Ferraris for all

Anyone interested in my take on the latest volatility in the financial markets can read my comment in this week’s Fund Strategy (30 July).

Not long ago, any problems in a foreign mortgage market would be of little interest to British investors. The shift to a more global world economy and financial system, where markets have become closely interconnected, has changed all that.

Last week, America's subprime mortgage problems finally hit global equity markets. After months of jitters in the bond markets, the anxiety infected stocks and markets around the world tumbled.

To understand how "contagion" can pass from one market to another, it is worth examining how the problems have spread from subprime. Although the details are complex, the unfolding of the crisis can at least be outlined in schematic terms.

The origin of the crisis can be seen in the surging American house prices running up to 2005. As a result, lenders lowered their underwriting standards for new loans and increased the proportion of lending to subprime borrowers. The process is discussed more fully in last week's cover story by Vanessa Drucker.

When the housing bubble burst, the mortgage market was hit. Delinquencies and foreclosures leaped. Rising interest rates are likely to exacerbate the problem.

In earlier times, the difficulties would probably have remained confined to the mortgage market; perhaps hitting the American economy too. But in the more globalised world, it infected the bond markets.

One of the main transmission mechanisms from the mortgage market to bonds are Collateralised Debt Obligations (CDOs). These are essentially mortgage obligations that are bundled and traded in the market. The problems in the mortgage market have hit CDOs, which in turn have hit institutions, including hedge funds, that hold such debt.

Uncertainty about CDOs has increased risk aversion in the bond markets. Spreads between relatively safe forms of debt and risky bonds have widened.

Last week it was the equity markets' turn to take a hit. The main reason seems to be that until now relatively buoyant bond markets have helped support equities. For example, cheap debt has made it easier for private equity firms to buy company shares. But it appears that the equity markets have realised the days of easy money from bonds could be over.

None of this means globalisation is necessarily bad. On the contrary, the ability to spread risk has many advantages. But the down side is that problems can easily move from one market to another.

Labels: finance, Fund Strategy, globalisation

Branko Milanovic, lead economist in the research unit in the World Bank, is sceptical about the growth of a global middle class. In an interview with the Toronto Globe and Mail he says that even the recent years of strong economic growth will not automatically lead to a larger middle class. In Latin America or the post-Communist countries it might be a case of a middle class re-emerging rather than a new one being created. He also argues that the emerging developing world middle class is based on more casual forms of labour than earlier middle classes.

Despite his current pessimism he is more upbeat than in his 2005 book, Worlds Apart. That argued that the 1980-2000 period was bleak for the creation of a new middle class.

Labels: book, economics, globalisation, inequality, Latin America

Someone asked me recently to recommend an essay or long article, available on the internet, to illustrate growth scepticism. I found it hard because the genre is fragmented. There is a vast literature of articles on specific topics but relatively little that gives a good overview of the subject. It is a jigsaw composed of numerous tiny pieces.

Eventually I decided on the 1996 United Nations Human Development Report on “Economic Growth and Human Development”. Although the report is ostensibly not anti-growth it warns growth can be: "jobless, voiceless, ruthless, rootless and futureless, and thus detrimental to human development." Its focus is supposedly on the quality of growth rather than being hostile to economic expansion itself. But with support like that growth hardly needs opponents.

Labels: development, economics, growth

David Brooks, a conservative columnist for the New York Times, had an article on July 24 arguing that the trend towards inequality in America is being exaggerated. Although Brooks has a vested interest in countering the Democrat’s arguments it does not follow that everything he says is wrong. The column is reproduced in full below (see also post of 17 June):

A Reality-Based Economy

If you've paid attention to the presidential campaign, you've heard the neopopulist story line. C.E.O.'s are seeing their incomes skyrocket while the middle class gets squeezed. The tides of globalization work against average Americans while most of the benefits go to the top 1 percent.

This story is not entirely wrong, but it is incredibly simple-minded. To believe it, you have to suppress a whole string of complicating facts. The first complicating fact is that after a lag, average wages are rising sharply. Real average wages rose by 2 percent in 2006, the second fastest rise in 30 years.

