EU Budget – Apparently a Fight Cameron can Call a Win

So I’ve been away for the weekend and swamped in work since last Wednesday. However, not to renege on my pledge to post at least once a week (and having already missed my self-imposed Friday deadline), I’ve decided to post what I believe is most likely the smallest post I’ve written so far (I am quite verbose…)

For expediency, I’ll just bring your attention to the resolution of the UK’s outrage at its reviewed EU budget contributions. Apparently, Osborne met his colleagues on Friday and they reached an agreement whereby the payment has been postponed, without the necessity to pay interests due to a delay.

I have three comments:

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Euroscepticism in the UK and the EU Budget – a case study

Every so often I’ll be talking with people regarding the special brand of Euroscepticism that prevails in the UK and think to myself I don’t really have a serious case study in mind. Sure, there’s the Daily Express’ “Get us out of the EU editorial” line or the famous front page of The Sun on November 1st 1990 telling the EU they could shove it in that very special “hundred year war” give-it-to-the French gesture you can’t really understand unless you have lived in the British Isles.



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Challenges and the Future of Africa – What insights for Europe?

On Wednesday, October 8th 2014, I was among the audience of the Wincott Lecture (hosted by the eponymous Foundation at Local Government House in London) given by Professor Sir Paul Collier, author of “The Bottom Billion – Why the poorest countries are failing and what can be done about it“. The topic was (sub-Saharan) Africa, its recent successes and future challenges.

The lecture was extremely pleasant and insightful. Although I have not yet read the book upon which the lecture was based, given the summary we were given in the lecture, I would recommend it. I will definitely try to read it when the time comes. My impression is that it illustrates the arguments it makes with examples of real life successes in African leadership.

The speaker was keen to highlight that Africa has succeeded in many respects but that for the sake of expediency he would be focusing on the failures of Africa and the remaining challenges to the continent. Due to the (quasi-)continental coverage of his review, his comments were necessarily general and focused on those shared elements. It was fairly high level but he focused on more qualitative dimensions.

African Failures

If memory serves me well, Mr Collier highlighted three main common areas of past failure and present concern for the future of Africa:

  • Management of energetic resources: How are the resources priced? How are revenues used? – Are African countries doomed to suffer from natural resource curse and the Dutch disease?
  • Management of urbanisation – Public infrastructure in Africa is very poor. Urbanisation is limited with the continent still possessing the largest level of rural population in the world. Economic growth, achieved with rising levels of productivity requires urbanisation, for the development of manufacturing and services industries where value added is higher.
  • The lack of a strategy for the future – Where are the countries going? What are their strategies? Is the focus on exploiting natural resources in order to consume now or is there a consensus that development requires public investment, the requisite for which is postponed consumption, potentially by one generation to the benefit of the next?

These are the questions that will shape the future of the continent as it continues to hope to develop. Are countries going to follow the failed consumerist path of Ghana or the stoic example of Botswana?

A different perspective on the sociological causes of African Failures

Having identified the challenges facing Africa, Collier considered a template for considering the dimensions shaping the likelihood of success going forward.

Identity-power (mis)match – Mr Collier makes the point that while most African countries are rather culturally fractionalised into several ethnicities, politically they are very centralised. Thus power is enforced from a level that does not overlap with anyone’s identity and preferences. At its least bad, it creates a one measure fits all approach to policy that is unfit for heterogeneous polities. At its worst is provides a forum for predation where whatever sectarian group gains power can exploit the country’s resources and distribute its benefits to its own members rather than benefiting the country as a whole.

Narratives of distrust of the state – This mismatch of identity and politics facilitates a narrative of distrust of the state, which is perceived as rapacious and a predator on individuals, a leviathan of predation along the lines of libertarian fears. The state takes but gives nothing in return. It just feeds itself and the pockets of those at its top; a sort of reverse Robin Hood.

