The Economic Consequences of the McPeace

The great Anne Applebaum argued in the Washington Post on Friday that Russia’s embargoes on Western products were the first stage of the end of globalisation and the final disproof of the theory that countries with McDonalds don't fight each other (the "McPeace" theory).   Anne knows more about Russia and Eastern Europe than I can ever hope to, and on that ground  I wouldn’t take her on.  But she set me thinking.  On her broader point on globalisation, I don’t think she’s quite right, but (as you’d expect)she's wrong in an interesting way.

Anne is certainly right to argue that the successive waves of sanctions mean that:

“a large country…has decided it prefers a territorial war with one of its neighbours to full membership in the international economic system”.

given that there is little doubt that Western financial sanctions are going to make it much more difficult for Russian banks and other countries to play as equals across (at least) Western markets.

Is it right to extrapolate from that, though, that:

“This week globalisation suddenly began to unravel a lot faster than anybody imagined”. 

and, more, that, this was a shock, because:

“globalisation offered a reassuring promise of irreversibility … we have taken for granted the assumption that globalisation is a new stage in world history, not a passing phase”. 

In fact, I doubt many international economists really think that.  It is, after all, almost obligatory to refer ominously to Norman Angell’s “The Grand Illusion” in any serious discussion of globalisation. And it is possible after all for any country to opt out of anything if it really wants to.   

Still, reversible or not, is this in fact the beginning of the triumph of politics over international economic integration?  I don’t think so.

First, what’s been striking since the Great Crash of 2008 is the continuity of economic integration, even though many countries will have been tempted to put up politically-driven barriers to trade and investment.  There’s been a bit of that, as the WTO has documented, but on the whole it’s not been significant, even in zones of relative tension like East Asia.  The only country that seems to have had a serious go is Argentina, marginal to the system and with its own brand of dysfunctional domestic politics driving it. 

Second, where countries have used trade measures, they’ve done so more to make a point rather than to cut themselves off seriously from global markets.  The EU and China’s trade niggling with each other over the last few years has aimed mainly to demonstrate to each other, and to domestic opinion, that they can’t be pushed around.  Russian sanctions on Western food products are a notch up from that, but probably only a notch, and anyway these products are a small part of most Western economies and often not very freely traded in the first place, thanks to the excellence of agriculture policy-making over the years.  (Russia is after all hardly the only country to have decided, as Anne’s article puts it, “it can accept higher food prices in the name of national honour”.)  Western sanctions are more serious, but would of course be rapidly reversed if Russian policy ever changed significantly. 

Third, Russia is only imperfectly globalised anyway.  True, Russia’s energy is traded on global markets, and Russian banks are significant participants in global capital markets.  But otherwise Russia is barely connected to the supply chains that drive industrial production nowadays, or to the flows of services that go with them – the global value chains that fuel prosperity.  Indeed that lack of connection is one reason why a business like McDonalds finds it hard to operate in Russia as it would elsewhere.  Russia can afford to cut itself off for a bit because the connections are quite weak anyway. 

So, no, I don’t think this is the beginning of the end.  But could it ever happen?  Could globalisation reverse out? 

Obviously it could.  Political conflict could bring the whole thing crashing down as in 1914.  But a more likely scenario over the next decade or two is that political tensions between the big regional players encourage globalisation to stay regional.  Most value chains are still regional not global, in three great economic regions centred on the US, Germany, and China.  The connections between them are relatively weak and many African and Latin American countries are not connected to any.  There are definitely scenarios where none of these connections ever get made, with foreign policy and domestic political pressures causing global integration to stall.  That could easily be a world of persistent  political tension between the blocs and maybe, one day, low-level conflict in the border areas.

