Nathan Gamester is a Programme Director at the Legatum Institute.
Today, in partnership with the Legatum Institute, Andrew Mitchell has published a pamplet, A safer and more prosperous world, laying out his vision for British international development. The pamphlet marks Mitchell’s return to the political stage; his first major intervention since resigning as Chief Whip last October.
Opposition to the Government’s development policy – especially among Conservatives – is well documented. At a time of slow economic recovery and budget cuts right across Whitehall, the commitment to increase spending on overseas aid has never been more controversial.
Many who question this policy ask whether it can be justified when so many Britons are suffering at home. There is often talk of aid cash “sloshing” around the international system only to end up in the pockets of corrupt government officials instead of going to those who actually need it.
To those sceptics, Andrew Mitchell’s message is clear. Firstly, we have a moral duty to help those who cannot help themselves. Secondly, this old view of how aid works is wrong. Aid does work, argues Mitchell. It is not simply about “soft-hearted altruism”. Rather it is about protecting our own national interests and ensuring our own security. And aid gets results.
Mitchell’s pamphlet is a timely reminder of an area of government policy in which British people should take pride. If you are a British taxpayer, then right across the developing world are children who have been vaccinated against a multitude of deadly diseases because of you. Today millions of children are going to school for the first time – because of you. Fewer women are dying in childbirth – because of you. More AIDS sufferers than ever before have access to antiretroviral therapy and are thus living with, rather than dying from, their disease – because of you. British people should be proud of this.
And to those who believe the government spends too much on foreign aid when it should focus on domestic priorities, Mitchell’s pamphlet contains a welcome message: the future of British aid lies not with DFID but in the private sector:
“In my view it is not an unreasonable proposition to suggest that in 50 years’ time CDC [the Government-owned Development Finance Institution] will be seen as the principal British development structure, rather than DFID. Nothing would more eloquently demonstrate the success of development policy as countries graduate from aid with their own equity and debt markets funding their future development.”
On the issue of international development, there is no doubting Mitchell’s expertise. For most of the last decade he has been the chief architect of this area of Conservative policy. He spent five years as shadow development secretary followed by more than two years as Secretary of State until the Prime Minister decided he wanted Mitchell permanently in Westminster as his Chief Whip.
News of his departure from DFID came as a surprise to many (although today’s pamphlet suggests that he has unfinished business with this area of policy). In Government, it can be rare to find senior ministers who feel a strong sense of both calling and enthusiasm for the portfolios to which they have been assigned. Andrew Mitchell, however, seemed well suited to International Development.
It was back in 2009 that the Conservative Party published its comprehensive Green Paper, One World Conservatism in which much of what is now government policy was set out: the focus on wealth creation as the most important driver of development; the recognition that peacekeeping and conflict prevention are fundamental to development; the need to ensure value for money and accountability for every penny spent; and perhaps most controversially, the commitment to increase the UK aid budget to 0.7% of national income.
It is to the Government’s credit that it has stuck to these principles despite the very challenging economic situation and the very real political opposition. This commitment has recently earned praise from Bill Gates who hailed the UK for “displaying moral leadership in front of the world.”
Many people who have served in government can take credit for ensuring Britain keeps its promise to the developing world. But perhaps the most significant of those is Andrew Mitchell. Mitchell has been called many things over the last six months, many of these it now appears were untrue. However, his lasting legacy – and perhaps one of this government’s most significant legacies – will be the commitment that is being shown to the world’s very poorest people.
Nathan Gamester is a Programme Director at the Legatum Institute. Follow Nathan on Twitter.
David Cameron recently talked about being in a “global race”. Today’s Prosperity Index, newly published by the Legatum Institute, suggests that the UK is performing better than some may have suspected. Nathan Gamester is the Programme Director for the Prosperity Index at the Legatum Institute. The Prosperity Index can be found at www.prosperity.com. Follow Nathan on Twitter.
During his conference speech earlier this month David Cameron focused his remarks around the idea that we are now in a global race. This, the Prime Minister said, means we face “an hour of reckoning” where our choices are to “sink or swim. Do or decline.”
The global race is very much on and, what’s more, the number of competitors is increasing. Advances in mobile technology across sub-Saharan Africa and other developing countries mean that doing business around the world has never been easier.
