Ferraris for all

Researchers at the Institute for Social and Economic Research at the University of Essex have produced an interesting but ultimately limited working paper (PDF) on inequality in Britain. Its focus is on the widespread acceptance of inequalities. It discusses theories, such as those of WG Runciman in the 1960s, that argue people are most interested in comparisons with those closer to them. But it concludes that rising affluence is the key factor behind the culture of contentment.

What such studies miss, based as they are on opinion poll data, is the bigger picture. A key determinant of perceptions of inequality is the possibility people see of transforming society. The idea that there is no alternative to the market has become mainstream for political reasons rather than simply as a result of economics.

Labels: inequality

David Miliband, Britain’s recently appointed foreign minister, is clearly bringing his previous preoccupations as environment minister to his new department. Last week he gave a speech to the United Nations General Assembly on inequality and insecurity. In it he argued – correctly - that poorer countries will suffer more as a result of climate change. But his approach of curbing consumption growth will not solve the problem. On the contrary, the only viable solution is to make poor countries far richer.

He also, like Jeffrey Sachs and others, links inequality to insecurity. In other words the approach is to try to defuse resentment rather than remove real inequalities by promoting development.

It is an upside down world he lives in.

Labels: consumption, development, environment, inequality

spiked has published a letter by me on the desirability of encouraging Indian villagers to use foot pumps to provide themselves with water. It is in response to an exchange between Brendan O’Neill, who argued that carbon offsets were being used to encourage such primitive technology, and Michael Buick of Climate Care who advocated such technology.

Whether you side with Brendan O’Neill or Michael Buick on the use of foot-powered water pumps in Indian villages depends on what you consider appropriate. Those who believe that Indians should enjoy Western living standards and the best modern technology should side with Brendan. Those who favour a life mired in rural poverty should support Michael.

Michael’s claim that Indian farmers choose pedal pumps of their own free will is ridiculous. It is like asking a person who is starving to death whether they are prepared to eat bread infested with maggots. They would probably eat the bread but only because better options are not available to them.

The real question is whether it is right for Indians to aspire to develop a modern industrialised and urbanised economy. As long as 70% of the population remains in the countryside, typically eking out a meagre living from tiny plots of land, the vast majority of Indians will remain poor. The solution to the lack of development is to change the character of the Indian economy rather than selling foot pumps.

Of course if Michael wants to use a foot pump to provide water for his own home that should be his free choice.

Labels: development, india, spiked, technology

BBC online has published a useful article which gives some insights into the contemporary debate on African development. After discussing how Africa is unlikely to met the Millennium Development Goals it quotes Simon Maxwell, the director of the Overseas Development Institute, saying that they “were always meant to be more of a tool of political mobilisation than an exact guide to aid strategy.” I take this to mean they were primarily for propaganda purposes in the West than promoting African development.

The article then goes on to discuss the latest report on economic development in Africa from the United Nations Conference on Trade and Development (Unctad). The report calls on African countries to follow the least of East Asia and encourage “developmental states” to help them develop. This view is supported by the likes of Matthew Lockwood (see post of 6 April 2007) and non-governmental organisations.

It is often said that the International Monetary Fund (IMF) promotes an opposing free market view to that of Unctad. But a speech to an Oxfam event this week by John Lipsky, the IMF’s first deputy managing director, envisioned an extensive role for the state in his conclusion:

“The public sector also helps to create the possibility of faster growth by providing a stable and predictable macroeconomic environment; by reducing the cost of doing business; by infrastructure investments; by providing health and education services; and by other sectoral reforms, including through improving financial and other regulations. And, of course, by working to reduce barriers to increased trade.”

Labels: Africa, development, economics

My comment in the latest issue of Fund Strategy argues that, if conditions are right, investment in infrastructure can be seen as part of an ethic of high expectations.

Infrastructure funds seem to be the latest fad. As Cherry Reynard reports in this week's cover story several groups have set up such portfolios.

Two key trends seem to be driving the surge in infrastructure investment. First, is the increasing privatisation of utilities and other infrastructure projects. In Britain such projects are part of the Private Finance Initiative (PFI) while internationally they are referred to as Build-Operate-Transfer (BOT). Such privatisations have given private companies the opportunity to invest in infrastructure.

