tag:theconversation.com,2011:/au/topics/economic-policy-814/articlesEconomic policy – The Conversation2023-01-30T13:14:44Ztag:theconversation.com,2011:article/1976732023-01-30T13:14:44Z2023-01-30T13:14:44ZBrazil’s economic challenges are again Lula’s to tackle – this time around they’re more daunting<figure><img src="https://images.theconversation.com/files/505670/original/file-20230120-15684-t92yp2.jpg?ixlib=rb-1.1.0&rect=77%2C17%2C3917%2C2329&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bolstering Brazil's economy will be hard if there's a global recession.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/brazils-president-luiz-inacio-lula-da-silva-gestures-during-news-photo/1246116883?adppopup=true">Mauro Pimentel/AFP via Getty Images</a></span></figcaption></figure><p>Even when they’re in trouble, Brazilians rarely lose their sense of humor. But in recent years, their joviality has often given way to <a href="https://www.ipsos.com/sites/default/files/ct/news/documents/2021-06/Culture%20wars%20around%20the%20world%20_0.pdf">political division</a> everywhere from social media to the dinner table.</p>
<p>One <a href="https://theconversation.com/brazil-no-longer-the-country-of-the-future-59505">familiar quip</a> – that Brazil is the country of the future and always will be – has lost its levity as Luiz Inácio Lula da Silva begins his third <a href="https://www.gov.br/secretariadegoverno/pt-br/posse-presidencial">presidential term</a>. <a href="https://www.npr.org/2023/01/01/1146518711/leftist-lula-brazil-sworn-in-president">Lula previously led his country from 2003 to 2010</a>. The president, who was sworn in again on Jan. 1, 2023, promised on the campaign trail that Brazil’s future can be like its past again: more prosperous and less polarized. </p>
<p>Having <a href="https://scholar.google.com/citations?user=KBw41t4AAAAJ&hl=en&oi=ao">studied Brazil</a> in <a href="https://www.nber.org/people/marc_muendler?page=1&perPage=50">our economic research</a>, and having lived in the country for several years by birth or by choice, we argue that it will not be easy for Lula to fulfill his economic promises.</p>
<p>Unlike in his first two terms, when domestic and foreign markets <a href="https://www.econ.puc-rio.br/biblioteca.php/trabalhos/show/1533">helped the economy along</a>, Lula now faces <a href="https://www.oecd.org/economy/brazil-economic-snapshot">strong headwinds at home</a> <a href="https://www.weforum.org/press/2023/01/chief-economists-say-global-recession-likely-in-2023-but-cost-of-living-crisis-close-to-peaking">and abroad</a> – and that means sound policies are even more important this time around.</p>
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<h2>Good times, bad times and economic choices</h2>
<p>Brazil shot up from the world’s 14th-largest economy in 2003 to the <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=BR">seventh-biggest in 2010</a>, during a boom that largely coincided with Lula’s prior presidency. At the same time, the country’s <a href="https://databank.worldbank.org/source/world-development-indicators">poverty rate</a>, which the World Bank today pegs at the share of the population living on less than US$3.65 a day, fell sharply, from 26% to 12%.</p>
<p><a href="https://www.exportgenius.in/blog/brazil-exports-higher-than-imports-a-brief-overview-of-brazil-trade-641.php">Brazil exports so many</a> gallons of orange juice, bags of coffee, bushels of wheat and other commodities that it’s serving up the world’s breakfast. Global growth during those years boosted the demand for these commodities as well as for Brazil’s processed goods. Manufacturing exports fueled Brazil’s growth in the decade following the year 2000 for the first time, led by sales <a href="https://legacy.trade.gov/steel/countries/pdfs/exports-brazil.pdf">of products like steel</a>, car parts and cars, and <a href="https://embraer.com/">aircraft made by Embraer</a>.</p>
<p>During these boom years, Lula ran a balanced government budget, held inflation low and <a href="https://www.imf.org/en/Publications/Books/Issues/2019/03/11/Brazil-Boom-Bust-and-Road-to-Recovery-44927">kept the Brazilian real’s exchange rate </a> with other currencies under control – macroeconomic policies that he maintained from his predecessor, Fernando Henrique Cardoso. Lula also bundled <a href="https://doi.org/10.1080/01436597.2015.1059730">Cardoso’s popular anti-poverty programs</a> into Bolsa Família, a successful <a href="https://doi.org/10.1017/S0022216X0600157X">conditional cash transfer program</a>. To remain enrolled and receive the monetary benefits, low-income families had to get their children vaccinated against diseases, keep them in school and <a href="https://www.iadb.org/en/toolkit/conditional-cash-transfer-programs/brazil-bolsa-familia">meet other requirements</a>. </p>
<p>Cynthia Benedetto, Embraer’s chief financial officer, <a href="https://valor.globo.com/brasil/noticia/2011/09/13/chegou-a-hora-do-brasil-ou-ela-acabou-de-passar.ghtml">observed in 2011</a>: “Since my childhood I heard that Brazil is the country of the future,” and then warned, “Now the future has arrived, and I start to fear that it is short.”</p>
<p>She was right. The good times didn’t last. </p>
<p>During the second decade of this century, the prices of many of the commodities that Brazil exports <a href="https://fred.stlouisfed.org/series/PNFUELINDEXQ">fell or even plummeted</a>. The country experienced two of the <a href="https://www.npr.org/sections/thetwo-way/2017/03/07/519073220/brazils-recession-the-longest-and-deepest-in-its-history-new-figures-show">worst recessions in its history</a>. In the downturn that lasted from late 2014 to mid-2016, <a href="https://sidra.ibge.gov.br/tabela/4094">nearly 5 million Brazilians lost their jobs</a>. After a sluggish recovery, the COVID-19 pandemic hit, and <a href="https://repositorio.cepal.org/bitstream/handle/11362/46504/64/PO2020_Brazil_en.pdf">10 million Brazilians became jobless</a> in another big downturn.</p>
<h2>Political upheaval</h2>
<p>Bad choices made tough and unlucky times worse.</p>
<p>A combination of <a href="https://doi.org/10.1080/05775132.2020.1866906">economic mismanagement</a>, <a href="https://www.jstor.org/stable/45290155#metadata_info_tab_contents">widespread corruption</a>, <a href="https://semancha.com/2013/06/22/the-gringos-guide-to-demonstrations-in-brazil/">political turmoil</a> and a <a href="https://ourworldindata.org/coronavirus/country/brazil">global pandemic</a> all contributed to 10 years of backward sliding after a decade of progress.</p>
<p>Lula’s <a href="https://www.poder360.com.br/justica/5-anos-de-lava-jato-285-condenacoes-600-reus-e-3-000-anos-de-penas/">allies</a>, including some in his <a href="https://www.camara.leg.br/tv/388972-supremo-condena-ex-ministro-jose-dirceu-a-10-anos-e-10-meses-de-reclusao/">inner circle</a>, were found to be part of <a href="https://www.bbc.com/news/world-latin-america-35810578">one corruption scheme after another</a>. Lula himself <a href="https://www.reuters.com/article/brazil-corruption-lula/former-brazilian-president-lula-found-guilty-of-corruption-idUSE6N1JB014">ended up in prison for corruption</a> until <a href="https://portal.stf.jus.br/noticias/verNoticiaDetalhe.asp?idConteudo=464261&ori=1">Brazil’s Supreme Court declared the case a mistrial</a> because the presiding judge was determined to have been biased.</p>
<p>Brazilians elected Lula’s hand-picked successor, <a href="https://www.bbc.com/news/world-latin-america-29782073">Dilma Rousseff</a>, in the 2010 and 2014 presidential races. She cast aside some of her predecessors’ policies that had buttressed economic stability.</p>
<p>Rousseff <a href="https://www.correiobraziliense.com.br/app/noticia/economia/2016/01/20/internas_economia,514557/tombini-se-curva-a-pressao-do-pt-e-banco-central-deve-manter-juros.shtml">ended the central bank’s de facto independence</a> and lowered interest rates in an <a href="https://drive.google.com/file/d/1ldGPSw-D2wugZNlKc8_lBg918YGC0-3G/edit">abrupt turnaround that sparked inflation</a>. She gave up on <a href="https://www.correiobraziliense.com.br/app/noticia/economia/2013/11/07/internas_economia,397597/mantega-admite-que-a-meta-fiscal-deste-ano-nao-sera-atingida.shtml">balancing the budget</a>.</p>
<p>Once corruption was exposed in state-owned oil company <a href="https://www.cnnbrasil.com.br/politica/lula-admite-corrupcao-na-petrobras-erros-de-dilma-e-compara-mensalao-a-orcament/">Petrobras</a>, the <a href="https://www.bbc.com/news/business-39194395">construction industry</a> and at Brazil’s massive <a href="https://www.metropoles.com/brasil/politica-brasil/diretor-do-bndes-brasil-legalizou-corrupcao-com-mudanca-na-lei">state-run development bank</a>, economic activity slowed across the board. Rousseff oversaw one of Brazil’s most severe economic contractions in memory: <a href="https://databank.worldbank.org/source/world-development-indicators">GDP shrank by 7%</a> and <a href="https://blogdoibre.fgv.br/posts/divida-bruta-ou-divida-liquida-eis-questao">public debt increased 20 percentage points as a share of GDP</a> from 2014 to 2016.</p>
<p>Brazil’s <a href="https://apnews.com/article/latin-america-caribbean-brazil-impeachments-international-news-d5614b598b25470e839d9d8acfc9cff8">Congress impeached and convicted Rousseff</a> in 2016 for fiscal improprieties. Her vice president, <a href="https://www.reuters.com/article/uk-brazil-politics-temer-idUKKCN0Y32WC">Michel Temer</a>, served out the rest of her term and appointed Lula’s central bank chair, <a href="https://www.reuters.com/article/us-brazil-politics-ministers/brazils-temer-names-henrique-meirelles-as-finance-minister-idUSKCN0Y322W">Henrique Meirelles, as minister of finance</a> to help rein in public debt.</p>
<p>Jair Bolsonaro, a vocal admirer of Brazil’s <a href="https://www.npr.org/2018/07/30/631952886/dictatorship-was-a-very-good-period-says-brazil-s-aspiring-president">20th-century military dictatorship</a>, <a href="https://www.theguardian.com/world/2019/jan/01/jair-bolsonaro-inauguration-brazil-president">became president in 2019</a> by riding the wave of widespread sentiment against Lula’s and Rousseff’s Workers’ Party. Bolsonaro prioritized <a href="https://oglobo.globo.com/economia/carlos-goes/coluna/2021/09/do-entusiasmo-com-equipe-economica-decepcao-25212666.ghtml">short-term political gain</a> over long-term adjustment, often <a href="https://www.bbc.com/portuguese/brasil-50105202">clashing with his own economic aides</a> and dodging rules meant to curb government spending. </p>
<p>By 2020, Brazil’s economy <a href="https://databank.worldbank.org/source/world-development-indicators">ranked No. 12 in the world in terms of GDP</a>, and living conditions deteriorated. In 2021, the poverty rate likely hit the highest level in a decade, according to estimates by <a href="https://web.archive.org/web/20230106004340/https://repositorio.ipea.gov.br/bitstream/11058/11563/4/NT_102_Disoc_Um_Pais.pdf">researchers at IPEA, a government think tank</a>, as well as <a href="https://agenciadenoticias.ibge.gov.br/en/agencia-news/2184-news-agency/news/35695-poverty-hits-a-record-in-2021-62-5-million-persons-highest-level-since-2012">IBGE</a>, Brazil’s statistics agency.</p>
<p>The pandemic and the social spending fluctuations it brought about have made it hard to accurately track economic trends in recent years. But the numbers suggest that Brazil is close again to where it started the 21st century. </p>
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<h2>Back to the future</h2>
<p>Lula’s economic challenges are daunting, over and above the political crisis after the <a href="https://theconversation.com/democracy-under-attack-in-brazil-5-questions-about-the-storming-of-congress-and-the-role-of-the-military-197396">riots by opposition supporters in Brasília</a>.</p>
<p>First, the economic outlook is gloomy. Inflation has led central banks worldwide to <a href="https://www.fitchratings.com/research/sovereigns/global-interest-rates-rising-faster-than-expected-pivot-unlikely-in-2023-10-11-2022">increase interest rates</a>, and the International Monetary Fund <a href="https://www.imf.org/en/Blogs/Articles/2022/10/11/policymakers-need-steady-hand-as-storm-clouds-gather-over-global-economy">forecasts a global slowdown in 2023</a>. </p>
<p>Even if the world still wants Brazil’s coffee, <a href="https://citrusindustry.net/2023/01/13/brazils-orange-juice-production-and-exports/">orange juice</a> and cereal from wheat or corn for breakfast, we doubt that foreign demand for Brazil’s exports will bounce back to the levels seen in past boom years. </p>
<p><a href="https://data.imf.org/commodityprices">Global prices for many of the commodities Brazil exports</a> have been sliding downward for the past 15 years. They briefly reached their 2008 peak level again in mid-2022, partly driven by Russia’s invasion of Ukraine and the ensuing global turmoil that <a href="https://www.ifpri.org/blog/food-export-restrictions-have-eased-russia-ukraine-war-continues-concerns-remain-key">drove food prices up</a>.</p>
<p>But the prices of commodities that are <a href="https://www.usitc.gov/data/gravity/itpde.htm">particularly important to Brazil</a>, such as <a href="https://tradingeconomics.com/commodity/soybeans">soybeans</a>, <a href="https://tradingeconomics.com/commodity/corn">corn</a> and <a href="https://tradingeconomics.com/commodity/coffee">coffee</a>, are all down significantly from their recent peaks.</p>
<p>During his 2022 campaign, Lula promised to <a href="https://economia.uol.com.br/noticias/reuters/2022/08/17/lula-reajuste-tabela-imposto-de-renda.htm">slash taxes on the upper-middle class</a> and <a href="https://oglobo.globo.com/economia/noticia/2022/10/eleito-prioridade-de-lula-e-renovar-auxilio-brasil-de-r-600-e-dar-aumento-real-para-o-minimo.ghtml">increase benefits for the poor</a> while <a href="https://gauchazh.clicrbs.com.br/economia/noticia/2022/11/alckmin-diz-que-governo-lula-vai-fechar-contas-no-azul-e-reduzir-divida-mas-nao-em-24-horas-clalruut3000801g7stvj1i22.html">keeping government finances under control</a>.</p>
<p>This arithmetic is feasible in an era of rapid growth, when newly generated wealth can finance public transfers. At times of slow or no growth, like today, it becomes much harder to pull off.</p>
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<p>Second, unlike when Lula first took office <a href="https://oxfordre.com/latinamericanhistory/display/10.1093/acrefore/9780199366439.001.0001/acrefore-9780199366439-e-416;jsessionid=A0929A5DBDAF95045F6D2AA8214B2378?mediaType=Article">following a period of fiscal stability</a>, this time he must credibly rebuild much of the fiscal framework.</p>
<p>After boosts to benefits, tax cuts and some <a href="https://www.insper.edu.br/agenda-de-eventos/lancamento-do-livro-para-nao-esquecer-politicas-publicas-que-empobrecem-o-brasil/">unfunded pension commitments to retirees</a>, it’s become hard to balance Brazil’s budget. In response to the crisis in the mid-2010s, Brazil’s <a href="https://www12.senado.leg.br/noticias/materias/2016/12/15/promulgada-emenda-constitucional-do-teto-de-gastos">Congress passed a spending cap</a> that gradually rises so as to foster slow fiscal adjustment while avoiding harsh austerity. But Bolsonaro essentially got rid of the cap by circumventing it.</p>
<p>One example is the federal government’s obligation to cover court-mandated payments: <a href="https://www.google.com/url?q=https://www.camara.leg.br/noticias/839381-camara-aprova-em-2o-turno-mudancas-na-pec-dos-precatorios/&sa=D&source=docs&ust=1674072828470042&usg=AOvVaw3wBnAFA1gSAvGVnSFLHL8g">Bolsonaro delayed</a> the disbursement of 110 billion reais ($21.6 billion), equal to more than 1% of Brazil’s GDP, in 2022. That means the new government has to pay this year’s and some of last year’s bills at the same time.</p>
<p>While <a href="https://www.nbcnews.com/news/latino/brazils-bolsonaro-says-no-national-lockdown-record-covid-deaths-rcna618">Bolsonaro dismissed the severity of COVID-19</a> when it was spreading uncontrolled through his country, his government did help people cope with its economic fallout by allowing <a href="https://www.planalto.gov.br/ccivil_03/portaria/dlg6-2020.htm">emergency spending that breached Brazil’s spending cap</a>. However, his administration <a href="https://g1.globo.com/jornal-nacional/noticia/2022/06/30/senado-aprova-pec-que-preve-estado-de-emergencia-para-ampliar-beneficios-sociais.ghtml">maneuvered to perpetuate the state of emergency</a> and kept spending levels higher than the cap would allow long after Brazilians stopped staying at home for public health reasons.</p>
<p>Third, we expect political divisions, including some <a href="https://www.gov.br/planalto/pt-br/acompanhe-o-planalto/noticias/2023/01/geraldo-alckmin-toma-posse-como-vice-presidente-da-republica">within Lula’s administration</a>, to be another obstacle. Different factions on his economic team are likely to be at loggerheads for the foreseeable future because they prefer starkly different policies.</p>
<p><a href="https://www.cnnbrasil.com.br/politica/simone-tebet-quem-e-a-nova-ministra-do-planejamento-e-ex-adversaria-de-lula-na-eleicao/">Simone Tebet</a>, the new economic planning minister who is in charge of coordinating spending, has several fiscal conservatives on her team.</p>
<p>Finance Minister Fernando Haddad, in contrast, has appointed undersecretaries known to invariably <a href="https://www1.folha.uol.com.br/colunas/bernardo-guimaraes/2022/12/o-que-esperar-da-politica-economica-do-novo-governo.shtml">advocate for more spending</a>. Plans for taxes and spending released to date set a budget surplus of 0.5% of GDP as the new government’s target, primarily financed with more tax collection. </p>
<p>Using budget projections by the <a href="https://www.imf.org/-/media/Files/Publications/fiscal-monitor/2022/October/Data/fm-october-2022-database.ashx">International Monetary Fund</a>, we consider those revenue projections <a href="https://www1.folha.uol.com.br/mercado/2023/01/pacote-de-haddad-vai-na-direcao-correta-mas-ha-duvidas-sobre-execucao-dizem-economistas.shtml">overly optimistic</a>.</p>
<p>To be sure, any new government deserves time to prove itself, especially under tough circumstances. But <a href="https://www.briq-institute.org/global-preferences/rankings#1-0-1">patience is rarer in Brazil</a> than humor – and always has been.</p><img src="https://counter.theconversation.com/content/197673/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marc-Andreas Muendler received funding from the National Science Foundation for research using Brazilian data.