That’s why inter-bloc initiatives like TTIP, TPP, and the EU/China and EU/Japan trade negotiations matter so much.  However slow, imperfect, and frustrating, they are ways of putting in the high-level economic wiring between regions that will make it harder to turn the lights out in years to come.  We should all be getting behind them.  They need to succeed.  If they don’t, then, yes, we could one day be in that world of regional blocs, with the balance of power determining relations.  Sound familiar?

Next year we are to bring the soldiers home

The article by Janan Ganesh (whom I don’t know but whose writing I generally enjoy) “Small-scale vision is right for post-imperial Britain” (£) is a perfect example of what happens when foreign policy is seen entirely through an economist’s prism.

He argues that:

“Britain…does not need a foreign policy, if that means an overarching mission or a take on the world.  What it needs are foreign policies.  It must know what it wants in specific areas of vital interest – these need not cohere into some grand narrative to please the windbags of diplomacy - and be prepared to let the rest go.”

He defines the “rest” as anything other than the EU or its “volatile borders”. 

Strangely, he claims a couple of paragraphs later that:

“Britain…has an interest in the preservation of a rules-based liberal order across the world, just as it did in 1914.”

Some might think that actually amounts to a grand narrative, but let that pass.  He goes on to justify that vision by saying that Britain

“does actually have a role in the world, and it is that of host.  It is a nexus for global flows of capital and people, and makes its living this way.”

That is true (up to a point).  However, it doesn’t particularly depend on a global liberal economic order.  Indeed, arguably, if Britain was the only liberal country in the world we might expect to do even better as host for foreign capital, just as Hong Kong and Singapore did in an illiberal East Asia, Cyprus in an illiberal Middle East, and so on.

So what is going on here?  Should we be trying to influence the world or not?  Reasonable people will of course agree with Ganesh when he argues that Britain’s economic heft should determine its foreign policy.  We cannot have a successful foreign policy if we are an unsuccessful economy.  But he draws the wrong conclusions from this, as so many do nowadays.  Why?

First, he exaggerates our past power.  Even in Britain’s heyday of the mid to late 19^th century whole areas of the world were off limits to Britain for anything other than economic activity: most of the Americas, much of East Asia, and indeed much of continental Europe.  And it was our inability to be the offshore balancer of Europe by the end of the 19^th century that forced us into the Entente and all that followed.  More recently, for all America’s power, it was on the defensive for big parts of the Cold War, and even thereafter was not able to impose its will even on small and relatively undeveloped countries.  In short, even the world’s mega-powers have had significant limits on their influence.  Was that a reason for them to give up on foreign policy?  No.  It was a reason to take it seriously. 

Second, in a smaller globalised world our strategic vision needs to be broader, not narrower.   Ganesh might actually have been more right twenty-five years ago.  In 1989, at the beginning of the current wave of globalisation, a major power like China could threaten Britain only through using nuclear weapons, not through conventional means, and a country like Iran could not seriously threaten us at all.  Nowadays remote cyber-attacks can bring key parts of national life juddering to a halt.  Human-delivered chemical or biological weapons can cause mass casualties.  Even serious economic sanctions can have dramatic effects.  In short, with not much effort, any country is within reach of any other nowadays.   So, even if we had no global interests at all, it would still be sensible for us to take an interest in other powers’ foreign policy and political intentions, and to do what we could to reduce conflict and promote prosperity. 

Finally, and most importantly, Ganesh implicitly buys into the narrative that Britain has little capacity to influence events – “one medium-sized power among many”.   Luckily, that is simply not so.  Of the 193 UN  member states, we rank sixth in economic power, and we will probably be fifth again soon when we overtake France.  The British economy is bigger than Brazil, bigger than India, bigger than all the ASEAN  countries put together.  As far out as 2050 we will still be in the Top Ten global economies.  Indeed, only the US and China are genuinely in a different class as powers.   And if Britain and France could really get their foreign and security policies together, as many hope and wish, together they would be the world’s third biggest power,  bigger than Japan or Germany.