The second complicating fact is that according to the Congressional Budget Office, earnings for the poorest fifth of Americans are also on the increase. As Ron Haskins of the Brookings Institution noted recently in The Washington Post, between 1991 and 2005, ''the bottom fifth increased its earnings by 80 percent, compared with around 50 percent for the highest-income group and around 20 percent for each of the other three groups.''

The third complicating fact is that despite years of scare stories, income volatility is probably not trending upward. A study by the C.B.O. has found that incomes are no more unstable now than they were in the 1980s and 1990s.

The fourth complicating fact is that recent rises in inequality have less to do with the grinding unfairness of globalization than with the reality that the market increasingly rewards education and hard work. A few years ago, the rewards for people earning college degrees seemed to flatten out. But more recent data from the Bureau of Labor Statistics suggests that the education premium is again on the rise.

Fifth, companies are getting more efficient at singling out and rewarding productive workers. A study by the economists Thomas Lemieux, Daniel Parent and W. Bentley MacLeod suggests that as much as 24 percent of the increase in male wage inequality is due to performance pay.

Sixth, inequality is also rising in part because people up the income scale work longer hours. In 1965, less educated Americans and more educated Americans worked the same number of hours a week. But today, many highly educated people work like dogs while those down the income scale have seen their leisure time increase by a phenomenal 14 hours a week.

Seventh, it's not at all clear that the big winners in this economy are self-dealing corporate greedheads who are bilking shareholders. A study by Steven N. Kaplan and Joshua Rauh finds that it's not corporate honchos who are filling up the ranks of the filthy rich. It's hedge fund managers. Or, as Kaplan and Rauh put it, ''the top 25 hedge fund managers combined appear to have earned more than all 500 S.&P. 500 C.E.O.'s combined.'' The hedge fund guys are profiting not because there's been a shift in social norms favoring the megarich. It's just that a few superstars are now handling so much capital.

Eighth, to the extent that C.E.O. pay packets have thickened (and they have), there may be good economic reasons. The bigger a company gets, the more a talented C.E.O. can do to increase earnings. Over the past two and a half decades, the value of top U.S. companies has increased 500 percent, according to Xavier Gabaix and Augustin Landier. The compensation for the C.E.O.'s of those companies has also increased 500 percent.

Ninth, we're in the middle of one of the greatest economic eras ever. Global poverty has declined at astounding rates. Globalization boosts each American household's income by about $10,000 a year. The U.S. economy, despite all the bad-mouthing, is chugging along. Thanks to all the growth, tax revenues are at 18.8 percent of G.D.P., higher than the historical average. The deficit is down to about 1.5 percent of G.D.P., below the historical average.

All of this is not to say everything is hunky-dory. Inequality is obviously increasing. There's evidence that global trade is producing more losers.

Instead, the main point is that the Democratic campaign rhetoric is taking on a life of its own, and drifting further away from reality. Feeding off pessimism about the war and anger at Washington, candidates now compete to tell dark, angry and conspiratorial stories about the economy.

I doubt there's much Republicans can do to salvage their fortunes by 2008. But over the long term a G.O.P. rebound can be built by capturing the Bill Clinton/Democratic Leadership Council ground that the Democrats are now abandoning. Whoever gets globalization right will have a bright future, and in the long run, the facts matter.

Labels: America, inequality

Monitoring the alleged sins of modern life

A new evil is stalking the land. The Energy Saving Trust (EST), a body founded by and partly financed by the government, has decided it does not like patio heaters. Its chief executive, Philip Sellwood, is quoted in an EST press release as suggesting that people should wear a jumper instead. He is also trying to discourage shops from selling them.

According to an article on BBC online the campaign is having some success: “Wyevale Garden Centres and Marks and Spencer have stopped stocking them, and the Mayor of London, Ken Livingstone has urged others to follow.”

So not only are we being encouraged to curb our drinking, eating and smoking but we are being asked to sit in the cold instead. But surely Sellwood does not go far enough according to his own logic. Manufacturing jumpers no doubt also creates carbon emissions. So perhaps we should all be prepared to sit outside naked in mid-winter? Or maybe we should give up socialising all together and stay indoors, on our own, with a low fat, organically produced ready meal?

