New Economist

Can London talks save Doha?

The Doha WTO trade round is looking pretty sick, but with another two months to go it isn't dead yet. Heather Stewart reports in today's Observer on Secret talks to save trade deal:

Peter Mandelson, the European Trade Commissioner, will chair three days of crucial talks in London this week in an attempt to break the deadlock in world trade negotiations as campaigners warn that the needs of the poor are being ignored. Protesters plan to picket the meeting, which begins next Friday, accusing a coterie of six powerful World Trade Organisation members - including Europe, the US, Brazil and India - of trying to stitch up a deal that will hurt developing countries.

But don't hold out hopes of a major breakthrough:

...Ministers have set themselves a deadline of the end of next month to hammer out the broad outlines of a trade deal, after talks in Hong Kong in December failed to finish the job of rewriting the rules of the global marketplace. WTO director general Pascal Lamy has been pushing all sides to reach agreement. 'The notion that this might be the end-game has created focus and a bit of heat,' he told reporters last week.

But Mandelson stressed that it would be wrong to rush for a solution. 'There's a danger that you head for the lowest-common-denominator outcome. Achieving consensus takes time: it's a slow, painful process, and it's a complicated one.'

...Mandelson himself has little room for manoeuvre, with France promising to block generous concessions on Europe's agricultural subsidies, but he hinted that he could have something more to offer, and India and Brazil are ready to throw open their manufacturing and services markets to foreign companies.

...One potential area of flexibility for the commissioner could be so-called 'special products': Europe has reserved the right to designate up to 8 per cent of its farm products as 'sensitive', and thus exempt from subsidy cuts. Mandelson could agree to reduce the number of these untouchable commodities if he gets what he wants from Brazil and India.

From 'bra wars' to 'shoe wars'

Will Brussels never learn? Only a few short months after the debacle over blocking imports of Chinese textile and clothing (the so-called 'bra wars'), press reports indicate that the European Union will impose import duties as high as 20% on tens of millions of cheap leather shoes from China and Vietnam. David Gow's report in the Guardian, Chinese shoes draw Mandelson into new tariff tussle, claims that EU Trade Commisioner Peter Mandelson "reluctantly" agreed the move, ostensibly because:

A nine-month investigation by EU trade officials has found "clear-cut" evidence that Chinese - and Vietnamese - firms have been dumping shoes with leather uppers in Europe at below the cost of production since all quotas were lifted on January 1 last year.

But maybe this was the real reason:

Mr Mandelson ..has come under pressure from European shoe producers in Italy, France and the Czech Republic to impose duties. A similar coalition forced him to declare temporary quotas on Chinese clothing last year.

He was reluctant about that those measures too. But that didn't stop Britain's voice in Brussels from opting for protectionism on both occasions. Wherever a lousy trade policy is to be found, one can expect to find Mr Mandelson ever so reluctantly signing up to it. His must be a life of perpetual regret.

Whether or not the dumping is real or imagined, it does not make much economic sense to curb cheap imports. As Bendt Bendtsen, the Danish economics minister, wrote in a letter to today's Financial Times, the cost to European consumers of more expensive Asian shoes could be almost 10 times greater than the economic benefit for European shoe producers:

Our studies show that ...the total gain for the EU producers is just above €100m a year if an anti-dumping duty of 40 per cent is being levied on leather shoes from China and Vietnam. For the consumers and the user industries in the EC the total loss can be estimated to approximately €975m per year. In other words, for each €1 gained by the EU producers from trade protection, EU consumers and user industries have to pay almost €10.

Philip Thornton in The Independent writes that tariffs would start at 4% on 7 April and be raised to a maximum somewhere below 20%.

Yesterday retailers condemned the decision, saying it would add an average of £5 to the price of a pair of shoes on UK high streets and open the door for similar demands for tariffs from other manufacturing groups.

The European Commission has clearly learnt from last year's import debacle, by raising prices rather than restricting import numbers - and by pre-announcing and phasing in the tarrifs, leaving room for negotiation.

This approach will be less visible to consumers, and help avoid embarrassing news stories about millions of items being held up at ports. But if it does come to fruition, plenty of low income consumers in Europe - not to mention even lower income workers in China and Vietnam - will suffer.