So let us forget this idea that Britain can’t have strategic reach.  We can.  But we need to be ready to pay for it.  What we are is not a weak power, but a strong power that chooses not to act strong.  We simply don’t invest in a strong external policy.  That is not just the ability to wage expeditionary warfare.  It’s the ability to train and work with others’ militaries, to maintain military expertise and production that others want to buy into, and to maintain a diplomatic effort that genuinely knows what is happening overseas and can properly define interests and direct activity at home.  It’s also the ability to stand by our word, our allies, and our friends, and to see things through.  In short, to command respect. 

In neglecting this, we seem to be gradually becoming “normal European”, with the diplomatic services and military getting by on a shoestring, with much potentially constructive activity wasted on futile multilateral coordination, posturing, and such-like displacement activity, and with the country unable to see projects through for infirmity of purpose. 

As Philip Larkin put it in 1969:

Next year we are to bring the soldiers home.

 (…)

It's hard to say who wanted it to happen,

But now it's been decided nobody minds.

The places are a long way off, not here,

Which is all right, and from what we hear

The soldiers there only made trouble happen.

(….)

Our children will not know it's a different country.

All we can hope to leave them now is money.

Lear's Fool and public administration: Part 2

I argued in my previous post that the traditional model of relations between Ministers and officials was unrealistic in the modern world.

So what is the alternative?

Bringing in the odd special adviser or technical specialist is not enough.  There aren’t enough SpAds and there never will be.  Anyway, their role is firefighting and obstacle-clearing, not complex policy design.  Equally, specialists recruited from outside government often find it hard to work as policy officials.  It takes them time to adjust to the risk-aversion of government or to the fact that subject expertise often takes second place to political needs. 

Instead, our system needs to evolve more significantly.  I therefore recommend two reforms.

First, normalise movement in and out of the system.  Not at the margin but as the norm.  The UK is fortunate in having a conglomeration of think tanks, professional advisers, academics, and experts in all fields that is second to only the US.  Few of the people who work in them would think of spending a spell in government except, occasionally, as a specially recruited political adviser.   That is a real loss.

Instead, we should make it easy for experts to come in and out of government in much larger numbers.  We should actively expect rotation of senior officials and advisers into and out of the bureaucracy when a new government comes in, probably for fixed but renewable terms, precisely because they are subject experts and because they have sympathy with the political goals of the government.  As governments changed, this would happen again.  Over time the higher reaches of outside organisations would be peopled with individuals who understood the realities of working in government and might yet have that experience again. 

Some will argue this is not consistent with Northcote-Trevelyan.  But that train has left the station.  There already are outsiders in government, at all levels, not recruited through the civil service entrance exam.  There just aren’t enough of them to make a difference and they have to operate in an culture shaped by the permanent officials.  Bringing in a critical mass of such people, with executive authority, would dramatically change the mood in government and the incentives on officials. 

Second, designate certain senior official roles as “public-facing” and requiring a confirmation process before the relevant Parliamentary Select Committee.  This would include permanent secretaries, probably DGs (the next grade down), specific professional roles such as chief economist or chief scientist, and a significant subset at least of ambassadors.  Such confirmation would be needed whether the incumbent was a permanent official or an outsider brought in.  Procedural rules could be devised to ensure that confirmation processes did not drag out like the US system.  The point here is that such officials could be questioned about political and party political realities and their own views about them.  They’d have to have the confidence of their Minister in doing so (or else they wouldn’t be proposed or would fail confirmation) but once endorsed they would share in the Minister’s legitimacy to speak publicly on controversial issues, to make a case, and even to take decisions on Ministers’ behalf.   

Both these reforms would go in the same direction – to have capable and intelligent people running our government, but people who are not committed for life to a subordinate bureaucratic role.  Both reforms would help us manage the reality that such relatively expert officials would have views and perspectives of their own. 