Marc-Andreas Muendler worked as a consulting researcher for the Brazilian labor ministry and the Brazilian census bureau, and currently works closely with the research department of Brazil's central bank in Sao Paulo on research into firm dynamics.</span></em></p><p class="fine-print"><em><span>Carlos Góes was a senior economic adviser at the Executive Office of the President of Brazil (2017-18). He is currently an economics columnist for O Globo, a Brazilian newspaper. He is the founder of Instituto Mercado Popular, a nonpartisan São Paulo-based think tank. </span></em></p>He faces strong headwinds at home and abroad as his third term as president gets underway.Marc-Andreas Muendler, Professor of Economics, University of California, San DiegoCarlos Góes, Doctoral Candidate in Economics, University of California, San DiegoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1958082022-12-15T15:56:25Z2022-12-15T15:56:25ZWhat do politicians really think of economists? Our new research explains why relations fell apart after 2008<figure><img src="https://images.theconversation.com/files/501110/original/file-20221214-13666-u73s9p.jpg?ixlib=rb-1.1.0&rect=22%2C0%2C3721%2C2453&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/close-conference-meeting-microphones-businessman-82082848">ESB Professional / Shutterstock</a></span></figcaption></figure><p>As countries across Europe and around the world grapple with high living costs and impending recession, voters are <a href="https://redfieldandwiltonstrategies.com/latest-gb-voting-intention-13-november-2022/">concerned about the economy</a> and how their elected representatives will fix it. </p>
<p>For many, it’s tempting to call on politicians to cede some of their power to economic experts. Politicians might be more able to make difficult or unpopular (but necessary) decisions if they could argue they were following expert advice, as they did <a href="https://www.ft.com/content/1efbd3ac-8af3-11ea-a01c-a28a3e3fbd33">during the pandemic</a>.</p>
<p>But our new research reveals what politicians, when asked in private, really think about economists. Our team at UCL conducted <a href="https://www.agendapub.com/book/detail/politicians-and-economic-experts-by-anna-killick/?k=9781788215640">nearly 100 in-depth interviews</a> with economic ministers, opposition spokespeople and economic committee members. They were from five countries – France, Germany, Denmark, the UK and US – and across the party spectrum from the right-wing Alternative fur Deutschland to the French Communist party.</p>
<p>Across the board, politicians reported declining respect for economists since the 2008 financial crisis. And they were concerned that any increased reliance on such experts would alienate voters. </p>
<p>Very few politicians saw economists as experts in the way public health or other “hard scientists” are experts. They usually supported one specific group of economists rather than the discipline as a whole. Centre-left politicians tended to say the only economists they respect are “Keynesian”. They argued that John Maynard Keynes’s approach “allows us politicians to intervene” to promote greater socioeconomic equality. </p>
<p>Far-left politicians proclaimed the value only of non-mainstream economists, such as environmentalist <a href="https://www.kateraworth.com/doughnut">Kate Raworth</a>, who argues the planet’s resources are finite and growth not always desirable.</p>
<p>Centre-right politicians mentioned <a href="https://www.britannica.com/biography/F-A-Hayek">Friedrich Hayek</a> most often, best-known for defending free-market capitalism. They also described having respect for other “free market economists”. </p>
<h2>Losing usefulness</h2>
<p>Even politicians who had the utmost respect for mainstream economists most of their working lives found them less “useful” since the 2008 financial crisis. One British centrist politician told us that until 2008, “the economy worked almost like clockwork”. After the crash, people’s trust in the standard economic model was shattered, not just by the crisis itself, but by economists’ failure to predict it.</p>
<p>Those in office during the crisis consulted economists who were often divided. After they left the room, the politicians felt they were alone in “shouldering responsibility”. Very often they felt their greater knowledge of their constituents’ everyday circumstances meant they had a surer sense than the experts of whether something like a <a href="http://news.bbc.co.uk/1/hi/business/8135717.stm">car scrappage scheme</a> would restore confidence. They felt similarly alone as they charted how to get economies out of lockdown or through the supply chain crisis.</p>
<p>As well as viewing economists as less united and therefore less “scientific” than other experts, politicians complained they are often impractical, operating at too abstract a level and relying on mathematical modelling rather than real-world conditions. They may seek out an economist working on a specific policy area they need to explore. But only if the work they have done has been tested in the real world, and the economist is one of the rare breeds that can explain in accessible terms. </p>
<p>We found a greater integration of politicians and economists in Denmark’s consensual political system, where many parties share the same commitment to a Scandinavian welfare model of the economy and coalition is the norm. But in the US (where we might expect high levels of respect for economists, having pioneered the field) politicians had arguably the lowest respect for them. They labelled them by political party – “Republican” or “Democrat” – and said they use them to add value to their arguing points.</p>
<figure class="align-center ">
<img alt="Donald Trump, as US president, gestures while speaking at a podium outside the White House" src="https://images.theconversation.com/files/500675/original/file-20221213-12689-oswirn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/500675/original/file-20221213-12689-oswirn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/500675/original/file-20221213-12689-oswirn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/500675/original/file-20221213-12689-oswirn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/500675/original/file-20221213-12689-oswirn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/500675/original/file-20221213-12689-oswirn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/500675/original/file-20221213-12689-oswirn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">US politicians are concerned that reliance on experts has made voters turn to populism.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/washington-dc-june-12-2019-president-1424043059">Evan El-Amin / Shutterstock</a></span>
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</figure>
<p>The politicians we interviewed also worried that turning to economic experts would make voters more distrustful. They thought past attempts to separate economics from the political arena – for instance, giving more power to central banks – confused and estranged voters who then turned to populist politicians offering simplistic solutions. </p>
<p>In the US, Republicans were privately horrified that President Donald Trump had “demagogued” economic issues. They had spent decades carefully crafting consistent and coherent economic messaging on the virtues of free trade and balancing the budgets, only for him to <a href="https://www.pbs.org/newshour/economy/making-sense/trump-says-he-launched-an-economic-boom-heres-what-we-know">tell voters</a> that protectionism would bring back rust belt production jobs and cutting their taxes could be paid for out of increased borrowing.</p>
<h2>Meeting voters where they are</h2>
<p>As economic issues rise up the agenda for voters, many politicians welcomed the prospect of turning away from more cultural issues like immigration. But they recognised that if they are not prepared to outsource economic policy problems to economists they will have to explain their own policies more effectively to voters. They need to economically educate voters – not in a formal sense, but at least by being more in-depth and open. </p>
<p>Voters find economic issues more technical than social and cultural ones. As one French Socialist put it, they “turn off” because they doubt they will be able to understand. But, he said, politicians have to appeal to voters’ intelligence and urge them to make the effort to understand. His ideal situation would be if voters were informed enough to “qualify” their judgements more, saying things like “well, it could have been worse”. </p>
<p>Politicians have to prepare the ground by starting where voters are. One free trade Republican described using chocolates to illustrate how Trump’s tariffs made aluminium wrappers more expensive. Another said he regularly visited factory workers in their lunch hour for a question and answer session to explain his economic thinking.</p>
<p>Another often overlooked barrier is that politicians often have moral economic goals, whether left-wing visions of social justice or right-wing visions of the value of unleashed markets. But they are inhibited in describing them to voters because they think there is a gulf between them and voters, who they see as narrowly self-interested. Our research urges them nevertheless to be more open about their thinking with voters. If they want to earn trust on economic policy, they will have to be more honest about what they are trying to achieve.</p><img src="https://counter.theconversation.com/content/195808/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The UCL based research Anna Killick conducted for this book was funded by the UKRI Future Leaders Fellowship MR/ S015280/
1 to study “mental models in political economy”.</span></em></p>Since the 2008 financial crisis, politicians from a range of parties and countries have reported losing respect for experts.Anna Killick, Research Fellow, Political Science, UCLLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1946192022-11-23T21:39:15Z2022-11-23T21:39:15ZCanada should focus on building ties with countries that share its values — but tread carefully<figure><img src="https://images.theconversation.com/files/496232/original/file-20221118-12-ny8ar0.jpg?ixlib=rb-1.1.0&rect=140%2C0%2C7659%2C4291&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Foreign Ministers Josep Borrell of the EU, James Cleverly of Great Britain, Yoshimasa Hayashi of Japan, Antony Blinken of the U.S., Annalena Baerbock of Germany, Melanie Joly of Canada, Catherine Colonna of France, and Antonio Tajani of Italy, at the G7 Foreign Ministers' Meeting in Münster, Germany, on Oct. 3, 2022.</span> <span class="attribution"><span class="source">(AP Photo/Martin Meissner)</span></span></figcaption></figure><p>In his recent book, <em><a href="https://www.penguinrandomhouse.ca/books/669023/values-by-mark-carney/9780771051579">Values: Building a Better World for All</a></em>, economist and former governor of the Bank of Canada and Bank of England Mark Carney argued that economic activity should be intentionally linked to the social and political outcomes it generates. </p>
<p>The premise is this: society’s problems of inequality, health and economic crises, and a deteriorating climate stem from a problem in how and what we, as humans, value. According to Carney, this problem can be solved by reimagining capitalism in a way that places human values at its core. </p>
<p>It’s a concept echoed by others. Recent work by <a href="https://marianamazzucato.com/books/the-value-of-everything">economist Mariana Mazzucato offers similar sentiments</a>. So, too, has the <a href="https://www.cips-cepi.ca/2022/10/20/the-world-according-to-chrystia-freeland/">recent series of speeches given by Canada’s Deputy Prime Minister, Chrystia Freeland</a>, that outline her vision for the world economy.</p>
<p>A central element to her vision <a href="https://www.theglobeandmail.com/politics/article-canada-trade-allies-freeland-friendshoring/">is the idea of “friend-shoring”</a> — deliberately crafting economic relationships with countries that share similar political and social values with Canada.</p>
<p>Business schools are following suit as well by emphasizing shared values in what they teach and research. <a href="https://smith.queensu.ca/centres/isf/index.php">Sustainable finance</a>; the <a href="https://corporatefinanceinstitute.com/resources/esg/esg-environmental-social-governance/">environmental, social and governance</a> framework; corporate social responsibility; and <a href="https://hbr.org/2018/07/creating-a-purpose-driven-organization">purpose-driven corporations</a> are now part of their core curriculum.</p>
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<img alt="A woman in a white button-down shirt giving a speech from behind a podium. Behind her, orange work suits hang in a cage." src="https://images.theconversation.com/files/496216/original/file-20221118-24-waw8qb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/496216/original/file-20221118-24-waw8qb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=388&fit=crop&dpr=1 600w, https://images.theconversation.com/files/496216/original/file-20221118-24-waw8qb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=388&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/496216/original/file-20221118-24-waw8qb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=388&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/496216/original/file-20221118-24-waw8qb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=487&fit=crop&dpr=1 754w, https://images.theconversation.com/files/496216/original/file-20221118-24-waw8qb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=487&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/496216/original/file-20221118-24-waw8qb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=487&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Deputy Prime Minister and Finance Minister Chrystia Freeland delivers a speech to business leaders, in Gatineau, Que., on Oct. 17, 2022.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Adrian Wyld</span></span>
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</figure>
<p>All of this is occurring at a time when global geopolitical tension is on the rise. War is raging in Eastern Europe. Countries now compete over everything from <a href="https://doi.org/10.1257/aer.20150774">mineral resources</a> to <a href="https://doi.org/10.1080/14650045.2020.1835863">energy</a> to <a href="https://www.christophermiller.net/semiconductors-1">microchips</a>. Trade is <a href="https://www.cfr.org/teaching-notes/globalization-myth-why-regions-matter">becoming more regionalized and insular</a>. Warnings emanate every day from academia and think tanks about the <a href="https://www.rushdoshi.com/thelonggame">rise of the economic colossus of China</a> and the political and military ambitions the country might harbour.</p>
<p>In response, the theme of shared values has emerged as a tool to overcome the bad geopolitical gambles Canada and other countries have made in the past — namely, the failed attempt at western integration.</p>
<h2>Failed western integration attempt</h2>
<p>At the end of the Cold War, western nations decided to try to integrate formerly Communist states and large emerging markets into the western-led economic system. <a href="https://press.princeton.edu/books/paperback/9780691201009/free-trade-under-fire">Trade and investment barriers fell</a> and <a href="https://wwnorton.com/books/Globalization-and-Its-Discontents/">global economic institutions gained membership and influence</a>.</p>
<p>They hoped doing so would generate political benefits — a vested interest from those markets in preserving that system — and the adoption of political reforms necessary to compete successfully in it — namely openness, transparency and maybe, over time, a gradual move towards democracy.</p>
<p>That gamble didn’t pay off. Powerful emerging markets, particularly China and Russia, did not change their politics. Instead, they doubled-down, <a href="http://cup.columbia.edu/book/chinas-search-for-security/9780231140508">becoming even more politically centralized</a>, domineering and <a href="https://global.oup.com/academic/product/overreach-9780190068516">suspicious of the West</a>.</p>
<p>Meanwhile, the costs the West tolerated for decades — job losses, an eroding middle class, loss of domestic opportunity in favour of cheap imports — <a href="https://globalreports.columbia.edu/books/the-populist-explosion/">spawned a virulent nationalist and populist response that now threatens the domestic stability</a> of many western countries.</p>
<h2>Unity through shared values</h2>
<p>Now, Canada and its western allies are reversing course and attempting to redefine what differentiates and unites western economies and societies through shared values. Is this a wise move? Generally speaking, yes. But there are caveats.</p>
<p>First, the emergence of war, <a href="https://www.cgai.ca/northern_populism_causes_and_consequences_of_the_new_ordered_outlook">populism</a> and the <a href="https://freedomhouse.org/report/freedom-world/2022/global-expansion-authoritarian-rule">hardening of authoritarianism</a> have presented a series of rude wake-up calls for Canada and its allies. Geopolitics and enduring differences in national interests are real and need to be taken seriously. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/from-trump-to-putin-why-are-people-attracted-to-tyrants-186988">From Trump to Putin: Why are people attracted to tyrants?</a>
</strong>
</em>
</p>
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<p>Second, people need to be reminded that values exist, matter and, sometimes, will cause conflict with those who do not share them. This is a painful, but necessary reality. Lastly, the strategy of re-stating
shared values can be a unifying thing for societies — something <a href="https://theconversation.com/how-to-depolarise-deeply-divided-societies-podcast-193427">much needed in an age of political division</a>.</p>
<p>The challenge is in the execution. Values are intrinsically divisive because not everyone shares them. If you are “for” those who share your values, you are, by implication, against those who do not. This makes the world more divided <a href="https://theconversation.com/the-u-s-capitol-violence-could-happen-in-canada-here-are-3-ways-to-prevent-it-152960">and potentially more dangerous</a>.</p>
<h2>Getting values right</h2>
<p>The following suggestions will help policymakers utilizing the shared values strategy get the execution right.</p>
<p>First, if policymakers value markets, they should trust them. If a consumer buys a product based on criteria other than merit or price, then values are already built into their buying decision. Consumer values <a href="https://www.brookings.edu/book/the-market-for-virtue/">have shaped the direction of the markets for decades</a>. Sustainable investing used to be fringe, but is now mainstream. Well-functioning open markets make countries wealthier. And <a href="https://doi.org/10.1093/oxrep/gru006">wealthier countries make more sustainable, value-based economic choices</a>.</p>
<figure class="align-center ">
<img alt="A panel of six people sit behind a long table in front of an audience. Behind the panel, the words 'United Nations COP27' are displayed." src="https://images.theconversation.com/files/496221/original/file-20221118-9310-iqmkxj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/496221/original/file-20221118-9310-iqmkxj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/496221/original/file-20221118-9310-iqmkxj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/496221/original/file-20221118-9310-iqmkxj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/496221/original/file-20221118-9310-iqmkxj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/496221/original/file-20221118-9310-iqmkxj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/496221/original/file-20221118-9310-iqmkxj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Attendees listen to a plenary session at the COP27 U.N. Climate Summit on Nov. 18, 2022, in Sharm El-Sheikh, Egypt. There must be global co-operation on issues like climate change.</span>
<span class="attribution"><span class="source">(AP Photo/Peter Dejong)</span></span>
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<p>Second, governments shouldn’t overemphasize the importance of value-sharing. Even though countries may not share values, they might still have common interests, such as stability and increasing economic prosperity. Co-operation on global issues — <a href="https://theconversation.com/cop27-which-countries-will-push-to-end-fossil-fuel-production-and-which-wont-193471">combating climate change</a> and <a href="https://theconversation.com/canada-could-slow-the-accelerating-nuclear-arms-race-122315">preventing nuclear proliferation</a>, for example — is a necessity. Countries cannot shut out an adversary on economic issues and then hope to enlist their help on others. </p>
<p>Lastly, policymakers shouldn’t overplay the values card domestically. Getting domestic consensus on what supposed shared values are is a tricky thing. As <a href="https://www.brookings.edu/book/democracies-divided/">domestic political polarization is growing</a>, exacerbating domestic value divides through stringent value declarations could make the country weaker, not stronger. Stability and prosperity at home is the best foundation for extending values abroad.</p>
<p>Geopolitics is back, if indeed it ever left. Different value systems do shape economic activity and can play a key role in alleviating inequality while ensuring economic prosperity — if policymakers know when, and how, to use them effectively.</p><img src="https://counter.theconversation.com/content/194619/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Detomasi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Deliberately crafting economic relationships with countries that share similar political and social values with Canada has emerged as a tool to address current geopolitical issues.David Detomasi, Associate Professor, Distinguished Faculty Fellow In International Business, Queen's University, OntarioLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1913782022-09-28T16:54:55Z2022-09-28T16:54:55ZUniversal credit changes: increasing pressure on part-time workers is the wrong move at the worst time<figure><img src="https://images.theconversation.com/files/486834/original/file-20220927-26-hq3qol.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C2312%2C1713&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The growth plan will require thousands more workers on universal credit to search for more work or face sanctions.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bath-uk-october-5-2012-people-1694021932">1000 Words/Shutterstock</a></span></figcaption></figure><p>Chancellor Kwasi Kwarteng has laid out the government’s <a href="https://www.gov.uk/government/news/chancellor-announces-new-growth-plan-with-biggest-package-of-tax-cuts-in-generations">“mini budget”</a>, a package of tax cuts that will mostly benefit the wealthiest in Britain. But people on the other end of the income scale are facing changes too. </p>
<p>Kwarteng announced that those on universal credit will now face <a href="https://www.bbc.co.uk/news/business-62989572">stricter requirements</a> to look for work or face their benefits being cut. People in part-time work will need to prove they are looking for more work. </p>
<p>For those of us who have spent years researching the benefits system and the impact of welfare reforms, our collective sigh was audible. This announcement contradicts countless studies showing that this kind of policy is ineffective and only increases pressure on people who are already struggling. As workers grapple with a devastating cost-of-living crisis, this renewed offensive on low-income households is the wrong move at the worst time. </p>
<p>Approximately 6 million people now claim <a href="https://www.gov.uk/universal-credit">universal credit</a>, a single monthly payment for people who are unemployed or on a low income. Of these claimants, around 2.3 million are <a href="https://www.gov.uk/government/statistics/universal-credit-statistics-29-april-2013-to-13-january-2022/universal-credit-statistics-29-april-2013-to-13-january-2022#:%7E:text=The%20number%20of%20people%20on%20Universal%20Credit%20in%20employment%20has,on%20Universal%20Credit%20has%20decreased.">in work</a>.</p>
<p>Claimants can be required to undertake job search and work-related activities for up to 35 hours per week. This is what’s known as conditionality – your eligibility to receive benefits is contingent upon you meeting certain conditions. </p>
<p>Historically, the UK benefits system has imposed conditionality on unemployed people (you must be actively looking for work to receive benefits). Universal credit expanded this when it was introduced in 2013, bringing out-of-work and in-work claimants into the same system, and requiring part-time workers to actively seek additional work. </p>
<p>Failure to comply with these expectations can result in a <a href="https://blogs.lse.ac.uk/politicsandpolicy/benefit-sanctions-are-harmful-and-ineffective/">benefit sanction</a>, when benefits are stopped for a specified period – in some cases, <a href="https://www.gov.uk/government/publications/universal-credit-sanctions-statistics-background-information-and-methodology/a">up to six months</a>.</p>
<p>The chancellor’s new growth plan requires people on universal credit who earn less than the equivalent of 15 hours a week at the national living wage to take steps to increase their earnings, or face benefit reductions. Previously, this was the case for people working nine hours a week or less, and was already set to increase to 12 hours this month. </p>
<p>This new move is anticipated to bring an additional 120,000 people into the government’s <a href="http://data.parliament.uk/DepositedPapers/Files/DEP2021-0349/78_Intensive_Work_Search_regime_v19_0.pdf">intensive work search regime</a>, which usually involves weekly or fortnightly meetings with a work coach.</p>
<p>The government’s own research failed to deliver a compelling case for this policy change. A <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/739775/universal-credit-in-work-progression-randomised-controlled-trial-findings-from-quantitative-survey-and-qualitative-research.pdf">randomised control trial</a> conducted between 2015-18 found that after 52 weeks, people in an intensive in-work progression regime only earned an average of £5.25 more per week compared with workers who weren’t receiving additional support. A <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/739767/impact-assessment-universal-credit-in-work-progression-randomised-controlled-trial.pdf">further assessment</a> at 78 weeks suggested that there was no significant impact.</p>
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<strong>
Read more:
<a href="https://theconversation.com/universal-credit-is-built-around-flawed-incentives-that-are-doing-real-damage-fixing-it-is-essential-105202">Universal Credit is built around flawed incentives that are doing real damage – fixing it is essential</a>
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<h2>The real effects of benefits sanctions</h2>
<p>Our <a href="http://www.welfareconditionality.ac.uk/">research, carried out over a five-year period from 2013-2018</a>, demonstrates that sanctions-backed conditionality can be counterproductive and ineffective. We have <a href="https://theconversation.com/universal-credit-is-built-around-flawed-incentives-that-are-doing-real-damage-fixing-it-is-essential-105202">previously highlighted</a> the flaws in increasing conditionality for in-work claimants.</p>
<p>Pressuring low-paid, part-time workers to increase their hours or take on multiple jobs can have adverse physical and mental health impacts. Working parents in our research noted the strain of balancing work and home life, including the shortcomings and high costs of childcare, and a heavy reliance on family or friends to compensate for this. The dangers of taking away essential income from people during difficult times are evident.</p>