If we really are in a global race, how are we doing? Are we falling behind our fellow competitors or surging ahead? Last week’s GDP growth figures may not have proven that we are up to full speed but they do suggest that something is working.
Click on the table to enlarge.
The growth figures are positive, but they don’t tell the whole story. The Legatum Prosperity Index™ is an assessment of what makes a country truly successful, encompassing traditional measures of material wealth as well as capturing citizens’ sense of wellbeing. Covering 96% of the world’s population and 99% of global GDP, the Index provides a more complete picture of global prosperity than any other tool of its kind.
By Joseph Willits
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Public policy group, the Legatum Institute has announced a series of key appointments. President and CEO of Legatum, Jeffrey Gedmin anticipates the appointments being a step forward in helping "to grow Legatum as an important voice on behalf of entreprenurial capitalism, and effective, accountable government, both in the West and the developing world."
To oversee the Institute's economics research programme and Legatum Propensity Index, economist Robert Hahn will work with spring appointee Anne Applebaum. Hahn was previously Director of the AEI-Brookings Joint Center for Regulatory Studies, and has served on the Council of Economic Advisors at the White House, and on the faculties of Harvard University and Carnegie Mellon University respectively.
Diane Zeleny will join Legatum as Vice President for Strategy and Communications, and will serve as the Institute's representative in Washington. Zeleny has had numerous experience in international relations and public affairs, with both NATO and the US Department of State. Most recently she was Director of External Relations for the Broadcasting Board of Governors in Washington.
To head a new joint venture between the Legatum Institute and Foreign Policy Magazine, 'Democracy Lab', former Newsweek Tokyo and Moscow bureau chief Christian Caryl will join. Caryl also worked for Radio Free Europe/Radio Liberty in Washington.
Another appointment on "Democracy Lab" as Economics Editor is Peter Passell. Passell is a former New York Times columnist and currently a senior fellow at the Milken Insitute, and Editor of their publication, the Milken Institute Review.
By Jonathan Isaby
News arrives that the Legatum Institute - the London-based think-tank researching and advocating an expansive understanding of prosperity - has appointed a new Chief Executive Officer.
He is Dr. Jeffrey Gedmin, who for the last four years or so has been President of Radio Free Europe/Radio Liberty, where he directed broadcasting and operations in almost thirty languages. Prior to that, he worked variously at the Aspen Institute Berlin, the American Enterprise Institute in Washington and the New Atlantic
Dr. Gedmin said on his appointment:
“The Legatum Institute offers an unparalleled platform upon which to shape ideas and policy in the world today. I am honoured to be appointed to this prestigious post and look forward to leading the Legatum Institute in developing fresh ideas and translating them into action.”
He will take up the post on March 1st.
Four of London's leading think tanks have all attacked today's increase in VAT to 20%; an increase that George Osborne intends to be a permanent rather than emergency fixture.
Leading the charge has been Matthew Sinclair of the TaxPapers' Alliance. Speaking to the BBC earlier he pointed out that David Cameron had broken a promise not to raise VAT. The Lib Dems even ran a poster campaign against higher VAT (remember this?). Matt Sinclair said taxes were high enough in Britain and more should have been done to cut spending.
Philip Booth of the Institute of Economic Affairs sets out the alternatives to higher VAT in a powerful piece on Coffee House:
"The NHS has been ring-fenced, even though it has experienced huge budget increases and has a shocking productivity record. Pricey gimmicks given to pensioners such as the Winter Fuel Allowance, free television licences and free bus travel remain in place, whilst the government has promised to increase state pensions in line with the higher of inflation, earnings or 2.5% - the “triple lock”, as the government calls it. This last profligacy is wholly unnecessary at a time when much of the working population is experiencing real wage reductions. A 2.5% trim of the NHS budget, not increasing the aid budget, the abolition of the pensioners’ gimmicks and not implementing the triple lock would enable the government to cancel the VAT increase with considerable room to spare."
