Sunday 21 October 2012

A bad moon rising: Chinese growth and baking

This blog post is posted in celebration of the Chinese Mid-Autumn festival (I am a couple of weeks late, I know).  Below I put my own take on the now predominant view that China’s growth story will continue unabated.

Nb. This post and its comments were removed for a while so I have posted the comments at the bottom of the blog

Ingredients

For the skin (exclusive institutions): 
  •  An authoritarian government 
  •  State controlled enterprise
  •  A weak judicial system
  • A good sprinkling of corruption 
For the filling (demography):
  • A one child policy
For the glaze (rote education):

  • An overarching centralised education system
  • A history of standardized tests and rote learning
  • Plenty of rising demand for university places
                The Chinese moon cake is a specialty given to friends and relatives at the time of the Mid-Autumn festival. This celebration commemorates Chang’e and Houyi who were forced by fate to inhabit the Moon and the Earth respectively. On the night of the mid-Autumn festival however, Houyi is able to visit his wife, and it is for that reason that the moon looks so very beautiful that evening.  A glowing orb that rises from the East might be a perfect analogy for the predictions about China’s long run growth. From the Economist maintaining that China might overtake the US economy by 2020 to the Leftist academic Martin Jacques predicting that China’s economy would be double that of the US’s by 2050, there has been an endless stream of projections based on China’s unbridled growth. However, for me there are at least three factors, much like the three parts of moon cake recipe, which when combined have the potential to spell economic malaise.   

                To begin with there is the skin, exclusive institutions, which hinder Chinese growth.  This requires the mixing together of an authoritarian regime with state controlled enterprise. Together these factors work to deter potential entrepreneurs without state backing; if you have no assurance that the state won’t punish your success at the expense of a state backed company, you will have little incentive to start or grow a successful enterprise. To this you add in a weak judicial system, one which fails to protect property rights. This further acts as deterrent to growth as businesses and individuals are reluctant to invest where their investment may be confiscated by the government.

                To all this, I would whack in a healthy dose of corruption which misallocates resources and undermines the competitive market place. A report released last year by the Chinese government found that between 16,000 and 18,000 government officials and employees of state-owned enterprises had smuggled more than $120bn overseas between the mid-1990s and 2008.However, it is not just the cost to government coffers; corrupt behaviour in government changes a citizen’s incentives such that engaging in hitherto profitable economic activity is no longer worthwhile. Simply put corruption raises the price of business and puts a brake on the growth of the private sector.

                At this stage you might find that the mixture reacts. As inequality rises in China, as a result of an uneven playing field, citizens are becoming less tolerant of their economic situation and the government. According to a 2012 poll by the Pew research centre, nearly half (48%) of Chinese respondents reported that wealthy inequality was “a very big problem”. In a country used to the Communist ideals of total equality this will not sit well. Indeed, China’s gini index, now at 0.46, has surpassed the 0.4 level which is a predictor of social disturbance. By exerting pressure on the batter (through the arrests of political dissidents, censorship of the press etc) you can limit the reaction somewhat, but in a country with a growing and increasingly vocal middle class this can only ever be a stop gap measure.

                The second stage in this recipe, preparing the filling, is amazingly easy as it requires only one ingredient; a one-child policy. However, it is important you let this component rest, as its effects manifest themselves slowly over time. Most developed countries are in some way suffering from their ageing demography. The UK, Italy, Japan and many other developed nations are suffering as their elderly, retired populations grow and are supported by a diminishing labour force. Not only does this shrinking labour force directly impact growth it also leads to a decrease in household savings, reducing capital available for investment. However, China won’t face a diminished demography as much as a demographic drop off. The one-child policy has exacerbated the slump in China’s labour force in the coming years. While China’s current median age is 34.5, similar to America’s 37, this is expected to rise to 49 by 2050, far ahead of the expected US median age (40). Its over 65’s will account for 26% of the 2050 population, also ahead of America’s. China’s growth has been in part due to a very large and youthful labour force. When the labour force contracts (by 11% between 2010 and 2050) and this dividend disappears China will be hard pressed to find a comparable economic stimulant. To quote The Economist; “unlike the rest of the developed world, China will grow old before it gets rich”.