Private-over-public interest norms – When the state is seen as a hurdle to individuals, the system becomes rigged against the little guy, who is financially oppressed. A failed state cannot be counted on to provide any sort of useful guidance so (discreet/private) disobedience is for the best. This creates a channel to legitimise corruption as a way to correct the evils perpetrated by the state. If a judge isn’t paid enough money, then auctioning a verdict will correct the evil. If a tax inspector struggles to feed his family, a bribe will correct the state’s greed. No one could be expected to do any differently and even if they did, they wouldn’t last long in those systems, because eventually they would starve. Nevertheless, the state stops functioning, not withstanding wonderful-looking institutions on paper (like competitive elections).

Perhaps in a slightly sceptical manner, I find it hard to believe that the author came up with this type of analysis, mainly because such concepts are more commonly found in political science and sociology than the lecturer’s natural economic habitat. Having looked around a bit I’ve come up with a number of culprits, none of which I find to completely satisfy his analytical framework. As far as identity is concerned, my first whiff of the topic came from my own field of economics, through the intermediary of Akerloff. One such theory is Narrative Identity. However, it seems more focused on the story telling of identity than on how identity and narrative interact. With regards to Norms, one interesting approach, which probably can be very useful in the analysis of corruption, is the Return Potential Model. These topics also seem to rise out of Paul Collier’s latest book on migration, “Exodus: How Migration is Changing our World“, which seems to have made some extrapolations people in the business of studying migration found inaccurate. However, and this might be a gap of my readings, I have never before seen these three dimensions so cleverly integrated into one cohesive analytical framework.

2 types of comments come to mind at this stage.

Misconception, Disengenious Arguments and the Broader Picture

The first type has to do with the narrow scope of the elements he chose to highlight in his talk and a specific remark that struck me as somewhat naive: I doubt that the speaker genuinely believes that those three sociological dimensions are what is necessary for Africa. Perhaps in my own exercise of confirmation bias, I chose to believe that as myself, and despite his criticism of the exaggerated focus that has recently been made on institutional economics, its diagnosis, prognosis and advice, the speaker would not recommend that reform in Africa (or anywhere for that sake) should focus on the above three dimensions at the detriment of institutional and macroeconomic variables. Clearly, growth requires investment in human capital and infrastructure, contextualised in an accountable and transparent structure of power with checks and balances and a legitimate orderly process of succession. His comments about identities, narratives and norms clearly play a role, and these insights are not insignificant. I agree that they are necessary. However, and much like the insights of institutional and those of macroeconomics, these sociological insights are not sufficient. I don’t believe that Mr Collier meant to imply his insights were sufficient, but his emphasis and exclusive focus was such that the audience could have been excused for believing otherwise.

This takes me to the specific example that stayed with me for how naive it struck me as. Bear in mind I am not part of the elite of any African country and have never met any of its members to this day. All I’m using is my judgement of the likelihood that events would unfold in the manner the speaker described it. As such, and armed with these very limited tools, a comment he made about informal checks and balances struck me as disengenuous. The specific example described the stoic exemplary lifestyle of a local president (I admit I don’t remember which) and how his personal lifestyle of simplicity and sacrifice inspired his countrymen, along the lines of what is happening in Uruguay with José Mujica. He went on to argue that if this president should he have decided to shift towards a more indulgent, ostentatious exercise of power as a despotic cleptocrat the internal pressure that would have been imposed would have been equivalent to that of a working judiciary as a check on government action. The idea is that he would have been removed from power at best or killed for his sins, in the worst case scenario. The argument was supported by the collective agenda adopted by the country’s elites and the stake of his supporters.

I find this comment disingenuous and prone to leaving the audience with the impression that the author believes all it really takes is a good leader and all is sorted, which is not true.Clearly a cleptocrat could easily buy off his less ethical opponents and eliminate those more staunchly opposed, particularly one as charismatic as this one appears to be. Moreover, the process would have been disorderly because the informality of such an institutional arrangement would have likely resulted in sectarian killings. Not that the situation could not have devolved into chaos in other countries, but a lack of checks and balances and blind trust that the elites will be enlightened to pursue the common wealth of the population even when faced with temptations is disingenuous.