Labels: climate, environment, sin tracker

Engineers Against Poverty has published a debate between me and David Nicholson-Lord, research associate of the Optimum Population Trust, in its July newsletter. Nicholson-Lord argues that the size of the global population is itself a problem. I counter that human ingenuity has enabled humanity to overcome apparently natural limits and is likely to do so in the future. The debate can be viewed on pages 3-5 of the newsletter: here (PDF).

Incidentally, Nicholson-Lord is also the deputy chairman of the New Economics Foundation (NEF). His involvement in both organisations suggests the NEF is more Malthusian than its radical reputation suggests.

Labels: consumption, development, environment, media appearances

James Woudhuysen has written a more extensive article for Spiked on bashing China (see yesterday's post).

Postscript (27 July) - some additional references:

* Brendan O’Neill’s article on the comment is free website on 25 July.

* Edward Burtynsky’s book of photographs on China.

Labels: china, development, environment, spiked

This week’s Fund Strategy included a comment by me on attacks on China for not being sufficiently green.

Last week seemed to be Bash China Week. Suddenly there was a widespread discussion of China's supposed failings.

Rather than caricature what is said, it is probably best to quote it verbatim. A cover story in Business Week, a prestigious global business magazine, started with the sentence: "Beijing can't clean up the environment, rein in stock speculation, or police its companies."

John Vidal, the environment editor of the Guardian, wrote on the newspaper's comment is free website: "What we are witnessing is the mass poisoning of a people and the ecological devastation of a nation."

Arguably the Guardian is prone to such hyperbole but Vidal's article was based on a report from the Organisation for Economic Development (OECD) on China's environmental performance. Naturally the OECD would not use such intemperate language as Vidal but its report was sharply critical.

No doubt there is some truth in many of these criticisms. They are also to some extent a counter to the hype about China taking over the world in the next 10 minutes. But they nevertheless exhibit a disturbing lack of perspective.

The starting point to examine this question should be the recognition that China is still a relatively poor country. As David Smith, the economics editor of the Sunday Times, pointed out in his recent book, it is 107th in the world in terms of income per head. China's income per head averages $6,000 compared with an average for the rich countries of the OECD of $25,000 (in 2000 purchasing power parity dollars).

This may surprise people who see the headlines about China's rapid growth. Indeed a striking news story last week was that China is likely soon to overtake Germany to become the world's third largest economy. But the apparent paradox is easily resolved. China's GDP has to be divided by 1.3 billion people to determine average living standards. So even though the economy is large in absolute terms the average citizen remains poor.

As a developing country, it cannot afford to be as concerned about the environment as a rich one. Environmental measures - whether reducing air pollution or cleaning up rivers - have a cost. That is one reason why economic development is positive: it gives countries the resources to clean up the environment for the benefit of their inhabitants. However, it also means that developing countries will often have other priorities, including escaping extreme poverty, which will outweigh improving the environment.

A continuation of China's rapid economic development will put it in the best position to deal with the other problems that it faces.

Labels: china, development, environment, Fund Strategy

Human beings are worth virtually nothing. That at least is the conclusion of the new “insignificance” tour at the prestigious American Museum of Natural History in New York. The tour is led by Jing Li, a Columbia university student, who is quoted in an article in the New York Sun as saying "The objective for me is to show how insignificant humans are on a planetary, evolutionary, and socio-economic-anthropologic scale". So humans have only lived for a tiny fraction of time in planetary terms, we are not at the top of the food chain and our environment determines who we are.

It is a sad reflection of contemporary society that human achievements are viewed with such disdain.

Labels: America, development, environment, progress

Spiked has published my review of The Bottom Billion by Paul Collier. For earlier discussions of this book see posts of 14 May, 6 June and 1 July.

Labels: Africa, aid, book, development, review, spiked

The Joseph Rowntree Foundation has produced two related reports on inequality in Britain.

Poverty, wealth and place in Britain, 1968 to 2005 looks at how the gap between rich and poor has risen to its highest level for 40 years. It also shows how the the rich are increasingly living in areas segregated from the rest of society.


Public attitudes to economic inequality examines people’s attitudes to inequality. It shows people are more likely to think those on higher income are overpaid than those on lower incomes are underpaid.


Data on poverty and wealth in Britain are also available: here.

Labels: inequality

Helen Johns and Paul Ormerod have written a useful critique of the idea that government policy should be focused on happiness in today’s Financial Times (“Don’t ask the state for happiness”). Their thoughts are based on their Happiness, Economics and Public Policy, which is published this week by the Institute of Economic Affairs.

