New Economist

(Almost) everything you wanted to know about the Nordic model

Edward Hugh has already stolen my thunder, but as promised yesterday here is some more about the so-called 'Nordic model'. The Nordic countries are ranked among the most competitive countries in the world, have high living standards, and are home to quite a few successful multinationals. Yet they also have some of the highest rates of taxation and public spending, and lowest levels of inequality, in the world. How do they do it?

That question has been posed many times in recent years. The best recent work I am aware of on the Nordic model was published by the European Policy Centre as a working paper in September: The Nordic model: A recipe for European success? (PDF). Edited by Carlos Buhigas Schubert and Hans Martens, it includes quite a wide range of contributors and is over a hundred pages long. In their introduction, Schubert and Martens provide a good overview of what makes the Nordic model distinct - and successful. But they also point out that what may look to outsiders like a coherent approach contains significant differences:

When one looks at the situation in more detail, the Nordic model naturally divides into many sub-models. So although it has some clear overall characteristics, there are, of course, also differences. Norway is an oil economy. Sweden is still a manufacturing society to a significant extent. Finland is dominated by one company, Nokia, and is still suffering from losing its biggest trading partner – the Soviet Union. Denmark has a small, flexible economy which relies on pockets of high-tech and generally small and medium-sized businesses.

Can the Nordic model be replicated? Perhaps, but not easily. The authors also note that the Nordic countries have small populations, are very homogenous, "with a preference for equality, inclusion and collective action". Most also have a long history of political dominance by social democratic parties. Those cultural and political characteristics, and the institutional complementarities that go with the Nordic economic and social model, will make it harder to export key elements elsewhere, particularly in anglo-saxon countries.

Though recommended reading, I would add the caveat that you won't find much criticism within the EPC document. It was "produced with the generous support of the Nordic Council of Ministers", after all.

Also worth a look:
* The Nordic model - a model for Lisbon? (PDF), a 16 page paper prepared by Danish, Finnish and Swedish Social Democrat MEPs for a Socialist Goup discussion, May 2005.
* A new book by Olli Kangas and Joakim Palme, Social Policy and Economic Development in the Nordic Countries, Palgrave, July 2005 (though it is more about social policy than economic).
* The January 1999 Economist survey of the Nordic countries, Happy family? (Unfortunately, most is only available to subscribers only).
* A 1996 conference paper by Lars Mjøset, Nordic economic policies in the 1980s and 1990s (PDF).
* Papers given at a 2001 seminar on the Nordic alternative and the related Nordic model website.

Europe, the 'accidental player'

Is Europe an effective global player? Absolutely not, argues Jean Pisani-Ferry, Director of European think tank Bruegel. Despite having a "vast formal power", they fail to use it effectively. It is "more than time for the EU to move away from the status of an accidental player". His paper, The Accidental Player: The EU and the Global Economy (PDF), was presented in Delhi last month. Here's as sample:

The situation I have described is one of over-representation and under-effectiveness of the EU in international economic relations. I think that this combination is increasingly unsustainable and that calls for a change cannot and should not be resisted any more.

It is unsustainable, first, because the only way the EU could justify remaining the winner in the distribution of formal power is by behaving like a benevolent hegemon – that is, by providing a public good that would lead the other players to accept its dominance. As developed above, the muted role the EU plays in substantive international discussions does not justify an overrepresentation.

Europe and global imbalances: Not the problem, but part of the solution

Alan Ahearne and Jürgen von Hagen set out the major policy options facing Europe in the face of the alarming deterioration of the US trade and current account balances, in a Policy Brief just published by new European think tank Bruegel. The report, Global Current Account Imbalances: How to Manage the Risk for Europe (PDF), argues that although Europe may not be part of the problem, "it is boundd to be part of the solution":

The evolution of global current account imbalances, especially the huge and growing US current account deficit, has been the most alarming global economic development in recent years. So far, European policymakers seem to have watched the growing imbalances without much concern, in the hope that the EU will be largely unaffected by the inevitable correction of the US external deficit. This apparent complacency is unwarranted. Europe may not be part of the global current account problem, but it is bound to be part of the solution.

The US current account deficit must narrow eventually and this process will almost certainly involve a significant depreciation in the dollar. The more stubbornly Asian countries refuse to adjust their exchange rates and current account surpluses, the larger will be the appreciation of the euro and the resulting deterioration in the euro area’s current account balance. The sharper the adjustment and the larger the share of this adjustment that falls on Europe, the greater the risk of deflationary pressures and a severe recession in the euro area.

