2nd June 2017

1)Sovereignty and Borders

Sharun Mukand suggested that the extent of the market is limited by the scope of workable regulation/governance. Yet the main locus of legitimate regulation/governance remains the nation state since this is the domain of democratic deliberation. The scale of democratic legitimacy of governance remains at the nation state. There will always be legitimate differences of interests between nation states, engendered by culture, history, per capita income, diversity and individual needs. Policy making at national level needs room for manoeuvre, but this comes at a price. Forms of trans-national government are likely to remain weak at best.

Sharun suggested that ambitions for economic globalisation and integration may need to be moderated. Globalisation involves trade-offs of winners and losers and that a backlash can erode liberal democracy. A key question as who should evaluate these trade-offs, with the two options being defined broadly as ‘technocrats’ and ‘the noisy political marketplace’. A defensible liberal democratic position needs to evolve to manage these tensions, which does not depend solely on the rather unreliable (trade adjustment) mechanism of ‘winners compensating losers’. Populist responses may also misunderstand and misread these trade-offs.

Henrietta Moore responded emphasising the differences between popular aspects of globalisation –the free flow of ideas, information and exotic food – and elements which provoke fear and distrust, including migration and the export of jobs. The predominant sentiment now appears to combine feelings of ‘being ignored’ with impressions that the winners from globalisation are ‘winning bigger’ and the losers are ‘losing harder’. In this context, the argument that globalisation benefits everyone, and ‘raises all boats’, tends to gain little traction. Popular approval for trans-national trends in scientific research, particularly in support of medical advances, is undercut by instances of the repatriation of supply chains and the consequent export of employment.

The discussion included the following points.

  1. Most of our economic activity is measured by the boundaries of the nation state, especially GDP, which fails to capture or represent large and significant amounts of activity, regulatory boundary and control. Limiting analysis to nation state excludes cross-border activity, such as trans-national companies, and ecological systems. Over-reliance on the nation state and lack of data at sub-national level also raises challenges for debates around break-up of nation states (e.g. current constitutional structure of UK). More alternative ‘mappings’ of economic activity are needed. Lack of data was a common theme in limiting our understanding of globalisation.
  2. National actions, as well as at individual level, can be subject to fallacies of composition. Policies undertaken by nation states, such as taxation, may have spill-over effects. National taxation policies may reflect domestic political culture, but this can erode the common overall tax base by distorting location decisions. Co-ordination beyond the nation state requires global macro-understanding. Ideas of global governance are utopian; aim should be for co-operation, rather than conjoined government. But how do we take account of some trans-national policies being more effective in some countries and/or regions than others.
  3. To what extent does globalisation of regulation and coordination increase our vulnerability? Heterogeneity of different economic policies and regulation may lead to greater resilience through diversification, even if the cost is some potential economic efficiency. Perhaps exposure to greater risks leads to improved domestic governance.
  4. Given the current widespread perception of people that they have been ‘left behind’ international institutions need to align their objectives with domestic policies, to rebalance the costs and benefits of change. International frameworks need to be flexible and responsive, if they are to gain any of levels of political legitimacy which reside currently with nation states. There have been recent calls for a restoration of the Bretton Woods system: this now seems a rather dated approach, but the shortage of potential alternatives is significant.
  5. Economists have not really considered the value of ‘political legitimacy’. While many agree that ‘political legitimacy’ is essential for greater co-operation beyond the nation state, what are the ‘inputs’ required for ‘political legitimacy’. Should economists approach this as a ‘factor of production’ – an input which we can affect by long term policies, or simply an exogenous constraint which limits our economic possibilities? Is it good enough just to leave this to some vague political process. Legitimacy over time is also important, it is path dependent and changes over history.
  6. Nation states have generally been domain of economic advancement, but ordinary citizens feel increasingly that they have no ways of engaging with the processes that determine their lives; there is an absence of ‘Citizens’ Economics’. Perhaps what is needed is rethinking the role of the nation state. Ideas cannot be contained behind borders and yet they might be the most powerful dimensions of fundamental and irreversible changes in working practices. In the future, most adults will not be ‘working’ in the way that we understand the term currently.

2)Global Finance

Richard Portes suggested that macroeconomic models have erred in assuming globalisation has and will improve stability, yet there is little evidence that the opening capital accounts has led to greater efficiency or risk sharing and reduced sovereign risk. The Mundellian notion of a trilemma (capital flows, interest rates and exchange rates) may in fact be a dilemma (capital flows and interest rates) as exchange rates are no longer able to isolate countries or support domestic adjustments. The financial crisis highlighted the damage caused by restricting the scope of vulnerable countries to exchange rate flexibility. Integration of financial markets and cross-border consolidation has instead fed back to cause increasing income inequality. All this ought to give us pause for thought.

We should consider the optimal currency area literature from a more financial perspective (Optimal Financial Area?). Nation states would have a major role in this process; and there would be a critical need for accurate data, at as granular a level as possible. This remains a fundamental weakness of the globalisation of finance. Databases on cross-border flows and risk transfer through derivatives ought to be made available. We also must also explore the contradiction of low global interest rates and the disincentives for investment: what is the role of safe assets in secular stagnation?