I accept that I’m focusing too much on one example and this is not fair to the speaker, so I repeat that I agree with him and that I’m using this example as a case study on “how not to interpret” his argument. As a matter of fact, having looked for other talks of his, and found the following TedTalk lecture, it is apparent that my assumption is not wrong, even if his thinking on the topic has evolved to include these sociological elements when before he either ignored them in favour of institutions, of which he now seemed less keen to focus on.

To conclude this remark, I do find the three sociological dimensions described by Mr Collier to be extremely interesting. However, if I should use them to discuss development, I should look at them as the Societal Paradigm, the first of three pillars, the other two being Macroeconomic and Industrial Policy Political Institutions.

3 pillars of a prosperous society

With the “right” societal paradigm, are the right political institutions more likely to emerge, thus leading to better macroeconomic policies? – I don’t know. Most likely the whole thing is endogenous, but clearly if you tick all these boxes you are likely to be doing well. Whether the arrows should be there to show that one leads to another is not something I’m entirely confident of. (PS: for those of you unfamiliar with the concept of subsidiarity, it is the economic equivalent to identity-power match, except that it matches power with economic internalisation. If a policy has externalities, so that its (positive or negative) effects spillover onto its neighbours, the avoidance of free-riding from one to the other and the appropriate pricing of the costs or benefits of the policy might suggest pooling of sovereignty between the two regions. Thus human activity should be managed at its lowest level of political aggregation.)

From Africa to Europe – What implications for the EU?

Returning to praise, and this is the second type of opinion that the lecture left me with, I definitely found the relationship between identity-power mismatch, distrustful narratives and the prevalence of private-over-public interest norms appealing dimensions and logics for those looking for a new way to consider public attitudes to the EU. I would question the validity of the last leg regarding the private-over-public interest norms to this specific case, but I might be wrong. Supranational integration at the European level is not sufficiently high to offer similarly conspicuous opportunities for corruption to civil servants who are also extremely well paid, contrarily to the tax officials in DRC or judges in Ghana (I think it was Ghana).

Nevertheless, it is still interesting to apply these tools to the EU. What comes out? – Clearly there has been a shift over time from power being allocated at the national level to transfers of power to the supranational sphere. How they are perceived is very interesting. In the periphery, this is resented as appearing to limit national sovereignty, even when de facto sovereignty was already perceived to be below its idealised de jure level. This is a sentiment that is often expressed by countries when  the European Commission makes recommendations on desirable economic policy reforms, most recently by France’s Hollande. So perhaps there is an issue of mismatch between identity and power in the EU. Certainly, the resurgence of right-wing Eurosceptic nationalism is consistent with the theory that when the above type of mismatch occurs an anti-establishment narrative emerges. Like I said, whether such narratives have spilled into uncivic norms strikes me as more unlikely. Nevertheless, one interesting thing that I’m taking from this post as I get to its conclusion is that there might just be an underlying struggle between this cultural subsidiarity that requires identity to match power, and policy subsidiarity that requires the scope of a sector to be matched by the appropriate economic management and resources.

To me, Europe makes economic and geopolitical sense and no one has been able to give me a proper explanation against it. But it may not appear to make cultural sense (a criticism often levied against the project). In the USA, the war of independence helped set the ground for such a common past and a fitting narrative, but the economic differences between the North and the South still required national identity to be consolidated through civil war. In Europe, all we’ve got are 2000 chaotic years of war leading to a consensus for cooperation. But we don’t really have  a common narrative. We don’t really have a common identity. As integration continues driven as it is by subsidiarity and the management of externalities, will the shifting balance between cultural subsidiarity and economic policy subsidiarity begin to cause a rift in the fabric of the project? – I like economics because it tends to use tools that are useful to tractably think about the world, among them well-defined variables and mathematical logic. I like that you can make a statement and then pick it apart, looking at the required steps necessary to get to the described effect. Not only does it make it empirically relevant, in that you can test your hypothesis, but before that it is possible to work through the stages and make sense of things. My amateurism when it comes to sociology and the chaos that I perceive therein always made me suspicious of it and what I’ve perceived to be its focus on unquantifiable variables. Aside from Social Network Analysis, I never really saw a way to connect economics and politics with the stuff of sociology, like identities, narratives and norms. This is the first time I’ve found a way to think about the interaction of economics, politics and sociology that makes sense.