The Turner Report: What the tanks think

Yesterday the independent Pensions Commission, headed by the ubiquitous Lord Turner, finally published its long-awaited second report, A New Pension Settlement for the Twenty-First Century. At 472 pages the main report is a beast of a thing. The appendices are another 312 pages, and even the executive summary (PDF) is 40 pages long!

Today's front pages are awash with commentary, so I won't - for now - add to it. In any event, it will take some time to digest its findings and the rationale behind them. But I thought it would be useful to link to some of the other commentary on the report, from UK think tanks.

The IPPR's senior economist Peter Robinson has a new booklet After Turner: creating a sustainable pensions settlement which argues there are six key questions that need to be addressed to secure a sustainable pensions settlement, that is "one based on making difficult choices and trade-offs".

Question 1: Should the Basic State Pension be increased and linked to earnings and is it affordable?
Question 2: Should the State Second Pension and contracting out rebates be abolished?
Question 3: Should the State Pension Age be increased?
Question 4: How should tax incentives for pensions and savings be reformed?
Question 5: Should there be compulsory contributions by employees and/or employers into a second pension?
Question 6: How should women and carers claim a more generous state pension?

Right-of-centre tank Reform published a booklet on Sunday, Pensions Reform (PDF) by Derek Scott, Nick Bosanquet, Andrew Haldenby and Corin Taylor. According to the media release, the report "warns that tax rises are the wrong solution to the long term pensions crisis", as they would "undermine economic growth and employment".

The better solution is to restore incentives to save and to work later in life, including significant income tax reductions for older workers.

The authors do not appear to understand that a tax expenditure of this kind has just as much fiscal impact as does a tax rise.

The Pensions Policy Institute, a relatively new kid on the block, published A Commentary on the Pension Reform Debate in September, providing a concise 'state of the debate' summary. They also have an extensive range of Briefing Notes on a whole gamut of pension-related policy issues.

The Social Market Foundation published a pamphlet last week, What if: a UK model for compulsory pensions, explores how pension compulsion might best be implemented should Adair Turner favour this as a policy (he didn't).

The new Fabian Society pamphlet, The politics of pensions reform by Richard Brooks and John Denham, argues that "a revitalised basic state pension, linked to earnings, should be at the heart of a new reform package". They also think that "getting the politics of reform right will be just as important as having the right policy". Perhaps. But one fears getting the politics 'right' may well lead to the 'wrong' policy.

Forthcoming book: The Human Security Report

The forthcoming Human Security Report is a great idea:

Modeled on the UN's Human Development Report, the Human Security Report will provide an annual mapping of the incidence, intensity, causes, and consequences of global violence and policy responses to that violence. Each report will carry a series of essays focusing on a thematic issue. The theme of the first issue will be "War in the 21st Century".

Launched a fortnight ago, but not due to be published by Oxford University Press until the end of this month, the report has been produced by Andrew Mack and his team at the Human Security Centre, based at the University of British Columbia.

Funded by five governments and three years in the making, it tracks and analyses trends in political violence around the world. Some of the findings, as reported in the press kit, may surprise. As summarised in a free 12 page Overview (PDF), the report takes issue with claims that:

° The number of armed conflicts is increasing.
° Wars are getting deadlier.
° The number of genocides is increasing.
° The gravest threat to human security is international terrorism.
° 90% of those killed in today’s wars are civilians.
° 5 million people were killed in wars in the 1990s.
° 2 million children were killed in wars during the last decade.
° 80% of refugees are women and children.
° Women are the primary victims of war.
° There are 300,000 child soldiers serving around the world today.

Not one of these claims is based on reliable data. All are suspect; some are demonstrably false. Yet they are widely believed because they reinforce popular assumptions. They flourish in the absence of official figures to contradict them, and conjure a picture of global security trends that is grossly distorted. And they often drive political agendas.