Laura Bear responded by asking how global finance might affect the impact of public spending on infrastructure. She used the example of India’s railways to highlight how different financing regimes change the form of public institutions and their economic results. During the colonial period the use of guaranteed returns to UK based shareholders led to a systemic drain of wealth. This was followed by post-independence national investment funded through monetisation and bank loans, which created stable economic growth. During the 1990s under structural adjustment public debt was suddenly treated as the same as financial debt plunging the railways into permanent crisis and underinvestment. Now the Indian government is turning to global finance on unfavourable terms that may well cause a drain of wealth from India once again to financial rentier classes. This move will also reorient the railways to serving large corporations and trade rather than creating wider growth and social benefits.

These same issues of financing of infrastructure are now, post-Brexit, facing the UK. The choices over what kind of financing is deployed by the government will most likely radically shape the form and impact of infrastructure. Reliance on shorter term finance accessible on global markets may lead to shorter term commercial decisions and economic structures. Macroeconomics presently cannot model these differential impacts since it assumes that all public spending has the same impact on inclusive growth. It also builds models on limited national data that only show in public capital expenditure. Interdisciplinary research combining social science real world evidence from infrastructure experiments in the global south with macro-economic scenario modelling is needed. This would allow evidence based design of infrastructure and government funding policies.

Angus Armstrong presented comments from Franklin Allen. First, there is an extraordinary heterogeneity of housing finance models around the world. We need to understand why and ask whether there is a role for government in transferring interest rate risk today rather than waiting until interest rates start rising. Second, global financial institutions may be here to stay which means we should consider how to create a cross-border loss sharing mechanisms. We must avoid increasing moral hazard, but let’s accept that the cost of most direct interventions is recovered. Third, we are not appreciating the impact of China on international finance. By 2035 China will be bigger than the US and EU and its infrastructure financing will shape the evolution of capital markets.

The discussion included the following points.

  1. Has global finance enhanced the legitimacy of the nation state? Governance can be hybrid in nature, but legitimacy always resides in democratic processes. Financial power can exert pressure on democratic procedures, but the ultimate power rests with the electorate. Ultimately, sovereignty require control of a currency. Central bank tools such as currency swaps (at the heart of the global financial system) are based on political choices and often unobserved by national democratic processes.
  2. A return to Bretton Woods (closed capital accounts) is not feasible, but efforts could be made to formalise risk management in global financial arrangements. Economists have discussed risk sharing possibilities for decades, e.g. GDP bonds, but they are conspicuous in their absence. What is limiting risk sharing between nations and would the crisis have been different if there was more risk sharing or would this really have led to more contagion?
  3. Financial globalisation has led to an erosion of legal processes. Perhaps finance has failed to keep up. Banks took excessive risks, to the detriment of taxpayers, and fines have effectively displaced prosecutions. Legal systems, largely based at the level of the nation state, are lagging behind the globalisation of international finance. Arguably, beyond a certain level, ‘too much’ finance does more harm than good. Understanding these trends might require the relevant unit of analysis to become ‘the multinational company’ rather than the state.
  4. Is there a case for considering different types of public finance for different types of public expenditure –health, education, defence, and physical infrastructure etc.? Local authorities are turning increasingly to private finance to fund investment, often importing expertise in this area because no local capacity is available. Intra-national divisions in this area could usefully be examined by macroeconomists. Around the world, we observe many different models of sub-national government finance but very little economics to explain this. How do the different arrangements effect activity, democratic legitimacy and governance?

3)Global Trade

Alan Taylor suggested that core trade and macro theory are based on different assumptions: trade has balanced external accounts and barter, macro has imbalances and money. Some overlaps and commonalities are starting to emerge. These include: the effects of trade on wages and inequalities; technological change; the impact of growth in China; the effects of offshoring; and the unbundling of production processes. Confluences are occurring with economic geography in allying trade theories to regional inequalities, imbalances and debt (and not necessarily based on ‘equilibrium’; see MIT’s China shock project). Trade can influence inequality through skills, factor endowments, location within national borders, location across borders and access to raw materials each with separate consequences for policy.

The traditional focus of macro on fiscal and monetary policy have largely transcended globalisation of trade. But this need not be the case: changes in domestic pricing because of international competition may mean that inflation and unemployment rates are more influenced by international factors raising questions about inflation targeting. The same may be true for fiscal policy if trend growth is influenced by international factors over a cycle. We might also consider access to raw materials in such model which have been largely taken for granted.

David Soskice responded by describing some current work on a two sector macro models with an innovative core and feeder periphery. Key groups of skilled employees are semi-permanently located in the core areas. Such skill clusters, often linked to universities, develop by ‘assortative mating’, often drawing on educational resources provided by the nation state and focused and directed by multinational organisations. He noted examples from the USA of skilled foreign nationals moving to Silicon Valley, and then moving back to their countries of origin to help set up similar networks there. Counterpart regions are those sometimes classed as ‘left behind’, that were set up to supply industrial systems but which no longer have that role.