I leave the final word to Tim Worstall's column in tomorrow's Times: A cheap load of cobblers

This is “unfair” competition that leads to dumping: apparently some 215 million pairs of such shoes are being sold at less than the cost of the raw materials.

Leave aside for a moment every economist’s suspicion of such tales of dumping; on close examination they almost never turn out to be true. Think, instead, of what is happening if it actually is true. The taxpayers of Vietnam and China are being gouged by their governments. This money is then — via the subsidy to manufacturers — being offered to us, the shoe buyers of Europe. We get a pair of shoes plus whatever the subsidy was to spend on whatever else it is we wish.

It is near insane that the peasant in the rice paddy be taxed to make us Europeans even richer. But if our rulers actually looked out for us, they wouldn’t slap a tariff on the shoes. No, the only rational response to such an offer of free money is that (attributed to) Calvin Coolidge. When offered his first pay cheque as US President he said to the Treasury messenger who brought it: “Thank you. Please come again.”

Free movement of EU10 workers: the story so far

The opening up of (some) European borders to workers from new Central and East European EU members has helped to fill skills gaps but has not cost domestic workers their jobs, according to the European Commission's first report on the so-called 'Polish plumber' problem - that is, the transitional arrangements for workers from the new EU member states that took effect in May 2004.

The Report on the Functioning of the Transitional Arrangements set out in the 2003 Accession Treaty (PDF) found that "for the EU as a whole, flows of workers have been rather limited". Nonethgeless, there was "an overall positive message". The emphasis is from the original document:

The statistical analysis of the national data received and used for this report permits the following conclusions:
- Mobility flows between the EU10 and the EU15 are very limited and are simply not large enough to affect the EU labour market in general. In addition, mobility flows from EU15 to EU10 Member States and between EU10 Member States are generally negligible (see table A1).
- The percentage of EU10 nationals in the resident population of each EU15 Member State was relatively stable before and after enlargement, with increases in the UK and, more conspicuously, in Austria and in Ireland25. In Austria, however, there is evidence to suggest that the stock of EU8 nationals stabilised in 2005.
- There is no evidence to show a direct link between the magnitude of mobility flows from EU10 Member States and the TA in place. Ultimately, mobility flows are driven by factors related to supply and demand conditions. If anything, TA will only delay labour market adjustments, with the risk of creating "biased" destination patterns even on a more permanent basis.
- The employment rate of EU10 nationals in EU15 Member States is similar to that of country nationals, and it is even higher in Ireland, Spain and the UK.
- The migration flows following the enlargement have had positive effects on the economies of the EU15 Member States: EU10 nationals positively contribute to the overall labour market performance, to sustained economic growth and to better public finances.
- This employment rate has increased in several countries since enlargement. Enlargement has helped to formalise the underground economy constituted by previously undocumented workers from the EU10, with well-known beneficial effects, such as greater compliance with legally sanctioned labour standards, improved social cohesion and higher State income from tax and social security contributions. This also improves the integration of EU10 nationals due to a change in employers' attitudes, greater opportunities to set up private businesses, better information and regulation.
- The sectoral composition of the EU15 national workforce has not shown significant changes since enlargement showing no evidence of crowding out of national workers by the limited inflow of workers from EU10 Member States. EU 10 nationals have a complementary role to play.
- EU10 nationals alleviate skills bottlenecks in the EU15 Member States and contribute to long-term growth through human capital accumulation.

Countries that have not applied restrictions after May 2004 (UK, Ireland and Sweden) "have experienced high economic growth, a drop of unemployment and a rise of employment". According to Nicholas Watts in today's Guardian, the Commission wnats other EU countries to follow their example:

France, Germany and other members of "Old Europe" were urged yesterday to throw open their borders to migrant workers as figures showed that east European workers were contributing to high economic growth.

The European commission called on Berlin and Paris to follow the example of Britain, Ireland and Sweden, which granted free movement to workers from the new members of the EU.

Vladimir Spidla, the former Czech prime minister, who is now the European employment commissioner, said: "Free movement of workers is economically rational and is enshrined in EU treaties. We have not seen any catastrophic tendencies since enlargement."