Dalibor Rohac, a research fellow at the Legatum Institute, disputed the idea that a VAT rise was less economically harmful than other alternatives:
“There can be no question about the fact that the British economy would benefit from further downsizing of the public sector, but one can understand how difficult it is implement sizeable spending cuts, especially in the short run. This being said, the Chancellor is mistaken if he believes that a rise in the VAT will have a smaller impact on the economy than a rise in the income tax. For all practical purposes, the VAT and the income tax have the same economic effects and lead to equivalent economic distortions. Even if we were to accept that tax increases were needed, there are alternatives to a VAT hike, which would have a much smaller impact on incentives to work and do business.”
Tom Clougherty of the Adam Smith Institute (which recently calculated that Tax Freedom Day will be three days later this year) argued that the Coalition should be CUTTING tax to stimulate growth and revenues:
“Rather than increasing taxes, government should be looking at making targeted tax cuts to encourage economic growth. Raising the VAT might be the “least worst” option, but it still risks putting a dampner on our economic recovery.”
I have argued against the VAT rise but now regard it as a battle lost and surrender.
In today's Times (£) Lord Heseltine comes to the timely defence of the City:
“My view is a very clear one, the City of London is a vital part of the national economy. It is a world-class industry and brings huge wealth to this country. The politics [of the City] are very difficult, so skilled political judgment is needed to make sure you don’t throw the baby out with the bathwater, and there are at the fringes difficult things to defend. But the underlying health of the City and the financial world are of enormous significance to us.”
Tarzan's intervention will reinforce George Osborne's efforts to prevent Vince Cable from imposing even heavier taxes and regulations on London's banks. Mr Cable - now known by Tory MPs as the Anti-Business Secretary - may have lost his battle against Rupert Murdoch but he is determined to pursue his attacks on the City. Cable has compared bankers to “spivs and speculators” and his tough stance enjoys widespread public support. He is also being egged on by powerful newspapers, including the Daily Mail.
Up until now there have been few defenders of the City's importance to the UK economy. Mark Field MP has been an honourable exception. Lord Heseltine's intervention coincides with the publication of a new report from The TaxPayers' Alliance and the Legatum Institute. In a joint piece for today's Wall Street Journal Europe (£) Matt Sinclair (TPA) and Dalibor Rohac (Legatum) warn that the post-crisis approach to regulating the banks could precipitate the next crisis. Their main concern is globally harmonised regulations:
"International rules are supposedly necessary to stop financial contagion and a regulatory "race to the bottom." But harmonized regulatory regimes behave like farming monocultures: both are very vulnerable to disease. International rules will encourage firms to hold similar assets, take a similar attitude to risk and respond similarly during a crisis. The result will be more severe and more frequent international crises."
In their joint paper (available here) Rohac and Sinclair also worry that there isn't a big enough counter-cyclical element to the new banking rules. They also warn that "some measures proposed, like attacks on tax havens and hedge funds, are motivated by other agendas and do not actually address the problems that led to the financial crisis."
By Tim Montgomerie
The Mayfair-based Legatum Institute rank Britain as the fifth best country in the world for entrepreneurship and innovation:
"There are clear signs of robust innovative activity in the UK. Its royalty receipts as well as licence fees and receipts are the third highest in the world, bringing in 13.9 billion USD per year. It places in the top 20 for both its high R&D expenditure and its high ICT exports. Although Britons perceive the entrepreneurial environment to be below average*, start-up costs are ranked seventh lowest in the world. Mobile phone access is high, and the country places in the top 10 for both access to internet bandwidth and to secure internet servers, all of which points to a strong infrastructure for entrepreneurship. The UK is among the 20 best countries worldwide for equality of economic development across different socio-economic groups. However, only 78%* of Britons believe that hard work will get them ahead in life, which is below the global average."
The UK's overall ranking in this third annual edition of the Prosperity Index is 13th. "Mediocre" education and health services hold the UK back. Norway, Denmark and Finland top the league. Zimbabwe is ranked bottom of the league.
Two interesting key findings from the report. It argues that two Europes are emerging with the gap between successful and unsuccessful nations widening (click on image to enlarge):
It also concludes that it is much harder for a large country to be prosperous. Noting that the USA and Japan are exceptions, most of the world's most populous nations lack the cohesion of smaller nations and struggle to break into the top twenty in any category.
The Prosperity Index site is here and it contains a treasure trove of information about the nations of the world.
Dalibor Rohac is a Research Fellow at the London-based Legatum Institute.