This has helped me make sense of how such a process of progressive failure might come to pass based exclusively on non-economic issues. Shielded as I was behind my absolute conviction of the inevitable merits of European integration, and because I still believe in the costs of going the other way, I’m a little spooked by the fact that I now can see how things could unfold the other way. It’s not a pleasant thought, but thank you Mr Collier.

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3 lessons from the Scottish referendum: the insult, the fear and the pork – where to from here?

This post could have also been named “How to campaign: confirmation bias, framework effects and the flypaper effect“. But I’m trying to go for a less academic tone these days, so I thought I should at least give the post a more accessible title…

I know I’m coming to this party so late we might as well admit it is over. No one is writing about this anymore. However, I’ve come to the conclusion that many a lesson can be learned from the Scottish referendum and the successful campaign against independence.

Lessons from the Scottish Referendum

First, you don’t gain votes by telling people something is too difficult, particularly when others can do it. It’s a negative message that mostly conveys a sense of perceived incompetence that offends the confirmation bias of those who’d have the responsibility of carrying out the task. In the case of the Scottish referendum, one of the least successful strategies appears to have been to argue that setting up a new country was too hard a task, with too many complex details. Confirmation bias probably means no one likes to get the impression their interlocutors think of them as inferiors. From this point of view, if we are to believe (the very credible) people of YouGov, the shift in conversation from the negative complexities of monetary arrangements to the benefits of a Scottish NHS went a long way towards helping the Scottish independence camp.

Second, fear works. Instead of focusing on how difficult something might be, focus on conveying the feeling that it will be costly, painful or dangerous. Framingk effects work in such a way that we discount potential benefits more than potential losses so that we fear more than we hope, which I would expect to have been an evolutionary adaptation whose adopters enjoyed a higher survival rate. On average we are chickens, basically. So scaremongering the Scots about being unable to coordinate policy for the Pound Sterling (£) and the danger of having the Euro worked.

Finally, votes are for sale. Fearful of the uncertainty that dominated buildup  to the referendum, the 3 leaders of the main British political parties sold the house and became great big sellers of pork, promising Scotland more political power for little more fiscal responsibility if it chose to remain in the union.

It’s not great leadership, but it worked, helped as it was by an already fairly split electorate.

The appeal of Independence

First and foremost, I was rooting for independence because if I were Scottish, I think I would resent the UK, much as I would resent a Spanish king if Portugal had not regained its independence in the 16th century. While a union might have been entered into voluntarily, it probably benefitted a limited number of Scottish aristocratic families that were able to easily integrate with their English overlords. Again, this is not a vociferous anti-British or anti-Scottish statement. It’s what happened when Portugal became a United Kingdom with Spain. Plenty of Portuguese (e.g.: Miguel de Vasconcelos and Francisco de Melo) received privileges and were favoured by the Phillips of Spain. It’s nothing British, English, Scottish, Portuguese or Spanish. It’s just what happens. Scotland also has a long tradition of nationhood and different preferences from England, with great national heroes like Robert the Bruce, the very famous William Wallace, and more recently with the roles it played during the Jacobite risings. Meanwhile, the Highland Clearances of the 18th and 19th century were not unlike the social abuses that accompanied the much vilified potato famine in Ireland, with similar migratory effects. Sure, the UK now foots the bill, but that only happened after Ireland became independent and the SNP started making political inroads. The specific arrangements of Scottish governance have been on the UK government’s agenda since the second half of the 19th century and this was the third referendum in half a century.