<p>When speaking to people on universal credit, <a href="https://www.cambridge.org/core/journals/journal-of-social-policy/article/inwork-universal-credit-claimant-experiences-of-conditionality-mismatches-and-counterproductive-benefit-sanctions/82C05CC442F9EBA049E99E0523A9C3F0">we found</a> that many experienced increasing distress with the mounting pressure of in-work conditionality. Some even ended up leaving universal credit despite remaining eligible. This resulted in significant financial hardship. </p>
<p>An <a href="https://www.gov.uk/government/publications/supporting-progression-out-of-low-pay-a-call-to-action/supporting-progression-out-of-low-pay-a-call-to-action">independent review</a> commissioned by the Department for Work and Pensions (DWP) in 2020 called for incentive-based approaches rather than sanctions. Baroness Ruby McGregor-Smith, who conducted the review, highlighted the need for investing in training, childcare and transport to enable people to progress. She also noted that JobCentres and other free or affordable support are primarily aimed at helping people into work in the first place – not to progress in work. </p>
<p>The government’s latest announcement is not just a concern for claimants. <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/1467-923X.13130">In recent research</a> with employers, businesses reported that they may not be able to offer more hours on a consistent basis, and raised concerns about how this policy would impact staff wellbeing and retention rates. </p>
<h2>Who will be hit hardest?</h2>
<p>The people most likely to be hit hardest by this policy are people who are already disadvantaged and struggling. Women, especially <a href="https://www.research.manchester.ac.uk/portal/en/publications/the-motherhood-pay-gap-a-review-of-the-issues-theory-and-international-evidence(029c55cb-1a95-43e2-be6d-efbadfdcf2c4).html">mothers</a> and those with caring duties, <a href="https://journals.sagepub.com/doi/10.1177/0950017007087420">disabled people</a> and some <a href="https://www.tuc.org.uk/research-analysis/reports/bme-women-and-work">black and minority ethnic groups</a>, are often in part-time or lower-paid work, so are more likely to face these requirements. They are also at higher risk of underemployment and insecure jobs.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/the-uks-work-first-approach-to-benefits-hurts-mothers-176074">The UK’s 'work-first' approach to benefits hurts mothers</a>
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<hr>
<p>The DWP’s <a href="https://www.gov.uk/government/publications/the-future-cohort-study-understanding-universal-credits-future-in-work-claimant-group/the-future-cohort-study-understanding-universal-credits-future-in-work-claimant-group#composition-and-characteristics">own analysis</a> shows that most in-work universal credit claimants likely to be brought under an in-work conditionality regime will be women (77%) and parents (70%), with over half (51%) expected to be lone parents. Nearly one-third (27%) will be disabled or limited by a health condition. </p>
<p>The department acknowledges that getting another job or advancing in their current job is difficult for people who have to balance work with caring responsibilities and health conditions. Placing more pressure on working claimants will amplify the disadvantages they already face, and the difficulties of contending with the cost-of-living crisis this winter.</p><img src="https://counter.theconversation.com/content/191378/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lisa Scullion has previously received funding from UKRI/ESRC</span></em></p><p class="fine-print"><em><span>Katy Jones receives funding from the ESRC. </span></em></p><p class="fine-print"><em><span>Sharon Wright receives funding from UKRI/ESRC. </span></em></p>Requiring low-paid, part-time workers to increase their hours or take on multiple jobs can have adverse physical and mental health impacts.Lisa Scullion, Professor of Social Policy, University of SalfordKaty Jones, Research fellow, Manchester Metropolitan UniversitySharon Wright, Professor of Social Policy, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1824042022-05-10T18:25:18Z2022-05-10T18:25:18ZFederal budget delivers long-overdue policy changes for Canada’s charities<figure><img src="https://images.theconversation.com/files/462118/original/file-20220509-15-30xmfl.jpg?ixlib=rb-1.1.0&rect=491%2C108%2C4542%2C3592&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Canadian charity sector has significant social impact and is committed to providing unwavering support to every aspect of people’s lives.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>The COVID-19 pandemic has <a href="https://www.imaginecanada.ca/sites/default/files/Sector-Monitor-Ongoing-Effects-COVID-19-Pandemic-EN.pdf">dealt a catastrophic blow</a> to Canada’s charitable and non-profit sector. Representing almost nine per cent of the country’s GDP and employing over two million people, the sector experienced an <a href="https://sscf.ca/wp-content/uploads/2021/10/SSCF-Vital-COVID-Focus-2021-Report-Web.pdf">overwhelming demand for services</a> with fewer staff and even less volunteers to meet increased demand during the pandemic.</p>
<p>Beyond the sector’s substantive <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/211004/dq211004d-eng.htm">economic contribution</a>, it has an extraordinary social impact and commitment to providing unwavering support to every aspect of people’s lives. </p>
<p>Charities were expected to pivot quickly in response to the crisis. Coupled with profound capacity challenges, this translated into staff feeling overworked, leading to <a href="https://thephilanthropist.ca/2021/07/pulse-check-with-sector-leaders-on-mental-health/">burnout and other mental health problems</a>.</p>
<p>More than half of charities also experienced declines in revenues, leading to <a href="https://pavro.on.ca/resources/Documents/Career%20Ads/Imagine%20Canada%20pre-budget%20submission%20-%20Budget%202021%20(January%202021).pdf">depletions of their operating budgets for two reasons</a>. On one hand, significant revenue losses are attributed to cancellations of numerous in-person fundraising campaigns and a delay in shifting to online fundraising, as it required different skills.</p>
<figure class="align-center ">
<img alt="A volunteer organizing cardboard boxes at a food bank." src="https://images.theconversation.com/files/462119/original/file-20220509-19-pi08y8.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/462119/original/file-20220509-19-pi08y8.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/462119/original/file-20220509-19-pi08y8.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/462119/original/file-20220509-19-pi08y8.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/462119/original/file-20220509-19-pi08y8.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/462119/original/file-20220509-19-pi08y8.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/462119/original/file-20220509-19-pi08y8.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">In the past six months, the Daily Bread Food Bank and its member agencies have seen an average of 105,000 client visits each month, a 51 per cent increase compared to previous year.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Cole Burston</span></span>
</figcaption>
</figure>
<p>On the other hand, as people grappled with job losses and limited financial resources, charitable donations — <a href="https://www.imaginecanada.ca/sites/default/files/2019-05/30years_report_en.pdf">one of the key sources of revenue streams for charities</a> — also declined. </p>
<p>While charity financial data is slowly becoming available to confirm the impact of COVID-19 on the sector, <a href="https://vancouver.ca/files/cov/npo-current-state-report-covid-19-summer-2020.pdf">community evidence suggests</a> that <a href="https://www.cbc.ca/news/business/nonprofits-charities-pandemic-closures-1.5625165">a handful of charities ceased operations</a>, especially those in the areas of sports and recreation, arts and culture, and religion.</p>
<h2>Support for charities was temporary</h2>
<p>While the federal government did attempt to support Canada’s charities during the pandemic, it introduced only temporary measures. Programs such as the Canada Emergency Wage Subsidy, the Canada Emergency Commercial Rent Assistance and the Canada Emergency Business Account only offered <a href="https://imaginecanada.ca/en/360/ongoing-impacts-covid-19-crisis-charitable-sector">42 per cent of charities some relief</a>. </p>
<p>The government also offered charities serving vulnerable populations assistance via the <a href="https://www.canada.ca/en/services/benefits/emergency-community-support-fund.html">Emergency Community Support Fund</a> worth $350 million. This funding was distributed in the summer and fall of 2020 by three national partners — United Way Centraide Canada, Community Foundations Canada and Canadian Red Cross — according to eligibility criteria.</p>
<p>In January, the federal government announced an additional one-time $400 million investment as part of the <a href="https://www.canada.ca/en/employment-social-development/news/2022/01/government-of-canada-launches-call-for-proposals-for-national-funders-to-support-charities-and-not-for-profits.html">Community Services Recovery Fund</a>. It is likely that this fund will be distributed through the same three national funders, but <a href="https://www.canada.ca/en/employment-social-development/programs/social-development-partnerships/community-services-fund.html">the decision hasn’t been finalized yet</a>. </p>
<p>While this kind of support is welcome, it is partial and only available for charities registered with the <a href="https://www.canada.ca/en/revenue-agency/services/charities-giving/giving-charity-information-donors/about-registered-charities/what-difference-between-a-registered-charity-a-non-profit-organization.html">Canada Revenue Agency</a>, which excludes many non-profits. </p>
<p>After a two-year struggle to remain afloat, charities and non-profits continue to endure financial and capacity challenges, leaving their daily existence in question.</p>
<h2>New reforms for charities</h2>
<p>Charities and non-profits in Canada will finally get a break as the <a href="https://budget.gc.ca/2022/home-accueil-en.html">2022 federal budget</a> implements long-needed regulations to support the charitable sector. Two new amendments will take effect. </p>
<p>As part of the first amendment, charity funders with investment assets exceeding $1 million will be required to increase their annual funding to five per cent from 3.5 per cent. Taking effect on Jan. 1, 2023, this rate increase will translate into an additional $2.5 billion in annual funding. </p>
<p>Foundations with investment assets below $1 million and above $25,000 will continue to grant at 3.5 per cent, with the rest remaining fully exempt from granting obligations. </p>
<figure class="align-center ">
<img alt="A woman standing and speaking behind a podium. She holds a bundle of papers in one hand." src="https://images.theconversation.com/files/462120/original/file-20220509-11-shi01k.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/462120/original/file-20220509-11-shi01k.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=445&fit=crop&dpr=1 600w, https://images.theconversation.com/files/462120/original/file-20220509-11-shi01k.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=445&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/462120/original/file-20220509-11-shi01k.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=445&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/462120/original/file-20220509-11-shi01k.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=559&fit=crop&dpr=1 754w, https://images.theconversation.com/files/462120/original/file-20220509-11-shi01k.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=559&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/462120/original/file-20220509-11-shi01k.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=559&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Federal Finance Minister Chrystia Freeland holds a copy of the budget during a visit to Dalhousie University in Halifax on April 12, 2022. The new budget implements long needed regulations to support the charitable sector.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Andrew Vaughan</span></span>
</figcaption>
</figure>
<p>While the proposed regulatory change to granting foundations is framed as a response to the pandemic, <a href="https://www.researchgate.net/publication/360427251_How_Foundations_Spend_Is_the_Current_35_Asset_Disbursement_the_Right_Public_Policy">researchers have long asked</a> the federal government to adopt a scale-based payment policy specifically for the outlined reasons.</p>
<p>The benefit of regulating charitable funders in this way is twofold. First, significant funds will be channelled back to the charitable sector, allowing it to recover financially and rebuild its capacity. Second, a <a href="https://www.utpjournals.press/doi/abs/10.3138/cpp.2014-033">scale-based payment policy like this</a> considers the ability-to-pay principle, which helps maintain a financially healthy charity sector. </p>
<p>Crucially, the second amendment will allow granting foundations to provide <a href="https://pfc.ca/wp-content/uploads/2022/04/budget-2022-member-advisory-en.pdf">funding to organizations outside of those registered with the Canada Revenue Agency</a>. This means that other non-profit organizations will become eligible for financial support, as long as certain accountability requirements are met. </p>
<h2>A new home for charities</h2>
<p>While the details of the two amendments are still being confirmed, these policy changes are encouraging steps forward for the charitable sector. </p>
<p>However, to ensure its long-term health, the <a href="https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/corporate-reports-information/advisory-committee-charitable-sector.html#8">Advisory Committee on the Charitable Sector</a>, which represents voices of community leaders, non-profit sector stakeholders and researchers, is calling on the federal government to <a href="https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/corporate-reports-information/advisory-committee-charitable-sector/report-advisory-committee-charitable-sector-february-2021.html#h11_2">create a “home” in the government</a> for charities. </p>
<p>Like <a href="https://agriculture.canada.ca/en">Agriculture Canada</a> for farmers, or <a href="https://www.canada.ca/en/canadian-heritage.html">Canadian Heritage</a> for artists, this home will create and support programs relevant to charities and non-profits. It will also communicate on behalf of these organizations with other government departments. It is needed because charities are crucial for our society. We need to continue to support this vital part of Canada’s social fabric for everyone’s well-being and for overcoming future crises.</p><img src="https://counter.theconversation.com/content/182404/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Iryna Khovrenkov receives funding from Social Sciences and Humanities Research Council Partnership Grant for "Impact Assessment of Actions Taken by Canadian Grantmaking Foundations in Response to Social Inequalities and the Environmental Issue” project.</span></em></p>The 2022 federal budget implements long needed regulations to support the charitable sector.Iryna Khovrenkov, Associate Professor, Johnson Shoyama Graduate School of Public Policy, University of ReginaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1761042022-02-17T13:59:05Z2022-02-17T13:59:05ZSouth Africa should design economic policy based on strengths of regions: here’s how<figure><img src="https://images.theconversation.com/files/445635/original/file-20220210-25-1oe278w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty images</span></span></figcaption></figure><p>Economists and policy-makers seem to have a blind spot when thinking about how the economy functions and what determines success. Analytical frameworks and government policies consistently neglect the role of space and geography in favour of national averages and sectoral plans. Yet growing evidence from around the world shows the importance of place and location for productivity, growth and development.</p>
<p>Intuitively, it is obvious that economic progress depends on the quality of local skills, capable public institutions, reliable infrastructure, and proximity to markets and suppliers. But just how important are these factors compared with the particular mix of local industries and macro-economic conditions?</p>
<p>In a <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/saje.12303">recent paper</a> we unpacked the economic performance of different provinces in South Africa to diagnose the significance of local factors and sectoral conditions. This is helpful in understanding why some provinces consistently outperform others. And what might be done to help lagging regions improve their competitiveness.</p>
<h2>Uneven development</h2>
<p>The starting point is to recognise the systemic differences in the size and performance of South Africa’s nine provinces:</p>
<p>Production is highly uneven across the country. The province of Gauteng generates a third of national GDP - more than double the output of the next province - but with less than 1.5% of the land. According to South African Revenue Service, individual taxpayers from Gauteng <a href="https://www.sars.gov.za/wp-content/uploads/Docs/TaxStats/2019/Tax-Stats-2019-Full-doc.pdf#page=60">contribute 47%</a> of the national total for this revenue source. Yet they only constitute 25.8% of the country’s population.</p>
<p>Some provinces are more productive than others. The Gauteng and Western Cape economies expanded at an average rate of almost 3% per annum between 1995 and 2018. This was a third faster than the rest of the country. </p>
<p>There is growing divergence between the largest and smallest provinces. Over the last two decades the share of national GDP in the three largest economies (Gauteng, KwaZulu-Natal and the Western Cape) increased, while the share in the three smallest (North West, Free State and Northern Cape) contracted. Spatial inequalities have been further <a href="https://www.tandfonline.com/doi/full/10.1080/23792949.2020.1851143">amplified </a> by the COVID-19 pandemic.</p>
<p>What lies behind the growing divergence between the best and worst performing regions? And what underpins the continuing growth and prosperity of Gauteng?</p>
<h2>Unpacking uneven development</h2>
<p>The performance of provinces is often attributed to their industrial structure: the problem with lagging regions is said to be their dependence on lagging sectors. Hence, the challenge for provinces such as Mpumalanga and the North West is their reliance on mining and related heavy industries because of rising energy costs and volatile commodity prices. </p>
<p>The usual policy prescription is to find the means to diversify and industrialise. </p>
<p>Yet industrialisation is unrealistic for many small towns. Bigger agglomerations have many advantages that make them more likely to benefit from spatially-blind national industrial policies. The unique strengths and limitations of each local eco-system need to be carefully considered as opposed to generic plans that gain little local traction.</p>
<p>There are several reasons why economies develop unevenly between places, including:</p>
<ul>
<li><p>The industrial structure and whether it is dominated by relatively dynamic or stagnant clusters of firms and their suppliers.</p></li>
<li><p>Natural resource endowments, including mineral reserves, soil quality and rainfall.</p></li>
<li><p>The quality of physical infrastructure, such as road, rail and harbours, as well as public utilities and municipal services.</p></li>
<li><p>The skills and capabilities of the local workforce, including basic education and tertiary institutions.</p></li>
<li><p>The quality of local institutions, including municipal leadership and technical competence. Also the efficacy of community-based organisations, business councils, industry associations and trade unions.</p></li>
</ul>
<p>These differences can be important, especially as the effects are cumulative and mutually reinforcing over time. There are potent implications for policy from this thinking. </p>
<h2>Different strokes</h2>
<p>Here are some examples.</p>
<p>To accelerate growth within the Eastern Cape, would it be best to incentivise key industries, such as the automotive sector? Or would public resources be better spent on improving the operating environment for a variety of businesses, such as through upgrading the infrastructure? </p>
<p>A third possibility could be to boost the quality and supply of particular skills that are in high demand by local firms.</p>
<p>It is difficult for policymakers to disentangle the multiple factors and forces underpinning regional growth and to pinpoint those with most potential to accelerate development. A sensible place to start is to disaggregate variables associated with national conditions from the distinctive circumstances prevailing within each region.</p>
<p><a href="https://economy.id.com.au/darwin/shift-share">Shift-share analysis</a> is a common technique for this purpose. This separates out the change in output for a region into three main components:</p>
<ul>
<li><p>growth arising from national industry trends (known as the industry-mix effect), </p></li>
<li><p>growth arising from cross-cutting productivity (known as the region effect), and </p></li>
<li><p>growth related to industry-specific locational advantages (known as the industry-place interaction effect).</p></li>
</ul>
<p>Our results demonstrate that national industry trends explain not more than half of the growth performance of provinces. </p>
<p>For instance, in Gauteng, a favourable industry-mix worked together with positive place-based factors to give it a significant growth advantage compared to the rest of the country. By contrast, the Eastern Cape was hamstrung by poor local productivity despite an advantageous industry composition. The Free State had the worst of both industry and regional factors and so was at a significant disadvantage. </p>
<p>In every case, regional factors were fundamental in explaining provincial economic outcomes.</p>
<h2>Conclusion</h2>
<p>It is vital that national growth plans pay careful attention to the unique features of each region if they are to succeed. One implication for policymakers is that targeting growth sectors cannot be the sole focus of industrial policy.</p>
<p>The findings call for more detailed analysis of the core features of each province to help them navigate structural change. This includes the performance of the metro economies. A more devolved approach to national economic policy could build on the strengths of every region. </p>
<p>The national economy is hamstrung if only some regions manage to grow.</p>
<p><em>This article was first published by <a href="https://www.econ3x3.org/about-econ3x3-forum">Econ3x3</a> under the heading, <a href="https://www.econ3x3.org/node/470">Place matters: National prosperity depends on every region performing better</a>.</em></p><img src="https://counter.theconversation.com/content/176104/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin Visagie receives funding from the South African National Research Foundation through the SARChI in City-Region Economies at the University of the Free State.</span></em></p><p class="fine-print"><em><span>Professor Ivan Turok receives funding from the South African National Research Foundation through the SARChI in City-Region Economies at the University of the Free State.</span></em></p>A more devolved approach to national economic policy could build on the strengths of every region.Justin Visagie, Senior Research Specialist, Human Sciences Research CouncilIvan Turok, Distinguished Research Fellow, Human Sciences Research CouncilLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1655392021-08-04T14:55:55Z2021-08-04T14:55:55ZSouth Africa’s way forward: abandon old ideas, embrace bold experimentation<figure><img src="https://images.theconversation.com/files/414510/original/file-20210804-15-akwmyh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A protest organised by the Congress of South African Trade Unions in South Africa. The question is: on whose behalf does the union movement advocate?</span> <span class="attribution"><span class="source">Phillip Magakoe/AFP via Getty Images</span></span></figcaption></figure><p><em>Foundation essay: our foundation essays are longer than usual and take a wider look at a key issue affecting society.</em></p>
<p>In the <a href="https://www.marxists.org/reference/subject/economics/keynes/general-theory/preface.htm">preface to his great book, The General Theory of Employment, Interest and Money</a>, written in the 1930s at the height of the Great Depression, the renowned economist John Maynard Keynes suggested that the obstacle to decisive change </p>
<blockquote>
<p>lies not so much in developing new ideas as in escaping from old ones. </p>
</blockquote>
<p>In this moment of crisis, South Africa urgently needs decisive action. But all too often South Africans of all political stripes seem trapped in stale discourses. These are not anchored in South Africa’s political, economic and social realities. Nor do they offer any practical, timely strategy for getting from here to there. </p>
<p>This piece explores how the country might break loose from old, unhelpful ideas in four areas, each introduced below with a question.</p>
<p>The first question concerns the interactions between policy, inclusion and growth. </p>
<p>In recent years, even prior to COVID-19, South Africa’s <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=ZA">economy had come to a standstill</a>. Most South Africans acknowledge that a renewal of growth, with the private sector playing a key role, is a necessary part of the country’s turnaround. And that policies that destroy confidence, undermine hope and block entrepreneurial energy are counterproductive. But:</p>
<h2>Question #1: What economic policies are pro-growth?</h2>
<p>The standard South African discourse has a very business-lobby-oriented perspective of what it means to be pro-growth. It is one preoccupied with reducing restrictive regulation, keeping taxes low and containing government spending. </p>
<p>This dichotomy between pro-growth and pro-inclusion policies is false.</p>
<p>For one thing, an acceleration of growth will do less to address South Africa’s challenges of poverty and inequality than champions of the narrowly pro-business agenda suggest. In a recent discussion of economic policy in South Africa, Harvard University’s <a href="https://carnegieendowment.org/2021/04/07/south-africa-when-inequality-and-institutions-collide-event-7598">Dani Rodrik</a> reflected on:</p>
<blockquote>
<p>the mismatch between what South Africa produces and what the country’s factor endowments are – a production structure largely biased towards skill-intensive sectors, while the labour force largely is unskilled … {A crucial challenge} is to stimulate labour-intensive production … This is structural transformation in reverse. It requires an industrial policy that promotes relatively low-productivity perhaps informal activities that are mostly services … This takes us into such new terrain that it is not entirely clear how to proceed …</p>
</blockquote>
<p>For another, in South Africa’s current circumstances pro-inclusion policies may be necessary to kickstart growth. Albert Hirschman’s <a href="https://www.jstor.org/stable/1882024">classic analysis</a> of Latin America’s “changing tolerance for inequality” lays out the logic:</p>
<blockquote>