It notes the remarkable extent of change in global security since the end of the Cold War:

° The number of armed conflicts around the world has declined by more than 40% since the early 1990s (see Figure 1.1 in Part I).
° Between 1991 (the high point for the post–World War II period) and 2004, 28 armed struggles for self-determination started or restarted, while 43 were contained or ended. There were just 25 armed secessionist conflicts under way in 2004, the lowest number since 1976.
° Notwithstanding the horrors of Rwanda, Srebrenica and elsewhere, the number of genocides and politicides plummeted by 80% between the 1988 high point and 2001 (Figure 1.11).
° International crises, often harbingers of war, declined by more than 70% between 1981 and 2001 (Figure 1.5).
° The dollar value of major international arms transfers fell by 33% between 1990 and 2003 (Figure 1.10).
Global military expenditure and troop numbers declined sharply in the 1990s as well.
° The number of refugees dropped by some 45% between 1992 and 2003, as more and more wars came to an end (Figure 3.1).

Provocative, readable and well documented - this report should cause some waves. (Hat tip: Robin Varghese at 3 quarks daily).

Goodbye Paris, hullo America: The world's top 100 public intellectuals

Who are the world’s leading public intellectuals? Kevin Drum, Tyler Cowen, Professor Bainbridge, The Observor blog, Clive Davis, the Mises Institute and others on the blogosphere report that Prospect and Foreign Policy magazines have compiled their list of who they regard as the world's top 100 public intellectuals. Needless to say it is hugely dominated by the west and above all America. David Herman writes in the Prospect cover story that Europe has lost its mojo:

A huge number of names come from the US and Britain. Almost a third are American citizens; one in seven are British. However the real story is not about nationality: almost half these people live in the US. Wherever you look in the intellectual culture—from DNA and AI to the new novels by Rushdie and Zadie Smith, from literary theory to economics—America is where the action is.

In Britain, most of the names come from Oxbridge and London. In the US, from the northeast, from Washington DC to Harvard and MIT. Europe has become America's intellectual poor relation. Not only are there relatively few European names, the quality is dubious. Too many of the names rest on old laurels, or are quirky (Negri? Sloterdijk? Zizek?). The almost complete disappearance of Paris as a centre of global ideas is most striking of all.

This Anglocentric bias will cause some controversy in continental Europe. There are, for example, as many Canadians and Australians represented as Germans (three each). Only four French intellectuals made the cut, compared to 14 British. The lack of women is also notable.

The list includes 9 economists, but they are quite a mixed bunch: Gary Becker (US), Jagdish Bhagwati (India, US), Hernando de Soto (Peru), Kemal Dervis (Turkey), Fan Gang (China), Paul Krugman (US), Jeffrey Sachs (US), Amartya Sen (India), Lawrence Summers (US). Richard Posner is listed as a "judge, scholar, author", but could just as easily been dubbed an economist. So too could Daniel Kahneman, labelled a "psychologist" despite winning the Nobel Prize for Economics in 2002.

I wasn't surprised by Krugman's or Sachs' inclusion - the two highest-profile economists in the United States right now - but disappointed that the two most influential economists of the last half century, Paul Samuelson and Milton Friedman, were excluded. There was another stunning oversight: Alan Greenspan. He has certainly been the most powerful economist of the last two decades, with financial markets analysing every syllable he utters. Other notable missing economists include Joseph Stiglitz, Eugene Fama, Douglass North and Charles Kindleberger.

Readers are invited to vote for a maximum of five names from the top 100 here. My five choices are people who not only have a high public profile, but who have made a major original contribution to modern science and thought:

1) Amartya Sen (economist, India)

2) Peter Singer (philosopher, Australia)

3) Richard Posner (judge, scholar, author, US)

4) Daniel Dennett (philosopher, US)

5) Daniel Kahneman (psychologist, Israel and US)

My write in is Milton Friedman, though I do so with some discomfort. I disagree with many of his views, and thought monetarism quite loopy in its heyday. But his huge influence on both economics and public policy around the world is undeniable. Other notable economists missing from the list include Paul Samuelson, Joseph Stiglitz, Charles Kindleberger and Eugene Fama.

Reading other blogs, Stephen Pinker seems popular - though I agree with Socratic Gadfly that Daniel Dennett "is a far better representative than also-listed Steven Pinker, as well as having a broader range of intellectual interests". The popularity of Lawrence Lessig among bloggers is no surprise, nor that of pop-science authors Richard Dawkins or Jared Diamond.

Of course, some commentators have been more concerned about who should not have made the list than who was missed out. On voting, Tim Worstall warns:

Anyone who answers Paul Krugman, Thomas Friedman, Tim Garton Ass, Germaine Greer or Naomi Klein (!) Chomksy (!!)  should and will be shot.