                To top it all off you need the glaze, which puts a less optimistic shine on Chinese growth. Despite China’s success in recent PISA tests, education has not been generally celebrated as victory in China. Many in the education sector felt that high verbal and mathematical test results have come at the cost of originality and inventiveness. To quote Xiong Bingqi, an education expert at Shanghai's Jiao Tong University, Chinese students “have huge vocabularies and they do math well. However, the level of their creativity and imagination is low”. This concoction comes together when you pour in an overarching centralised education system and a history of standardized tests and rote learning. The education system is focused on high test results and its rigidity means that teachers have little scope to take students outside the ‘teach-to-test’ model. This is in part maintained by a culture standardized testing and rote learning which dates back to the Emperor Wu (141 -87 BC.) and what became known as the Mandarin examination system. The emphasis of these examinations was on discipline ad rote memorization of classical texts. Not a harbinger of Steve Jobs-esque flare. To this you apply pressure from school students themselves, who are often desperate to obtain a place at oversubscribed universities.

                The by-product of these three ingredients can be damning. China’s growth has up till now been based on the adoption of existing technologies and rapid investment, not Schumpeterian creative destruction. Yet as China completes its catch up and the labour force shrinks, they will have to come to rely on innovation for sustainable growth. If the education system remains unreformed, and young Chinese aren’t taught to think creatively or originally, this will be incredibly difficult
                Thus, this recipe produces a far less buoyant bake than others have proposed yet I feel it is more realistic given the interplay of the current factors. Nonetheless, the economy is not doomed to sink. While the Chinese can do nothing about their demography they could take steps to change their education system and improve the rule of law and accountability across China.
Then you would be baking with a whole different set of ingredients...


