Second, there is a strong case for the construction of new public infrastructure to promote and facilitate future private sector growth.

Chart 3: Public Investment as a Percentage of GDP

Chart 3: Public Investment as a Percentage of GDP

The debt raised by a private sector company should be strictly less than the value of assets, broadly defined. That principle does not apply to a nation state. Even if government provided no capital services, the value of its assets or liabilities should not be zero except by chance.

National treasuries have the power to transfer resources from one generation to another. By buying and selling assets in the private markets, government creates opportunities for those of us alive today to transfer resources to or from those who are yet to be born. If government issues less debt than the value of public capital, there will be an implicit transfer from current to future generations. If it owns more debt, the implicit transfer is in the other direction.

The optimal value of debt, relative to public capital, is a political decision. Public economics suggests that the welfare of the average citizen will be greatest when the growth rate is equal to the interest rate. Economists call that principle the golden rule. Democratic societies may, or may not, choose to follow the golden rule. Whatever principle the government does choose to fund its expenditure, the optimal value of public sector borrowing will not be zero, except by chance.

Recommendations for the Autumn Statement

What can we learn from these three facts and what should we look for in the Autumn statement?

We should not be too concerned about a debt to GDP level approaching 100%. We have been there before and we will go there again.  We should be concerned that public spending has shifted away from investment on the capital account and towards the current account.

Economics has the reputation of being the dismal science. It is a dismal reality that there are diminishing returns to the prolongation of life. As we invest an increasing share of resources into advanced drugs and new treatments, the additional benefits, measured in extra weeks of life, will shrink.

As the population ages and life expectancy increases there will be an increasing burden on pensions and the National Health Service. These expenditures are predictable and can be planned for by stabilising the deficit on the current account either through limits on expenditures or through increased taxes. Our politicians must choose how much, as a society, we spend on health. And this choice must be presented to the electorate.

Capital account expenditures should be separated from the current account and increased back to 1960s levels. Work by Paul Romer, the new Chief Economist of the World Bank, suggests that these expenditures have the potential to pay for themselves. He advocates the creation of new charter cities and the expansion of existing cities. The last coalition government’s proposal to create a ‘Northern Powerhouse’ is an example of an investment of this kind.

There are also strong economic arguments to consider education expenditures at all levels – primary, secondary and tertiary – to be a capital expenditure. Education is an investment in the British people from which we all gain. But as with all capital expenditures, investment in education should be targeted towards the areas that have the highest potential for social impact.

 

On November 22, Professor Farmer will speak at an IPR public lecture entitled Prosperity for All: How to Prevent Financial Crises.

This post originally appeared on the NIESR blog.

 

 

In search of the green economy

📥  Economics, Energy and environmental policy

Professor Ricardo García Mira is Professor of Social and Environmental Psychology at the University of A Coruña in Spain, and Visiting Professor at the IPR.

On 12 December 2015, the United Nations Framework Convention on Climate Change adopted the Paris Agreement – a first-of-its-kind deal that bound member states to measures for climate neutrality in this century.

Some steps have already been taken as part of what we might call the institutional response to this challenge of sustainability; promoting environmental education programmes, holding awareness campaigns and providing means for accessing information are all positive measures. But are people taking on the challenge implied by living in a more sustainable way to fight against climate change? What changes should we introduce into our economic models to encourage them, and with what impact on our own lives? And are we taking involvement and cooperation seriously?

path3

 

Experts say that human responses to the environment are inconsistent with growing ecological awareness and the general acknowledgement of the anthropogenic origin of climate change. The best way to deal with this situation is not clear, but what is clear is that people, as individuals, need to undertake sustainable lifestyles. This is a challenge, because changing to a new lifestyle requires drastic changes in our daily conduct.

Although there is little general awareness of how serious and urgent environmental change is, there have been some attempts to head towards more sustainable lifestyles, and a good number of organisations are working in that direction. These are sustainable initiatives, starting up social innovation projects which, on numerous occasions, have taken the lead over governments as far as identifying the problem is concerned. They involve part of the population in the initiative, respond to the challenge of climate change with small-scale impacts, and ultimately facilitate the survival of sustainable economies in fields related to mobility, nutrition, construction, the use of energy and the reduction or rationalisation of consumerism, to mention but a few. The analysis of different initiatives for sustainable lifestyles in Europe today shows us that, even though there is no collective response to taking on climate change, there is evidence that it is possible to move towards a more sustainable economy in Europe.