The second driving force is the strong growth of the world economy and the developing world in particular. As poor countries become more developed they need more infrastructure including bridges, roads and telecoms networks. Such investment is vital for rapid growth to be sustained.

If the first trend makes private investment in infrastructure possible the second makes it desirable. In broad terms the more investment in infrastructure the better. It should help bring the developing world closer to the levels of production and consumption enjoyed in the West.

There is always a chance that infrastructure investment can be wasted. But the problem is too little infrastructure rather than too much.

Africa is an example of the difference infrastructure can make. It is in the middle of an economic boom that has lasted several years. However, its growth is heavily dependent on the production of natural resources. Developing infrastructure should make it possible to diversify its growth away from a heavy dependence on raw materials.

The rapid growth of mobile telephone networks is already making a big difference to people's lives in Africa. From a starting point of nothing many Africans are getting access to mobile phones. A conventional fixed line network would probably have taken a lot more time and effort to extend.

Of course private investors generally invest to make a return rather than for broader social reasons. In this respect infrastructure funds claim to offer risk and return characteristics that put them somewhere between bonds and equities. In this respect they can help diversify portfolios.

But if investors want to invest "ethically" how about an ethic of high horizons? More cars, more roads, universal access to electricity, access to a modern water grid, a mobile phone for all. That is the kind of ethic we could do with.

Labels: development, economics, ethics, Fund Strategy

I have stumbled across a paper by Aneel Karnani, an associate professor at the University of Michigan, which argues that microcredit does little to alleviate poverty. Businesses funded by microcredit tend to have low productivity and no economies of scale. He sees employment creation, with backing from the government, as key to eradicating poverty.

Labels: development, finance

Paul Krugman, a New York Times columnist and professor of economics at Princeton, has launched a blog. It seems the must-have accessory for any self-respecting economist nowadays (see my posts of 24 March and 25 April).

Krugman uses one of his first entires to publicise his new book, The Conscience of a Liberal. He describes it as: “a book about what has happened to the America I grew up in and why, a story that I argue revolves around the politics and economics of inequality.”

Labels: America, book, economics, inequality

Happily it looks like developing Asia has, so far at least, resisted the impact of the global credit crunch. A new forecast from the Asian Development Bank predicts economic growth of 8.3% this year compared with an earlier forecast of 7.6%. Growth of 8.2% is anticipated for next year as long as the global economy remains stable.

Labels: Asia, economics, finance

The 2007 State of the Future report from the World Federation of UN Associations takes a generally positive view of the future outlook. It starts by noting that people are becoming healthier, wealthier, better educated, more peaceful, increasingly connected and living longer. However, it also warns that the world is becoming more corrupt, congested, warmer and increasingly dangerous. Some of these latter claims in particular are open to question.

Labels: development, progress

Today spiked has published an important essay by Frank Furedi on environmentalism.

Labels: environment, spiked

My comment in the latest issue of Fund Strategy argues that the long-term economic growth of developing countries is far more important than short-term market volatility.

In the midst of the anxiety about a global credit crunch it is worth dwelling on some good news. The gap between the developed countries and the developing world has narrowed significantly thanks to rapid economic growth. In the long term this will prove a far more significant development than the turmoil in the credit markets.

Gross Domestic Product (GDP) per head in the developing countries grew by almost 30% from 2003-2007, according to the Trade and Development Report 2007 from the United Nations Conference on Trade and Development (Unctad). In contrast, growth per head in the developed world grew by 10%.

Thankfully this narrowing of the gap is the result of the developing world growing strongly rather than stagnation in the advanced economies. As has become usual in recent years the economies of China and India look set to be the star performers in 2007. But Africa is forecast to grow by about 6% with Latin America and West Asia growing by about 5%. Fewer than 10 of the 143 developing countries are expected to suffer a fall in GDP per head in real terms.