Among the useful points they make:

* Happiness data “show no correlation with a whole range of factors that might reasonably be thought to improve well-being, such as a massive increase in leisure time, a tendency to live longer and a decline in gender inequality.”

* “More sinisterly, the happiness view of the world has tendencies that are inherently anti-democratic. The expert with his or her clipboard and regressions knows better than ordinary people themselves what makes them happy. So local democratic or individual decisions can be overridden with a clean conscience.”

* “GNP is not an all-encompassing measure of welfare; it simply measures the size of the economy.”

However, they do not go as far as Michael Savage in explicitly rejecting happiness as a worthy goal for human action (see 11 July post).

Labels: happiness

I have belatedly discovered a great letter by Michael Savage, an investment banker, criticising the idea that happiness is a desirable goal for humans to pursue. It was published in the Financial Times on 28 June. I have reproduced it in full below.

Sir, Even if "emotional resilience" and "the habits of optimism" can be taught ( "Why it is worthwhile teaching children well-being", Anthony Seldon June 26), I do not want to learn them. I am even more repelled by the freakish idea of being taught how to "run my body optimally". What Dr Seldon takes as pathological symptoms are more commonly and correctly viewed as part of the spice of life, sometimes dragging us down, sometimes pushing us forward. Trying things out and sometimes making "sub-optimal" choices for ourselves is better education than this.

In practice we knowingly devote most of our time to things that we do not expect to bring us happiness. Writing articles on happiness - and letters responding to them - is worthwhile as part of a conversation about the ends we ought to pursue, but does not make us happy. Only the most freakish children find school "fun". And one finding from the research on happiness to which Dr Seldon refers is that raising children makes people unhappy. But raising children, pursuing careers, observing religious strictures and researching happiness are all aspects of life to which we may devote ourselves for rewards other than hedonism.

If happiness really is the chief human good, we should supplement happiness teaching with additional investment in pharmacological research to find the best drugs. But Dr Seldon is wrong. People who are always happy are dull, and the hedonistic life is shallow and unrewarding. Education is partly about training us to see beyond the merely entertaining and consider more inspiring and worthy ends.

Labels: happiness

Spiked has published an article by me on the displacement of GDP as a measure of human welfare by broader social indicators. I argue that the statistical debate hides a more general anxiety about popular prosperity.

Labels: development, economics, growth, spiked

This week’s Fund Strategy included a review by me of David Smith’s new book on China and India.

A few years ago David Smith, the economics editor of the Sunday Times, was giving a talk on the world economy to a group of businessmen in London. After someone asked a question about China and India it emerged that the audience had a downbeat attitude towards the rise of the Asian giants. It was in response to this pessimism among business types, in the West overall rather than just Britain, that Smith wrote The Dragon and the Elephant.

Smith succeeds admirably in his aim of providing an overall assessment of the rise of China and India. He concedes at the start that he cannot match the local knowledge of those who have spent many years specialising in the two countries. Instead he brings to bear the relatively detached perspective of a seasoned Western journalist with a strong overall grasp of the world economy.

Smith's approach is essentially chronological. After a brief introduction he starts by examining how China and India fell from their historical position of being leading economic and technological powers. From 1820 to 1914 the European powers were dominant in the world while the rest of the twentieth century belonged to America. In the subsequent chapters he examines how China and India finally set themselves on the path to development. He ends with a chapter comparing China with India and a conclusion on 10 ways the rise of the two countries will change the world.

The Dragon and the Elephant avoids many of the common pitfalls in writing on China or India. For example, he shows both the growing importance of the Chinese economy in absolute terms and its relative poverty. Although China is one of the world's largest economies it is only 107th in the world in terms of income per head. The explanation is that China's GDP has to be divided between 1.3 billion people. But many commentators find it hard to reconcile the two facts,

Where there is a well-publicised debate relating to a country's development the book tends to give both sides of the argument. In relation to India, for instance, many commentators argue that the economic reforms of 1991 were a watershed in the country's development. But other influential voices point out that India's growth rate first accelerated in the 1980s rather than the 1990s.