<p>It can happen that society’s tolerance for increasing disparities may initially be substantial {for example, South Africa in the first 15 years of democracy post-1994}. Tolerance for inequality is extended in the expectation that eventually the disparities will narrow again … Nonrealisation of the expectation that my turn will soon come will at some point result in my ‘becoming furious’, that is, in my turning into an enemy of the established order…</p>
</blockquote>
<p>Hirschman <a href="https://press.princeton.edu/books/paperback/9780691021942/the-new-authoritarianism-in-latin-america">distinguished</a> between:</p>
<blockquote>
<p>Two principal tasks or functions {that} must be accomplished in the course of the growth process. The first is the unbalancing function, the entrepreneurial function, the accumulation function … Increasing social and income inequalities are an important part of this picture.</p>
</blockquote>
<p>Once hope has curdled into anger and despair, renewing growth will depend on:</p>
<blockquote>
<p>the ‘equlibrating’ distributive, or reform function … to correct some of these imbalances, to improve the welfare and position of groups that have been neglected or squeezed, and at redistribution of wealth and income in general.</p>
</blockquote>
<p>Viewed from this perspective, employment subsidies, basic income grants and other social interventions to address poverty and improve prospects for upward mobility all become part of an (extended) pro-growth policy. These don’t come free. They will require a move away from pro-austerity fiscal policies. And, in time, some tax increases on higher-income earners. A hike in taxes will be dependent for its legitimacy on the likely effectiveness with which the public sector implements the social agenda. (More on this in the discussion of questions #3 and #4.)</p>
<h2>Question #2: What economic policies are ‘pro-worker’?</h2>
<p>On the surface, this question has a straightforward answer: pro-worker policies are the policies advocated by organised labour. But beneath the surface things aren’t that straightforward. </p>
<p>In recent decades, the composition of South Africa’s trade union membership has shifted from blue-collar workers, predominantly in the private sector, <a href="https://digitallibrary.un.org/record/815246?ln=en">towards white-collar public sector employees</a>. In addition, within the public sector, wage gains have <a href="https://www.businesslive.co.za/bd/opinion/2021-06-08-wider-personnel-reforms-should-be-paramount-in-public-wage-debate/">gone predominantly to middle-management cadres</a>. There have been limited gains for teachers, nurses and other frontline workers.</p>
<p>A <a href="https://ideas.repec.org/a/eee/wdevel/v110y2018icp88-103.html">recent study</a> sorted South Africa’s population into five broad income categories. It highlights a cliff. At the bottom of the cliff, about half of the population is chronically poor. At the top is the affluent elite, comprising a little more than 3% of the population, plus an additional 20% in a stable economic middle class. </p>
<p>In between are a “vulnerable 15%” that hover on the edge of the middle class, plus a “transient” 12% that move in and out of poverty.</p>
<p>It is not for me to pronounce on the strategies adopted by South Africa’s trade unions. Nevertheless, in the spirit of this article’s exploration of “the things we know that just aren’t so”, the following can be said: If South Africa is to effectively address its twin challenges of poverty and inequality, the focus of attention cannot be on competition for status and further wealth accumulation within the elite. Or on the pursuit of further gains for the already stable middle class. </p>
<p>Rather, it must be on the chronically poor and (especially, I would argue) on enhancing opportunities for accelerated upward mobility by the “vulnerable and transient” groups. This would also bring hope of a better life to the populace more broadly. Indeed, continuing extreme barriers to upward mobility comprise perhaps the greatest failing of the first quarter century of democracy. Thus the question arises: on whose behalf does organised labour advocate?</p>
<h2>Question #3: How can public sector capacity be mobilised?</h2>
<p>To reinvigorate growth and make inroads into inequality, South Africa urgently needs a nimbler, more results-oriented and more efficient public sector. On this, there’s both bad news and better news.</p>
<p>Here’s the bad news. </p>
<p>South Africans of many ideological hues have in their minds an image of the public sector as a well-oiled, top-down machine. In other words a capable, “developmental” state, always effective in delivering on clear goals set by planners and political leaders. </p>
<p>But that kind of well-oiled public sector machine isn’t going to appear any time soon.</p>
<p>The dream that the public sector can readily become a well-oiled machine is based on a misconception of the relationship between politics and bureaucracies. This relationship has been explored in depth by professor of politics and international affairs <a href="https://www.cambridge.org/core/books/statedirected-development/FF2DE2441F160254D72E3815D0FC750A">Atul Kohli</a>, and <a href="https://www.sup.org/books/title/?id=28707">numerous</a> other <a href="https://www.hup.harvard.edu/catalog.php?isbn=9780674065703">scholars</a>. </p>
<p>As they show, always and everywhere, even in places where bureaucratic “insulation” seems to prevail, public administrative systems are embedded in politics. </p>
<p>In some settings, the ways in which politics support top-down bureaucratic machines – the repressive authoritarianism of the apartheid state, or of a comprehensively planned economy and society – aren’t ones that most South Africans want. </p>
<p>In other settings, very benign initial conditions provide the basis for bureaucratic insulation – high incomes, reasonably equitable societies, and deeply rooted, broadly accepted institutional norms and practices. Such conditions are very far from South Africa’s current realities.</p>
<p>Here’s the better news.</p>
<p>South Africa’s current public sector challenges are anything but unique. The 2019 <a href="https://info.worldbank.org/governance/wgi/Home/Reports">Worldwide Governance Indicators</a> located South Africa in the 66th percentile globally for “government effectiveness”. And in the 59th percentile for “control of corruption”. This is well below the rankings for, say, Spain and Portugal. They ranked around the 80th percentile for both indicators. </p>
<p>But per capita incomes for Portugal and Spain are four times that of South Africa. And there is abundant evidence globally that per capita income and governance quality improve together. For both indicators, South Africa’s 2019 percentile rank remained above those of other middle-income countries – for example, Brazil, Colombia, Mexico, Thailand and Turkey (all countries with higher per capita incomes than South Africa’s) – as well as almost all countries with lower per capita incomes. Examples include India, Indonesia and Kenya.</p>
<p>Rather than indulge in unachievable fantasies of some well-oiled public machine, South Africa would do well in this moment of crisis to look for lessons on how to mobilise public sector capacity from the many places that have managed to achieve gains in the midst of messiness.</p>
<p>One set of lessons comprises the value of shifting focus away from an exclusive preoccupation with strengthening systems towards a more targeted, learning-by-doing, problem-driven approach. (These lessons have been synthesised in an <a href="https://bsc.cid.harvard.edu/building-state-capability-evidence-analysis-action">influential recent book on building state capability</a> by a group at Harvard’s Kennedy School.)</p>
<p>Avoid empty initiatives – endless plans for reform, endless upstream processes of consultation that are performative rather than practical, too general to lead anywhere. Strengthen “pockets of effectiveness”. Focus in a more action-oriented way on specific problems, specific departments (or individual state-owned enterprises) within government.</p>
<p>A second set of lessons highlights the importance of context – of letting go of a preoccupation with unimplementable “best practices”. Instead, look for a good fit between policy design and implementation on the one hand, and the prevailing political and institutional context on the other. </p>
<p>As the economist Mushtaq Khan put it <a href="https://ace.soas.ac.uk/publication/making-collective-action-effective/">in a recent briefing paper</a> on “strategic realism”:</p>
<blockquote>
<p>Look at data, but look also at the organisation of the society and sector to assess the relative power of relevant organisations, their interests and capabilities and their likely support for or resistance to particular solutions … While some powerful groups are inevitably going to lose out, there are powerful supporters who may in their own interest support the implementation of the policy.</p>
</blockquote>
<p>Underlying both of these lessons is a fundamental insight on how to effect change: focus on the human factor, the evocation of agency. Prioritise people and problem-solving over systems reform.</p>
<p>In <a href="https://press.princeton.edu/books/paperback/9780691070100/the-forging-of-bureaucratic-autonomy">a brilliant book, professor of government Daniel Carpenter</a> explores how motivated mid-level bureaucratic managers, acting as “public entrepreneurs”, can foster change by working to strengthen both internal capability and external alliances. The principal internal task is to get the organisation’s staff to embrace the developmental mission. As <a href="https://www.cornellpress.cornell.edu/book/9780801442926/state-building/#bookTabs=1">Francis Fukuyama puts it</a>:</p>
<blockquote>
<p>All good managers (private and public) know that it is ultimately the informal norms and group identities that will most strongly motivate the workers in an organisation to do their best… They thus spend much more time on cultivating the right ‘organisational culture’ than on fixing the formal lines of authority.</p>
</blockquote>
<p>Innovative public managers use external alliances to resist pressure to deflect the organisation away from its developmental mission. “Successful bureaucracies,” says Carpenter,</p>
<blockquote>
<p>practise a politics of legitimacy … Leaders build reputations for their organisations … They ground this reputation in a diverse coalition … {As a result} political authorities see it as in their interest to defer to agency action … because failure to do so would forfeit the publicly recognised benefits of agency capacity, and/or because the agency can build coalitions around its innovations that make it costly for politicians to resist them.</p>
</blockquote>
<p>This has profound implications for how civil society organisations engage, which brings us to:</p>
<h2>Question #4: How can civil society become part of the solution?</h2>
<p>This question has a seemingly obvious answer: the task of civil society is to hold government to account. Such a focus aligns well with the crucial role that civil society activism played in the overthrow of apartheid. It also is a natural response to a difficult lesson of the first quarter century of democracy – that scaling back activism (or joining the public sector) and embracing the dictum that “government should deliver” left a vacuum within which impunity could thrive. </p>
<p>However, a narrow preoccupation with holding government to account comprises, at best, a constricted vision of the role of civil society in a democracy. Indeed it can sometimes have the unintended consequence of fuelling cynicism and despair. In turn deepening dysfunction. </p>
<p>Learning from experience elsewhere can enrich the repertoire of ways in which civil society might engage.</p>
<p>One set of lessons was recently summarised by the <a href="https://www.thegpsa.org/about/collaborative-social-accountability">Global Partnership for Social Accountability</a>. It highlighted how less confrontational approaches can add value:</p>
<blockquote>
<p>We have learned that focusing only on scrutinising and verifying government actions can have limited value in our problem solving. When they engage to focus on the problem at hand, civil society, citizens and public sector actors are better able to deliver solutions collaboratively – especially when they prioritise learning. When social accountability mechanisms are isolated from public sector processes they are not as effective as collaborative governance. Collective action requires efforts that build bridges.</p>
</blockquote>
<p>Learning-by-doing in partnership with committed reformers within the bureaucracy enables civil society organisations to move beyond small self-contained non-governmental initiatives, and to leverage public resources and effect change at scale.</p>
<p>A second set of lessons, under the rubric of “<a href="https://accountabilityresearch.org/publication/social-accountability-what-does-the-evidence-really-say-2015/">strategic social accountability</a>”, explores how civil society engagement can help reshape power dynamics by building new cross-cutting coalitions. This could be among civil society reformers and reformers within the public bureaucracy, across national, provincial and local levels. As per Carpenter, investment in such alliances can help developmentally oriented stakeholders overcome resistance to change, including by pushing back against predation.</p>
<p>A third lesson is, at least in part, an affirmation of a more traditional dictum of champions of holding government to account: sunlight can indeed be the best disinfectant. Transparency in how civil society engages with officials in the public sector can reduce the risk that coalitional governance becomes a vehicle for corrupt collusion. Transparency vis-à-vis outcomes can signal to citizens that public resources are not being wasted but are helping to improve results.</p>
<p>The combination of participation and transparency can help enhance social solidarity and legitimacy of the public domain. Kenya’s education sector offers a striking example of how this can work. Here is how Ben Piper, a seasoned educational specialist and long-term resident in Nairobi, <a href="https://theconversation.com/active-citizens-for-better-schooling-what-kenyas-history-can-teach-south-africa-92534">described</a> the “special sauce” that accounts for the country’s unusually positive learning outcomes:</p>
<blockquote>
<p>In rural Kenya there is an expectation for kids to learn and be able to have basic skills … Exam results are far more readily available than in other countries in the region. The ‘mean scores’ for the Kenya Certificate of Primary Education and its equivalent at secondary school are posted in every school, and over time so that trends can be seen. Head teachers are held accountable; paraded around the community if they did well, or literally banned from school and kicked out if they did badly.</p>
</blockquote>
<p>A participatory approach to improving outcomes, along the lines of the Kenya example, <a href="https://global.oup.com/academic/product/the-politics-and-governance-of-basic-education-9780198824053?cc=us&lang=en&">currently is not part of the DNA of South Africa’s policymakers and activists</a>. </p>
<p>But need this continue to be the case?</p>
<p>Back in 1932, the United States was trapped deep in the economic and social disaster of the Great Depression. The president at the time, Herbert Hoover, unable to look beyond the blinders of the American ethos of rugged individualism, failed to craft an effective response. Franklin Delano Roosevelt defeated Hoover by a landslide, by embracing (and then as president following through with) a radically different governing vision. His <a href="https://www.presidency.ucsb.edu/documents/address-oglethorpe-university-atlanta-georgia">description of his approach</a> speaks directly to South Africa’s current crisis:</p>
<blockquote>
<p>The country needs and, unless I mistake its temper, the country demands bold persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all try something.</p>
</blockquote><img src="https://counter.theconversation.com/content/165539/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brian Levy was Academic Director at the Nelson Mandela School of Public Governance at the University of Cape Town from 2012 to 2019.</span></em></p>In this moment of crisis, South Africa urgently needs decisive action. But all too often South Africans of all political stripes seem trapped in stale discourses.Brian Levy, Professor of the Practice of International Development, Johns Hopkins UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1564752021-03-08T13:27:43Z2021-03-08T13:27:43ZEconomists: Biden’s $1,400 COVID-19 checks may be great politics, but it’s questionable economics<figure><img src="https://images.theconversation.com/files/388170/original/file-20210307-19-zp3zq0.jpg?ixlib=rb-1.1.0&rect=99%2C15%2C3190%2C2086&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Most people used the first coronavirus check to pad their savings or pay down debt.
</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/ReliefPaymentsDelays/78fab36dfcc54b218ff3df9ae4f5aa38/photo?Query=economic%20impact%20check&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=6&currentItemNo=1">AP Photo/Eric Gay</a></span></figcaption></figure><p>The US$1,400 direct checks to people are the <a href="https://www.crfb.org/blogs/whats-19-trillion-house-covid-relief-bill">most expensive</a> and <a href="https://poll.qu.edu/national/release-detail?ReleaseID=3688">perhaps most popular part</a> of the $1.9 trillion coronavirus relief package racing its way through Congress right now. </p>
<p>President Joe Biden is expected to soon sign the bill after the <a href="https://www.politico.com/news/2021/03/10/house-final-passage-wednesday-covid-aid-plan-475047">House on March 10 approved a version</a> of the legislation passed by the Senate a few days earlier. Moderate Senate Democrats, who had voiced concerns about how many people would receive direct payments in the original proposal endorsed by the House, <a href="https://www.nbcnews.com/politics/congress/senate-passes-1-9-trillion-covid-relief-bill-including-1-n1259795">managed to make them more targeted</a> at lower-income households, which means an <a href="https://itep.org/new-estimates-on-senates-slightly-revised-cash-payment/">estimated 17 million fewer people will get a check</a>. </p>
<p>The coronavirus package <a href="https://www.nytimes.com/2021/03/06/business/economy/biden-economy.html">contains a lot of provisions</a> that will help struggling Americans, and we understand why the checks are so popular – <a href="https://poll.qu.edu/national/release-detail?ReleaseID=3688">with 78% support among adults in a recent survey</a>. No one turns down extra money, after all. </p>
<p>But as economists, we also believe that these direct payments make little economic sense – even with the lower income threshold. And this is true whether you think the purpose of the checks is <a href="https://theconversation.com/relief-or-stimulus-whats-the-difference-and-what-it-means-for-bidens-1-9-trillion-coronavirus-package-155012">relief or stimulus</a>.</p>
<h2>Relief needs to be targeted</h2>
<p>First let’s consider the checks as relief. </p>
<p>The purpose of a measure primarily designed as relief during an economic crisis is to help those most affected. </p>
<p>The <a href="https://www.bls.gov/news.release/empsit.a.htm">latest jobs report shows</a> about 10 million people are unemployed, including 4.1 million who have been without a job for at least 27 weeks. That’s not to mention the millions more who have left the labor force altogether because of the pandemic. These people – mostly workers in the hospitality and leisure industries, disproportionately low-income and people of color – are in desperate need of aid and support, without which destitution and homelessness are real possibilities. </p>
<p>But for the vast majority of Americans, it’s like the pandemic never happened, financially speaking. These are mostly office workers and other professionals who have had to work from home for all or part of the pandemic but saw no change in their income. A <a href="https://www.pewresearch.org/social-trends/2021/03/05/a-year-into-the-pandemic-long-term-financial-impact-weighs-heavily-on-many-americans/">recent Pew survey found</a> that 79% of Americans reported their family’s financial situation is about the same as or better than a year ago. </p>
<p>The most pain was unsurprisingly among lower-income households, 31% of whom said they were worse off than a year ago – but even among this group over two-thirds said their situation was the same or better. </p>
<p>The House’s measure <a href="https://www.nbcnews.com/politics/congress/house-vote-biden-s-1-9-trillion-covid-relief-bill-n1258883">would have phased out</a> completely at incomes of $100,000 for single people and $200,000 for couples. The Senate version phases out at $80,000 and $160,000, which <a href="https://itep.org/new-estimates-on-senates-slightly-revised-cash-payment/">would still benefit about 280 million people</a>, including children, according to the Institute on Taxation and Economic Policy, a nonpartisan think tank.</p>
<p>This is a pretty marginal change and still means that checks will go to a lot of people who don’t really need them. </p>
<h2>Stimulus needs to stimulate</h2>
<p>OK, then how about the checks as a stimulus? So even if a lot of people who aren’t in desperate need get a payment, at least they’ll spend it and help the economy recover from the COVID-19 shock, right?</p>
<p>There are two problems with that. The first is that <a href="https://thehill.com/policy/finance/541749-february-jobs-report-biden-economy-coronavirus">it’s not clear the economy needs much stimulus right now</a>. While the jobs report showed millions of people remained unemployed, the <a href="https://www.bloomberg.com/news/articles/2021-03-05/u-s-feb-payrolls-increase-379-000-est-200-000">February numbers came in a lot better</a> than expected, adding to signs the U.S. economy is in fairly good shape. And there are also <a href="https://www.marketwatch.com/story/inflation-worries-are-back-heres-what-you-should-worry-about-and-what-you-shouldnt-11613594872">growing concerns about inflation</a>, given the sharp rise in some market interest rates, which too much stimulus could accelerate. </p>
<p>The other issue is that past coronavirus checks haven’t been all that stimulative. The government <a href="https://home.treasury.gov/policy-issues/cares/assistance-for-american-workers-and-families">began cutting $1,200 “economic impact” checks</a> for most Americans back in March and sent out <a href="https://www.washingtonpost.com/graphics/business/coronavirus-stimulus-check-calculator/">another round of checks about half that size in December</a>. </p>
<p><a href="https://www.nber.org/papers/w27693">Research conducted on the first round</a> of checks found that the vast majority of Americans <a href="https://www.statista.com/statistics/246268/personal-savings-rate-in-the-united-states-by-month">saved</a> most of the money or used it to pay down debt. About 40% of the money went toward purchases supporting industries such as food, beauty and other nondurable consumer products that had already seen spikes in spending before the checks went out.</p>
<p>In other words, the checks weren’t very stimulative. Moreover, a third of likely recipients of the next round of checks <a href="https://www.bloomberg.com/news/articles/2021-02-11/stimulus-checks-americans-plan-to-save-not-spend-covid-relief-money">said they would save the money</a>. </p>
<h2>A better use of the money</h2>
<p>So you might be wondering, what’s a better way to spend the <a href="https://www.crfb.org/blogs/whats-19-trillion-house-covid-relief-bill">several hundred billion dollars earmarked for checks</a>?</p>
<p>At a minimum, relief payments should be targeted, such as to people who lost jobs or are working fewer hours due to illness. But in our view, a better way would be to increase those supplemental unemployment checks from the $300 lawmakers agreed to to $600, as the first coronavirus relief measure included last March. </p>
<p>Or take the <a href="https://www.cnbc.com/2020/03/17/uk-announces-massive-aid-package-for-coronavirus-hit-industries.html">U.K. approach and provide targeted but generous</a> income replacement for workers affected by COVID-19. Another very helpful and focused measure would be to help people pay for their mortgages and rent – otherwise a <a href="https://time.com/5940505/housing-crisis-2021/">massive housing crisis is looming</a> on the post-pandemic horizon. </p>
<p>We believe President Biden’s COVID-19 relief bill <a href="https://www.cnn.com/2021/01/14/politics/biden-economic-rescue-package-coronavirus-stimulus/index.html">gets a lot right</a>, such as <a href="https://www.whitehouse.gov/briefing-room/legislation/2021/01/20/president-biden-announces-american-rescue-plan">significant aid to state and local governments</a>, increased food stamp benefits and additional support for small businesses. Sending one-off $1,400 checks to people experiencing no economic hardship during the pandemic is not among them.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p><img src="https://counter.theconversation.com/content/156475/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The $1.9 trillion package gets a lot of stuff right, but the direct payments are not among them, argue two economists.Robert H. Scott III, Professor of Economics & Finance, Monmouth UniversityKenneth Mitchell, Associate Professor of Latin American Politics, Monmouth UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1391622020-06-25T12:07:26Z2020-06-25T12:07:26ZEconomic policies can induce people to quarantine safely during the pandemic<figure><img src="https://images.theconversation.com/files/338723/original/file-20200531-78853-apkgsj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Folks are more likely to social distance properly if there are economic incentives to do so.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/illustration/pedestrians-in-flu-masks-walking-in-city-royalty-free-illustration/1215979706?adppopup=true">Malte Mueller/Getty Images</a></span></figcaption></figure><p>Recent economic proposals to deal with COVID-19, like those summarized by UC Berkeley economist <a href="https://www.foreignaffairs.com/articles/world/2020-03-26/flatten-curve-infection-and-curve-recession-same-time">Pierre Olivier Gourinchas</a>, have focused on compensating households and businesses for income losses due to lockdowns and other health mandates, and on minimizing the risk of an unemployment crisis and a financial meltdown. </p>
<p>Such proposals are useful, but they also fail to recognize an essential aspect of the current crisis. The transmission of COVID-19 depends on the decisions of individuals, decisions that are largely economic. </p>
<p>For example, whether contagion accelerates or abates largely depends on the degree of <a href="http://www.healthdata.org/covid/faqs#social%20distancing">compliance with stay-at-home and social distancing directives</a>. Compliance, however, depends on people’s response to their perceptions of costs and benefits. </p>
<p>As <a href="http://www.lse.ac.uk/school-of-public-policy/people/Andr%C3%A9s-Velasco/Andr%C3%A9s-Velasco">economists</a>, <a href="https://www.researchgate.net/profile/Roberto_Chang3">we</a> believe that economic policies can play a big role in how many people get infected by COVID-19 – because such policies shape incentives that influence individual choices. </p>
<h2>It comes down to choices</h2>
<p>In the United States, official projections of how many people will die from COVID-19 by the end of the summer <a href="https://www.reuters.com/article/us-health-coronavirus-usa-forecast/researchers-revise-u-s-covid-19-death-forecast-upward-again-idUSKBN22O3AR">have fluctuated from a low of 60,000 to more than 200,000</a>. These variations are largely due to differing assumptions about how people will behave.</p>