Despite this narrowing of the gap it is important to recognise the developed world remains far richer than the developed countries. In 1980 the developed countries were 23 times better off than the developed world in terms of income per head. By 2007 this gap had narrowed to 18 times. However, it should also be remembered that East and South Asia have performed substantially better than the rest of the developing world.

The rapid development of the poor world is confirmed by several articles on cities in the latest edition of the quarterly Finance & Development from the International Monetary Fund (IMF). While Latin America is already highly urbanised, Asia and Africa, the world's most populous regions, are urbanising fast. Already about half of the global population lives in cities.

Such urbanisation should be warmly welcomed. Along with industrialisation it is a key part of creating a modern, developed economy.

So rather than fret about a little volatility in global markets look to the longer term. The world economy is growing fast and demand looks set to rise particularly rapidly in the developing world. Things are far from perfect - in particular the developing countries have a long way to go. But there is enormous potential on the horizon.

Labels: cities, Fund Strategy, growth, inequality

There follows my review of Fantasy Island by Larry Elliott and Dan Atkinson (Constable & Robinson 2007) in the 10 September issue of Fund Strategy.

Larry Elliott and Dan Atkinson see Tony Blair as having turned Britain into a "fantasy island" during his decade in office. The two economics editors, Elliott at the Guardian and Atkinson at the Mail on Sunday, argue that Britain's apparent economic and social health is largely illusory. New Labour has, in their view, simply disguised problems and stored them up for the future.

Fantasy Island sees New Labour as responsible for five minor fantasies and two master fantasies. The minor fantasies relate to inflation, the knowledge economy, the public sector, work and defence. The master fantasies relate to debt and the environment. Behind all these fantasies is a common theme of excess. As Elliott and Atkinson argue: "There is a surfeit of consumption, a surfeit of speculation and a surfeit of deceit".

Before examining these fantasies in more detail it is important to note that this is a broadly sympathetic critique of New Labour. The two authors, who are not members of any political party, praise the organisation for its record on civil partnerships and the minimum wage. They also endorse its overseas record in relation to the Good Friday agreement, Kosovo, Sierra Leone and African development.

What they object to is Labour's habit of pretending two opposites are not opposite. For example, on the one hand New Labour preaches the virtue of people living within their means. On the other hand, it has presided over a huge build-up of household debt. Yet New Labour denies there is any contradiction between the two.

It is certainly possible to sympathise with Elliott and Atkinson's charge of self-delusion against New Labour. Its pronouncements are riddled with inconsistencies. Fantasy Island's strength is that it outlines many of these contradictions well. For instance, New Labour says it is against privatisation but, in its own covert way, has played a big role in privatising welfare services. The Private Finance Initiative has involved private companies in welfare provision at the cost of saddling the public sector with a heavy debt burden.

But the characterisation of New Labour's outlook as "fantasy island" in a way misses the point. If anything defines the party it is a lack of a broader vision of how to run society. It is the Ideas Lite party. To the extent it believes in anything it is regulating individual behaviour and imposing restraint on society. Labour has given up on taking control of the "commanding heights" of the economy and instead wants to tell people how to recycle their rubbish or what food to eat.

It is New Labour's lack of any principles that helps explain why it can take up apparently contradictory positions with such ease. Beyond its avid belief in social regulation it is highly pragmatic. All its leaders care about are the perpetuation of their own cliques and the survival of the party's electoral machine.

What Elliott and Atkinson are really saying is that Labour should be more consistent in its campaign against excess. Their starting point is the old environmentalist canard of limited resources: "living within our means has to start with acknowledging what the planet can and cannot bear." From this premise they go on to argue that it is necessary to start planning for a more frugal future.

Yet this underlying assumption is false. There is no finite amount of resources on the planet or limit to the extent to which humanity can exploit the Earth. The richer and more advanced we are the better able we are to utilise the planet to our advantage.

The pattern is clear in relation to energy but it could equally apply to other natural resources. Pundits have for decades predicted the exhaustion of oil supplies yet new sources of crude keep on being discovered. New fields are found, extraction technology improves and new sources, such as tar sands, are utilised. When oil does eventually run out there is no reason why it cannot be replaced with other sources of energy such as nuclear power or hydroelectric power. There is no fixed amount of energy in the world.

