"...the wish for improved relations with France was primarily but a fresh manifestation of the general tendency of British Governments to take advantage of every opportunity to approach more closely to the ideal condition of living in honourable peace with all other States." (The Eyre Crowe Memorandum, 1907)

Sunday, 10 August 2014

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?


Wednesday, 6 August 2014

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 19th 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 19th 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.


Sunday, 3 August 2014

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.