Smith is also good at bringing out the contrasts between the two countries. China's growth record is much more impressive than India's. China's development is primarily industrial while India depends heavily on services. India's population is, on average, substantially younger than China's. Nevertheless the two countries are still both, at least in population terms, largely rural.

If there is a problem with Smith's book it is a corollary of his project of summarising the received wisdom on the two countries. It is usually the case that the mainstream ideas on any subject are flawed. That is true of perceptions of China and India.

An important example is the exaggerated importance attached to demographics. Many commentators claim that, over the long term, India has an advantage over China because of its younger population. But a key lesson of economic development should be that the more productive an economy becomes the less demographics matter.

Comparisons between those of normal working age and those outside working age reveal little about the character of an economy. As an economy becomes more advanced it becomes possible for fewer people to support a larger number at a higher standard of living than previously. Dependents could be people outside the working age or alternatively they could be individuals who are unemployed or in education. As technology becomes more advanced and health improves it also becomes easier for the elderly to work too.

The problem India has with a huge pool of unskilled, agricultural workers is economic rather than demographic. It needs to promote a form of development that can bring these workers into the industrial and service sectors. The challenge is one of underdevelopment rather than of too many people.

Smith also wrongly takes it as given that economic development necessarily brings environmental problems. He says: "The nightmare, for the global environment and demand on the world's energy resources, would be a rise in Chinese car ownership towards American levels". That would certainly amount to several hundred million more cars on the road but it is not clear that it should necessarily be a problem. A lesson of economic history should be that economic development allows humanity to harness resources more efficiently. A richer society should have the necessary means to build a transport infrastructure able to handle so many cars. Technological development should also mean they are cleaner and more efficient than the present generation of vehicles.

The Dragon and the Elephant can also be faulted for its adherence to what could be called the "revelation" theory of economic development. Smith implicitly accepts the view that rapid development came to China and India because their leaders finally accepted free market principles. Until then, so the argument goes, they were enmeshed in socialism in China or Fabian dogma in India.

But the development process in the two countries was never as simple as that. In the decades following the second world war there was relatively little foreign investment or trade available for developing countries so correspondingly little incentive to liberalise. In any case the state still plays an enormous role in China's economy today and an important one in India.

Nevertheless, as an introduction to the rising economies of China and India The Dragon and the Elephant works well. It should provide a good starting point to anyone who wants a lucid primer on the subject. However, working out the real significance of developments in China and India is beyond the scope of the text.

Labels: Asia, book, china, Fund Strategy, india, review

This week’s Fund Strategy included a comment by me on changing patterns of world trade.

Agriculture has become a relatively niche enterprise in modern industrial economies. However, the latest 10-year Agricultural Outlook from the Organisation for Economic Development (OECD) and Food and Agriculture Organisation (FAO) of the United Nations highlights some important trends*. These apply to the economy and investment more generally rather than just agriculture.

Perhaps the most straightforward is that, in relative terms, agriculture is becoming less important. Everyone still needs to eat but agriculture is accounting for a smaller proportion of world trade and the global economy.

Second, trade is expanding, both in terms of the numbers of countries involved and the extent of trade. This is a key part of the globalisation process.

However, a few big players still dominate trade in agriculture. Back in the late 1980s the largest exporter was America followed by the European Union (EU) 15, Australia, Canada and Brazil. In the early part of this decade the EU had taken the lead followed by America, Brazil, Canada and Australia.

But the pattern is in the process of changing with the rapid growth of the developing world and Asia in particular. South-South trade is becoming increasingly important. In the case of agriculture the report describes the growing presence of Argentina and Brazil as "staggering". Other key southern exporters include India, Malaysia, Russia, Thailand, Ukraine and Viet Nam. In manufacturing it is clear that China is playing the leading role.

The growing affluence of the developing world is also affecting consumption. One of the clearest indicators is that people in the south are eating more meat. As countries become more affluent their consumption, and meat in particular, tends to rise.

Finally, the report shows how the increasing popularity of biofuels is putting up the cost of agricultural commodities. As biofuel production is increased the amount of land devoted to producing food falls. This has a direct impact on agricultural commodities and an indirect effect on meat as feed prices increase too.

This is also part of a broader trend in which environmental measures could play a role in increasing prices overall. For example, regulation and the promotion of environmental standards incur costs. While there is sometimes room for such measures it is important to recognise that they are not free and they can go too far.