<p>People’s adherence to lockdowns reflects their evaluation of economic costs and benefits. Imagine, for instance, a situation in which people must decide whether to stay at home or go out to work.</p>
<p>Staying at home involves foregone income; working outside the home implies more contact with others and a higher probability of contagion. A person who is infected can expect not only a loss of income, but also suffering the physical costs of disease or even death.</p>
<p>Just like epidemiologists create models of virus transmission, economists are developing models where the probability of contagion <a href="https://www.nber.org/papers/w27020">depends on how many people go out to work</a>. But our models also take into account that staying at home or working is an individual choice dependent on current economic conditions and on expectations about future conditions.</p>
<p>For example, if people expect that markets will recover strongly after the pandemic has subsided, they will be less reluctant to stay home today because staying home lowers the probability of being infected and being unable to work when the economy recovers. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/338724/original/file-20200531-78880-10ak0lv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/338724/original/file-20200531-78880-10ak0lv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/338724/original/file-20200531-78880-10ak0lv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/338724/original/file-20200531-78880-10ak0lv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/338724/original/file-20200531-78880-10ak0lv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/338724/original/file-20200531-78880-10ak0lv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/338724/original/file-20200531-78880-10ak0lv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">People who decide to interact with others increase their infection risk.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/social-distance-visit-between-young-boy-and-his-royalty-free-image/1219335032?adppopup=true">Cavan Images/Getty Images</a></span>
</figcaption>
</figure>
<h2>What works</h2>
<p>Our analysis implies a novel perspective on economic policy.</p>
<p>Consider current proposals for transferring money to those most affected by the pandemic. To compensate for income losses due to lockdowns, the governments of several developing countries like Malaysia or Peru have resorted to cash transfers to lower-income households.</p>
<p>These programs help the poor during this crisis but miss an opportunity to induce people to stay at home, because receiving the transfer does not depend on staying home. </p>
<p>In contrast, enhanced <a href="https://www.cnn.com/2020/05/28/economy/unemployment-benefits-coronavirus/index.html">unemployment insurance benefits</a> – a key component of the economic policy response in several countries, including the U.S. – have an advantage that has received little attention. To collect the benefits, workers must stop going to their usual jobs, reducing contact and contagion.</p>
<p>Another idea under discussion in the U.S. Congress – <a href="https://www.theverge.com/2020/5/12/21256466/house-democrats-nancy-pelosi-broadband-infrastructure-heroes-act-trillion-billion">subsidizing internet usage at home</a> – not only would help families with children who cannot attend school, but it would also give them – and everyone else – incentives to stay home. By contrast, subsidies to mobile internet, <a href="https://morningconsult.com/2020/04/02/broadband-subsidies-coronavirus-stimulus-package/">included in proposals by telecom companies</a>, would provide no such incentives. </p>
<p>Our model also predicts that individuals will be more willing to stay at home during a pandemic if they expect a swift economic recovery once the virus subsides. Intuitively, they will value their health more if they know they’ll be able to work in a post-pandemic world. This is a reason for governments to promise a strong economic stimulus via fiscal and monetary policies once the pandemic is over. </p>
<p>But a government can make such a promise in a credible way <a href="https://www.nber.org/papers/w27020">only by convincing people that it will not renege on the promise</a> when the pandemic is finally under control and pressures for fiscal austerity reemerge. So the government must have the ability to persuade and earn trust. Institutional strength, leadership and effective communication are critical. </p>
<p>Crafting solutions that consider the incentive effects of economic policy will reduce the costs of the pandemic, both in terms of lives and livelihoods.</p>
<p>[<em>You’re smart and curious about the world. So are The Conversation’s authors and editors.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklysmart">You can get our highlights each weekend</a>.]</p><img src="https://counter.theconversation.com/content/139162/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roberto Chang is on leave from Rutgers University as BP Centennial Professor at the London School of Economics and Political Science.</span></em></p><p class="fine-print"><em><span>Andrés Velasco is affiliated with Plural Chile (a think tank) and Ciudadanos (a political party).</span></em></p>Two economists argue that people who believe the economy will turn around quickly have more incentive to quarantine.Roberto Chang, Distinguished Professor of Economics, Rutgers UniversityAndrés Velasco, Dean of the School of Public Policy, London School of Economics and Political ScienceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1393872020-06-03T06:19:25Z2020-06-03T06:19:25ZKindness doesn’t begin at home: Jacinda Ardern’s support for beneficiaries lags well behind Australia’s<figure><img src="https://images.theconversation.com/files/339360/original/file-20200603-133933-1jqn9ox.jpg?ixlib=rb-1.1.0&rect=14%2C14%2C4898%2C3238&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>One of New Zealand Prime Minister Jacinda Ardern’s favourite exhortations is that we all “be kind” to one another. It’s part of the reason she and her government have won admiration around the world for their handling of the COVID-19 pandemic. </p>
<p>Their latest income support program, however, has led many to question why that kindness is not extended to the country’s 300,000-plus pre-COVID welfare beneficiaries. These New Zealanders have fared worse under New Zealand’s centre-left coalition than their Australian counterparts have under Scott Morrison’s centre-right government.</p>
<p>The <a href="https://workandincome.govt.nz/covid-19/income-relief-payment/index.html#:%7E:text=COVID%2D19%20Income%20Relief%20Payment,available%20from%208%20June%202020.">COVID-19 Income Relief Payment</a> announced last Friday is an after-tax payment of NZ$490 a week for a maximum of 12 weeks. It applies only to those who lose their full-time jobs due to the pandemic (the part-time rate is $250 a week). </p>
<p>The temporary scheme applies to job losses between March 1 and October 30 and replaces any other welfare payment a person may have been entitled to. Unlike other benefits, entitlement is individually targeted: you can receive the full payment unless your partner’s gross income exceeds $2,000 a week, in which case nothing is paid.</p>
<p>The new benefit can be viewed as a state-funded pandemic redundancy package. The rates have been deliberately set close to the <a href="https://www.employment.govt.nz/leave-and-holidays/other-types-of-leave/coronavirus-workplace/wage-subsidy/">12-week wage subsidy</a>, which has supported 1.64 million jobs since March 17. </p>
<p>Workers who lose their jobs as the wage subsidy becomes more targeted, or if their employers close or downsize, will in effect have an extra 12 weeks’ support at the same rate.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/339365/original/file-20200603-85844-123xy6j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/339365/original/file-20200603-85844-123xy6j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/339365/original/file-20200603-85844-123xy6j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/339365/original/file-20200603-85844-123xy6j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/339365/original/file-20200603-85844-123xy6j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/339365/original/file-20200603-85844-123xy6j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/339365/original/file-20200603-85844-123xy6j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Jacinda Ardern and Scott Morrison: centre-left versus centre-right, but who is really right?</span>
<span class="attribution"><span class="source">Bianca de Marchi/AAP</span></span>
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</figure>
<h2>Two classes of unemployed</h2>
<p>Less positively – and controversially – the payment creates a massive inequity between those who qualify and those who must rely on standard welfare benefits and welfare eligibility rules. </p>
<hr>
<p>
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<p>The single adult benefit is $251 a week. A couple with children gets up to $428, compared to $960 a week if they both receive the COVID-19 payment. As some critics have put it, New Zealand now has <a href="https://www.stuff.co.nz/business/300020101/unemployment-payment-scheme-shows-govt-knows-benefits-insufficient#:%7E:text=It%20seems%20that%20the%20Government,for%20other%20reasons%20and%20so">two classes of unemployed</a>.</p>
<p>The new payment also highlights the similarities and differences between the New Zealand and Australian income support responses to the pandemic. </p>
<p>Both countries focused first on short-term employment protection. New Zealand’s wage subsidy scheme was available to firms that had lost 30% of their revenue due to COVID-19, providing support for 12 weeks at about 50% of the median wage. When it runs out in June a more targeted scheme will be available for eight more weeks. </p>
<p>Australia’s <a href="https://treasury.gov.au/coronavirus/jobkeeper">JobKeeper</a> program pays roughly 70% of the median wage for a maximum of six months. </p>
<p>Those already on welfare benefits when the pandemic struck, however, have been treated quite differently. In the first round of responses, the Ardern government <a href="https://www.stuff.co.nz/national/health/coronavirus/120328660/coronavirus-lowincome-families-and-pensioners-target-of-major-payment-boost">increased</a> core benefit rates by $25 a week. This was a flat-rate, permanent increase of between 6% and 11%, depending on benefit category and family circumstances. </p>
<p>The <a href="https://www.workandincome.govt.nz/products/a-z-benefits/winter-energy-payment.html">Winter Energy Payment</a> allowance was also doubled between May and October, giving an extra $20.45 a week for a single person and $31.82 for a couple or family with children. </p>
<p>By comparison, the Morrison government introduced the temporary <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/coronavirus-supplement">Coronavirus Supplement</a>, an additional payment of A$225 a week to all existing and new beneficiaries. It applies for six months from late April. </p>
<p>The supplement roughly doubles the JobSeeker rate and is in addition to the two lump-sum A$750 <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2020/March/Coronavirus_lump-sum_payments">stimulus payments</a> to all income support recipients and concession card holders.</p>
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<p>
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Read more:
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<p>One could argue in favour of New Zealand’s Income Relief Payment as a somewhat oddly designed social insurance program. Such two-tier, time-limited schemes are, after all, the norm in Europe. But that works if – and only if – the bottom tier provides an adequate minimum standard of living. </p>
<p>That is not the case in New Zealand. Numerous studies, including most recently the government’s own Welfare Expert Advisory Group’s 2019 <a href="http://www.weag.govt.nz/weag-report/">report</a>, have shown New Zealand’s welfare system is well short of adequate. </p>
<h2>The government knows benefits are too low</h2>
<p>The minister of social development and other ministers have repeatedly acknowledged this. <a href="https://www.cpag.org.nz/news/">Analysis</a> by the Child Poverty Action Group shows that, taking the COVID response and earlier government measures into account, working-age beneficiary families’ incomes (after housing costs) are still below the poverty line. This is based on one of the government’s own child poverty indicators – “50% of median equivalised income”, or 50% of the median income after taking account of family size. </p>
<p>This analysis showed support for beneficiaries provides between 29% and 46% of median equivalised income, depending on family type and circumstances. The extra income needed to reach that poverty threshold ranges from $45 a week to $195 a week. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/339367/original/file-20200603-133875-n2iqqo.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/339367/original/file-20200603-133875-n2iqqo.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=384&fit=crop&dpr=1 600w, https://images.theconversation.com/files/339367/original/file-20200603-133875-n2iqqo.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=384&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/339367/original/file-20200603-133875-n2iqqo.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=384&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/339367/original/file-20200603-133875-n2iqqo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=483&fit=crop&dpr=1 754w, https://images.theconversation.com/files/339367/original/file-20200603-133875-n2iqqo.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=483&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/339367/original/file-20200603-133875-n2iqqo.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=483&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Peter Fraser, prime minister of New Zealand, 1940-49.</span>
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<p>Presenting his “rebuilding together” <a href="https://treasury.govt.nz/publications/wellbeing-budget/wellbeing-budget-2020">budget</a> in May, Finance Minister Grant Robertson referred to New Zealand’s first Labour government, which established what was then a world-leading welfare state after the depression of the 1930s. He also <a href="https://treasury.govt.nz/sites/default/files/2020-05/b20-speech.pdf">made mention</a> of Peter Fraser, the great Labour prime minister who was a central architect of that welfare state and who led New Zealand through the second world war and its aftermath.</p>
<p>What those early reformers would make of their successors is hard to say. But perhaps it wasn’t an <a href="https://www.stuff.co.nz/national/politics/121612995/are-you-serious-pm-jacinda-ardern-live-on-tv-as-m58-earthquake-rattles-beehive">earthquake</a> we felt last week while Jacinda Ardern was being interviewed live on TV. Perhaps it was Peter Fraser rolling in his grave.</p><img src="https://counter.theconversation.com/content/139387/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Fletcher was the independent specialist adviser to the Welfare Experts Advisory Group</span></em></p>With unemployment soaring due to COVID-19, why is Jacinda Ardern’s centre-left government significantly less generous towards beneficiaries than Scott Morrison’s centre-right government in Australia?Michael Fletcher, Senior Research Fellow, Institute for Governance and Policy Studies, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1377752020-05-07T19:52:07Z2020-05-07T19:52:07ZPast pandemics show how coronavirus budgets can drive faster economic recovery<figure><img src="https://images.theconversation.com/files/333266/original/file-20200507-49584-1vvfui2.jpg?ixlib=rb-1.1.0&rect=0%2C5%2C3888%2C2578&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>With New Zealand’s May 14 budget expected to chart the way out of the economic crisis, Finance Minister Grant Robertson should be looking to the past as well as the future. Finance ministers elsewhere are facing similar decisions, many even more constrained than New Zealand’s.</p>
<p>But the common claim that we live in “unprecedented times” is not entirely true. Social distancing and other dramatic interruptions to our lives are nothing new. </p>
<p>One clear precedent is the <a href="https://theconversation.com/au/topics/severe-acute-respiratory-syndrome-sars-81473">SARS epidemic</a> that hit Singapore, China, Hong Kong, and Taiwan in 2003. Other more localised but catastrophic examples, such as the Haiti earthquake of 2010 or the 2004 Indian Ocean tsunami, are also instructive.</p>
<p>What is different is the scale of the current crisis. Economies everywhere are in freefall and unemployment is rising. Gross domestic product figures for the first quarter of 2020 show economic declines not seen since WWII. The second quarter is <a href="https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020">predicted</a> to be even worse.</p>
<p>The challenge for governments is to manage both expectations and spending to drive recovery. Despite the <a href="https://www.rnz.co.nz/news/national/415689/cabinet-approves-fast-tracking-of-shovel-ready-projects">fast-tracking</a> of so-called “shovel-ready” construction projects, that does not necessarily mean infrastructural spending is a magic bullet.</p>
<h2>An alphabet of possible recoveries</h2>
<p>There are four plausible recovery trajectories. A V-shaped recovery suggests the affected economies will rebound rapidly after lockdown. A U-shaped recovery entails a similar return to normality but after a longer downturn. </p>
<p><img src="https://cdn.theconversation.com/static_files/files/1035/u-and-v.gif?1588822614" width="100%"></p>
<p>The W describes a second hit to the economy, most likely from a second wave of infections (as happened in the second winter of the catastrophic <a href="https://theconversation.com/nz/topics/1918-flu-pandemic-50734">1918-1919 flu pandemic</a>) but potentially also caused by misguided economic policies. Most worrisome here would be premature withdrawal of government spending support. </p>
<p>The worst case is L-shaped, in which the economy takes many years to come back.</p>
<p><img src="https://cdn.theconversation.com/static_files/files/1036/w-and-l.gif?1588825494" width="100%"></p>
<p>Recovery from SARS was V-shaped in all the affected economies. While SARS spread to many fewer places and disappeared more quickly than our present nemesis, social distancing in the four affected countries was not dramatically different. Fear at the time was as palpable as it is now. </p>
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<p>Taiwan, Hong Kong and Singapore all experienced a dip in GDP growth in the first half of 2003. But by the third quarter their economies were growing fast again. Statistical analysis we did for the Asian Development Bank found the epidemic did not have any longer-term adverse effect on these three economies. </p>
<p>China is a much bigger country, but even when we looked at its two hardest-hit regions, Guangdong and Beijing, the picture was the same – a V. We could see this from economic data from the Chinese National Bureau of Statistics, and with satellite images of night-time light emitted by urban-industrial areas. </p>
<p>These data suggest there was some re-orienting of economic activity after the SARS epidemic (as observed in the diminished night-light) but very little long-lasting effect on aggregate incomes. The same rebound may be happening right now in Wuhan which emerged from lockdown in March this year. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/333298/original/file-20200507-49584-o7mwba.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/333298/original/file-20200507-49584-o7mwba.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=349&fit=crop&dpr=1 600w, https://images.theconversation.com/files/333298/original/file-20200507-49584-o7mwba.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=349&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/333298/original/file-20200507-49584-o7mwba.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=349&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/333298/original/file-20200507-49584-o7mwba.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=439&fit=crop&dpr=1 754w, https://images.theconversation.com/files/333298/original/file-20200507-49584-o7mwba.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=439&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/333298/original/file-20200507-49584-o7mwba.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=439&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>SARS affected, drastically but briefly, only a few countries in East Asia (and Toronto, due to travel-borne infection). Each had the institutional capacity and financial resources to successfully mobilise recovery once the infection had been vanquished.</p>
<p>The data from recoveries after other types of disasters tell a similar story. Except for very poor and chaotically-governed places (such as <a href="https://link.springer.com/article/10.1007/s00181-017-1405-4">Haiti</a>), countries tend to recover quite rapidly. This is true for <a href="https://www.sciencedirect.com/science/article/pii/S0304387818310976?casa_token=JR3h7UoTFMQAAAAA:YUkeeX5yekMPkg6s4GDwXR6Jus8S7ur_nn4R5Fszc5NtdDdGNLMXV6kA1d5E-EhOFGfAFrutlyo">Indonesia</a> and <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/rode.12586">Sri Lanka</a>, hardest hit by the 2004 Indian Ocean tsunami. Their recovery was fuelled by generous assistance from abroad and large mobilisations at home.</p>
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</em>
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<h2>Targeted funding and managing fear to recover faster</h2>
<p>Two main observations emerge in this rear-view mirror. The first is that the targeting of recovery funding is <a href="https://www.nowpublishers.com/article/Details/IRERE-0104">crucial</a>. After previous shocks, when regions or cities failed to recover completely, it was usually because the recovery was under-resourced or funding was mis-targeted.</p>
<p>Unlike a natural disaster, the damage associated with COVID-19 is not to infrastructure. It is to employment in specific sectors such as tourism and culture. Policies should therefore target the maintenance of labour markets (even if it means sustaining them on life support) rather than spending on more infrastructure. </p>
<hr>
<p>
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Read more:
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<p>“Shovel-ready” projects were critical after the 2008 global financial crisis, when the disruption was largely to the construction/housing sector. A construction injection now will not provide work for most of people who have lost their jobs in restaurants, hotels, retail, or travel. </p>
<p>Spending on better and greener infrastructure, when the existing infrastructure is crumbling or dangerous, is good policy in and of itself. But it will not provide the necessary antidote to our current malaise.</p>
<p>Secondly, recovery depends crucially on expectations. In those cases where the shock <a href="https://www.sciencedirect.com/science/article/pii/S0305750X17303893?casa_token=xCDSv81Hr2gAAAAA:_g5fZQIS8Zt7omAwLRMwk0fQlF7AZP8Ju8Ce7jSeR_wT13yW0bQ1dRpo7sdq6ujCO8cd8jl9i1I">significantly increased</a> the fear of future shocks, recovery was slower. Households and businesses were more reluctant to buy and invest.</p>
<p>Without assurances that we have “solved” COVID-19 – with a vaccine or effective control – a full recovery is going to be impossible. The longer it takes, the more our recovery will be shaped like a drawn-out U rather than a V. As the Economist magazine recently put it, we will have a <a href="https://www.economist.com/leaders/2020/04/30/life-after-lockdowns">90% economy</a>.</p>
<p>Without a good public health response we might even risk a W, where a second wave of infection requires further harsh but necessary social distancing.</p>
<p>Without managing expectations about a COVID-free future, and without aggressive but well-targeted government action, the post-pandemic trajectory will look like an L. That will put a far greater burden on future generations than any debt governments might take on now to develop a vaccine or keep businesses afloat and people on payrolls.</p><img src="https://counter.theconversation.com/content/137775/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ilan Noy receives funding from several New Zealand government grants, including from the Health Research Council, the Ministry for Business, Innovation, and Employment, and the Earthquake Commission. </span></em></p>Previous shocks show that smart spending and building public confidence are crucial to the speed and shape of economic recovery.Ilan Noy, Professor and Chair in the Economics of Disasters, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1336642020-03-27T17:49:19Z2020-03-27T17:49:19ZHow SNAP can help people during hard economic times like these<figure><img src="https://images.theconversation.com/files/323331/original/file-20200326-132985-40ehou.jpg?ixlib=rb-1.1.0&rect=0%2C68%2C3800%2C1808&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The government helps tens of millions of Americans buy groceries.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/customers-bagging-there-products-at-the-tills-in-forest-news-photo/614265074">Jeff Greenberg/Getty</a></span></figcaption></figure><p><a href="https://www.cnn.com/2020/03/16/economy/job-losses-coronavirus/index.html">A record number of Americans</a> are seeing their hours cut or losing their jobs due to the initial economic repercussions of the coronavirus pandemic. How will millions of <a href="https://www.dol.gov/ui/data.pdf">newly jobless</a> families keep putting food on the table?</p>
<p>They might get some help from the <a href="https://www.fns.usda.gov/snap/supplemental-nutrition-assistance-program">Supplemental Nutrition Assistance Program</a>. The nation’s largest anti-hunger system helped about <a href="https://www.fns.usda.gov/pd/supplemental-nutrition-assistance-program-snap">35 million low-income people buy groceries</a> in 2019, down from a peak of over 47 million in 2013 in the aftermath of the Great Recession. </p>
<p>After repeatedly trying to <a href="https://theconversation.com/scaling-back-snap-for-self-reliance-clashes-with-the-original-goals-of-food-stamps-128839">scale back SNAP</a> the White House recently agreed to Congress’s efforts to ramp it back up. The <a href="https://www.congress.gov/bill/116th-congress/house-bill/6201/text">Families First Act</a>, which President Donald Trump signed into law on March 18, included an additional US$1 billion in funding for other nutrition programs and will let more people enroll in SNAP nationwide. The measure also permits the states, which administer this federal program, to temporarily offer higher monthly benefits to many families.</p>
<p>Based on the research I’m doing for an <a href="https://news.richmond.edu/releases/article/-/16856/ur-political-science-professor-awarded-funding-to-advance-book-project-on-history-of-americas-food-stamp-program.html">upcoming book</a> about SNAP’s history, I believe this expansion of the program will not just ease the personal economic pain brought on by this crisis. SNAP also <a href="https://www.ers.usda.gov/amber-waves/2019/july/quantifying-the-impact-of-snap-benefits-on-the-us-economy-and-jobs/">pumps more money</a> into local communities, as it’s designed to do whenever the economy weakens.</p>
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<h2>Help for low-income people</h2>