There is no rational basis for the series of extravagant claims made by the latest edition of biannual study "Living Planet," published by the World Wide Fund for Nature.
Of course, the WWF ought to be commended for its efforts to preserve biodiversity around the world. However -- while biodiversity is a worthy goal -- in pursuing it the WWF too often seems to forget about members of the human species - particularly the most vulnerable ones, living in developing countries. For instance, their campaign with SkyNews called for a blanket ban on importation of palm oil, in spite of the fact that most companies producing palm oil do adhere to standards of sustainable harvesting, and employ hundreds of thousands.
If taken seriously, the "Living Planet" report can lead to policy solutions such as this that will certainly hurt millions of people in developing countries. One would think that such policies should only be undertaken in light of very solid scientific conclusions. However, the scholarly foundations on which the report's bold claims stand are quite fragile, as they are based on the rather dubious practice of identifying recent trends and simplistically extrapolating them forward into the future - a method that fails to account for either the temporary nature of the underlying causes or the human capacity to adapt to changing conditions.
For example, the main metric used in the study is biocapacity - defined as the area available to produce renewable resources and to absorb CO2. This includes mostly grazing land, crop land, fisheries, forests, and natural resources needed to absorb carbon emissions. By the report's own admission, the rather extravagant claim that we are now using 50 percent more resources than the Earth can sustain - and that by 2030 we will be using twice as much as the Earth can provide - is driven almost entirely by the WWF's estimate of the area needed to absorb current carbon emissions and by the rapid increase in CO2 emissions since the 1960s.
Nevertheless, we know that people do adjust to changing conditions and to constraints which they face. Land use - in agriculture, in industry or in commercial development - is very different when land is abundant and when it is scarce. Similarly, agriculture has undergone massive changes in response to the relative abundance of land and labour in various areas of the world. The Green Revolution in agriculture of South-East Asia, for instance, led to dramatic increases in yields of rice and other grains, and enabled India and Bangladesh to avoid the famines that had been predicted by environmental alarmists.
Overall, there are no signs that the world is running out of agricultural resources such as arable or grazing land. Food prices have undoubtedly increased in the past decade, but this can be largely explained by the massive subsidizing of bio fuel production, for which the environmentalist movement is largely responsible.
In a speech to the London-based Legatum Institute, on Thursday of last week, David Davis MP set out “thoughts about the causes of the economic crisis, our responses, and the future threats.” Key extracts are republished below.
“You are probably all familiar with Minsky, but as a reminder, he said that the longer the growth period, the more you stretch the economic cycle, the more successful the most high-risk and aggressive financial companies will be. Companies that borrow more, invest in riskier or lower quality assets, will do disproportionately well. This encourages an increase in the level of debt that is considered acceptable by all companies and by the financial marketplace in general. The increase in debt finance fuels an increase in asset prices. The longer the growth phase goes on, the more debt-ridden and riskier companies get, and the more overvalued and lower quality their asset base becomes. More and more money will flow to the apparently successful high-risk companies. In a strange, reverse-Darwinian process, the most fragile will flourish. Portfolios of debt financing poor quality investments will grow geometrically. As a result of this process, the longer the boom, the bigger will be the crash. Quite why people needed Minsky to tell them this, I do not know. Charles Mackay was saying similar things in 1841 when he wrote his book, on the South Sea Bubble and the great tulip mania. It was called “Extraordinary Popular Delusions and the Madness of Crowds”. Keynes alluded to something similar… The point here is simple. Capitalism requires economic downturns to correct the risk profile of the economy and the accuracy of its asset pricing. Without that, the mechanism runs away, and we have an inevitable crash. It is better that these corrections are frequent and small, rather than infrequent and disastrously large. Politicians must understand this and their economic strategy should accept the economic cycle as a way of balancing the finances of the economy. If central banks are given this task, they must manage asset price inflation and economy wide debt levels as part of their job.”
Second. The macro economic strategy was bad enough, but the well-intended actions of government made an already unstable financial sector even more fragile.