That is an important point.  I don’t believe you can reasonably expect intelligent people to restrain their judgements, to do things they believe are mistaken, to suspend their own judgement in favour of others – just because Ministers tell them to.  The whole of the rest of society encourages people to speak up, to say what you think, to be true to your convictions.  What I am recommending goes with this grain, while managing it and using it for Ministers’ and the system’s best advantage. 

Martin Donnelly is right to say that under current arrangements officials develop ironic detachment as a defence mechanism distancing themselves from things they are asked to do.  But that’s not a good thing.  There are few other organisations where that would be seen as a desirable quality in employees.  Lear’s Fool is scarcely a good model for good administration. 

Lear's Fool and UK public administration: Part 1

Over the last couple of weeks there has been a flurry of comment on the capability of the UK civil service and the relationship between Ministers and officials. 

Martin Donnelly, Permanent Secretary at the UK’s Department for Business (= Economics Ministry), speaking to the Institute for Government on 30 June, set out in a characteristically thoughtful and elegant way a defence of the traditional framework.  Deliberately or not, it read as pre-emptive retaliation to Cabinet Office Minister Francis Maude, who it transpired, had already denounced to the Cabinet a memo purporting to set out the roles of permanent secretaries and the permanent civil service.  There has been a round of broader comment from people like Janan Ganesh in the FT (£), Dominic Cummings on his blog, and Giles Wilkes, an ex-SpAd colleague at BIS.

What is a reasonable person interested in government meant to make of all this?

I think all sides overstate their case.  But, putting my cards on the table, I am more with Ganesh and Cummings than with the proponents of the perfection of the current system, though for slightly different reasons.  I left government unconvinced by the current system and have come to think it in need of reform.

I’ll explain why, but let Martin Donnelly put the traditional view first.  His defence of the system rests on three premises.  First, that officials need to be professionally committed to Ministers, but within mutually understood boundaries, based on independence but an appropriate degree of mutual trust.  Second, that this collaborative relationship can deliver the best possible outcomes within a given political space, provided that officials understand their limited advisory role and that Ministers can give room to their different perspective.  Third, that wider society gets a good deal, provided the civil service can accept limits on its monopoly of advice and communicate with the wider world without usurping Ministers’ ultimate democratic legitimacy and profile.

What could be wrong with this?  Capable people serving Ministers professionally and helping them reach the best possible decisions?

Nothing – if it were really like that. 

The fundamental problem is not that this is a poor system.  It is that it requires super-paragons of the virtues to operate it in the way it’s meant to.  In a way the Maude document illustrates that.  Who could possibly incarnate all the requirements set out in it to be a good permanent secretary?  Anyone who could would be wasting their time on a permanent secretary’s salary.  In reality of course people are not like that, either at permanent secretary level or at any other.  That is simply human nature.   

So what’s the problem?  There are lots of issues: the infinite demand for civil servants’ work, the overload this causes for dedicated officials, and the readiness to accept second best in too many areas.  But here I want to highlight just three aspects. 

First, the very size and opacity of the system encourages everyone to find informal ways round the formalities.    

Nowadays every Minister is responsible for the work of hundreds if not thousands of officials and therefore unable to exercise any day to day oversight or even know most of the people who work for them. Moreover, analysis and advice on major questions from such large teams takes time to assemble and to put to Ministers.  Yet Ministers are exposed to the 24/7 media calendar and frequently have to take decisions rapidly.  In doing so they look for people to advise them whom they can trust and whose judgement they respect.  

In these circumstances it is absolutely inevitable that Ministers will reach out for sympathisers and that ambitious officials will seek to make themselves stand out to Ministers.  I’m oversimplifying obviously, but by and large simple cleverness or administrative excellence is not on its own enough for recognition or progress, because, as Martin Donnelly points out, the administrative timetable is longer-term than the political one.  Try to prove to a Minister that you can deliver good administrative results, and the odds are they will have been reshuffled long before the results become visible.  Signal to a Minister that “I get it, I share your goals, I will make the system work for you”, and be effective in managing the system in their interests, and a Minister will spot it.  In other words, the system selects for people who don’t work the system as it should work, not those who do.     