<p>SNAP helps a wider range of people than many other parts of the safety net. Almost two-thirds of recipients are <a href="https://www.fns.usda.gov/snap/characteristics-supplemental-nutrition-assistance-program-households-fiscal-year-2018">children, elderly or disabled</a>. But it is also available to able-bodied adults with and without children, working or not – <a href="https://www.washingtonpost.com/business/2019/12/04/trump-administration-tightens-work-requirements-snap-which-could-cut-hundreds-thousands-food-stamps/">albeit with some restrictions</a>.</p>
<p>SNAP offers a family of four a maximum benefit of $646 a month. The average person on SNAP gets around <a href="https://fns-prod.azureedge.net/sites/default/files/resource-files/SNAPsummary-2.pdf">$130 a month</a> – about $1.40 per person per meal. That might not sound like much to you, but it can make a big difference to anyone facing severe economic hardship.</p>
<p><a href="https://www.fns.usda.gov/snap/characteristics-supplemental-nutrition-assistance-program-households-fiscal-year-2018">More than 80% of families on SNAP</a> have incomes at or below the federal poverty line, which is $26,200 for a family of four.</p>
<p>People who apply for SNAP get their benefits <a href="https://www.fns.usda.gov/snap/facts">within 30 days and sometimes within a week</a>. The funds come on a debit-type card that can be used at roughly <a href="https://www.fns.usda.gov/resource/snap-retailer-management-year-end-summaries">260,000 retailers</a> including grocery stores, convenience stores and even some farmers markets.</p>
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<h2>Helping the economy</h2>
<p>The number of people on SNAP typically tracks how well the economy is doing. Losing a job is the <a href="https://frac.org/wp-content/uploads/frac-facts-snap-strengths.pdf">most common reason</a> people turn to SNAP.</p>
<p>Economists have found that every percentage point increase in the unemployment rate boosts the number of people on the program <a href="https://www.doi.org/10.1257/pol.20140016">by 15%</a>. SNAP recipients <a href="https://www.fns.usda.gov/snap/benefit-redemption-patterns-supplemental-nutrition-assistance-program">spend their benefits quickly</a>, injecting those dollars directly into the economy. </p>
<p>Use of SNAP is so widespread that the Center for Budget and Policy Priorities, a think tank, estimates based on its analysis of USDA data that <a href="https://www.cbpp.org/research/food-assistance/snap-boosts-retailers-and-local-economies">10% of all the food</a> U.S. families consume at home is purchased with SNAP.</p>
<p>Most SNAP funds are spent in big box or large grocery stores. But SNAP spending can account for <a href="https://www.dailyyonder.com/snap-plays-outsized-role-economy-rural-grocers/2017/08/04/">20-30% of sales</a> – <a href="https://www.bloomberg.com/news/articles/2020-03-15/coronavirus-pandemic-saves-poor-americans-from-food-stamp-cuts">or more</a> – for smaller, independent retailers in depressed areas helping keep these stores open.</p>
<p>Retailers, producers, distributors and marketers all benefit from SNAP purchases. SNAP benefits <a href="https://www.ers.usda.gov/amber-waves/2019/july/quantifying-the-impact-of-snap-benefits-on-the-us-economy-and-jobs/">increase spending on food</a>. But because some or all of a family’s food costs are covered by SNAP, they also have more money to spend on other things.</p>
<p>Recent studies have estimated that each $1 of SNAP benefits spent expands the economy by <a href="https://www.ers.usda.gov/topics/food-nutrition-assistance/supplemental-nutrition-assistance-program-snap/economic-linkages/">$1.54</a> to <a href="https://www.ers.usda.gov/webdocs/publications/44748/7996_err103_1_.pdf">$1.79</a> during a recession.</p>
<p>In fact, government economists concluded that SNAP <a href="https://www.ers.usda.gov/webdocs/publications/93169/err-263.pdf?v=1509.3">got more bang for the buck</a> in terms of creating jobs during the Great Recession than other federal and state assistance.</p>
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<h2>Families First Act</h2>
<p>The new <a href="https://www.congress.gov/bill/116th-congress/house-bill/6201">law changes who can get SNAP</a> and revises other aspects of the program. States will be able to use SNAP benefits to help families with children who get <a href="https://theconversation.com/americas-poorest-children-wont-get-nutritious-meals-with-school-cafeterias-closed-due-to-the-coronavirus-133341">free or reduced-price meals at school</a> but whose schools have closed.</p>
<p>Until the coronavirus crisis is over, the law <a href="https://www.federalregister.gov/documents/2019/02/01/2018-28059/supplemental-nutrition-assistance-program-requirements-for-able-bodied-adults-without-dependents">suspends a cap</a> that had limited benefits to just three months over a three-year period for able-bodied adults without kids under 18. Designed to require able-bodied people to get a job in order to get help, this cap normally applies to people who are aren’t working or are working less than 20 hours a week.</p>
<p>The suspension prevents <a href="https://www.supermarketnews.com/laws-regulations/snap-rule-change-would-cut-food-stamp-benefits-700000-recipients">roughly 700,000 people</a> from being kicked off the program, as the Trump administration had planned. </p>
<p>The law also allows states to offer some people getting SNAP benefits <a href="https://fns-prod.azureedge.net/sites/default/files/resource-files/SNAP-COVID-EmergencyAllotmentsGuidance.pdf">additional emergency aid</a>. This could mean several hundred <a href="https://www.wavy.com/news/virginia/virginias-snap-program-will-issue-emergency-benefits-amid-coronavirus-crisis/">extra dollars</a> for these families to stock up on food for at least a while. Some states have already <a href="https://www.fns.usda.gov/programs/fns-disaster-assistance/fns-response-covid-19/snap-emergency-allotments-current-snap">gotten approval</a> from the federal government to make these additional benefits available in March.</p>
<p>Finally, the law gives states <a href="https://www.cbpp.org/research/food-assistance/usda-states-must-act-swiftly-to-deliver-food-assistance-allowed-by-families">more administrative flexibility</a> to make it easier to keep people on SNAP and add new applicants. For example, stressed state agencies may be allowed to relax a requirement that all applicants be interviewed in person or over the phone before they can get benefits.</p>
<h2>Costs are unclear</h2>
<p>Low-wage workers, such as those who work for hotels, restaurants, bars and stores will be especially hard hit by the sharp economic downturn the new coronavirus is causing. These workers often live paycheck to paycheck and many more of them will need help than before.</p>
<p><a href="https://www.washingtonpost.com/business/2020/03/16/food-banks-are-seeing-volunteers-disappear-food-supply-evaporate-coronavirus-fears-mount/">Food banks and pantries</a> are scrambling for volunteers and donations and will not be able meet the soaring need. To be clear, even in good times, food banks typically offer only <a href="https://www.politico.com/story/2017/09/03/food-banks-fight-congress-food-stamp-cuts-242268">10% of the food assistance SNAP provides</a>.</p>
<p>Unlike some government programs, there is no set spending limit on SNAP. It covers benefits for all who qualify for help, regardless of what it’s going to cost.</p>
<p>No one knows yet how many more people will enroll in the program or what the total tab will be. But I believe the gains reaped as a result will be well worth it.</p>
<p>[<em>Get facts about coronavirus and the latest research.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=upper-coronavirus-facts">Sign up for our newsletter.</a>]</p><img src="https://counter.theconversation.com/content/133664/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tracy Roof does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The food aid program helps low-income families put food on the table and injects money straight into struggling local economies. It will be critical throughout the crisis the coronavirus is stoking.Tracy Roof, Associate Professor of Political Science, University of RichmondLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1339072020-03-19T03:59:37Z2020-03-19T03:59:37ZSocial distancing may be worth it, but we need to talk about economic costs<figure><img src="https://images.theconversation.com/files/321170/original/file-20200317-60901-1dm894j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><a href="https://theconversation.com/coronavirus-why-are-we-cancelling-large-gatherings-and-what-other-social-distancing-options-are-left-133631">Social distancing</a> has been embraced as a key government strategy to manage the COVID-19 crisis. </p>
<p>The policy involves limiting contact between people to reduce viral transmission. It extends from advice to avoid shaking hands and maintain at least 1.5 metres’ distance from others to bans on “non-essential” gatherings of more than 500 people outdoors and 100 people indoors.</p>
<p>These measures will have significant economic impact. But how big will that impact be. Is it worth it compared to the health benefits?</p>
<p>Right now we don’t know the answer. Political and business leaders are deferring exclusively to <a href="https://www.abc.net.au/news/2020-03-13/labor-mp-doctor-mike-freelander-coronavirus-public-gatherings/12050970">public health advice</a> about how to contain the COVID-19 virus. We have had no serious public discussion of the economic costs.</p>
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Read more:
<a href="https://theconversation.com/social-distancing-what-it-is-and-why-its-the-best-tool-we-have-to-fight-the-coronavirus-133581">Social distancing: What it is and why it's the best tool we have to fight the coronavirus</a>
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<p>Framing the response to the coronavirus emergency as a cost-benefit analysis may seem hard-hearted. Yet prioritising medical resources is routine in hospitals. The Australia New Zealand Intensive Care Society’s <a href="https://www.anzics.com.au/wp-content/uploads/2020/03/ANZICS-COVID-19-Guidelines-Version-1.pdf">COVID-19 Guidelines</a> specify “the likelihood of response to treatment” as a principle in accessing intensive care treatment. </p>
<p>We do put a value on lives lost or, conversely, lives saved. Under Australian government <a href="https://protect-au.mimecast.com/s/J62LCwVLMEfMVREETRz1sj?domain=pmc.gov.au">best practice guidelines</a> the value of a life is A$4.2 million, with one year of life worth A$182,000 (in 2014 dollars). </p>
<p>The costs of social distancing may well be worth the benefits, but we have not yet had this discussion. We need to have a frank public conversation about the full economic costs versus benefits of major social-distancing policies.</p>
<h2>Flattening the curve</h2>
<p>The aim of social distancing is to “<a href="https://theconversation.com/coronavirus-why-are-we-cancelling-large-gatherings-and-what-other-social-distancing-options-are-left-133631">flatten the curve</a>”. This means slowing the rate at which the virus is spread, so we get fewer critical cases in the short term. </p>
<p>Slowing the spread allows our medical services to cope with the caseload at any given time. It maximises the prospect of patients getting the care they need when they need it, therefore reducing deaths. </p>
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<img src="https://cdn.theconversation.com/static_files/files/890/Flatten_the_curve1.gif?1583941324">
<figcaption><span class="caption">Flattening the curve is another way of saying slowing the spread. The Conversation/CC BY ND</span></figcaption>
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<p>But the question is whether the benefits of social distancing are worth the costs. Is it better to slug businesses, workers and households over a long time under draconian social-distancing policies? Or would it be better to go for a shorter and less severe economic hit, but with more stress on the health system during that time?</p>
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Read more:
<a href="https://theconversation.com/how-to-flatten-the-curve-of-coronavirus-a-mathematician-explains-133514">How to flatten the curve of coronavirus, a mathematician explains</a>
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<h2>Limited evidence</h2>
<p>The cost-benefit evidence on social distancing is scarce. We have little hard data because there have been few actual epidemics/pandemics where social distancing has been widely adopted as public policy. </p>
<p>But modelling by health economists indicates some things. </p>
<p>One is that targeted social distancing – applied, for example, to old people – <a href="https://protect-au.mimecast.com/s/oGG9CxnMOVU6RQ55u740cN?domain=sciencedirect.com">is more effective</a> than a blunt policy applied to everyone. The reason is a blunt policy applies to recovered individuals as well as susceptible individuals. We don’t want recovered individuals to isolate or distance themselves – in fact we want them in public spaces acting as buffers between the infectious and uninfected. </p>
<p>Yet so far health experts have recommended blunt social distancing through cancelling large gatherings such as sport and cultural events, working from home and avoiding public places, and some school and work closures. </p>
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Read more:
<a href="https://theconversation.com/australian-schools-are-closing-because-of-coronavirus-but-should-they-be-133432">Australian schools are closing because of coronavirus, but should they be?</a>
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<p>School closures are extremely costly. A <a href="https://protect-au.mimecast.com/s/rqODCyoNQ6Cv2yPPInzQRS?domain=ncbi.nlm.nih.gov">2010 study</a> in Britain estimated a 13-week closure would reduce GDP initially by 8.1%. </p>
<p>On the other hand, <a href="https://protect-au.mimecast.com/s/vR_MCzvOVBHlwmYYh1DYA0?domain=bmcpublichealth.biomedcentral.com">modelling also shows</a> the effectiveness of social distancing depends on the infectiousness of the disease and it being done very early on in the epidemic. Do it well, the authors advise, “or not at all”.</p>
<p>This makes decisions to close schools, as Britain has done, or keep them open, as Australia is doing, highly contestable, either as too blunt a response or as not doing social distancing well. More information to weigh costs and benefits might help.</p>
<h2>Irreversible consequences</h2>
<p>Warwick McKibbin, director of the Centre for Applied Macroeconomic Analysis in the ANU Crawford School of Public Policy, <a href="https://www.brookings.edu/blog/up-front/2020/03/06/what-are-the-possible-economic-effects-of-covid-19-on-the-world-economy-warwick-mckibbins-scenarios/">estimated</a> a few weeks ago the coronavirus crisis will knock 2% off global GDP. </p>
<p>This estimate included the effects of sick workers and some effects on investment and supply networks. It did not include the effects of major social-distancing policies (such as widespread closures of schools and businesses and self-isolation), which would effectively destroy businesses and cause massive job losses. </p>
<p>Once we add these costs it is conceivable the total costs would be closer to those of the Great Depression, <a href="https://protect-au.mimecast.com/s/XLyNCANZjQiyl1KKhkvUyv?domain=treasury.gov.au">when GDP fell</a> by 10% in 1931 and unemployment was more than 15%.</p>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3549276">Lower-cost containment</a> measures may more prudent right now than simply escalating social distancing in a knee-jerk way.</p>
<p>Economics tells us there can be a non-trivial “<a href="https://www.nber.org/papers/w1019">option value</a>” in delaying decisions in the face of uncertainty where the decisions have irreversible consequences. It can be better to wait for new information. If we kill off businesses and jobs now, and the virus turns out to be not so bad, those lost jobs and businesses cannot be easily re-established just by scaling back on social distancing. </p>
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Read more:
<a href="https://theconversation.com/can-i-take-the-dog-for-a-walk-can-i-put-the-kids-to-bed-what-you-should-and-shouldnt-do-if-youre-in-coronavirus-self-isolation-133776">Can I take the dog for a walk? Can I put the kids to bed? What you should and shouldn't do if you're in coronavirus self-isolation</a>
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<p>Government stimulus spending will be no silver bullet here, no matter how big. Even though it’s the appropriate time for governments to borrow and spend, future generations will have to pay the debt through higher taxes or lower government spending on things like health and education. There is no “free lunch” in economic stimulus. </p>
<p>Government spending does not bring back international tourists or international students. It cannot save every job and business, nor compensate for the costs of restarting a failed restaurant or shop.</p>
<p>The benefits of social distancing may or may not be worth it. But we don’t know, and as a society aren’t even asking the question.</p><img src="https://counter.theconversation.com/content/133907/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We need a frank public conversation about the full economic costs versus benefits of social distancing.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1285382019-12-10T13:09:02Z2019-12-10T13:09:02ZRandomised trials in economics: what the critics have to say<figure><img src="https://images.theconversation.com/files/306063/original/file-20191210-95173-730nlj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Nobel Prize Laureates in Economic Sciences Michael Kremer, Esther Duflo and Abhijit Banerjee.</span> <span class="attribution"><span class="source">Epa/Jonas Ekstromer</span></span></figcaption></figure><p>The 2019 Nobel Prize <a href="https://www.nobelprize.org/prizes/economic-sciences/2019/press-release/">has been awarded</a> to three scholars for pioneering recent attempts to answer microeconomic issues in development using randomised experiments. </p>
<p>Over the last three decades randomised trials have become an increasingly popular way of testing interventions designed to address developmental challenges. </p>
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<a href="https://theconversation.com/how-randomised-trials-became-big-in-development-economics-128398">How randomised trials became big in development economics</a>
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<p>But they are controversial. A range of scholars <a href="https://www.sciencedirect.com/science/article/pii/S0277953617307359">have criticised</a> the use of the approach in development research. Criticism has touched on <a href="https://www.cgdev.org/sites/default/files/should-randomistas-continue-rule.pdf">a number of dimensions</a>. These include questions of <a href="https://academic.oup.com/aepp/article/32/4/515/8078">ethics</a>, <a href="http://www.opensaldru.uct.ac.za/handle/11090/691">methodological limitations</a> and the danger that policy efforts get <a href="http://bostonreview.net/world-books-ideas/pranab-bardhan-little-big">reoriented to small interventions</a>. There is also no evidence that the approach leads to better development outcomes.</p>
<p>Academic work we have been involved in has pointed to problems of <a href="https://www.sciencedirect.com/science/article/abs/pii/S0305750X19304541">informed consent</a> and the dangers of a <a href="https://www.tandfonline.com/doi/full/10.1080/02589001.2019.1579893">conflict of interest</a> in experiments with high political and economic stakes. And shown that there are <a href="https://academic.oup.com/wber/article/29/suppl_1/S217/1689262">fundamental methodological contradictions</a> at the heart of the emphasis on randomised trials for policy.</p>
<h2>Methodological problems</h2>
<p>The <a href="https://www.annualreviews.org/doi/abs/10.1146/annurev.economics.050708.143235">argument for using randomised experiments</a> is that they provide reliable estimates of the causal effects of potential policy interventions. And that they are therefore also the <a href="https://www.aeaweb.org/articles?id=10.1257/jel.48.2.399">best source of evidence for policy</a>. </p>
<p>But scholars in economics have objected to both of these claims. These criticisms date back to <a href="https://www.aeaweb.org/articles?id=10.1257/jep.9.2.85">the mid-1990s</a>.</p>
<p>First, to the experiments. An <a href="https://www.aeaweb.org/articles?id=10.1257/jep.9.2.85">important criticism</a> is that setting up an intervention can itself affect the outcome. For example, individual behaviour can affect who participates in an experiment. It can also affect the way participants and non-participants react to the intervention.</p>
<p>Take an experiment where randomly selected school children are given extra tuition. One consequence could be that parents of non-selected students will compensate by paying for tutoring. Or they could spend more time helping with homework. For their part, parents of selected students might reduce such efforts. </p>
<p>In situations like this the idea of establishing a simple causal effect <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-0262.2005.00594.x">has been shown</a> to be highly questionable. </p>
<p>In addition, most experiments only allow researchers to calculate average effects across groups. But for policy purposes, it is often necessary to have a sense of how interventions affect different people. </p>
<p>Linked to this is the fact that the actual effect of an intervention could change substantially (for better or worse) when it’s implemented <a href="https://www.researchgate.net/publication/313471689_Micro_Experiments_and_Macro_Effects">at scale</a>. </p>
<p>Experiments are usually implemented by research teams or their non-governmental organisation partner. But scaled-up policies are implemented by governments. This introduces a further set of dynamics that <a href="https://www.theigc.org/wp-content/uploads/2014/10/Bold-Et-Al-2012-Policy-Brief1.pdf">can affect</a> implementation. </p>
<p>Perhaps the <a href="https://academic.oup.com/wber/article/29/suppl_1/S217/1689262">biggest problem</a> is that there are many other factors that can affect the outcomes of interventions: researchers often do not know what these are and do not measure them. So deciding in advance whether an intervention that seemed to have positive outcomes in one place <a href="https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(11)60563-1/fulltext">will do the same elsewhere</a> becomes a matter of guesswork. </p>
<p>This undermines <a href="http://bostonreview.net/archives/BR31.4/banerjee.php">claims</a> by proponents of these methods that randomised experiments lead to more ‘rigorous’ policy decisions than other approaches.</p>
<h2>Ethical problems</h2>
<p>Among the ethical problems, one concern is that social experiments in developing countries face serious problems of informed consent. Many experiments randomly allocate interventions to entire clusters, such as schools or hospitals, which makes it <a href="https://jme.bmj.com/content/44/2/114">very difficult</a> for participants to opt out. </p>
<p>And most experiments also involve people who are very poor. They are more likely to be unable to make meaningful choices about participating, particularly if it’s in exchange for desperately needed income or services.</p>
<p>The lack of informed consent also increases the risk of unintentional harm. If participants are aware that they are in an experiment, then they can alert experimenters to unintended negative consequences. This is important when experiments allocate critical resources, such as income or healthcare, to impoverished people. Withholding or providing resources to particular groups can harm vulnerable groups or lead to contestations that are <a href="https://www.jstor.org/stable/20799152?seq=1#metadata_info_tab_contents">socially destabilising</a>. </p>
<p>These and other ethical concerns have prompted one respected economist to call for a <a href="https://www.theindiaforum.in/article/indecent-proposals-economics">moratorium</a> on social experiments until effective ethical safeguards are put in place.</p>
<h2>A distraction</h2>
<p>The pioneers of development economics understood development to mean fundamental transformation at the societal level. This required going beyond marginal improvements to the status quo. In this conception, development was largely the outcome of sustainable increases in income levels in society. Through the detailed study of the history of the now developed countries, the <a href="https://www.jstor.org/stable/1823540?seq=1#metadata_info_tab_contents">pioneers concluded that such transformation was the result of industrialisation</a>. </p>
<p>A body of research over the last 20 to 30 years also points to the primacy of industrialisation in the <a href="https://www.press.uchicago.edu/ucp/books/book/distributed/E/bo20848837.html">East Asian</a> and <a href="https://www.amazon.com/Making-Economic-Superpower-Unlocking-Industrialization/dp/9814733725">Chinese</a> development ‘miracles’.</p>
<p>The experimental turn in development economics has unfortunately <a href="https://wiser.wits.ac.za/system/files/seminar/Chelwa2017.pdf">distracted research and policy work from such age-old priorities of development</a>. And in any case, some of the favoured micro-interventions of the new development economists (pricing of mosquito nets, provision of school flip charts, and so forth) would be outcomes – rather than causes – of transformative development. </p>
<p>Angus Deaton, the <a href="https://www.nobelprize.org/prizes/economic-sciences/2015/deaton/facts/">2015 economics Nobel Laureate</a>, has <a href="https://press.princeton.edu/books/hardcover/9780691153544/the-great-escape">argued</a> that in the case of Britain spectacular improvements in well-being in the late 18th and early 19th centuries followed on the heels of increases in the general level of incomes in the economy. Increased societal incomes allowed British society to marshal the resources needed to invest in, for example, large scale public sanitation infrastructure. </p>
<p>The proponents of randomised experiments in development are, therefore, arguably guilty of putting the cart before the horse.</p>
<p>A final critical concern is that there is no historical evidence to support the claim, repeated in <a href="https://www.nobelprize.org/prizes/economic-sciences/2019/advanced-information/">this year’s economics Nobel award</a>, that the experimental approach to development policy actually yields faster growth or development. </p>
<p>Many countries have grown their economies and developed in various ways without policy decisions being reliant on, or prioritising, randomised experiments. </p>
<p>As we have noted, such experiments only address a limited set of possible development mechanisms that are susceptible to randomised experiments and coincide with researchers’ own pre-existing views. For example, teacher absenteeism is reduced to a crude question of incentives, rather than a set of complex systemic factors, and <a href="https://www.povertyactionlab.org/evaluation/encouraging-teacher-attendance-through-monitoring-cameras-rural-udaipur-india">made the subject of an experiment</a> where attendance is monitored. And these experiments rarely have any basis, either <a href="https://academic.oup.com/wber/article/29/suppl_1/S217/1689262">in theory</a> or <a href="https://www.sciencedirect.com/science/article/abs/pii/S0165176516303068">in practice</a>, for being scaled up or applied in other contexts. </p>