Some semi-valid points. Most of them are however just purely wrong:
1) Generally speaking, I haven't come across ONE prediction suggesting that China's GDP would not exceed USA's GDP in a few decades – or stop growing exponentially any time soon. USA's growth, in turn, is showing substantial signs of saturating behaviour.
2) Relative difference between the salaries of entrepreneurs and non-entrepreneurs in China have been continuously increasing for three decades: Now entrepreneurs make nearly 50% more than non-entrepreneurs. See page 17 for numbers from -95: http://cep.lse.ac.uk/pubs/download/cp253.pdf. Overall, according to various sources, China's transforming industrial policy setting has been increasingly supporting towards entrepreneurs over the past few decades. Here's more on that: http://www.economist.com/node/18330120
3) Why wouldn't state-owned companies facilitate growth? Large domestic monopolies, undervalued currency and increasing export sector combined is a pretty much the best driver of growth you can hope for. This is basic economic/trade theory.
4) The question of property rights is two-sided. Better property rights facilitate incentive for tech development for individual companies, loose control, in turn, facilitates nation-wide implementation of different technologies. Technology diffusion vs. private incentive to develop? Even if there were some welfare losses due to loose iPR, it's hard too see that affecting long-run growth: as said, in addition to the fact that they don't actually account for much of the growth, entrepreneurs are thriving.
5) It's easy to say that authoritarian governments are bad. Communists are always bad, stupid and evil – we know that. It's another think to claim that there was a causal relationship between having an authoritarian government and slowing economic growth.
6) USA's gini index has been more than that of China for 30 years: http://upload.wikimedia.org/wikipedia/commons/thumb/0/01/Gini_since_WWII.svg/720px-Gini_since_WWII.svg.png. Now they're even.
7) Culture-wise, China is one of the last countries where social disturbance would actually contribute negatively to economic growth. Look at UK a few years back or Greece now.
7) $120bn of corruption over 17 years is $7bn per year, which is about 0.1% of China's nominal GDP in 2011. Yeah, how the public sector can take that? Yeah, why should I work anymore since there is corruption? Simply put the welfare losses from corruption are marginal if you look at the big picture.
8) Smart comparing China's age distribution to America's numbers. Try any European country. Furthermore, it is fairly clear that lack of workforce has never been a slightest issue for China. I am really getting frustrated...
9) Education...yawn. Sure the Chinese system lags its Western equivalents. Sure there is an undersupply of study places. What does this has to do with growth prospects? China has a hundred million students. The schools are packed with talent. Every fourth international student is Chinese. Come on now.
It smells as if the writer had just taken Econ101 and heard that Chinese are communists.
Please think again.
1.    Hi,
Thanks for your comment.
I thought I might respond to some your points. As you expressed concerned over my credentials I’ve tried to give examples outside my blog to support my responses.
1)I thought like you might to see the views of two economists, Darron Acemoglu (a professor at MIT and one of the worlds 10 most cited economists) and James Robinson ( a professor at Harvard) , who have predicted that China’s growth will be substantially limited in the long term. http://www.huffingtonpost.com/daron-acemoglu/china-superpower_b_1369424.html
2)Thanks for the stats! I do agree that China has been doing more to support entrepreneurs in recent years and that their policies have been largely successful. However, in my opinion, they can never be completely successful while the rule of law (and by that I mean a strong sense of law outside of party politics) is still weak. When law courts are in some sense still guided by the political will of those in power entrepreneurs can never be completely secure in their activities. See the questionable case of Dai Guofang; http://www.washingtonpost.com/wp-dyn/articles/A55000-2004Aug10.html
3)Theoretically, monopolies in general suffer from a lack of competition, which can allow them to keep prices high, restrict choice and result in productive and allocative inefficiency (Econ 101) . In practice, for China at least, studies have found that if many of China’s SOE’s lost their government grants and subsidies they would actually be losing money. This in turn starves money from small and medium sized businesses trying to operate in China; the Chinese entrepreneurs you championed above. For more information http://www.economist.com/node/21564235
4)I have to disagree with you here. While I do think China an intellectual property rights is a fascinating topic I was thinking more of property rights in the most traditional sense, property rights which protect individuals and business against expropriation by the government. There is very little evidence to support the notion that the government being able to expropriate your property without legal recourse is a positive step for growth, quite apart from being inhumane. The Olympics was only one example; http://www.bbc.co.uk/blogs/thereporters/jamesreynolds/2008/07/olympic_evictions.html
5) I never claimed the Communists were “always, bad stupid and evil”. I would never do so in part because I have friends who are communist. I would also not insinuate that communism and authoritarian government are synonymous. I wasn’t sure what your point was but work by economic historians and institutional economists has shown that authoritarian regimes have never sustained long run growth in part for reasons I have mentioned in the first section of my blog post. That is not to say that authoritarian regimes don’t have some of their own advantages .In fact, as a transitional government I think Chinese government could be very successful if manages to shift from an authoritarian to increasingly democratic government.
6) Yes the Gini coefficient in both China and the US is above what is deemed. Indeed it is even higher in Latin America (see http://data.worldbank.org/indicator/SI.POV.GINI). However, in the US and in Latin American democracies there is a public means of airing grievances around rising wealth inequality. One simply need see the Occupy Wall Street movement. In China there is no such resource as the state does not traditionally take too kindly to those criticising its policies.
7) a) I wasn’t sure I understood your point either. Social disturbance, if it pushed China farther down the road of reform could be a good thing. However, social disturbance by creating uncertainty and discouraging foreign investment could at least in the short term negatively impact on growth. This, I understand, is why the Chinese government worries so much about dissent.
7) b) The £120 billion was only the amount grafted by a group of 16,000 – 18,000 government officials. In 2005 alone, the national audit office reported £35 billion of fraud by government officials (please see http://www.nytimes.com/2009/12/30/world/asia/30fraud.html?_r=0). That’s 1.5% of China’s nominal GDP, a far bigger consideration. And that is only government corruption that has been audited at a the supra-regional level. Corruption exists on a far wider scale on a more local level. Furthermore, local corruption, quite apart from disadvantaging the poorest who are hard pressed to pay bribes, exists has been proven to be damaging to the business environment; http://lnweb90.worldbank.org/eca/eca.nsf/1f3aa35cab9dea4f85256a77004e4ef4/e9ac26bae82d37d685256a940073f4e9?OpenDocument. These are not my views but the World Bank's.
8) Thanks for the compliment but the comparison wasn’t mine it was the Economists (http://www.economist.com/node/21553056).Furthermore I wasn’t saying that China’s labour force was an issue now but that it would be in the future.
9) I’m sorry you got so tired by this point. Might I suggest an injectuon of caffeine? My point wasn’t that the education system lags the Wests entirely, just that it had little focus on creativity or imagination in the workplace which would limit the future work forces ability to innovate. Innovation, as I am sure you will agree, is indeed crucial to growth. This was in no way a slight on Chinese students or teachers who I am certain are super talented. In fact, they are the ones who are being disadvantaged here by rigid Chinese education policy.
Furthermore I have heard there is a Communist regime in China though I didn’t learn that in Econ 101.
Thanks for your feed back :)
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Thursday 28 June 2012