It is when Ministers invest such officials with particular authority that the system deforms and officials playing by the rules find themselves outflanked and unable to make an impact.  An alert Permanent Secretary can stop Ministers promoting officials unreasonably, but cannot stop them investing sympathetic officials with informal authority or listening to them disproportionately.  Damian McBride’s  picture of the Treasury under Gordon Brown describes exactly this situation in its most extreme form.  

Second, the current system selects against those who are sceptical about government’s role. 

The civil service is not party political and indeed officials within it are usually discreet about their own political opinions.  But massive modern government is bound to draw to it individuals who believe in a role for government and get satisfaction from operating the levers it gives them.   Officials are less likely than the average to believe that government action is worthless, prone to error, or just less good than alternatives. They are more likely to believe evidence that government is effective and to downplay or discount evidence that goes in the other direction.  So the reflex of the system is – “here’s a problem – and here’s what we can do to help you fix it.”  That didn’t matter a hundred years ago when the Government only spent 5% of GDP anyway.  Now it spends half the country’s wealth and no area is ring-fenced off.  Anyone who says “the solution is for you to stop doing things and let others act” is going against the grain.   

For that reason it’s wrong to think that Departments have “departmental” policy that that they pursue regardless of what Ministers want.  But officials in them have a real interest in their Department’s continued existence and, where possible, in expanding their own influence. That’s because the value of an official’s work can’t easily be determined by outputs, so people resort to other measures to determine status. Closeness to Ministers (above) is one of those measures, but so is the breadth of your policy areas and the number of people working for you. Where policy choices go with that latter grain, they are more easily pursued.  I suspect that if Michael Gove’s reform plans had involved a powerful central bureaucracy implementing his vision, he’d have found it bureaucratically much easier to get things done than by shrinking the DfE and letting schools make their own decisions (though of course the reform would have been much less effective). 

Equally, is it coincidence, for example, that the – misplaced - enthusiasm for “industrial policy” comes from the Department (BIS) that has the biggest role in implementing it in practice?

Incidentally, that’s why “reforms” to the machinery of government tend to make things worse rather than better, because existing interests make it hard to implement simple reforms in a simple way.  I’ll save the example I know best in this area, trade, for another day.

Third, the system is not compatible with modern needs for transparency and openness. 

It is getting harder and harder to manage the contradiction between retaining a ring-fenced policy-making space and keeping broader confidence in the system through transparency.  Ministers already lack confidence in policy made solely “in house”, and encourage reaching out to outside experts.  Moreover, social media has become more important in communicating government, and successful communication in this area requires “personality”, the sense of an individual behind it, not wooden signed-off tweets and no interactivity.  Indeed the system is already adjusting and many senior officials – Permanent Secretaries, Chief Scientists, Chief Vets, ambassadors, chief economists, and so on - are semi-visible media figures nowadays, asked to communicate policy in an engaging and convincing way.  That is already usurping the role traditionally that of Ministers.  In the modern world, there is no going back. 

That’s the diagnosis.  What can we do about it?  For that, readers are asked to await Part 2.

The Juncker affair

There has been much good comment on the ongoing affaire Juncker, notably this from Gideon Rachman and this from Philip Stephens at the FT.  Standing on the shoulders of those giants, but drawing on my own experience in similar processes in the past, here is my tuppennyworth on the situation with a week to go.  

The strategy

It was, and is, the right thing to try to get someone other than Juncker.   He’s a corporatist, unsympathetic to flexibility and subsidiarity, and doesn’t seem to have much sympathy for the UK’s thinking.  That’s not what the EU needs just now.