<p>One area of particular concern, which has been the subject of much of the work by the Nobel awardees, is education. Our previous and forthcoming work raises numerous concerns with education experiments. The methodological basis for claiming policy relevance of even popular experiments like randomising school class size <a href="https://open.uct.ac.za/handle/11427/13324">is deeply suspect</a>. Some such experiments have been found to be <a href="https://www.tandfonline.com/doi/full/10.1080/02589001.2019.1579893">illegal and unconstitutional</a> And a <a href="https://www.youtube.com/watch?v=ok0s5uzRN5s">trickle down effect</a> of this approach to local research has been to <a href="http://resep.sun.ac.za/wp-content/uploads/2016/05/PSPPD_BICiE-email.pdf">ignore or deny</a> the role played by <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/saje.12227">insufficient aggregate public resources for education</a>.</p>
<p>Given all these factors, we suggest that instead of advancing development and poverty reduction, the approach advocated by this year’s economics Nobel winners could actually hold back progress in developing countries.</p><img src="https://counter.theconversation.com/content/128538/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller receives funding from a European Union-funded project, "Putting People back in Parliament", led by the Dullah Omar Institute (University of the Western Cape), in collaboration with the Parliamentary Monitoring Group, Public Service Accountability Monitor (Rhodes) and Heinrich Boell Foundation (South Africa). He is affiliated with the Public and Environmental Economics Research Centre (University of Johannesburg), regularly making inputs to Parliament oversight of the national budget, advising civil society groups on public finance matters and consulting for private sector organisations on an ad hoc basis. He resigned from the South African Parliamentary Budget Office in 2016. The views expressed are his own.</span></em></p><p class="fine-print"><em><span>Grieve Chelwa has received funding from the DG Murray Trust for work on the economics of alcohol consumption in South Africa. He has also received funding from the Bill and Melinda Gates Foundation, the American Cancer Society and the International Development Research Center (IDRC) for work on the economics of tobacco control on the African continent. And lastly, he's received funding from the International Growth Center at LSE and the Volkswagen Foundation for his work on the economics of education in Zambia.</span></em></p><p class="fine-print"><em><span>Nimi Hoffmann has received funding from the South African Department of Basic Education to help conduct a nationally representative survey of teachers. She has also received funding from the European Commission to conduct a tracer study of schools for children displaced by conflict and climate collapse in Somalia and Ethiopia. She is a lecturer at the Centre for International Education at the University of Sussex and a research fellow at the Centre for International Education, Cape Peninsula University of Technology.</span></em></p>Randomised trials in development have attracted criticiism over ethical issues and questions about being effective for policy.Seán Mfundza Muller, Senior Lecturer in Economics, Research Associate at the Public and Environmental Economics Research Centre (PEERC) and Visiting Fellow at the Johannesburg Institute of Advanced Study (JIAS), University of JohannesburgGrieve Chelwa, Senior Lecturer -- Economics, University of Cape TownNimi Hoffmann, Lecturer in International Education, University of SussexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1249652019-10-28T01:02:35Z2019-10-28T01:02:35ZArgentina elects new president on promises to fix economy and unify a struggling nation<p>Argentina has elected Alberto Fernández of the Peronist party as its next president with <a href="https://www.lanacion.com.ar/politica/%20-generales-argentina-2019-nid2301132">48% of the vote</a>. Fernández defeated <a href="https://elpais.com/internacional/2019/10/27/argentina/1572135195_737076.html">incumbent Mauricio Macri and four other candidates</a> on Sunday, Oct. 27, avoiding a runoff.</p>
<p>Fernández and his running mate, Cristina Fernández de Kirchner – a senator, former Argentine president and former first lady – ran on a left-leaning platform, appealing to Argentines <a href="https://www.batimes.com.ar/news/argentina/alberto-fernandez-launches-plan-to-tackle-hunger-in-argentina.phtml">suffering from chronic economic crisis</a>. </p>
<p>“If you want justice, solidarity, employment, public education and public health, then let’s work together to build the Argentina we all deserve,” said Fernández at his <a href="https://www.lanacion.com.ar/politica/alberto-fernandez-cristina-kirchner-cierran-mar-del-nid2300287">campaign’s Oct. 24 closing rally</a>.</p>
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<a href="https://theconversation.com/argentina-elige-nuevo-presidente-con-la-promesa-de-solucionar-la-crisis-economica-125948">Argentina elige nuevo presidente con la promesa de solucionar la crisis económica</a>
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<p>The duo heads up a <a href="https://www.bloomberg.com/graphics/2019-argentina-presidential-election-macri-fernandez/">broad-based new political coalition</a> that brings together <a href="https://www.bbc.com/news/world-latin-america-50145935">distinct strands</a> of Argentina’s Peronist party. Fernández, a moderate 60-year-old lawyer, was Fernández de Kirchner’s chief of staff early in her first administration. They publicly <a href="https://www.euronews.com/2019/08/13/a-look-at-the-man-leading-the-race-to-be-argentina-s-next-president">fell out in 2008</a> over economic policy. </p>
<p>Setting aside past differences, they’ve promised to right Argentina’s economy and restore the country’s eroded social safety net.</p>
<h2>Economic voting prevails</h2>
<p><a href="https://theconversation.com/argentina-how-inflation-debt-and-poverty-combined-to-deliver-a-brutal-primary-election-result-for-president-mauricio-macri-121960">President Macri’s defeat</a> is widely seen as a response to his <a href="https://www.bbc.com/news/world-latin-america-50183955">economic failures</a>. </p>
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<a href="https://images.theconversation.com/files/298816/original/file-20191027-114005-1lbievd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/298816/original/file-20191027-114005-1lbievd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/298816/original/file-20191027-114005-1lbievd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=890&fit=crop&dpr=1 600w, https://images.theconversation.com/files/298816/original/file-20191027-114005-1lbievd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=890&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/298816/original/file-20191027-114005-1lbievd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=890&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/298816/original/file-20191027-114005-1lbievd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1118&fit=crop&dpr=1 754w, https://images.theconversation.com/files/298816/original/file-20191027-114005-1lbievd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1118&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/298816/original/file-20191027-114005-1lbievd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1118&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Mauricio Macri.</span>
<span class="attribution"><a class="source" href="https://upload.wikimedia.org/wikipedia/commons/thumb/e/e2/Mauricio_Macri_2016.jpg/606px-Mauricio_Macri_2016.jpg">Argentina Presidency of the Nation</a></span>
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<p>Macri <a href="https://theconversation.com/argentina-departs-from-the-kirchner-model-but-mauricio-macri-now-has-to-govern-a-divided-nation-51060">won office in 2015</a>, when Argentia’s economy was struggling, promising “<a href="https://www.americamagazine.org/politics-society/2019/01/24/despite-zero-poverty-promise-argentina-poverty-rise">zero poverty</a>.” Today, <a href="https://www.indec.gob.ar/indec/web/Nivel3-Tema-4-46">35%</a> of Argentines live in poverty – <a href="https://www.eldia.com/nota/2017-3-29-2-56-16-el-indec-registra-una-baja-de-la-pobreza-pero-sigue-en-un-30-3">up 5% since 2016</a>. </p>
<p>Children have been hit hardest by <a href="https://www.focus-economics.com/countries/argentina">Argentina’s recession</a>, which began in 2018. Half of all Argentines under age 14 are <a href="https://www.indec.gob.ar/uploads/informesdeprensa/eph_pobreza_01_19422F5FC20A.pdf">poor</a>. </p>
<p>The South American country has also seen record inflation – predicted to reach <a href="https://www.reuters.com/article/argentina-economy/argentina-inflation-expected-at-53-in-december-2019-treasury-officials-idINKCN1VX09U">53% by the year’s end</a> – and <a href="https://www.latimes.com/world/la-fg-argentina-peso-20180901-story.html">currency devaluation</a>. The Argentine peso lost more than half its worth last year and fell another <a href="https://www.cnn.com/2019/09/02/investing/argentina-peso-currency-controls/index.html">35%</a> in August 2019. </p>
<p>Macri, a conservative businessman, blamed <a href="https://www.batimes.com.ar/news/argentina/candidates-clash-over-economy-venezuela-in-first-presidential-debate.phtml">his Peronist predecessors</a> for Argentina’s economic woes. </p>
<p>But his efforts to right the economy – which included <a href="https://www.infobae.com/economia/2019/03/28/el-mapa-de-la-pobreza-argentina-y-por-que-se-espera-que-no-baje-en-2019/">imposing strict limits on social welfare spending</a>, in compliance with an International Monetary Fund loan agreement – merely <a href="https://jacobinmag.com/2019/06/argentina-macri-imf-austerity-kirchner">exacerbated inequality</a>. Unemployment stands at <a href="https://en.mercopress.com/2019/09/20/unemployment-on-the-rise-in-macri-s-argentina">almost 11%</a>.</p>
<p>Macri also <a href="https://nacla.org/news/2019/10/24/argentina-elections-IMF-kirchner-macri-what-to-expect">failed</a> to adequately address the currency crisis, which further <a href="https://jacobinmag.com/2019/04/austerity-argentina-mauricio-macri-cambiemos">undermined the productivity of Argentina’s struggling industrial base</a>. </p>
<h2>Back to the future</h2>
<p>President-elect Fernández has pledged to <a href="https://www.nytimes.com/2019/10/14/opinion/argentina-election.html">jump-start production</a> and <a href="https://www.batimes.com.ar/news/argentina/alberto-fernandez-launches-plan-to-tackle-hunger-in-argentina.phtml">restore social programs aimed at curbing hunger and poverty</a>. He says he will pay off Argentina’s staggering national debt, but insists that such payments <a href="https://www.clarin.com/politica/video-alberto-fernandez-rumbo-presidenciales-27-octubre_3_TLDeyaxk.html">will not come at the expense of the social safety net</a>. </p>
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<a href="https://images.theconversation.com/files/298813/original/file-20191027-113948-pw45md.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/298813/original/file-20191027-113948-pw45md.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/298813/original/file-20191027-113948-pw45md.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/298813/original/file-20191027-113948-pw45md.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/298813/original/file-20191027-113948-pw45md.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/298813/original/file-20191027-113948-pw45md.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/298813/original/file-20191027-113948-pw45md.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/298813/original/file-20191027-113948-pw45md.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Fernández casts his ballot, Oct. 27, 2019. Voting is compulsory in Argentina.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Argentina-Elections/bad742c4fefb48f888e6c0291dd5a085/21/0">AP Photo/Gustavo Garello</a></span>
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<p>Fernández hopes to give voters a <a href="https://www.lavoz.com.ar/videos/primer-spot-de-alberto-fernandez-sin-cristina-y-con-nestor">“repeat performance” of 2003</a> – the year Argentina elected President Néstor Kirchner on the heels of a <a href="https://www.nytimes.com/2001/12/24/world/argentine-leader-declares-default-on-billions-in-debt.html">devastating economic crisis</a>.</p>
<p>Defaulting on more than US$100 billion in loans, the Argentine government in late 2001 was forced to freeze bank accounts for weeks and <a href="https://www.nytimes.com/2002/01/07/world/argentina-unlinks-peso-from-dollar-bracing-for-devaluation-and-even-harder-times.html">abandon its policy of pegging the peso’s value to that of the dollar</a>. Argentines with savings saw their nest-eggs evaporate as the peso <a href="https://www.nytimes.com/2002/01/12/world/argentine-peso-drops-sharply-after-link-to-the-dollar-ends.html">lost 66% of its value overnight</a>. Working people were <a href="https://www.nytimes.com/2001/12/24/world/argentine-food-riots-end-but-hunger-doesn-t.html">plunged into poverty</a>. </p>
<p>Kirchner, a little-known governor of the Patagonian province of Santa Cruz, proved to be a formidable politician. He <a href="https://www.theguardian.com/business/2005/dec/19/argentina.internationalnews">renegotiated the country’s debt</a>, opened trials against military officials <a href="https://theconversation.com/in-argentina-the-supreme-court-spurs-national-outrage-with-leniency-for-a-dirty-war-criminal-78296">accused of human rights violations during the dictatorship of the 1980s</a> and <a href="https://worldview.stratfor.com/article/argentina-10-years-after-kirchner">expanded social spending</a>. Kirchner left office in 2007 with a record <a href="https://www.infobae.com/2007/08/24/333431-continua-alta-la-aprobacion-del-gobierno-kirchner/">70% approval</a>. </p>
<p>He was succeeded by his wife, Cristina Fernández de Kirchner. She <a href="https://www.nytimes.com/2007/10/30/world/americas/30argentina.html">continued many of his policies</a>, but by the time she left office, in 2016, Argentina’s economic growth had slowed, the currency depreciated once again and <a href="https://www.bbc.com/news/world-latin-america-34580287">inflation had edged up</a>.</p>
<p>During the 2019 presidential campaign, Fernández largely overlooked his VP candidate’s mixed economic record, appealing to Néstor Kirchner’s 2003 comeback story and the Peronists’ legacy of empowering poor people. </p>
<p>Argentina’s Peronist party was founded in 1947 by Juan Domingo Perón. Along with his wife Evita, Perón transformed Argentina by <a href="https://www.washingtonpost.com/news/made-by-history/wp/2018/02/20/stop-comparing-trump-to-south-american-dictators-hes-actually-far-worse/">incorporating its growing working class</a> and other marginalized sectors into political, economic and social life. Perón’s experiment <a href="https://www.washingtonpost.com/news/made-by-history/wp/2018/02/20/stop-comparing-trump-to-south-american-dictators-hes-actually-far-worse/">boosted Argentina’s industrial base and expanded employment</a>, but ended in political and economic crisis. In 1955, he was overthrown in a coup.</p>
<p>Though its <a href="https://books.google.com/books/about/Transforming_Labor_Based_Parties_in_Lati.html?id=aeXD9F8OkFoC">ideological orientation has shifted from left to right</a> and <a href="https://audioboom.com/posts/7387290-nestor-kirchner-2003-2007">back</a> over the decades, the Peronist party remains a central institution of Argentine politics.</p>
<h2>Fernández de Kirchner’s long shadow</h2>
<p>Fernández’s efforts to promote national unity were complicated by his running mate’s polarizing record.</p>
<p>Many Argentines remember Cristina Fernández de Kirchner’s administration as a time of <a href="https://www.nytimes.com/2019/08/15/world/americas/argentina-president-kircher.html">excessive spending, conflict with the media and scandal</a>. Now under investigation on <a href="https://www.washingtonpost.com/world/the_americas/argentinas-cristina-kirchner-facing-corruption-allegations-mounts-unlikely-comeback/2019/07/28/3f3a31d4-a3dd-11e9-a767-d7ab84aef3e9_story.html">12 charges of corruption</a>, she played a low-key role in the campaign. </p>
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<a href="https://images.theconversation.com/files/298814/original/file-20191027-113953-12ysu19.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/298814/original/file-20191027-113953-12ysu19.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/298814/original/file-20191027-113953-12ysu19.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=378&fit=crop&dpr=1 600w, https://images.theconversation.com/files/298814/original/file-20191027-113953-12ysu19.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=378&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/298814/original/file-20191027-113953-12ysu19.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=378&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/298814/original/file-20191027-113953-12ysu19.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=475&fit=crop&dpr=1 754w, https://images.theconversation.com/files/298814/original/file-20191027-113953-12ysu19.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=475&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/298814/original/file-20191027-113953-12ysu19.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=475&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Cristina Fernández de Kirchner is a polarizing figure in Argentina.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Argentina-Elections/d14b1e7692404008b0b09b5d3cccb8b5/47/0">AP Photo/Natacha Pisarenko</a></span>
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</figure>
<p>However, Fernández de Kirchner’s record of social inclusion endeared her to <a href="https://www.theguardian.com/world/2019/oct/24/christina-de-fernandez-kirchner-argentina-marci">many Argentines</a>. During <a href="https://audioboom.com/posts/7393663-cristina-kirchner-2007-2015">two terms in office</a>, she <a href="https://www.nytimes.com/2008/10/22/business/worldbusiness/22argentina.html">renationalized Argentina’s pension system</a>, which was privatized in 1993, to protect retirees from market volatility. She also established a <a href="https://www.anses.gob.ar/asignacion-universal-por-hijo">small stipend for low-income families</a> who ensure their children attend school and have regular health screenings. </p>
<p>These reforms moved Argentina’s welfare state in a more progressive direction for the first time in decades and improved income distribution, my <a href="https://www.cambridge.org/core/books/welfare-and-party-politics-in-latin-america/BFE6B43ED35B5CB02919279F5620AB73">research on inequality in Latin America shows</a>. Argentina’s current crisis <a href="https://revistaanfibia.com/cronica/por-que-no-estalla/">would likely have been more severe</a> absent this safety net.</p>
<p>Fernández de Kirchner was Argentina’s first elected female president. Though the country’s <a href="https://www.nytimes.com/2018/08/09/world/americas/argentina-abortion-laws-south-america.html">feminist movement has grown substantially recently</a>, a broadly popular <a href="https://www.theguardian.com/world/2018/aug/09/argentina-senate-rejects-bill-legalise-abortion">abortion legalization bill</a> was rejected by Argentina’s senate in 2018. As a senator, Fernández de Kirchner <a href="https://www.nytimes.com/2018/08/09/world/americas/argentina-abortion-vote.html">strongly supported</a> the measure. </p>
<h2>Uphill battle</h2>
<p>A repeat performance of Argentina’s 2003 economic turnaround is unlikely.</p>
<p>President-elect Fernández, who assumes office in December, will come to power during a full-blown crisis. Fernández also faces an unfavorable international economic climate, with the <a href="https://www.nytimes.com/2019/09/01/world/asia/trump-trade-war-china.html">trade war between the U.S. and China</a> threatening to slow consumption in two of Argentina’s top export markets. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/298815/original/file-20191027-113987-181xb8l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/298815/original/file-20191027-113987-181xb8l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/298815/original/file-20191027-113987-181xb8l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=419&fit=crop&dpr=1 600w, https://images.theconversation.com/files/298815/original/file-20191027-113987-181xb8l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=419&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/298815/original/file-20191027-113987-181xb8l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=419&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/298815/original/file-20191027-113987-181xb8l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=526&fit=crop&dpr=1 754w, https://images.theconversation.com/files/298815/original/file-20191027-113987-181xb8l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=526&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/298815/original/file-20191027-113987-181xb8l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=526&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Mass protests followed Argentina’s 2001 economic crisis, Dec. 20, 2001.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Argentina-Greece-Economy/381dcb1ea27b499b8d640b2e892f857e/104/0">AP Photo/Walter Astrada, File</a></span>
</figcaption>
</figure>
<p>The last Argentine president elected under similar circumstances, Fernando de la Rua, oversaw the political and economic implosion of 2001. He was <a href="https://www.nytimes.com/2001/12/21/world/argentine-leader-his-nation-frayed-abruptly-resigns.html">forced out of office by mass protests</a> in December 2001.</p>
<p>President-elect Fernández knows this history well. He was on the Buenos Aires city council when de la Rua <a href="https://www.clarin.com/politica/murio-fernando-rua-salida-helicoptero-casa-rosada-sello-breve-mandato-presidente_0_JUuJ5cejI.html">fled the presidential palace in a helicopter</a>. </p>
<p>Fernández has assured voters he’s ready for the uphill challenge, saying “<a href="https://www.clarin.com/politica/alberto-fernandez-cerro-campana-cristina-kirchner-saque-saco-operaba-unidad-puse-saco-conducir-_0_NVub9T9A.html">We know what needs to be done to get Argentina back on its feet</a>.”</p>
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<p class="fine-print"><em><span>Jennifer Pribble does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Argentina has voted for change. Alberto Fernández, a 60-year-old lawyer, defeated President Mauricio Macri with a campaign emphasizing economic recovery, social inclusion and national unity.Jennifer Pribble, Associate Professor of Political Science and Global Studies, University of RichmondLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1194012019-07-03T14:06:26Z2019-07-03T14:06:26ZEvolution of ANC economic policy sheds light on squabble over the central bank<figure><img src="https://images.theconversation.com/files/281112/original/file-20190625-81762-i8miak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Debate about SA Reserve Bank's mandate must be done in a more considered manner, informed by evidence.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The recent <a href="https://www.enca.com/news/anc-heavyweights-divided-reserve-bank-mandate">squabble</a> over the mandate of the <a href="https://www.resbank.co.za/Pages/default.aspx">South African Reserve Bank</a> has very little to do with real economic policies. It is rather emblematic of the intensely polarised levels of political distrust that currently exists within the <a href="https://www.anc1912.org.za/">African National Congress</a> (ANC), the governing party. Compounding the problem is the lack of any coherent grand vision from the post-apartheid leadership of the ANC about the road they wish South Africa to embark on.</p>
<p>The ANC has been largely clear on values and principles (non-racial, democratic, state led, re-distributive) that inform economic policy but short on specific details of what strategies could achieve these. This may have served the ANC well during its years in exile. However, since the <a href="https://www.sahistory.org.za/archive/book-6-negotiation-transition-and-freedom-chapter-1-transition-context-christopher-saunders">transition</a> to democracy in 1994, the costs of its inability to deliberatively focus on important issues in the economic realm have come back to haunt the party. </p>
<p>Now, as it muddles from one crisis to the next, the various factions of the party will use particular issues on the economy, and everything else from the <a href="https://mg.co.za/article/2019-06-09-00-clear-policies-needed-for-effective-land-reform">land issue</a> to the role of the ANC Women’s League, to fight their battles. What should concern all South Africans is the enormous costs this lack of coherence has on the economy – from <a href="http://www.thepresidency.gov.za/profiles/president-jacob-zuma-0">President Jacob Zuma’s</a> firing of Finance Ministers <a href="https://mg.co.za/article/2019-02-19-nenegate-the-financial-cost-of-political-uncertainty">Nhanhla Nene</a> and <a href="https://ewn.co.za/2017/03/30/president-jacob-zuma-cabinet-reshuffle-pravin-gordhan-fired">Pravin Gordhan</a>, to the recent squabble, and the Public Protector’s outrageous <a href="http://saflii.org/za/cases/ZAGPPHC/2017/443.html">over-reach</a> in her bizarre Absa “findings”.</p>
<h2>Evolution of economic policy</h2>
<p>We have found no evidence of the official ANC policy stance on the Reserve Bank and monetary policy going into the negotiations that delivered the 1994 political settlement. It is mentioned only once. And that is in a administrative sense in the <a href="https://www.politicsweb.co.za/documents/the-ancs-1994-election-manifesto">Ready to Govern</a> document the ANC published in 1992.</p>
<p>During the negotiations, the ANC’s stance on an independent central bank seems to have been informed by a visit, among others, to the <a href="https://www.bundesbank.de/en/bundesbank/organisation">German Bundesbank</a> by some members of its Department of Economic Policy. This visit convinced the ANC that support for an independent central bank would buttress the credibility of its economic policy management. For the <a href="https://www.sahistory.org.za/topic/national-party-np">National Party</a>, the objective was to keep what they perceived to be a populist and ‘socialist-inclined’ ANC away from the levers of monetary policy-making.</p>
<p>As it turned out, the sections of the constitution that dealt with the central bank were not debated much during the negotiations because the major parties were in agreement. </p>
<h2>How SARB’s mandate came about</h2>
<p>We do not yet have the official transcripts of what was discussed behind the closed doors of <a href="https://www.sahistory.org.za/article/convention-democratic-south-africa-codesa">CODESA </a>. Such transcripts should shed light on how the decision on the independence of the Reserve Bank was contoured around the economic policy positions of the major parties.</p>
<p>Also noteworthy is the fact that the Constitutional <a href="https://www.resbank.co.za/AboutUs/Mandate/Pages/Mandate-Home.aspx">clause</a> on the mandate of the Reserve Bank bears an uncanny resemblance to the bank’s 1990 mission statement. This is no coincidence. <a href="https://www.resbank.co.za/AboutUs/History/PreviousGovernors/Pages/DrChristianLodewykStals.aspx">Chris Stals</a> who was the Reserve Bank Governor at the time has said that the constitutional clause was drawn directly from the Reserve Bank’s mission statement. </p>
<p>The Reserve Bank’s 1990 mission statement stated that the Bank’s “primary aim was the protection of the internal and external value of the rand”. These words are virtually the same as those which entered the final Constitution in 1996. We understand that the ANC added in words to the effect that the Bank had to carry out its mandate in the interests of “balanced and sustained growth…”. </p>
<h2>Neither balanced nor sustainable</h2>