So in some respects the world has not changed as much as many assume. The developed economies still play a dominant role in the world economy. However, as the rapid development of the south continues, particularly in East Asia, this pattern looks set to change considerably.

*OECD-FAO Agricultural Outlook 2007-2016. Highlights are available: here.

Labels: development, Fund Strategy, trade

The Economist has some peculiar but useful coverage of the Millennium Development Goals (MDGs) in this week’s issue (7 July).

Its comment on global poverty seems unclear about whether to welcome or oppose them. It says” “the MDGs can justifly claim to generate a bit of buzz about duties a government might neglect.” But it goes on to argue that: “they cannot do what they purport to do, which is to provide credible benchmarks against which governnments can be judged.”

The conclusion sums up the confusion:

“The millennium bash [in 2000] secured global agreement on what matters. That is not nothing. But impoverished countries have to start where they are, not where summiteers might wish them to be. Aid money cannot bridge that gap, and the custodians of the MDGs should not pretend otherwise. But nor should a lack of foreign cash stop countries inching their way out of poverty by their own efforts—which is the only way any nation has ever done it. To make poverty history, you have to understand how history is made.”

What this misses is that the MDGs institutionalise a climate of low expectations in relation to devlopment. Rather than seeing development as a process of transformation, from a poor society to a rich one, they reinforce the idea that alleviating the worst aspects of poverty should be the key goal.

Meanwhile, the Economist’s briefing on the MDGs is more useful. Among other things it shows the long history of United Nations promises on development and the relative success of the world in reducing extreme poverty.

The article also includes a passage on Africa which provides a partial rejoinder to the situation is getting worse (see 4 July post). Overall the situation seems to be improving although progress is painfully slow:

“The extreme-poverty rate in Africa has fallen from an estimated 46% in 1999 to 41% in 2004, but that is still way off the 2015 target of 22%. Hunger and malnutrition still gnaw at the region: the proportion of under-fives who are underweight has declined only marginally, from 33% in 1990 to 29% in 2005.”

Labels: Africa, development

An article published today on the Guardian’s comment is free site shows how apparently radical views on inequality and corruption can lead to conservative conclusions. Salim Lone, a columnist for Kenya’s Daily Nation and former spokesman for the UN mission in Iraq, starts by bemoaning Africa’s poor record on development. He goes on to argue that:

“In truth there was never any real prospect that western governments, which have gleefully presided over the creation of new classes of the super-super-rich, would use their considerable influence to push African leaders to pursue policies which would shift resources away from the rapacious national elites towards the poor.

“Nor was it likely the west would permit Africa to stray from the neoliberal orthodoxies prescribed for the continent by the World Bank and the IMF. These policies have generated wealth for elites and created economic growth in a few countries, but have proved over two decades singularly unable to reduce the human misery afflicting hundreds of millions.”

While Western intervention is certainly open to criticism it would be easy to draw the conclusion from Lone’s argument that real development is not welcome. From his perspective any economic growth could simply benefit the rich and encourage corruption. His view is also compatible with the current emphasis on alleviating the worst excesses of poverty rather than transforming poor economies into wealthy ones. And given his former job at the UN he clearly has no principled objection to Western intervention in he developing world.

Labels: Africa, corruption, development, inequality

This week’s Fund Strategy included a comment by me on Gordon Brown’s decade as chancellor of the exchequer.

The conventional wisdom is that Gordon Brown's 10-year tenure as chancellor of the exchequer was a success. One of the main arguments against this view is his abject failure to meet his stated aim of closing the productivity gap with Britain's competitors.

A new study by the Centre for Economic Performance (CEP) at the London School of Economics* shows there is still an enormous productivity gap between Britain and other developed economies. Output per hour worked is 13% lower than Germany, 18% below America and 20% below France.

To put this into perspective the report points out that: "if we could reach French productivity levels, we could award ourselves 20% higher wages or take a day off and still earn the same. Or we could spend the extra resources on schools and hospitals, greater benefits for the needy or lower taxes."

The productivity gap also has important implications for the British corporate sector. Over the long-term it is a key determinant of corporate health. As the old adage says: "productivity isn't everything, but in the long run it's almost everything."

