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Which will be the big economies in 15 years? It's not a done deal
Will China, Russia and Mexico, governed by extractive elites, really do
so well? Is Europe such a write-off? And what about Britain?
The Observer (UK)
Saturday 28 December 2013
By Will Hutton
Here is a puzzle that preoccupies futurologists, business strategists,
economists and the world's foreign offices. Who is going to do best or
worst economically over the next 15 years out of the world's current
top 10 economies? In 2013, the US is comfortably number one, twice the
size of China and two-and-half times the size of the number three,
Japan. After Germany at fourth comes a cluster of countries with less
than a trillion dollars of GDP separating them. France just pips
Britain at sixth. Then follow Brazil, Russia, Italy and Canada with
India, hurt by the collapse of the rupee, just outside the top 10 at
11.
The conventional wisdom, informed by conventional economics, is clear,
represented faithfully by the conservative-leaning Centre for
Economics and Business Research (CEBR) in its annual world economic
league table released last week. The European economies, especially
France and Italy, will sink down the league table, burdened by
taxation, welfare and ageing populations. China is inexorably rising
to take over the top spot, but in 2028, later than the CEBR thought
last year. India will climb to number three. Russia will do well, as
will Mexico and eventually Brazil. The UK, if it continues to shrink
the state, keeps taxes low, deregulates its labour markets, continues
to be open to immigration and disengages with Europe, may only fall
one place in the 2028 ranking to seventh. But even though the UK and
US will fare better than mainland Europe, the relative decline of the
west will continue.
Britain's conservative press seized on the projections with glee,
proof positive that George Osborne is on the right track and
Euro-scepticism is triumphant. The Express trumpeted: "Booming Britain
will be top dog as the rest of Europe stagnates", while one
commentator in the Mail wrote of Britain's "renaissance": the CEBR had
handed the chancellor a "weapon with which to attack Labour's agenda
of despond and false promises".
Hmm. Booming Britain? Renaissance? The problem is that the economic
theory that supports these predictions is itself in crisis. By
prioritising the role of low taxes, deregulation, the inevitable
efficiency of markets and the accompanying inevitable inefficiency of
the state as drivers of growth, it assumes that the last 30 years -
and in particular the 2008 financial crisis - had not happened. These
are the terms in which UCL's Professor Wendy Carlin, leading the
programme at the Institute for New Economic Thinking (INET) to reframe
the economics curriculum to include economics' new advances, describes
the state of much current teaching and debate, exemplified by both the
CEBR report and the reaction to it.
For the best economics now has much more sophisticated understanding
of what drives innovation, investment, productivity and growth than
the simple faith in low tax and loosely regulated markets. It
criticises the refusal to understand the complexity of how economies
and societies create and assimilate paradigm-changing
technologies. Nor is there room for assessing the quality of a
country's entire institutional nexus - from company organisation to
the accountability of government - in building inclusive,
value-creating capitalism rather than extractive, value-capturing
capitalism. The best brains in economics are now working on how
economies work in reality, rather than as prospectuses for rightwing
politicians and newspapers.
For example, in Why Nations Fail, MIT's Daron Acemoglu and Harvard's
James Robinson present the results of 15 years of research into the
rise and fall of countries and their economies. It is a far cry from
the CEBR analysis, arguing that what differentiates countries is the
quality and effectiveness of their economic and political
institutions. Capitalism has to be shaped and governed to allow the
new continually to reshape and even destroy the old: it has to allow
multiple runners and riders, lots of experimentation and harness whole
societies into accepting and taking risks. This happens best when
economic and political institutions do not fall into the hands of one
party or a group of self-interested oligarchs who essentially extract
value; they need to be open and inclusive, constantly pushing back
against the wealth extractors.
Acemoglu and Robinson are right, although inclusiveness and
accountability go well beyond the democratic political institutions on
which they focus - and for whose lack they doubt predictions of
China's continuing inexorable rise. It extends to the integrity and
soundness of the financial system, how effectively governments accept
the risk of investing in frontier technologies that private
entrepreneurs never undertake alone, how companies are prevented from
falling into the hand of self-interested, overpaid boards and ensuring
that workplaces are inclusive too. But they do recognise, along with
the IMF and OECD, that growing inequality menaces vigorous
societies. It is a proxy for how effectively an elite has constructed
institutions that extract value from the rest of society. Professor
Sam Bowles, also part of the INET network, goes further. He argues
that inequality pulls production away from value creation to
protecting and securing the wealthy's assets: one in five of the
British workforce, for exampe, works as "guard labour" - in security,
policing, law, surveillance and forms of IT that control and
monitor. The higher inequality, the greater the proportion of a
workforce deployed as guard workers, who generate little value and
lower overall productivity.
The CEBR does warn that the break-up of the UK, if Scotland votes for
independence, would qualify its optimistic predictions. But it never
asks why Scottish voters might be so disillusioned if the
Euro-sceptic, low-tax, low-regulation world it paints is so rosy:
perhaps the Scots understand better than conventional economists what
is really going on. More of what the CEBR recommends as the route to
future riches - placing our faith in markets and individual incentives
along with disregarding inequality and the dysfunctionality of our
institutions - could break Britain up.
It is also reason to be sceptical about most of its projections. Will
China, Russia and Mexico, governed by extractive elites, really do so
well? Is Europe such a write-off? After all, Mr McWilliams, the
affable Euro-sceptic who runs the CEBR, warned more than two years ago
that European leaders had a month to save the euro.
I also bet that the US, if the destructive Tea Party can be held at
bay, will hold on to the top spot. Britain, it is true, could catch up
with Germany, but only if it builds on the effective industrial policy
the coalition is developing and consigns small-state conservatism to
the dustbin. Above all, I doubt the endless rise of Asian and
Latin-American autocracies. The west is not dead yet.