And the Joy of Curmudgeonry is quite splenetic about Slavoj Zizek:

Now, if I might venture here upon an expression of my own view, I should say that professor  Zizek is a purveyor of ugly, senseless and frivolous tat – in other words, everything one expects from a celebrated intellectual fraudster – and that reading his dumbfounding works is the closest one is ever likely to get to an armchair lobotomy.

Of course any list of this nature is subjective and somewhat arbitrary. As Daniel Drezner, points out, part of the problem is that the criteria used is quite muddled. Foreign Policy magazine (emphasis added) explains the criteria thus:

What is a public intellectual? Someone who has shown distinction in their own field along with the ability to communicate ideas and influence debate outside of it.

Candidates must have been alive, and still active in public life (though many on this list are past their prime). Such criteria ruled out the likes of Aleksandr Solzhenitsyn and Milton Friedman, who would have been automatic inclusions 20 or so years ago. This list is about public influence, not intrinsic achievement.

So is it only public influence, or influence and distinction in their own field? One can't help thinking the list is more about popularity and public prominence (or notoriety) than anything else. As for Milton Friedman, he's not exactly on the hustings these days but his ideas still influence. Have none of the list compilers visited Central or Eastern Europe in the past decade?

How to reform the IMF

The International Monetary Fund, once the pre-eminent multilateral financial institution, faces an identity crisis. How to make it strong and effective again? Ahead of this weekend's World Bank-IMF annual meeting, the Institute for International Economics has organised a one-day Conference on IMF Reform.

A 93 page background paper for tomorrow's event, by Edwin M Truman, is now available: International Monetary Fund Reform: An Overview of the Issues (PDF). Truman argues that "the IMF is in eclipse" and "consequently, the world is worse off. Despite the considerable reforms over the past decade,
more should be done." But simple measures won't not enough - reform is needed across a range of areas:

No single step or magic formula will restore the IMF to its prior position as a highly respected institution. Effective reform of the IMF must encompass many aspects of the IMF’s activities—where it should become more as well as less involved. Over the past decade, a large number of changes in the international financial architecture and in the IMF’s operations have been put in place. Those reforms have not been sufficient to restore the IMF to the center of today’s international monetary and international financial system, assuming that was the intentions of the reformers.

Successful reform of the IMF must engage the full spectrum of its members. The IMF should not focus primarily on its low-income members and the challenges of global poverty. It should not focus exclusively on international financial crises affecting a small group of vulnerable emerging market economies. Instead, it must be engaged with each of its members potentially on the full range of their economic and financial policies emphasizing primarily those policies that impact the functioning of the global economy.

Truman concludes:

A major priority is IMF governance. An equally important priority is to upgrade the IMF’s role in the international monetary system. In addition, improvements should be made in IMF lending operations, and the IMF must be pulled back from becoming just another development financing institution. The IMF’s financial resources will soon need to be augmented.

Measuring transparency, fighting corruption

Is the importance of governance and anti-corruption overrated? Is governance is a luxury that only rich countries can afford? Doesn't it take generations for governance to improve? Not according to Daniel Kaufmann, Director of Global Programs at the World Bank Institute. In his article 10 Myths About Governance and Corruption, just published in Finance & Development, Kaufman tackles those and other myths. The potential economic gains from improved governance are big:

The research generally shows that countries can derive a very large "development dividend" from better governance. We estimate that a country that improves its governance from a relatively low level to an average level could almost triple the income per capita of its population in the long term, and similarly reduce infant mortality and illiteracy.

But it is a fallacy that one "fights corruption by fighting corruption":

..through yet another anticorruption campaign, the creation of more 'commissions' and ethics agencies, and the incessant drafting of new laws, decrees, and codes of conduct. Overall, such initiatives appear to have little impact, and are often politically expedient ways of reacting to pressures to do something about corruption, substituting for the need for fundamental and systemic governance reforms.

Kaufman argues against the 'business-as-usual' modus operandi: "a bolder approach is needed". A key part of the solution is greater transparency and accountability. To do that you need among other things, better measures. The World Bank Institute's good governance and anti-corruption activities have developed  Worldwide Governance Research Indicators covering 209 countries, helped to build governance diagnostic capacity, and are now seeking to better measure transparency.