"We all know about the attempts at social engineering the housing market that was at the core of the subprime crisis. Just as dangerous, however, the regulatory structure of banking actively encouraged the practises that we all now recognise as disastrous. The Basel Accord was created in 1988, and was the backdrop for all the major national regulatory frameworks. It was modified a number of times up until it was replaced in 2008. It essentially defined and set the capital requirements for banks, how much capital you need, and how much debt you are allowed. We hear the phrase, “financial innovation”, a lot. From 1998 to 2008 a significant part of that so-called financial innovation was designed to game the system, to allow the banks to make the maximum amount of risky investment on the back of the minimum amount of capital. Each of the most famous and most dangerous innovations was a response to this pressure.
“…We need to simplify: build firewalls where possible within the financial network to prevent the spread of crises. We need to render the accounts of the financial system transparent and comprehensible. We probably need a structural solution. But most of all, we need to understand and act on the fact that if we incentivise people to misbehave, misbehave they will. And that is precisely what the regulatory system has done these past 20 years.”
Third. The next problem we will inherit from this crisis is the sheer size and burden of the state.
“Gordon Brown was massively increasing the size of the state before the credit crunch. Massive increases in the costs of welfare, health, education, and local government were the order of the day for the decade before the crunch. The Coalition is right to make cutting the deficit its top priority. Labour's Rake's Progress to national bankruptcy had to be brought to an end. We could not go on spending money we did not have. As former Treasury Chief Secretary Liam Byrne so concisely put it: “I am afraid there is no money.” Actually Mr Byrne rather understated the problem. As he wrote his parting shot, the world's bailiffs were preparing to beat a path to our door. Let me make it quite clear. It would have been immoral for the Government to load yet more debt on future generations to repay. And it would have been economically illiterate. David Cameron and George Osborne should be congratulated for having the courage to grasp this nettle so decisively and so immediately.”
“An even bigger challenge faces this Government. We cannot be defined by a purely cuts agenda. If the only message the public takes away from the events of the next few months and years is one of retrenchment and loss of services, politically, at least, we will have failed. We need a more positive narrative than only simply of endless and painful retrenchment. We need to rediscover the case for growth _ and make it loud and clear across the land. Higher spending, higher borrowing, a bigger and more intrusive state has been tested to destruction… One of the most pernicious things about the Brown binge is that it was designed to create a dependency state, both politically and economically. In political terms he created handouts that he explicitly challenged the Tories to say that they would withdraw, from Christmas bonuses to child endowment funds. Even worse, he created welfare systems that discouraged work, and as a result were designed to ratchet up and progressively create a bigger and bigger load on fewer and fewer [overburdened] taxpayers. This has explicit implications for George Osborne in his round of cuts. There will be occasions when he has to choose between easy, immediate cuts in spending, or transforming the system to ensure that the political and economic pressures lead to long term lower spending. The obvious area where this is contentious is in Iain Duncan Smith's welfare budget. Optimal state arguments on this are clear. We should always favour the long term reduction over the short term.”We need to take a long term view of the structure of our economy and its potential for growth.
“We need to create a million jobs all over again _ but not by expanding the state_s bloated payroll. We need to create more entrepreneurs _ people who will risk their money and their reputation on a wealth creating idea. Most of our future expansion will start at least in niche markets. So we need to help small and medium sized firms expand. We have about one million small firms in Britain. If only half of them took on two more workers in the next year, that_s an extra one million jobs. But help is not some box-ticker from Whitehall or the Town Hall. Help means lower business taxes, less red tape, less wealth-destroying interference from officialdom. And we need to teach our young people the economic facts of life. Fewer and fewer can expect to work for big firms employing thousands of people. More and more should expect to set up their own companies and join the wealth-creating classes. We need an active agenda for growth. We need to believe in markets again. Free enterprise. Low taxation. Only that way can we turn the tide.”
by Dalibor Rohac
Vince Cable's speech at the Liberal Democrats Party conference on Wednesday can easily be dismissed as yet another vacuous ramble targeted at an audience which is not exactly reputed for its intellectual rigour. However, this conclusion would be hasty, as the speech conveys a rather disturbing message to those who hope that the present government is committed to paving the way towards a freer and more prosperous society.
But, first, let us give credit where credit is due. Dr Cable is spot-on when he denounces the economic legacy of Labour. Britain had been on an unsustainable fiscal path before the crisis started. Similarly, the Labour government was not doing anything to discourage the real estate bubble from emerging. One can only agree that the pinnacle of hypocrisy is when Labour dismisses the coming fiscal consolidation without proposing any alternative. Finally, Dr Cable is absolutely correct when he says that the growth driving the economic recovery has to be sustainable, and not based on another bubble.