The good life

The challenge of real change in behaviour and lifestyles depends on overcoming the deep-rooted conceptions that we still hold about what success, self-fulfilment and consumption are. Attaining a sustainable lifestyle demands an economic model that is truly different from the current, unsustainable models. Using a bicycle instead of a luxury car or living in a smaller house requires us to investigate the complex interactions between psychological, economic, social and technological factors that promote or hinder the adoption of sustainable lifestyles and the transition to an environmentally responsible social economy. A macroeconomic focus on the study of lifestyles should contemplate the way these sustainable but small lifestyle initiatives can be scaled up to a national and even global level, and what needs changing in our economy so that it can become ecological and sustainable.

If we take climate change seriously we will no doubt have to reduce our general level of consumption, but we do not have to see this as a sacrifice. Research results are showing that Europeans are feeling a greater and greater sensation of dissatisfaction with current consumer-based lifestyles and the accelerated rhythm of modern life. In fact, research shows that we experience a greater sensation of welfare when we enjoy more time for ourselves and when we can spend it with others in meaningful activities; in general, we are happier when we withdraw from everything that is related to a materialist understanding of what the good life means.

Culture is an important factor in this problem too. In our concept of what the good life means, we make consumerism the equivalent of the good life and happiness, and our economy is based on this concept. However, people are realising more and more that the way we live is, in many ways, unsustainable – not just from the perspective of the environment, but also because we feel more and more distant and alone, or that our lives lack meaning. Because of this, we must try to develop and assess a global model that can explain changes in lifestyle, while simultaneously testing the efficiency of different routes of transition to a greener and more environmentally sustainable economy.

Possible economies

The University of A Coruña, in partnership with the University of Bath, endeavours to unravel the multifactorial problem of using economic policy to influence behaviour in the GLAMURS (Green Lifestyles, Alternative Models and Scaling towards Regional Sustainability) project. The overall purpose of GLAMURS is the study of the different economic and behavioural models experts have defined as the most conducive to the development of specific policies and combinations of policies to guarantee sustainable development. Our results will furnish recommendations not only for the European Commission and other levels of policymaking, but also for professionals who work in sustainable initiatives and for people interested in living a more sustainable life.

Three possible economies are being analysed by this consortium of eleven European universities in the context of climate change. The first point of analysis starts with the evaluation of a lifestyle based on what has been called the “green economy”, focused on the ecoefficiency of an economic and production system which orients its action towards producing and consuming in a more responsible manner within a model that respects the responsible and efficient use and management of environmental resources.

Secondly, the model of “degrowth” is analysed; it is possibly the least popular model as it requires a reduction in consumption, which today is associated with social and economic status. According to this approach, it is not necessary to grow continuously. Human beings can live and efficiently distribute their resources by reducing production and consumption, which would alleviate environmental impact and make lifestyle more sustainable and closer to nature.

Finally, a third focal point is based on “growth anchored in the community”, the idea of generating the necessary level of self-sufficiency in a community to become sustainable in terms of emissions, production and the consumption of resources. This model can be adapted to the characteristics and needs of various communities, which in a participative way would responsibly manage their own resources.

Individual behaviour, then, interacts with and is dependent upon other systems in society, such as political, economic and cultural systems. Part of our research includes an analysis of how people use their time, and also the role that identity and social rules on responsible environmental behaviour play therein. Identities, based on feelings of belonging to specific social groups, are also developed through observing our own behaviour, and constitute that part of what makes us unique – in addition to being a driving force for behaviour when we define ourselves as the kind of person who acts in favour of the environment. It is also important for people to be aware of the situations in which their choices are sustainable, how taking choices in awareness contributes to the construction of a personal identity which includes seeing ourselves as in favour of the environment, which in turn leads to more sustainable lifestyle choices.