To be fair Britain's productivity gap with France and Germany has gradually narrowed since 1991 - although that was before New Labour came into office. But the key continental economies remain substantially more efficient than Britain.

The CEP gives several reasons for Britain's relatively low productivity. Britain's research and development (R&D) as a proportion of national income has steadily declined since the early 1980s. Britain spent 1.1% of GDP on R&D in 2004 compared with 1.7% for France, Germany and America.

Another part of the explanation seems to be the relatively low skill level in Britain. According to a 2006 report from the Organisation for Economic Cooperation and Development: "the UK's skills base remains mediocre by international standards." Seven million adults lack functional numeracy while five million lack functional literacy.

Britain's skill level is substantially worse than its peers. The proportion of low skilled people in Britain is three times higher than America and almost double the level in Germany and Japan.

No doubt there are other important elements of the explanation for Britain's productivity gap. But whatever the reasons it represents a key failure of Brown's time as chancellor.

*"UK productivity during the Blair era". Available: here (PDF).

Labels: economics, Fund Strategy

Niall Ferguson, a professor of history at Harvard, had a review of Paul Collier’s The Bottom Billion in today’s New York Times (also see posts of 14 May and 6 June). Ferguson argues that the most high profile recent debate on Africa has been between Jeffrey Sachs of Columbia University and William Easterly of New York University – both white men based in New York. Sachs argues for government intervention to help solve the problem whereas Easterly is sceptical about the benefits of aid.

Ferguson goes on: “Now comes another white man, ready to shoulder the burden of saving Africa: Paul Collier, the director of the Centre for the Study of African Economies at Oxford University. A former World Bank economist like Easterly, Collier shares his onetime colleague’s aversion to what he calls the “headless heart” syndrome — meaning the tendency of people in rich countries to approach Africa’s problems with more emotion than empirical evidence. It was Collier who pointed out that nearly two-fifths of Africa’s private wealth is held abroad, much of it in Swiss bank accounts. It was he who exposed the British charity Christian Aid for commissioning dubious Marxist research on free trade. And it was he who pioneered a new and unsentimental approach to the study of civil wars, demonstrating that most rebels in sub-Saharan Africa are not heroic freedom fighters but self-interested brigands.”

Collier argues there are four traps into which the poorest countries tend to fall:

* Civil war.
* The resource curse.
* Being landlocked.
* Bad governance.

His preferred solution, which Ferguson supports, is more Western intervention. This can take the form of the growth of international law and military intervention where necessary.

David Chandler, professor of international relations at the University of Westminster, also refers to Paul Collier, although in passing, in a review article on liberal interventionism in spiked this week. Chandler points out that Collier was the head of a World Bank team on conflict studies which influenced, among others, Paddy Ashdown. Chandler also cites a 2000 book by Collier and a World Bank paper (PDF) he co-authored in 2001.

Meanwhile, William Easterly has an article in the latest issue of Foreign Policy (July / August) attacking “the ideology of development”. His argument is straightforward: “like Communism, Fascism, and the others before it, Developmentalism is a dangerous and deadly failure.” His target is not increasing prosperity as such but the idea it can be promoted by the authorities from above. He names Jeffrey Sachs and Thomas Friedman of the New York Times as key proponents of the developmentalist approach.

Labels: Africa, book, development, review, spiked

London’s Tate Modern gallery has a fascinating exhibition on 10 of the world leading global mega-cities: Cairo, Istanbul, Johannesburg, London, Los Angeles, Mexico City, Mumbai, Sao Paulo and Tokyo. It looks at the cities from five perspectives: size, speed, form, density and diversity.

Even the basic statistics on cities are worth knowing. For example, in 1900 only 10% of the world’s population lived in cities, now it is 50% and by 2050 it is expected to be 75%. Also 95% of urban growth in future is expected to be in Africa and Asia.

An earlier version of the exhibition was shown at the 10th International Architecture Exhibition at the 2006 Venice Biennale. Some of the additional exhibits deal with predictably dull topics such as the environment and sustainability. But the bulk of the exhibition gives some insight into a key characteristic of the contemporary world. There are also further resources on the accompanying web pages on the exhibition.

Global Cities is free and runs till 27 August.

Labels: Africa, Asia, cities