Will China, Russia and Mexico, governed by extractive elites, really do
so well? Is Europe such a write-off? And what about Britain?
The Observer (UK)
Saturday 28 December 2013
By Will Hutton
Here is a puzzle that preoccupies futurologists, business strategists,
economists and the world's foreign offices. Who is going to do best or
worst economically over the next 15 years out of the world's current
top 10 economies? In 2013, the US is comfortably number one, twice the
size of China and two-and-half times the size of the number three,
Japan. After Germany at fourth comes a cluster of countries with less
than a trillion dollars of GDP separating them. France just pips
Britain at sixth. Then follow Brazil, Russia, Italy and Canada with
India, hurt by the collapse of the rupee, just outside the top 10 at
11.
The conventional wisdom, informed by conventional economics, is clear,
represented faithfully by the conservative-leaning Centre for
Economics and Business Research (CEBR) in its annual world economic
league table released last week. The European economies, especially
France and Italy, will sink down the league table, burdened by
taxation, welfare and ageing populations. China is inexorably rising
to take over the top spot, but in 2028, later than the CEBR thought
last year. India will climb to number three. Russia will do well, as
will Mexico and eventually Brazil. The UK, if it continues to shrink
the state, keeps taxes low, deregulates its labour markets, continues
to be open to immigration and disengages with Europe, may only fall
one place in the 2028 ranking to seventh. But even though the UK and
US will fare better than mainland Europe, the relative decline of the
west will continue.
Britain's conservative press seized on the projections with glee,
proof positive that George Osborne is on the right track and
Euro-scepticism is triumphant. The Express trumpeted: "Booming Britain
will be top dog as the rest of Europe stagnates", while one
commentator in the Mail wrote of Britain's "renaissance": the CEBR had
handed the chancellor a "weapon with which to attack Labour's agenda
of despond and false promises".
Hmm. Booming Britain? Renaissance? The problem is that the economic
theory that supports these predictions is itself in crisis. By
prioritising the role of low taxes, deregulation, the inevitable
efficiency of markets and the accompanying inevitable inefficiency of
the state as drivers of growth, it assumes that the last 30 years -
and in particular the 2008 financial crisis - had not happened. These
are the terms in which UCL's Professor Wendy Carlin, leading the
programme at the Institute for New Economic Thinking (INET) to reframe
the economics curriculum to include economics' new advances, describes
the state of much current teaching and debate, exemplified by both the
CEBR report and the reaction to it.
For the best economics now has much more sophisticated understanding
of what drives innovation, investment, productivity and growth than
the simple faith in low tax and loosely regulated markets. It
criticises the refusal to understand the complexity of how economies
and societies create and assimilate paradigm-changing
technologies. Nor is there room for assessing the quality of a
country's entire institutional nexus - from company organisation to
the accountability of government - in building inclusive,
value-creating capitalism rather than extractive, value-capturing
capitalism. The best brains in economics are now working on how
economies work in reality, rather than as prospectuses for rightwing
politicians and newspapers.
For example, in Why Nations Fail, MIT's Daron Acemoglu and Harvard's
James Robinson present the results of 15 years of research into the
rise and fall of countries and their economies. It is a far cry from
the CEBR analysis, arguing that what differentiates countries is the
quality and effectiveness of their economic and political
institutions. Capitalism has to be shaped and governed to allow the
new continually to reshape and even destroy the old: it has to allow
multiple runners and riders, lots of experimentation and harness whole
societies into accepting and taking risks. This happens best when
economic and political institutions do not fall into the hands of one
party or a group of self-interested oligarchs who essentially extract
value; they need to be open and inclusive, constantly pushing back
against the wealth extractors.
Acemoglu and Robinson are right, although inclusiveness and
accountability go well beyond the democratic political institutions on
which they focus - and for whose lack they doubt predictions of
China's continuing inexorable rise. It extends to the integrity and
soundness of the financial system, how effectively governments accept
the risk of investing in frontier technologies that private
entrepreneurs never undertake alone, how companies are prevented from
falling into the hand of self-interested, overpaid boards and ensuring
that workplaces are inclusive too. But they do recognise, along with
the IMF and OECD, that growing inequality menaces vigorous
societies. It is a proxy for how effectively an elite has constructed
institutions that extract value from the rest of society. Professor
Sam Bowles, also part of the INET network, goes further. He argues
that inequality pulls production away from value creation to
protecting and securing the wealthy's assets: one in five of the
British workforce, for exampe, works as "guard labour" - in security,
policing, law, surveillance and forms of IT that control and
monitor. The higher inequality, the greater the proportion of a
workforce deployed as guard workers, who generate little value and
lower overall productivity.
The CEBR does warn that the break-up of the UK, if Scotland votes for
independence, would qualify its optimistic predictions. But it never
asks why Scottish voters might be so disillusioned if the
Euro-sceptic, low-tax, low-regulation world it paints is so rosy:
perhaps the Scots understand better than conventional economists what
is really going on. More of what the CEBR recommends as the route to
future riches - placing our faith in markets and individual incentives
along with disregarding inequality and the dysfunctionality of our
institutions - could break Britain up.
It is also reason to be sceptical about most of its projections. Will
China, Russia and Mexico, governed by extractive elites, really do so
well? Is Europe such a write-off? After all, Mr McWilliams, the
affable Euro-sceptic who runs the CEBR, warned more than two years ago
that European leaders had a month to save the euro.
I also bet that the US, if the destructive Tea Party can be held at
bay, will hold on to the top spot. Britain, it is true, could catch up
with Germany, but only if it builds on the effective industrial policy
the coalition is developing and consigns small-state conservatism to
the dustbin. Above all, I doubt the endless rise of Asian and
Latin-American autocracies. The west is not dead yet.