David Tuckett read a contribution from Dennis Snower which examined the implications of a world which is integrated economically but fragmented socially. The detachment of economic progress from social progress over years has led to public disillusion with globalisation, distrust of refugees, and rising levels of nationalism. A rebalancing is needed between the benefits of globalisation and the need to consider social disempowerment and disengagement. Future research might consider a rethinking of economic decision making with respect to these needs and the social settings that provide empowerment and solidarity and thereby provide a macro-foundation of microeconomics.

This may extend to rethinking of economic policy: new measures of wellbeing, based not merely on consumption, but also on achievement and social affiliation, new measures of business success, beyond shareholder value, new measures of policy success, beyond time-invariant utility maximization and a new recognition of the significance of moral values, as supports for the social settings conducive to empowerment, solidarity and human cooperation.

The following points were discussed

  1. Better data is imperative. How can we understand global value chains and what this means for trade policy without the data. Can GDP-related measures of material wealth be matched by equivalent indices of empowerment, political engagement, and other societal needs?
  2. What is ‘fair trade’ in a post Brexit world? A surprising 60% of UK public would accept duties on goods imported from the EU. Such unexpected attitudinal responses may be important in designing future policies. There may also be differences between cognitive understandings of such issues and reactions to actual experiences. ‘Free trade’ will often mean democracies engaging in commercial relationships with nation states who do not share democratic values about workers’ rights and environmental protection. How far should these issues affect or be included in trade agreements? If Brexit is about ‘unfairness’ or inequality from trade; it is not obvious that striking even more trade deals is the answer.
  3. Macroeconomics tends to focus on deficits and capital flows. Broader models would address questions of how people understand issues such as free trade, offshoring and wages, even if these views may not always reflect reality. The belief, for example, that production moves to China because of lower wages does not consider recent rises in Chinese wages; the attraction of China is connected more closely with production supply chain locations, which cannot be moved easily. Disciplines such as sociology and anthropology could address issues such as: cultural conditioning; the meaning of democracy; and the ease with which industrial production can be moved.

4)Migration

Laura Bear read some comments from Katy Gardner. Movements of people will always occur in some form, as part of the basic human condition. Many economists consider the movement of people is a motor of economic development, particularly through income flows back to countries of origin. There is also a moral issue of the lottery of the location of birth and why this should be entrenched by migration policies. However, a counter argument proposed by Borjas is that migration needs to be resisted, given potential problems of ethnic enclaves and perceptions of migrants as fiscal burdens. Anthropologist see migration as neither good nor bad, but that the effects arising from it need to be understood. Migration is often, for instance, linked to structural adjustments in lower and middle class social groupings.

The example of the Bangladeshi diaspora, containing both inter and intra-national components, shows that migration cannot be reduced simply to issues of economic rationality. Deliberate recruitment by UK colonial officials of the most enterprising people led to social and economic adjustments within Bangladeshi society. Travel become a way of life, relating as much to social status as to economic rationality. Given the lower living costs in Bangladesh, family reunification in the UK is based on social needs rather than economic rationality. Migrants may also return to Bangladesh in later life.

Anthropological views can also help to explain why attitudes to migration have hardened in Britain, itself a ‘nation of migrants’. Some areas of the country have traditionally stigmatised mobile populations; other regions are relatively new to the experience of significant migration, or have populations who themselves feel denied the possibility of movement. A wider and more informed public debate on the issues is needed on issues relating to migration, which should not be seen as a good/bad phenomenon.

Responses to this contribution included the following points:

  1. Macro models traditionally consider migration as simply changes in the labour supply. It may be possible to build more sophisticated models; age structure of labour force; segmented labour force; impact on native workers; different savings ratios; cultural and innovative contributions. Models could view migrants as undergoing ‘adaptive changes’ as they adopt different preference as part of their changed life experiences.
  2. There is good evidence of the positive contribution made by migrants, but there is tension between the economic need and political demands to restrict migration. The belief that other people are unfairly ‘doing better’ leads to reduced resilience and less ability to cope with problems. However, the meaning of ‘left behind’ is subjective, and can vary widely between different regions. Concerns over the ‘left behind’ and their views of migrants should not be dismissed, and must be unpacked carefully. Questions of identity under globalisation are subjective, and depend critically on experiences of inequality; these issues are not well understood. There is evidence that South Asians in the UK supported Brexit to reduce further immigration from Eastern Europe.
  3. Globalisation and the mobility of labour affects wage-bargaining power. It is difficult to pin down other relationships between migration and zero-hours contracts, or with public expenditure. Perceptions of migration are linked strongly to inequality and low-wage economic growth. Movements of capital, and of industrial plant, are harder to imagine or envisage. Further internal migration within the UK could be important in balancing and benefiting a national diaspora.
  4. Migration may be included in a global model to show impact of donor and recipient nations. Can migration be harmful to the source country, in terms losing both talented people and the tax base that they form? There is evidence from Europe that this is the case e.g. Greece. Do we have a good explanation why migrant employment rates in some countries (US and UK) are higher than for natives and the reverse is true elsewhere?

END

17 July 2017

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