The institutional power-grab involved in a Juncker nomination is also worth fighting.  Hitherto there's been a presumption that the individuals appointed to the top EU jobs had to be broadly acceptable to all Member States.  The veto was the ultimate guarantee of this.  It is, unfortunately, clear that the Treaty drafters did intend to change that previous system, but equally clear that they didn’t intend to go this far.  We are now moving to a system where not only (unfortunately) is there majority voting in the European Council, but where the Parliament has the initiative.  That is much more like the normal EU law-making process, which Britain has rightly resisted in areas of fundamental importance, and totally inappropriate for major institutional issues.

The tactics

The British diplomatic tactics have been much criticised.  I'm not sure why.  Few European leaders seemed to have genuinely bought into the Spitzenkandidaten concept before the European Parliament elections.  Thereafter, a blocking minority of UK, Germany, and miscellaneous Nordics and Central Europeans looked feasible and Merkel seemed to be at least potentially on board.  When she switched under domestic pressure, the British had lost vital days in rallying others and in making clear the principled nature of their objections.  By that point, Britain was always going to be up against it.   

The critics seem to be arguing that Cameron shouldn't have gone in so hard against Juncker, even if he was a poor candidate, because he can't now back down gracefully in the face of a majority in his favour.  I don't buy this.  Equivocation on our part would have been read by others as meaning "the Brits will buy it in the end" and made it still harder for us to win our case. On issues that matter in the EU, you are always best stating your case forcibly, politely, but clearly.  

What now?

Today's meeting of Socialist EU leaders came out for Juncker.  This looks to spike the last, faint, hope that Britain might be able to construct a blocking minority involving the Italians.  As of now, it looks as if only Hungary might vote no.  It’s not yet totally impossible that some of our friends like the Dutch or Swedes might argue next week that it’s not sensible to isolate the Brits and that further delay is needed, but it’s a waning hope and they might not succeed anyway.

The No.10 and FCO teams will have been working the phones hard for weeks now.  They'll need to keep doing so, but the purpose of the calls will subtly shift.  Rather than trying to rally support, I imagine they will be trying to signal three things, ie that:

(i) the UK will, if it comes to it, be voted down rather than join a consensus;

(ii) we won't escalate further, we will work professionally with Juncker, but no-one should expect us to go out of our way to make his life easy in future;

(iii) we expect the candidate for European Council President (who will, in fact, be at least equally influential in any renegotiation process) to be acceptable to the UK.

What does this mean for Britain in the EU and our relationship with Germany?

It makes no difference to our position in the EU.  We have taken unpopular isolated positions in the past and more often than not been vindicated.  In fact, where we’ve run into problems it’s when we’ve backed down after taking a stand (eg the Ioannina compromise on majority voting or the “beef war” in the mid-90s).  In short, this will not in itself change any other Member State’s perception of us or make any renegotiation more difficult.

Still, some irritation may remain for a bit.  Just in case, I would have thought Britain absolutely must put forward a Commissioner candidate of sufficient standing and authority to make it very difficult for the Parliament to target him (or her) or for Juncker to avoid giving them a serious job.  I am not sure any of the current names in the frame quite meet that test. 

As for UK / Germany, clearly there will be a bit of bumpiness in the short run.  How serious and how long it lasts depends on whether either Cameron or Merkel think they were genuinely misled by the other in any of their discussions. 

Finally, some argue this makes delivering German support for a renegotiation more difficult.  I doubt it (it will be water under the bridge by then) but anyway in my view it’s a mistaken strategy anyway to rely on Merkel and Germany delivering what we want.  In the EU you win arguments by setting out your case early, repeating it continually, and shifting the climate of opinion.  Power politics counts in the end, but you have to change the view of what’s “normal” and “reasonable” first.  Britain has only just started to do that.  I will return to that point in future posts. 

Welcome

Welcome to all.
After a longer-than-anticipated delay, I will begin posting here soon.  The blog will cover a range of issues: international affairs with a political economy perspective, the European Union, and government more broadly.
See you soon.
David