In a forthcoming World Bank Policy working paper, Transparenting Transparency: Initial Empirics and Policy Applications, Ana Bellver and Daniel Kaufmann construct an initial transparency index for 194 countries. The aggregate index is based on over 20 independent sources, and has two sub-components: economic/institutional transparency, and political transparency. An unobserved component model was used to generate country ratings and margins of error. What did they find?

The results emphasize variance. First, the preliminary evidence based on these initial indicators suggests enormous variation across countries in the extent of transparency. ...Further, there is significant within-country variation, with large differences in performance between economic/ institutional and political dimensions of transparency.

Liberia and north Korea had the worst economic/institutional transparency, while the United States had the highest, closely followed by Canada, Chile and the UK. Political transparency estimates saw North Korea and Libya at the bottom, while the Nordic countries fared best. Though "mindful of the challenges in inferring causality", their analysis finds that:

..transparency is associated with better economic and human development indicators, even after controlling for differences in income. Thus, for the same level of income per capita, countries which rank higher in the overall transparency index are also more competitive in international markets and their population has higher life expectancy at birth, female literacy and child immunization levels.

This paper is very much a work-in-progress. The authors emphasise its preliminary nature, and hope "to elicit feedback at an early stage". Go read it.

What will the next emerging market crisis look like?

Foreigners are once again pouring cash into emerging markets, and the Buttonwood columnist at The Economist is worried. What will happen when it stops? she asks. The column cites Emerging Portfolio Fund Research, which tracks funds with assets totalling more than $4 trillion:

Between the beginning of June and the week ending August 17th, emerging-market equity funds took in a net $6.94 billion. That brings the year’s total to $8.74 billion, nearly three times 2004’s level and more than the previous high of $8.6 billion for all of 2003. Bond funds tell the same story, with total net inflows this year of $4.74 billion, a record.

The reasons for the big inflows are straightforward: (1) inflation and cash rates are low, so money is cheap; (2) market risk aversion is also low; (3) yields on many investments in western markets have been poor; (4) the return on emerging-market debt and equities is higher. Foreign investors chasing higher yields are. once again, prepared to take a punt on emerging markets. But many who recall the Asian, Russian, Brazilian or Argentinian crises over the past decade will be less sanguine.

Buttonwood reports a new study by Christian Stracke of CreditSights that compares emerging economies’ dependence on portfolio inflows now and eight years ago - just before the onset of the Asian crisis. It demonstrates (see table) that portfolio liabilities are generally much lower now - albeit patchily so. The Economist's conclusion:"a sell-off rather than a rout may be the worst that happens if foreign investors turn tail".

Maybe so. But if there were a new emerging market financial crisis, how would it start and spread, and which economies would be most vulnerable?

Can rich Democrats overcome flabby ideas?

Michael Kinsley argues in Sunday's LA Times that "the Republicans are the party of ideas and the Democrats are the party of reaction". Though Mark Thoma disagrees, plenty of rich Democrats seem to concur.  The Democrat's disastrous Presidential loss last year has prompted almost a hundred progressive plutocrats to offer $1 million apiece to bolster their case. Thomas B. Edsall reported in Sunday's Washington Post that Rich Liberals Vow to Fund Think Tanks.

At least 80 wealthy liberals have pledged to contribute $1 million or more apiece to fund a network of think tanks and advocacy groups to compete with the potent conservative infrastructure built up over the past three decades. The money will be channeled through a new partnership called the Democracy Alliance, which was founded last spring... Many influential Democratic contributors were left angry and despairing over the party's poor showing in last year's elections, and are looking for what they hope will be more effective ways to invest their support.

I'm sure more money would help. But as research I discussed back in March suggests, liberal think tanks suffer from other problems:

* too much focus on projects, rather than ideas
* a lack of nimbleness - inability to redirect resources quickly
* a desire for neutral, 'balanced' research
*  too little organisational support.

These may in the end prove more of a barrier than funding. Blimpish, in his comments on my earlier piece, favours a simpler explanation: liberals are a bit flabby and their ideas weak.

Not to get too dialectic in my explanations, but I think a lot of this comes down to having to be sharp. For decades, conservatives (especially in the US) have been fighting against the mainstream and so had to refine their ideas and their means of communications. Liberals have until recently had it quite easy, and so have grown a bit flabby. There's now a turning of the tables - and in that situation, the biggest risk is for liberals to get defensive and refuse to review their ideas.