A sweet success? Sanctions in Myanmar

One of the most surprising things about this recipe is how quickly it seemed to come together. Be warned it takes a while to really ‘set’ and won’t necessarily work as well with different ingredients

Ingrediants
  •      Base:
  • A government desperate for financial resources
  • An authority group that’s lost political legitimacy
  • A reliance on ‘ally’ countries with extractive agendas
·         ‘Carrot’:
  • High profile visits and diplomatic relations
  • Debt forgiveness
  • Support and aid from the World Bank and IMF
  • Interest and  investment from foreign companies
  • No involvement of the International Court of Justice at the Hague
·         ‘Stick’ – strict EU, US, Norwegian, Japanese, and Australian sanctions including:
  • Arms embargo,
  • Ban on Burmese goods including timber, mining and gems industry
  • Ban on companies investing and working in the country 
  • No humanitarian aid
  • No visas for army members and junta.

            Anyone who has spent the last six months watching the political developments in Myanmar unfold could be excused for experiencing some degree of vertigo. The progress of reforms appears to be so rapid the even South East Asian experts failed to predict the military junta’s political u-turn. However, a closer look at Myanmar’s situation reveals a rather interesting recipe; perhaps one which offers for hope for the much disparaged sanctions. These economic restrictions are often derided, especially by those who disapprove of the ‘soft power’ approach. Yet Myanmar’s recent reforms have shown how successful sanctions can be, if done properly and made with the right ingredients.                                                                                                                                                                                                                                                                                               
            For an effective recipe made with sanctions, it is crucial that you have the right base for reform. This shouldn’t be too tricky as sanctions are usually applied to countries with deeply corrupt and extractive institutions that profit a self-serving elite. Over time, the nature of these institutions typically leads to the type of base required; an authority or government that is desperately short of both resources and political legitimacy. Such was the case for Myanmar. The base was improved further by its alienation from other countries, leaving it hopelessly dependent on one country; China. China, like Myanmar’s own military junta had an extractive agenda in the country, and the government eventually found that Chinese business investment was often little more than a snatch and grab, with companies mistreating employees and damaging the local environment. These factors, when combined, make an ideal base for the next step. 
            However, this part of this recipe is probably the trickiest, as it requires a careful culinary balancing act; offsetting the right amount of ‘carrot’ against the right amount of ‘stick’. This balance must be exactly right for reforms and development in a country to ‘set’. In the case of Myanmar it began with the ‘stick’; the harsh sanctions imposed on it by countries as diverse as the US, Norway, Japan and Australia. These took the form of a prohibition on companies investing and working in Myanmar, a ban on exports such as teak and gems, no visa’s for any members of the army or junta and eventually a suspension of humanitarian aid. Over time these sanctions began to bite, and in turn help prepare the base. Once this is ready, you gradually, and I stress gradually, add your ‘carrot’ while slowly taking away the ‘stick’. In the case of Myanmar it began with President Obama promising a visit by Secretary of State Hilary Clinton following the release of Aung San Suu Kyi. Myanmar then freed 650 political prisoners and in turn the US re-established diplomatic ties. This careful removal of ‘stick’ and addition of ‘carrot’ encouraged Myanmar’s reform and on the 1st of April Myanmar held the first free and fair elections since 1990. As a result, the EU is suspending all sanctions (apart from the arms embargo) for one year and multinational companies are clamouring to invest in Myanmar.
            As successful as these reforms have been so far, their speed risks upsetting the careful balance that is required in this recipe. It is essential that other countries give only enough ‘carrot’ to encourage the current reform while still reserving some rewards for future reform. While Myanmar has made impressive progress there are still some fundamental changes which need to be made. Primarily the army’s power needs to be greatly reduced. While Aung San Suu Kyi’s National League picked up 43 out of the 45 seats in the recent election, this comprises only 6% of the 650 seat parliament. In addition to this, the constitution of Myanmar still leaves the army with a significant power. If Myanmar is to become a fully functioning democracy it still has plenty of improvement to make and for the sake of preserving the fragile balance, countries should be careful not to make too many concessions to the regime too quickly. Aung San Suu Kyi put it best when she said “the world loves a happy ending...but there is still a long way to go”. Myanmar’s reforms haven’t quite ‘set’ yet.