The same approach can be applied to climate change. For Elliott and Atkinson, as with so many others, this is seen as the ultimate factor limiting consumption. But much of the technology needed to tackle the problem already exists. There are already many sources of energy that do not emit greenhouse gases. There are also other technologies, such as modern flood defences, that can protect humanity against the impact of rising sea levels. What is missing is the resources for this technology to become widely used. More economic growth and prosperity should provide us with such resources.

No doubt technology will improve further still as long as science and experimentation are encouraged. One way to see the history of humanity is of ingenuity enabling it to overcome what were previously seen as insurmountable problems. In the longer term it may even be possible to use advanced technologies to control the climate.

Yet Elliott and Atkinson's starting point is the mistaken idea of natural limits rather than having a positive vision of creating a better society. Although they are reluctant to spell out the consequences of this world view it presumably means more austerity and restraint. It means curbing the growth in living standards and perhaps even cutting them in absolute terms.

From this perspective it is possible to see the true content of the authors' critique of New Labour. For them its problem is that it is not New Labour enough. It should not just preach austerity but follow it through in practice. Gordon Brown, until recently known at the "Iron Chancellor", does not have enough mettle.

What Elliott and Atkinson propose in place of Fantasy Island could be called Nightmare on Fleet Street. Their vision is even more bleak and limited than that of New Labour. In that sense Fantasy Island is a remarkable achievement.

Labels: book, debt, economics, Fund Strategy, review

Helene Guldberg writing in the latest spiked review of books reviews several works arguing, among other things, that affluence is damaging children’s lives. Guldberg counters that the problems are exaggerated and on balance children have benefited immensely from greater affluence.

A particularly interesting passage looks at how the idea of childhood can be seen as relatively new. She discusses the work of Philippe Aries, a French historian, who she describes as arguing: “In the seventeenth century the modern view of childhood first emerged, but it was not until the late nineteenth and early twentieth centuries, with the advent and extension of compulsory schooling and a corresponding decline in child labour, that childhood really existed in the modern sense.”

Labels: affluenza, book, health, progress, spiked

The Trade and Development Report 2007 from the United Nations Conference on Trade and Development (Unctad) has useful statistics on economic growth and inequality. For example, to quote one of the accompanying press releases:

“the per capita gross domestic product (GDP) in developing countries increased by almost 30% between 2003 and 2007, compared to 10% for the Group of Seven (G-7) highly industrialized countries. In 2007, six years after the start of the global recovery, fewer than 10 out of 143 developing countries are set to record a fall in real per capita income.”

Later it goes on:

“Despite this broadly favourable trend, the relative gap in living standards between the developed and most developing countries remains huge: in 1980 per capita income was 23 times higher in developed than in developing countries. In 2007 the gap had narrowed to 18 times. However, this reduction was entirely due to rapid growth in East and South Asia. For Africa, Latin America, West Asia and the transition economies, the relative gap in 2007 is wider than it was in 1980.”

Labels: development, economics, growth, inequality

The September 2007 issue of Finance & Development, a quarterly publication from the International Monetary Fund, includes some interesting articles on the global trend towards urbanisation. Highlights include Martin Ravallion, the director of the development research group of the World Bank, arguing that, if anything, an even faster pace of urbanisation is needed. There are also numerous charts and statistics to illustrate how the world is urbanising.

Labels: cities, development

There follows a news analysis by me for Fund Strategy on investment in Africa. Parts of it are technical but it is mostly accessible to general readers. There was also a related comment piece.

Fund groups seem to be taking Africa seriously at last. New Star recently let it be known that it is seeking regulatory approval for a Heart of Africa fund, which will be available to retail investors. A few days later Stanlib, the asset management subsidiary of South Africa's Standard Bank, launched two Africa Ucits III funds: one investing in South Africa and one in the rest of Africa.

Other fund groups are also responding. Fidelity has announced that South Africa will be a key holding in its new Emerging Europe, Middle East and Africa (EMEA) fund. And Investec, a South African-owned firm, is busy promoting its Africa funds.