I think I would have liked my own country to be independently responsible for its own fate. Clearly no country is isolated from the rest of the world, so an independent scotland would only be viable as a offshore financial centre or as a member of the EU, but that would be its decision. Clearly there’s also an issue of disparity in preferences. Scotland is more leftwing than England is, probably due to having a poorer population, which I’d blame on the aforementioned history. In a way, British identity is dominated by English preferences so the exercise of power in the UK through policies is more in tune with English preferences than it is with Scottish ones. Because of devolution, this does not create the sort of mismatch in the UK that it would within the very culturally fractionalised but politically centralised African nations that Paul Collier discusses, but even so, it appears almost half the population of Scotland has indeed adopted a narrative of discontent, with norms that may justify secession in their eyes. But more on this line of thought next week.

The View from the Rest of Europe

Lastly, Scottish independence would also been interesting and have potentially fascinating externalities in relation to Catalonia. Although the latest poll shows a rise in support for continued union with Spain, past polls have shown that the pro-independence movement has much more strength in the still-Spanish region, but there seems to be no appetite for devolution or allowing Catalonian independence from Madrid.

From Catalonia a great push might create a trend and we could see local cultures in Brittany, Aquitaine and Corsica flourishing once again, coalescing around political movements and who knows extending throughout the rest of France? – Clearly, this is a domino theory of emerging European localism that is only possible in the context of the EU as a unifying power. I honestly haven’t properly thought this through, so I can’t say for sure that such fractionalization would result in the chaos that resulted from the collapse of Yugoslavia, undermining the quality of life of all citizens and potentially eroding the roots of the EU or whether it would be orderly like day the secession of the Baltic republics from the USSR. But it sure would have been interesting to watch. France did a pretty good job at unifying its regions under a single cultural paradigm, eliminating competing languages and regionalism since the middle ages, and particularly with the large scale national education system that followed the French revolution.

Going forward – This conversation isn’t over

The above notwithstanding, I believe the last drop of ink has not yet been spilt over Scottish independence. Either for the reason mentioned above, that the concessions from the UK will be too generous so as to make independence all but a formality, giving Scotland the level of autonomy granted to old protectorates in the early 20th century or falling short of Scottish demands.
One final alternative is that the fear incentive may be removed. The main concern was that Scotland would be out of the EU and it’s single market, left economically isolated from its peers. However, this British government, has long expressed its interest in bringing about a referendum over the UK’s continued membership of the EU. Such a poll would most likely result in a resounding vote for exit. Which would ironically remove the incentive for Scotland to remain in the UK. So we shall see.

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Coming back: Some changes and the promise of regular posts

Dear reader,

My apologies; I’ve been quiet for too long. If you are a regular reader of this website you are entitled to be rightly ticked off and legitimate in having all but written me and this website off. Here’s to hoping you haven’t, even if this is not the first of these posts I’ve written.

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Economic Growth and Military Expenditure: R&D, Consumption, Capture – What Future for Europe?

Before anything else, I want to start by acknowledging the fact that the focus of this article represents a relatively narrow section of what is an enormously interesting, fertile and relevant field of economics with much to contribute to societal welfare and development. I refer the reader to the section of this website with a list of selected references on economic growth, covering Sollow-growth theory, Ramsey models, overlapping generations, endogenous growth and institutional economic contributions to the field.

Perhaps the topic of this post section can be argued to fit within the endogenous institutional growth theory section. Nevertheless, the role of military-supported R&D in driving technological and by association real economic growth appears to me as being underestimated in the public consciousness and often ignored in supply-side debates of long term economic growth particularly in Europe. It appears to me that this is an unfortunate oversight both for its positive and negative potential. I offer a very short discussion of these issues below by emphasizing the appeal of the implications for economic growth and dangers of government capture and militarism.

In summary, it appears that there are four important factors behind the effect that government military expenditure has on economic growth: Scope, scale and how it is funded. The main strains of literature informing the considerations below stem from Ruttan (2006), Barro and Redlick (2011)Ilzetzki et al (2010) and Acemoglu et al. (2010.b).

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