            Nevertheless, if this does prove to be a successful recipe using sanctions, could this be applied elsewhere in the world? One obvious thought might be Iran. Another ‘rogue nation’, to use the famous American phrase, is facing its toughest round of sanctions yet. From the 1st of July the EU will halted all imports of Iranian oil and earlier in the year the US government announced that it would penalise any financial institution found to be doing business with Iran’s central bank. Yet, despite the severity of these sanctions, the method of applying them cannot be the same in Iran as in Myanmar. With Iran one is working with an entirely different set of ingredients.
            On the surface the situations appear similar; a hard-line regime, with extractive institutions and mired in corruption. However, their ingredients that comprise the base of the two are subtly different.  To begin with, the Iranians base is not nearly strong enough (i.e. the government is not yet desperate enough) to support a fragile ‘carrot and stick’ manoeuvre. While the government does not enjoy much support (as shown by the Green Revolution in 2009), the theocracy still maintains a powerful ideology and one that many Iranians still support. Secondly, while sanctions are beginning to sink in, Iran is in a financially stronger position than Myanmar. It is more developed than its Asian peer and still has some semblance of a strong middle class remaining. Iran also has enough resources saved up to weather EU sanctions, at least according to the government. Ahmadinejad announced recently that Iran has an oil fund worth some $35 million to tide the country over to 2015, even if they didn’t sell any oil during that period. This is crucial, because in an extractive economy like Iran’s, the government very much relies on handouts for support and their control of citizenry. Iran is also not dependent on one ally, as Myanmar was. Due to its vast resources of oil, it still maintains relationships with countries that have no qualms about its nuclear activities.
            With an entirely different set of ingredients for the base, sanctions will not come together as quickly or as sweetly as they did in Myanmar. Nonetheless, a longer preparation time shouldn’t lead us to write recipe off straight away. Iran’s base may not be ready now there is a chance that sanctions will push it there for the future. As they at last begin to bite, Iran’s economy is stuttering and ordinary Iranians are suffering. Food inflation is running at above 50% and food shortages have been reported. Unemployment is a problem too; 22% of Iranian families have no breadwinner. As this continues the regime will begin to lose whatever remains of its political legitimacy. Despite deeper coffers, the Iranian government are also deeply concerned about their oil flow. Harsh new EU sanctions will cut Iran’s oil exports by at least 25% and this for a government which is dependent on oil for 50% to 70% of their revenues.  The EU and U.S. have also put banking penalties on financial transactions with Iran which have effectively, in the words of Ahmadinejad, shut Iran out of international banking. This lack of finance is aggravated by the fact local investment in Iranian business has slumped. Iranian investors are now investing spare resources in ‘havens’ such a property, gold and even carpets. Finally, as Iran increasingly becomes a pariah state, it will be forced into greater reliance on allies such a China and India. These are countries that are already prepared to push Iran for discounts on oil following the latest t round of sanctions. 

So there it is; a sweet, simple and hopefully successful recipe for reform through sanctions in Myanmar. Whether the long-time frame and varied ingredients prove too much for this recipe in Iran remains to be seen.
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Tuesday 27 March 2012

Game-changing recipe: A quick and easy city?


Paul Romer, the father of endogenous growth theory, thinks that he can whip up a city in a foreign country in a matter of years, with all the established institutions and rule of law that took most countries hundreds of years to develop. An ambitious recipe, no?

Ingrediants
  • A charter – good rules, a legal system with;
  • Choice’s for people
  • Choice’s for leaders
  • Uninhabited land, 1,000 km2 at least
  • Managers/leaders
  • Designers and builders
  • Financing
  • Citizens




This recipe is based on the perhaps unsurprising statistic that right now 700 million people around the globe say they’d like to live somewhere else. Why don’t they have this option? Paul Romer is hoping to teach government, business and academics how to concoct cities for them to live in.