To anyone with only a cursory knowledge of Africa this sudden interest probably appears odd. The mainstream media discussion of Africa tends to focus on such disasters as Zimbabwe's chaos or the Darfur crisis. Then there is the annual Red Nose Day, which portrays Africans as perpetual victims in need of Western charity. It hardly seems an attractive place to invest.

But there is a strong case for investment in Africa. Politically it has become more stable and investor-friendly than at any time in the post-colonial period. Economically the continent is booming. The International Monetary Fund (IMF) forecast of GDP growth of 6.2% for Africa this year compares with 4.9% global growth and 2.5% for the advanced economies.

John Mackie, the head of African funds at Stanlib Asset Management in Johannesburg, says: "There is a very strong underlying growth story, a lot of positive political developments and a lot of positive regulatory changes".

On the political front, African countries have moved away from the nationalist economic policy of the 1960s and 1970s. Today they are generally keen to encourage foreign investment as a way of promoting development. And they have mostly escaped from the economic stagnation that devastated Africa for much of the 1980s and 1990s.

On the economic front the continent is benefiting from the rapid growth of the world economy, and particularly China. The rapid rise of China as an industrial power has pushed up raw material prices, which in turn has boosted African producers. China is also investing in African infrastructure in return for access to raw materials such as copper, diamonds, oil and platinum.

But African development has not been restricted to raw materials and infrastructure. The rapid penetration of mobile phone technology is having a significant impact on the continent. Africa is also benefiting from increased tourism.

David Christie, the head of distribution for Ashburton in sub-Saharan Africa, is positive on what he calls a "cascade effect" as growth in one sector leads to broader development. "The emerging black [African] market has really taken to consumerism," he says.
The case for African investment is based mainly on these broader developments. But it also benefits from a low correlation with Western markets. Most African equity markets and currencies do not move in line with those of the developed world.
Of course investment in Africa also involves potential problems. Even the most ardent of advocates of Africa funds generally concede there are significant risks.

On the economic front the biggest risk is that the boom subsides or even goes into reverse. Africa has had growth spurts before but they have often proved unsustainable. If the world economy slows, and China's appetite for raw material subsides, the basis for Africa's recent growth would be threatened. Although Africa may be diversifying economically, it remains heavily dependent on natural resources.

Fears of such a reversal are at the forefront of the concerns of such organisations as the IMF and the United Nations' Economic Commission for Africa (ECA). To quote the ECA's "Economic Report on Africa 2007": "The current growth momentum ... rests on a very fragile foundation. The continent continues to rely on primary commodities whose prices have been major sources of trade shocks."

In relation to politics, the main concerns are exemplified by Zimbabwe, with its hyperinflation and stagnant economy. Investors fear that the rest of Africa could revert to such conditions but it is important to recognise that the country is at present an exception. "Zimbabwe is a basket case at the moment," says Stanlib's Mackie. "But it is only one of 50 countries in Africa."

There are also ways round some threats within African countries. One is to invest in companies, either African or with strong African interests, that are listed in places such as America, Australia, Canada or Britain. It is also possible to invest in South African companies as the country's market is relatively developed and many of its firms invest widely in the continent.

Perhaps the biggest immediate risk is liquidity. Buying and selling African stocks can be a cumbersome process. But diversification in stocks in different countries and sectors can help mitigate this problem.

Whatever decisions investors make, it is important to put Africa in its proper context. Its 920m people make up about 14% of the world's population, but in economic terms it accounts for only 3.4% of global output. Its stockmarkets are so small that MSCI only has indices for Egypt, Morocco and South Africa.

If investors decide to invest in Africa, it is not likely to make up more than a small proportion of their portfolio. But if Africa manages to sustain the growth rate it has achieved in recent years, that could change.

Labels: Africa, finance, Fund Strategy

The increasingly shrill attacks on China’s environmental record are staggering (see posts of 23 July, 24 July and 10 August). Elizabeth Economy, the author of a book on China’s environmental record, has written an essay for Foreign Affairs arguing argue bottom-up reforms are needed if China is to address its poor record. She sees the national bureaucracy as setting bold targets but attacks local officials for ignoring them.

Labels: china, environment