Yet, when it comes to the possible avenues for achieving this, Vince Cable’s arguments become much more blurry. Unsurprisingly, the “government has a key role”. It has to - among other things - force the banks to extend credit to “sound, non-property, business” and make sure that the capital is not “frittered away in bonuses and dividends". Finally, Dr Cable announces that the government needs to “make [banks] safe and make them lend". Unfortunately, he does not offer the slightest hint of how this could be achieved.
After all, the present crisis was driven by reckless lending, even to individuals and businesses that were not creditworthy. The idea that the recovery can be driven by simply encouraging the banks to do the same again means getting us exactly back to the “failed world of ‘business as usual”, which he rightly rejects earlier in the speech.
The fact that Dr Cable has not grasped the dangers of government-induced misallocation of capital is apparent when he defends the idea of a “Green Investment Bank” that could use “vast amounts of institutional capital” to “support environmentally valuable projects and infrastructure, alongside [...] private investors: making the rhetoric of the Green New Deal real". Does Vince Cable really not understand that the current crisis is a result of the US federal government picking arbitrary segments of the economy (in this particular case, real estate) and channelling resources towards them through a variety of policy interventions? Why does he think that a "Green New Deal" is going to lead to anything other than a "Green Bubble"?
It is simply a fact of life that governments do a very poor job at identifying worthwhile projects and allocating capital to them. This applies to green energy as it does to any other area of the economy. After all, it is very easy to look at the political backlash of support for photovoltaic solar panels in places like California or Germany. Green projects, which once seemed attractive to policymakers, have now become a political liability, and governments are in an extremely difficult position if they want to retract resources from projects which are now clearly economically unsustainable without permanent support from the public purse.
“The Post Office is not for sale,” we are being assured. Instead, “employees in Royal Mail will benefit from the largest employee share scheme of any privatisation for 25 years,” as if employee ownership was an unambiguously worthy goal. In fact, worker ownership generally suffers from a serious incentive problem, as the dispersed nature of ownership creates an incentive for workers to shirk and, as a rule of thumb, is not advisable – unless one believes that companies should be run for the benefit of their employees and not for the benefit of their clients.
Given that Dr Cable seems to believe that the House of Commons should be run for the benefit of the MPs, this might not come as a surprise. However, even if one takes into consideration the interests of Royal Mail employees, it is not at all clear that employee ownership is going to help them. Most importantly, it would effectively prevent them from diversifying their wealth and would make both their salaries, and the value of their savings, dependent on one single company – moreover on one which is supplying products and services that are likely to become increasingly obsolete in the future.
One ought to make an important concession to Vince Cable. He is absolutely right in pointing out that markets fail, and that they are “often irrational or rigged". However, his speech is driven by a completely unfounded belief that the government – unlike markets and “short-term investors looking for a speculative killing” – will be able to identify the “good companies” and channel resources to them.
This belief is not based simply on bad economics; it is based on a fundamentally Marxist vision of economic life, as Dr Cable himself reveals when he says that “capitalism takes no prisoners and kills competition where it can.” Interestingly enough, he attributes the idea to Adam Smith, obviously having in mind the famous passage from The Wealth of Nations (I.10.82). He forgets that Smith was not deploring capitalism and markets as such, but rather merchants’ propensity to use the power of the state to obtain special privileges. The idea that, if left unregulated, capitalism will naturally evolve towards increasingly concentrated market structures cannot be attributed to Smith, but to Marx.
History of economic thought aside, there is no empirical evidence for the idea that unregulated capitalist markets actually evolve towards monopolies. Yes, there exist highly concentrated industries, some of them created by government interventions, some of them created by the existence of economies of scale, but there is no compelling account of market dynamics that would drive an initially competitive market towards monopoly.
It is only appropriate to call a spade a spade, and a Marxist a Marxist. And holding a fundamentally Marxist set of beliefs should not be a desirable qualification for the post of Business Secretary in a non-Labour government.
Dalibor Rohac is a Research Fellow at the London-based Legatum Institute.