Giving the 'Polish plumber' a chance

Last September I argued that it was time for EU countries to welcome the 'Polish plumber'. At the time of EU enlargement in May 2004, only Britain, Ireland and Sweden allowed workers from Eastern and Central Europe free access to their labour markets. The other 12 of the 'old' EU-15 member states imposed 'transitional restrictions' on labour movement.

But by 30 April 2006, member states have to declare whether they aim to ease, lift or keep the restrictions in place for another 3+ years. A EurActiv report, Member states ponder lifting labour market restrictions, expects most of the remaining twelve to lifyt or ease their restrictions on the 'Polish plumber' and other migrant workers:

Spain, Finland, Portugal and Greece now appear inclined to ease or even remove restrictions on labour movement from the EU-8 states in May 2006. France and Belgium are reportedly considering easing the restrictions only gradually, leading up to their full removal by the end of the decade. Denmark said that it will give its policy a careful review. Austria and Germany, both saddled with high unemployment, have indicated that they will keep the restrictions in place. 

Non-EU member Norway is also considering opening its doors to the new EU member states. In a referendum in September 2005, Switzerland decided to open up its labour market to workers from the EU-10 countries.

Britain has easily absorbed the quarter of a million foreign workers it has received over the past 18 months. Many British employers say they could not do without them. In London the Eastern European shop asistant is now so ubiquitous, and so accepted, that it's hard to remember what the fuss was all about. Let's hope other member states can emulate the UK's positive experience.

Denmark's flexicurity model: ready for export?

Some European politicians are turning to the Danish 'flexicurity model' - a combination of easy hiring and firing, generous unemployment benefits and an active labour market policy - in an attempt to reinvigorate their sluggish labour market. This week French PM Dominique de Villepin, for example, announced measures to boost youth employment that seem to have been inspired by the 'flexicurity' model.

But if it's such a great system, why haven't other European countries adopted it already? After all, the model has been around for over a decade and has been actively touted by the European Commission. Two French labour economists, Yann Algan and Pierre Cahuc, attempt to explain this puzzle. In a new IZA discussion paper, Civic attitudes and the design of labor market institutions: Which countries can implement the Danish flexicurity model?, they argue that the generous unemployment benefits that form part of the Danish model can only work in a high-trust society where few cheat the system:

We argue that the flexicurity model is hardly sustainable in countries displaying weak public-spiritedness because the unemployment insurance design raises moral hazard issues that are much more difficult to overcome in countries where individuals are more prone to cheat over government benefits.

Besides, we are also able to document that civic attitudes cannot be systematically changed quickly just by changing institutions. This result has far-reaching consequences for the policy reforms agenda. It indicates that civic attitudes impose real constraints on the choice of labor market institutions. From this point of view, it is unlikely that countries with weak public-spiritedness can implement the Danish Model without specific action aimed at changing the values of their citizens.

...this analysis suggests that public-spiritedness is a key ingredient in the possibility for a society to implement efficient public unemployment insurance. To that regard, a country may be unlikely to succeed in its labor market reforms without a comprehensive policy affecting civic behavior of its citizens.

France is not such a country. The authors demonstrate that it has a much less generous unemployment benefit system than the Danes, and the French are much more accepting towards welfare cheating. On that evidence no sane French politician would want to import the flexicurity model. The authors conclude:

...this analysis suggests that public-spiritedness is a key ingredient in the possibility for a society to implement efficient public unemployment insurance. To that regard, a country may be unlikely to succeed in its labor market reforms without a comprehensive policy affecting civic behavior of its citizens.

This is an interesting proposition. While it doesn't wholly resolve the policy question, it takes us some of the way there. It also helps answer the vexed debate over whether the Nordic model is exportable.

Brown to EC: sod off

In a follow up to my post last Friday, Chancellor faces EU censure over deficit, Chancellor Brown has politely but firmly told the European Commission to sod off. The Financial Times reports Britain rejects EU demands to rein in its budget deficit:

Britain on Wednesday rejected demands from the European Commission to raise taxes or cut spending to rein in its “excessive” budget deficit, in a new setback for Brussels in its attempt to enforce budget discipline.

Gordon Brown, the British chancellor of the exchequer, rejected both the Commission’s forecasts and conclusions. “We make no apologies for investing in vital public services,” said a UK Treasury spokesman.