The basis for this recipe is ‘choice’ but being a rather too abstract notion for a recipe it can be boiled down to a charter, which allows for the operation of quasi-independent city-states. This charter effectively opens up two types of choice; a choice for people and a choice for leaders. The choice for people comes, of course, from the option to live and work in the city, voting with their feet on the institutions and rules put in place by an independent legislative body. The choice for leaders is less obvious. Effectively it is the choice to set up a governing system free from the special interest groups and elites which so often dominate the politics of a developing country. By appointing outside experts to oversee the rules and rights of the charter city, it can distance itself from the predatory practices of the home government, attracting new citizens and foreign investment.

To this document you must add some of those traditional factors of production economists are so fond of. Let’s start with natural resources in the form of land; Mr. Romer estimates that nothing less than 1,000 km2 will do. To this, we add labour, specifically the mangers and designer who will design and run the city. These parties will consist of both residents and leaders of the country as well as foreign experts and governments. This latter group is there to ensure that independent and effective institutions are constructed and maintained in the new city, acting as referee if necessary. Then for good measure we need to add some physical capital in the form of international financing. If the previous ingredients come together successfully, the addition of international financing should not be too tricky as investors will be tempted there by light-touch regulation and an effective rule of law. Finally, add a liberal sprinkling of citizens, keen to live and work under the foreign institutions they were previously willing to migrate so far for. They will finish off the dish nicely. 

As shocking as this recipe might seem, it’s is actually not all that crazy as in some sense charter cities have existed before. You only have to look at Hong Kong; a Chinese city but effectively run with rules adopted from the British. Indeed Romer credits Hong Kong’s success to the British; “The British did more to reduce world poverty in Hong Kong than all its aid programmes put together”.  Deng Xiaoping, for one, recognised this and created four special economic zones in China. Following their success 14 coastal cities were given this privilege. In this way he did not force a market economy on the Chinese people but effectively gave people the choice to move to these “charter cities”.

Indeed when Romer says “our new goal should be that when every family thinks about where they want to live and work they should be able to chose between at least a dozen different cities who are all competing to attract new residents” he makes no mention of its historical precedence. In medieval Europe something like this actually existed. Power was so fragmented across the continent, that there was little centralization and instead free cities and principalities competed against each other for citizens.  

Despite this seeming precedence however, political chefs need to tread carefully. While it is indeed true that at one time Europe was dominated by something like charter cities, these cities were a natural evolution; the result of European geography and culture failing to leave one group strong enough to dominate the rest. For Europe this development took hundreds of years and did not last nearly as long, as the power of centralizing monarchies grew. What Paul Romer is describing, is an attempt to short cut the evolution responsible for complex and independent societies in the hope that academics and foreign governments can override natural socio-economic development.

While I think that the above is the greatest caveat, Romer is far more likely to face criticism from those who will deem his charter cities a new form of colonialism. Romer acknowledges this and is eager to demonstrate that by giving citizens and leaders choices about their city, he is overcoming the condescension and coercion which came to epitomize colonialism. Unlike colonialism, citizens choose to submit to a different way of living. Indeed in the very place you’d expect people to be suspicious, Africa, many of the leaders are keen on this new idea, seeing it as a way round the institutional sclerosis that too often occurs.  They see it as a place to encourage investments, when many investors are wary of investing in Africa precisely because of the weakness of institutions, like property rights.

However it is Latin America which will be the first continent to see a charter city, rendering this recipe is no longer merely theoretical. Romer and the government of Honduras are working together to rustle up a skyline, in 1,000 km of uninhabited land in Trujillo, Honduras. The Honduran government agreed to it partly because they are fed up of watching 75,000 of their citizens, often the best and the brightest, leave Honduras annually to seek a better life in the US. They Hondurans have already started adding to their uninhabited land by mixing in the city building expertise of Singapore and South Korea, both of whom are interested in the charter city idea.