Some 12 countries out of 25 in the European Union are running deficits above the bloc’s limit – including France, Germany and Italy – in spite of pleas from Brussels and the European Central Bank for fiscal discipline.

Joaquin Almunia, EU monetary affairs commissioner, said he was “sure” Mr Brown would adjust his plans. “The UK has to comply with the rules,” he said. He wants Mr Brown to bring the UK deficit below the stability and growth pact’s 3 per cent of gross domestic product limit in the 2006-07 financial year.

Mr Almunia claimed Mr Brown’s spending plans implied Britain would break the stability and growth pact’s deficit ceiling for four successive years – starting in 2003-04 – unless corrective action was taken.

Peter Mandelson, the British trade commissioner, was said by aides to have watered down the language used in the Commission’s report to “ensure a fair text”. But Mr Brown, whose habit of lecturing others on economic management causes irritation in many European capitals, was in no mood to take advice himself.

The Treasury now forecasts borrowing falling to 3 per cent of GDP in 2005-06 and to 2.7 per cent in 2006-07, well below the stability pact’s limit and says there will be no change of policy.

Europe's leaders look to the 'Swedish model'

We will be hearing a lot more about 'flexicurity' and the Swedish and Nordic models over the next few months, with the Austrian EU Presidency - and the Commission - keen to promote them in preference to the supposed 'evils' of the anglosaxon model. Last Thursday, Nicholas Watts wrote in the Guardian that the next EU summit will highlight the Nordic model as a solution to Europe's "economic slumber". Here is an excerpt from Europe's leaders look north, but has Sweden really got the best of both worlds? It's a reasonably balanced piece - though I seriously doubt Watts' claim that the British government thinks the Scandinavian model "combines the best of both worlds".

Days after European leaders finally agreed a €862bn (£593bn) budget at last month's EU summit, key figures are looking to Scandinavia, which has enjoyed steady economic growth for 50 years while ensuring that a protective arm is thrown around its people.

Austria, which took over the EU's rotating presidency on January 1, will highlight the Nordic model at the next European summit in March, when leaders will try to chart a way out of the EU's economic slumber. Britain, the champion of flexible Europe, and Jacques Chirac, an opponent of the "Anglo-Saxon" economic approach, believe Scandinavia combines the best of both worlds: relatively low unemployment, at 5.8%, and generous social provision.

Joakim Palme, the author of a paper on the Nordic model for the EU jobs summit at Hampton Court last October, believes Europe's mighty but struggling economies are wise to look north. "I do not say the Nordic model should be copied. But if you are serious about combating poverty and inequality and want to combine that with growth and employment, it is difficult to discard the way the Scandinavians have organised the system of social protection."

Chancellor faces EU censure over deficit

The FT's Tobias Buck reports that Gordon Brown faces EU censure over deficit:

Gordon Brown, the UK chancellor of the exchequer, faces embarrassing censure from the European Commission next week, when Brussels will recommend the launch of an excessive deficit procedure against Britain for its failure to keep public borrowing below 3 per cent of gross domestic product.

Britain is on track to break the budget deficit ceiling enshrined in the European Union’s stability and growth pact for four years running, according to the latest Commission estimates.

Borrowing reached 3.2 per cent of GDP in the financial years to March 2004 and March 2005, and is expected to rise to 3.4 per cent in 2005-2006. The deficit is also expected to remain above 3 per cent in the fiscal year 2006-2007.

These predictions mean the Commission will now formally call on EU finance ministers to declare that Britain is running an “excessive deficit”. It will also urge member states to tell London to bring borrowing below the 3 per cent threshold by 2006-2007 – one year earlier than forecast.

Brussels had previously shied away from such a step, arguing that Britain’s deficit was temporary. However, the recent deterioration in the country’s public finances means that excuse is no longer acceptable to the Commission, which is tasked with upholding the strictures of the stability pact.

The UK is bound by the pact’s provisions, even though it is not a member of the 12-member eurozone. However, unlike the governments that have adopted the single currency, Britain cannot be financially penalised.

It is a little curious that the UK should be bound by the Growth and Stability Pact limits when it is not part of the Euro/EMU, and I expect HM Treasury will give this declaration short shift.

(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.