In fact, despite my aforementioned criticism I am impressed by Mr. Romer’s vision and ambition. After all, with his recipe for a city, is he not trying to do what all development economist dream of; overcoming the trials and tribulations of an underdeveloped state to bring wealth and prosperity to its people? Even if he fails, he has highlighted the role of institutions and government in economic development, which should be applauded. Please feel free to comment if anyone disagrees! 
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Wednesday 7 March 2012

Italian slow-cooking: A tale of two tyrannies

Italian recipes are always popular so I thought it was be a great way to start my new economic/political cookbook. Buon appetito!
Ingredients
For your base, the ‘tyranny of the majority’:
·         An ageing demographic
·         Article 45 of the Treaty of the Functioning of the European Union (which allows for the free movement of people)

For the ‘tyranny of the minorities’:
·         Ineffective government
·         A culture of guilds and cartels
·         A widespread dislike competition (witness the platforms of the People of Freedom and the Northern League).
As Alexis De Tocqueville toured America, he remarked on the dangerous ‘tyranny of the majority’ that he believed would “render the law unstable”. However, the recent Euro debt crisis has shown us that it is not just the tyranny of the majority that is dangerous; it is when this majority combined with a ‘tyranny of the minorities‘. This set-up renders not only governments unstable (ciao Berlusconi!) but the country’s economy too.
The way the debt crisis has recently been reported in the media would leave one believing that the recipe behind the disaster has been a quick pan-to-plate job with a befuddling variety of ingredients; a global recession, a single currency, high sovereign debt, lax consideration of the growth and stability pact, etc. However, I believe an authentic Italian crisis requires a much longer cooking time and yet a simpler set of ingredients. Indeed, while the rapidity may surprise some, others have wondered how Italy has lasted so long without meeting financial difficulty. Its growth rate between 2000 and 2010 has averaged at 0.25% a year; a figure so low it was only surpassed by Haiti and Zimbabwe. Not ideal neighbours for the country of Caesar and Garibaldi. Furthermore, productivity only grew by 0.1% between 2001 and 2005 and actually shrank by 0.8% between 2006 and 2009.  
What do you need to create this kind of economic sclerosis? I would say the base of this recipe requires an ageing demographic. In Italy, the birth rate has fallen much faster than in other European countries, to 1.3 children per family. Thus while the number of those over the age of 65 has markedly increased, by 10.4%, the number of those up to the age of 14 has only grown by 1.9% (2001-2006) . With age often comes seniority and as in most countries, Italy’s businesses, large and small, are owned and run by the boomer generation. However, their hold has become entrenched and to the detriment of meritocracy in Italy. Often the younger generation find they are too young to be promoted or that their superiors will take the lion’s share of their success, financial or otherwise. As a result, large numbers of ambitious young Italians leave the country every year in search of greater opportunities. In fact, Italy is the only rich European country to be a net exporter of graduates.  The old rule the roost, and the potentially productive youth flee to other European countries to advance their careers. However, well-entrenched this age bias is in business, it is further fortified by the government. Italy spends 14% of its GDP on pensioners, more than any other European country. In 1994 Berlusconi came to power in Italy promising pension reform; 17 years on they have never happened.
To this base you need to mix in a variety of what I have termed ‘tyranny of the minorities’. This is really just a sprinkling of different cartels and entrenched business interests which stop Italy’s economy from working in a productive manner. In fact, almost every industry in Italy has their own lobby group and set of protections. An example of this, (highlighted in the Economist’s special report on Italy last summer) is taxi drivers. In Milan, it is near impossible to find a taxi. This is odd given that Milan is probably Italy’s most dynamic and wealthy city; surely demand is high enough? The reason is a classic constriction of supply; taxi drivers in Milan must pay a large amount of money for a taxi licence (€200,000 in 2003) which thus limits the number of cabs driving around.
In this way privileges are confined to the lucky few, at the expense of a taxed majority. However, it particularly hurts Italy’s youthful minority who suffer disproportionately high levels of unemployment. In November of 2011, Italian youth unemployment was at 30.1%, well above the 22% Euro zone average. The protectionist measures adopted by government which enshrine these hard-to-get/hard-to-lose jobs in guilds and cartels ensure that the young are kept out of various professions. Indeed almost the only way to get a job in Italy these days it through raccomandazioni, a series of family connections within the labour market.
There you have it, hopefully a rich but simple entrĂ©e; an Italian crisis. I’d be interest to hear if anyone has a recipe for the solution!
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