<p>The notion of ‘balanced growth’ is a curious and largely meaningless turn of phrase that has little or no traction in monetary or economic theory. The only <a href="https://www.economiainstitucional.com/eng/abstracts/rei39.htm">reference</a> we are aware of relates to its use in the early 1950s. That was in the famous debate between economists <a href="https://strathprints.strath.ac.uk/65220/">Albert Hirschmann</a> and <a href="https://economicsconcepts.com/big_push_theory.htm">Paul Rosenstein-Rodan</a> about the best route to development for the newly independent countries of Africa and Asia.</p>
<p>To argue that this vague phrase means that the Reserve Bank also has <a href="https://www.resbank.co.za/AboutUs/Mandate/Pages/Mandate-Home.aspx">growth mandate</a> is disingenuous. The Reserve Bank has succeeded in its narrow (and narrowing) price stability mandate. But its policy stance has not helped to create sustainable or ‘balanced’ growth, however one interprets the latter. The growth of an economy with such high levels of income and wealth inequality, arguably the highest in the world, as well as unemployment of 40% (by the broader definition) is neither sustainable nor balanced. </p>
<p>We accept that economic reform is not a matter for monetary policy alone. But limiting the role of monetary policy to ensuring price and financial stability doesn’t help either. Added to this is the ruling out of activist fiscal policy because of the pre-occupation with budget deficits. This therefore means that the burden of economic policy reform will have to fall on microeconomic restructuring alone. If that is the position of government, perhaps <a href="https://www.fin24.com/Economy/ramaphosa-policy-on-sarb-has-not-changed-20190606">President Cyril Ramaphosa</a> should just say so.</p>
<h2>Historical anomaly</h2>
<p>The ‘ownership’ of the Reserve Bank is not a matter to get ourselves into knots about. That the SARB has private shareholders is an <a href="https://www.weforum.org/agenda/2015/07/should-central-banks-have-private-shareholders/">anomaly of history</a>. While most central banks established in the early 20th century had private shareholders, most have since changed this to state ownership.</p>
<p>This really is a matter that the ANC should have sorted during the negotiations phase of the transition to democracy but, as we have argued above, there was neither an appetite in the top echelons of the ANC to address this anomaly or related policy matters nor did they apply their minds to that matter in the hurly burly of the CODESA negotiations. </p>
<p>There was an opportunity again to address this in the early 2000s when the Bank came under fire from a group of right wing shareholders hell bent on <a href="https://www.unisa.ac.za/static/corporate_web/Content/Colleges/CEMS/Journals/SA%20Business%20Review/documents/Sabview_21_Chap1.pdf">gate-crashing</a> the Board and cashing in on the nationalisation of the bank they hoped would follow. It has now become a political football, symbolic of the political fractiousness we are now experiencing.</p>
<p>We would have no problem with, and in fact would strongly support, taking the central bank into state ownership while retaining its operational independence. This will bring it into line with the global norm. But this has to be done at the right time, under the right conditions. </p>
<p>Whatever the debate of the early 1990s may have been, the Reserve Bank was granted operational independence. Tampering with its independence now will be <a href="https://www.fin24.com/Economy/south-africa-reserve-bank-attacks-could-hurt-rating-says-sp-20190607">risky</a> in the extreme, not least in terms of the country’s credit rating. One point worth emphasising is that most independent central banks are also state-owned. But we fear that those in a particular faction of the ANC pushing for the nationalisation of the central bank may have a far more insidious agenda.</p>
<h2>A matter for informed debate</h2>
<p>The issue of the mandate of the Reserve Bank is of course a matter that has been the subject of serious debate. Given the challenges of growth and employment in the economy, it is difficult to sustain the argument that these are entirely irrelevant to the Reserve Bank. On the contrary, any reasonable state would align its policy mechanisms and institutions to its overall economic agenda. </p>
<p>But the debate needs to be held in a more considered manner, informed by evidence. This should include inputs from specialists who understand how financial systems operate and how the economic growth process works.</p>
<p>We would argue that the debate about the mandate of the South African Reserve Bank needs to be located within a clearly articulated political vision and social compact on the transformative good society South Africans aspire to. Such a vision and a social compact have yet to emerge. When they do emerge, they must be accompanied by the mechansims of economic and social policy that will be required to give effect to such a vision.</p>
<p><em>Vishnu Padayachee and Robert van Niekerk are authors of “Shadow of Liberation: Contestation and Compromise in the Economic and Social Policy of the African National Congress, 1943–1996” (Wits University Press, October 2019)</em></p><img src="https://counter.theconversation.com/content/119401/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vishnu Padayachee. I have over my career received funding from a number of international and national foundations, but none related directly to the research that informed this article in Conversation.</span></em></p><p class="fine-print"><em><span>Robert van Niekerk receives funding from national and international organisations and foundations supporting research but this funding has no relevance for the article.</span></em></p><p class="fine-print"><em><span>Imraan Valodia does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The debate about the mandate of the South African Reserve Bank must be located within a clearly articulated political vision and social compact on the kind of society South Africans aspire to.Vishnu Padayachee, Distinguished Professor and Derek Schrier and Cecily Cameron Chair in Development Economics, School of Economics and Business Sciences, University of the WitwatersrandImraan Valodia, Dean of Commerce, Law and Management, University of the WitwatersrandRobert van Niekerk, Wits School of Governance's Chair in Public Governance, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1067492019-02-04T11:38:33Z2019-02-04T11:38:33ZIs authoritarianism bad for the economy? Ask Venezuela – or Hungary or Turkey<p>Democracy is at risk worldwide. And the economy may be, too.</p>
<p>Seventy-one out of the world’s 195 countries saw their democratic institutions erode in recent years, according to the <a href="https://freedomhouse.org/report/freedom-world/freedom-world-2018">2018 year-end report by democracy watchdog Freedom House</a>, a phenomenon known as “<a href="https://www.annualreviews.org/doi/abs/10.1146/annurev-polisci-050517-114628">democratic backsliding</a>.” Signs of backsliding include elected leaders who expand their executive powers while weakening the legislature and judiciary, elections that have become less competitive and shrinking press freedom. </p>
<p>When <a href="https://www.annualreviews.org/doi/abs/10.1146/annurev-polisci-050517-114628">government institutions erode like this</a>, it isn’t just bad for democracy - it also <a href="https://www.washingtonpost.com/news/democracy-post/wp/2017/02/13/why-the-rise-of-authoritarianism-is-a-global-catastrophe/">hurts countries economically</a>, research shows.</p>
<p>To understand why, we applied our background as <a href="https://scholar.google.com/citations?user=h0o27GgAAAAJ&hl=enstudied">political scientists</a> focused on <a href="https://works.bepress.com/nisha-bellinger/">developing economies</a> to study Venezuela, Turkey and Hungary – all countries that have seen varying degrees of <a href="https://www.v-dem.net/en/">democratic backsliding</a> in recent years.</p>
<h2>The authoritarian economic problem</h2>
<p>All three countries have struggled economically as their democratically elected leaders turned nakedly authoritarian over the past five years.</p>
<p><iframe id="YXRFQ" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/YXRFQ/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>In Turkey, President Recep Erdoğan has been <a href="https://www.bloomberg.com/news/articles/2018-07-09/turkey-to-be-transformed-as-erdogan-sworn-in-with-strong-powers">steadily consolidating presidential powers</a> for years while attacking the independence of both the <a href="https://www.theguardian.com/commentisfree/2017/jul/19/turkey-erdogan-turkish-democracy">legislative and judicial</a> branches, as well as restricting press and <a href="https://www.hrw.org/news/2018/05/14/turkey-government-targeting-academics">academic freedoms</a>. Turkey’s economy has <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=TR">struggled</a> in kind, with gross domestic product dropping about 60 percent between 2013 and 2016. Its <a href="https://theconversation.com/turkeys-currency-collapse-shows-just-how-vulnerable-its-economy-is-to-a-crisis-101556">currency, the lire, also collapsed last year</a>, plunging the country into crisis. </p>
<p>Under the <a href="https://theconversation.com/venezuelans-want-president-maduro-out-but-most-would-oppose-foreign-military-intervention-to-remove-him-109135">autocratic leadership</a> of President Nicolás Maduro – who is now in a bitter <a href="https://theconversation.com/venezuela-power-struggle-plunges-nation-into-turmoil-3-essential-reads-110419">power struggle</a> to retain the presidency – <a href="https://theconversation.com/inside-venezuelas-crisis-7-essential-reads-89018">Venezuela</a> has seen financial ruin. Inflation hit <a href="https://www.forbes.com/sites/stevehanke/2019/01/01/venezuelas-hyperinflation-hits-80000-per-year-in-2018/">80,000 percent there last year</a>, and food and medicine are scarce. Venezuela’s government stopped releasing economic data in 2014, but its gross domestic product is believed to have <a href="https://www.bloomberg.com/news/articles/2018-11-22/venezuela-economy-is-said-to-have-fallen-16-6-percent-in-2017">shrunk by around 15 percent</a> for <a href="https://www.forbes.com/sites/nathanielparishflannery/2018/03/22/venezuelas-economic-crisis-worsens-in-2018/">each of the last three years</a>.</p>
<p>Meanwhile, Hungary has stagnated as <a href="https://theconversation.com/hungary-election-viktor-orban-tightens-his-grip-with-a-super-majority-94680">Prime Minister Victor Orbán</a> has become <a href="https://www.nytimes.com/2011/12/22/world/europe/foes-of-hungarys-government-fear-demolition-of-democracy.html?module=inline">increasingly undemocratic</a>. Since the 2014 election, when Orban’s <a href="https://theconversation.com/how-viktor-orban-degraded-hungarys-weak-democracy-109046">grip on power really tightened</a>, growth has mostly <a href="https://data.worldbank.org/country/hungary">dropped</a>, from 4 percent in 2014 to 2 percent in 2016. The <a href="https://data.worldbank.org/country/hungary">World Bank predicts</a> that Hungary’s economy will continue to contract through 2020 and beyond.</p>
<h2>Leaders are fallible</h2>
<p>Authoritarianism isn’t always bad for the economy. Autocratic <a href="https://www.worldbank.org/en/country/china/overview">China</a> and <a href="https://www.straitstimes.com/business/economy/singapore-economy-grew-22-in-q3-less-than-expected-full-year-growth-forecast-at-3">Singapore</a> are both economic success stories, growing at double digits – a pace largely unseen in Western democracies. </p>
<p>But these countries were never set up to be democracies. </p>
<p>When a one-time democracy turns toward authoritarianism, however, the economic effect is often negative. That’s because, in a democracy, economic policy is meant to be made jointly, by various elected officials from the executive and legislative branches. Other independent government agencies, like the U.S. Federal Reserve or central bank, help decide economic policy, too.</p>
<p>Lawmakers check <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1468-0343.00066">impulsive decisions by presidents</a> in a number of formal and informal ways, our research shows. Policies that relate to government investments, taxing and spending, among other issues, are generally the result of negotiation between the two branches.</p>
<p>When legislatures can no longer effectively serve this function – because they’ve been sidelined, <a href="https://www.reuters.com/article/us-venezuela-politics-parliament/parliamentary-body-demands-venezuela-halt-harassment-of-opposition-mps-idUSKBN1H42G6">as in Venezuela</a> and Turkey, or because they are dominated by the ruling party, as in Hungary – there’s little to prevent <a href="https://onlinelibrary.wiley.com/doi/10.1111/j.1540-5907.2008.00315.x">authoritarian leaders</a> from making bad choices that hurt the economy.</p>
<p>Turkey is a good example of the risks that come from having one all-powerful, fallible leader. </p>
<p>In July 2018, President Erdoğan expanded his executive powers to include making <a href="https://www.bloomberg.com/news/articles/2018-07-10/erdogan-gives-himself-power-to-appoint-central-bank-governor">key appointments to Turkey’s central bank</a> and appointed his son-in-law to lead economic policy in Turkey. Erdoğan then <a href="https://www.cnbc.com/2018/04/16/turkeys-currency-is-tanking-and-president-erdogan-is-keeping-it-down.html">restricted the bank</a> from raising interest rates to curb rising inflation – despite <a href="https://foreignpolicy.com/2018/05/25/erdogan-is-a-mad-economist-and-turkey-is-his-laboratory/">warnings from economists</a> that this move would lead the value of the Turkish currency to plummet. And, of course, it did. </p>
<h2>Social unrest is bad for the economy</h2>
<p>Legislatures play an important role in setting economic policy also because, as representative bodies made up of different political parties, they serve as channels through which people and <a href="https://www.cambridge.org/core/journals/european-journal-of-sociology-archives-europeennes-de-sociologie/article/dictatorial-institutions-and-their-impact-on-economic-growth/FE171E0B87781B9A0ABDF3A6635C5C63">social groups</a> can make demands on policymakers. </p>
<p>In healthy legislative debate in a functioning democracy, opposing parties develop economic policies that help their constituents. They also try to change laws that they believe will hurt the people they represent.</p>
<p>When authoritarian leaders sideline opposition parties and stack the legislature with their supporters, the only way for citizens to air their grievances is on the streets.</p>
<p>Venezuelans staged months of <a href="https://www.cnn.com/2017/04/18/americas/venezuela-protest-explainer/index.html">mass daily protests in 2017</a> after President Maduro <a href="https://www.reuters.com/article/us-venezuela-politics-parliament/parliamentary-body-demands-venezuela-halt-harassment-of-opposition-mps-idUSKBN1H42G6">stripped Venezuela’s opposition-dominated parliament of its powers</a>. They are marching again now, <a href="https://www.bbc.com/news/world-latin-america-47060659">demanding Maduro’s ouster</a>. </p>
<p>Social unrest can <a href="https://muse.jhu.edu/article/528239">deepen economic woes</a>, especially when it gets violent. Riots may <a href="https://www.securitymagazine.com/articles/88297-when-critical-infrastructure-encounters-civil-unrest">destroy physical infrastructure</a> like oil pipelines or block highways that keeps the country running. People may flee for their own safety, leaving jobs undone and critical positions unfilled. </p>
<h2>Democratic backsliding reduces foreign investment</h2>
<p>International markets, too, <a href="https://www.cnbc.com/2014/09/29/why-hong-kong-unrest-scares-markets.html">dislike social unrest</a>. When protests are prolonged or if the governments crack down violently, it is common for <a href="http://www.jpolrisk.com/protests-in-latin-america-impact-on-investment-the-economy-and-political-stability/">investors to flee</a>.</p>
<p>International investors get worried, too, when parliaments have too few opposition parties to effectively check the executive branch, our <a href="https://journals.sagepub.com/doi/full/10.1177/0032321718799015">study</a> finds. </p>
<p>When democratically elected leaders turn authoritarian, investors get nervous, withdrawing funds and reducing investments.</p>
<p>Since 2013, Hungary, Venezuela and Turkey have all seen notable declines in their foreign direct investment, a measure of global confidence in a country, according to the <a href="https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD">World Bank</a>. Declines range from 66 percent in Venezuela to 300 percent in Hungary. </p>
<p><iframe id="U5U0Z" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/U5U0Z/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>One reason investment drops as democracy erodes is because investors fear the government could begin meddling in their businesses in ways that reduce profits. </p>
<p>This is a common strategy of authoritarian leaders from both the right and the left.</p>
<p>Since taking sweeping control of Hungary’s parliament in 2018, for example, President Orban’s right-wing Fidesz party has reasserted government control over major energy firms, taking over public utilities and <a href="https://www.cnbc.com/2018/10/02/reuters-america-hungary-adopts-law-to-control-foreign-investment-in-sensitive-sectors.html">increasing government oversight of foreign companies</a> that operate in the country.</p>
<p>In Venezuela, the left-wing Maduro has <a href="https://www.wsj.com/articles/venezuela-seizes-warehouses-from-empresas-polar-other-companies-1438294617">taken over food production</a> in the country, ordering companies like Nestle and Pepsi to vacate their factories in 2015.</p>
<h2>It’s all about the legislatures</h2>
<p>Our <a href="https://journals.sagepub.com/doi/full/10.1177/0032321718799015">study</a> found one condition that allows economies to thrive even when democracy is in decline: functioning political parties in independent legislatures.</p>
<p>In the Philippines, hard-right president Rodrigo Duterte has <a href="https://news.abs-cbn.com/focus/06/25/17/stray-cats-killers-and-no-regrets-de-lima-on-life-in-jail">imprisoned</a>, even killed, thousands of citizens as part of his “war on drugs.” Duterte has also arrested <a href="https://www.theguardian.com/world/2018/sep/25/duterte-critic-antonio-trillanes-iv-hits-out-at-darkness-and-evil-philippines">powerful people</a> who criticize his policies. So far, however, the <a href="https://freedomhouse.org/report/freedom-world/2018/philippines">Filipino</a> parliament is still fairly functional, with opposition parties that operate freely.</p>
<p>Consequently, the Filipino economy remains unaffected by Duterte’s authoritarianism. Gross domestic product has grown at a good rate of around <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?locations=PH">7 percent since 2012</a>. Foreign investments have also been increasing. </p>
<p>Sharing some power with lawmakers gives the economy a boost. Ultimately, that may help these authoritarian-leaning leaders stay in power longer.</p><img src="https://counter.theconversation.com/content/106749/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When an elected leader turns autocratic, the economy tends to suffer. That’s because, in a functioning democracy, economic policy is made jointly, with lawmakers playing a key role.Nisha Bellinger, Assistant Professor of Political Science, Boise State UniversityByunghwan Son, Assistant Professor of Global Affairs, George Mason UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1058832018-10-31T15:38:26Z2018-10-31T15:38:26ZMorality: the new way to understand economic decisions<figure><img src="https://images.theconversation.com/files/243207/original/file-20181031-76390-1cb0ww0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Balancing act.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/money-saving-kids-family-financial-wealth-1086770639">William Potter/Shutterstock</a></span></figcaption></figure><p>There is no one way of understanding the bases of, or justification for, austerity. If there was, there wouldn’t be such voracious debate around the topic. A <a href="https://inews.co.uk/news/politics/budget-2018-michael-portillo-grace-blakeley-this-week-bbc/">recent televised discussion</a> provides a perfect example of this.</p>
<p>In it, Labour National Forum’s Grace Blakeley drew an analogy with a business that fails to invest in the resources necessary to operate successfully: “It would be like a bar [saying], I’m going through hard times, so I’m selling all my bar stools, I’m going to close an extra day a week and I’m going to stop selling more expensive beer.” For Blakeley, austerity is short-sighted and fails to recognise that businesses need investment to generate profits.</p>
<p>Former Conservative minister Michael Portillo responded, “[That] is like a family saying, well we don’t have any money, we are living beyond our means, so what we ought to do is … borrow a whole lot of money and spend it on this, that and the other and pretend that is going to raise our productive capital.” For Portillo, if the economy is conceived as a family, then continuing to spend money that you don’t have just digs an ever deeper hole. </p>
<p>Blakeley countered: “Let’s take that metaphor further shall we? … we are spending more than we are earning … we are going to stop feeding our children, and … stop paying our rent. Eight years down the line, the kids are dead, and we have been kicked out of our house, but at least we are not spending more than we are earning any more.”</p>
<p>In a sense both Blakeley and Portillo are “right” on their own terms but they are talking past each other. Such arguments are commonplace in economic debates and morality is often invoked to lend emotional weight to the speaker’s viewpoint. But should morals even be a part of economics?</p>
<h2>Understanding ‘economic morality’</h2>
<p>Our <a href="http://www.systemsofexchange.org">Systems of Exchange (SOE)</a> framework is useful in making sense of competing economic arguments. It organises views into four types, based on the importance of individuals or groups, and types of rationality.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/243039/original/file-20181030-76413-14ckppc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/243039/original/file-20181030-76413-14ckppc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/243039/original/file-20181030-76413-14ckppc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=458&fit=crop&dpr=1 600w, https://images.theconversation.com/files/243039/original/file-20181030-76413-14ckppc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=458&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/243039/original/file-20181030-76413-14ckppc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=458&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/243039/original/file-20181030-76413-14ckppc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=575&fit=crop&dpr=1 754w, https://images.theconversation.com/files/243039/original/file-20181030-76413-14ckppc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=575&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/243039/original/file-20181030-76413-14ckppc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=575&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Systems of exchange framework.</span>
<span class="attribution"><span class="source">Biggart and Delbridge</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The first dimension considers two types of rationality in economic decisions. Both are rational, but while “instrumental” looks for the most economically efficient outcome, “substantive” calculates the most efficient means for achieving a moral or value-based result.</p>
<p>The second dimension looks at social relations. <a href="https://www.investopedia.com/terms/n/neoclassical.asp">Neoclassical economics</a> assumes that everyone making their own independent rational choices will lead to the best outcome. An “invisible hand” will guide us towards maximum overall social benefit. In other economic settings, the group, not the individual, is considered the critical unit for decision making and the identity of the people involved matters. </p>
<p>Portillo’s argument features an economically rational argument: one must spend within one’s means. However, applying the framework, Portillo’s logic becomes confused. The metaphor fails to recognise that the family is made up of people who care about what happens to each other. This is the weakness that Blakeley picks up – “the kids are dead”. </p>
<p>But Blakeley’s bar metaphor does not acknowledge that businesses cannot borrow forever. And her framing of Portillo’s “family” as a group bound by affection and obligation does not work when referring to something as complex and rule-based as the UK economy. </p>
<h2>New thinking for old problems</h2>
<p>Debates like this are age old. For the last few decade,s there has been a clearly dominant perspective – at least in the UK and US – that the efficiency and prosperity driven by “economic man” (an ideal person who acts rationally and with complete knowledge) and unfettered markets will deliver for the common good. But <a href="https://www.theguardian.com/news/2017/nov/14/the-fatal-flaw-of-neoliberalism-its-bad-economics">there is increasing evidence</a> that this belief may be unfounded (or at least comes with significant downsides for large parts of society). </p>
<p>There are alternatives, however, and the SOE framework helps us think through these. In <a href="https://www.standard.co.uk/lifestyle/books/the-future-of-capitalism-facing-the-new-anxieties-by-paul-collier-review-a3947586.html">his new book</a>, economics professor Paul Collier has set out an “alternative in which the means are infused with a moral purpose”. Steeped in the values of philosophers David Hume and Adam Smith, this form of capitalism reconnects Smith’s arguments about markets and moral sentiments in understanding the economy. Collier argues: </p>
<blockquote>
<p>Smith recognised that seeing a person from the inside not only enables us to understand them, but induces us to care about them and to assess their moral character. These emotions of empathy and judgement he saw as the foundations of morality, driving a wedge between what we want to do, and what we feel we ought to do.</p>
</blockquote>
<p>While economic thinking has a powerful simplicity at its heart, Collier’s work is a timely reminder that economic ideas often get over simplified and misrepresented. As we see from analysing the Blakeley/Portillo debate, understanding economic exchange is complex. There are social relational aspects, acting as critical foundations or impediments, and alternative rationalities orientated to economic outcomes or substantive values such as fairness or happiness. </p>
<p>There are debates to be had about the place of morals or social values in economic decisions. But productive discussions require understanding of the assumptions of each perspective. There is no “correct” economic argument, all positions entail trade-offs. And economic policy decisions remain political as well as moral.</p><img src="https://counter.theconversation.com/content/105883/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rick Delbridge has previously received funding from the ESRC and EPSRC. </span></em></p><p class="fine-print"><em><span>Nicole Woolsey Biggart does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Morals and the markets can mix after all.Rick Delbridge, University Dean of Research, Innovation and Enterprise and Professor of Organizational Analysis, Cardiff UniversityNicole Woolsey Biggart, Research Professor and Dean Emerita, University of California, DavisLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1044182018-10-09T09:55:59Z2018-10-09T09:55:59ZSouth Africa’s stimulus package shows power is finely balanced in the ANC<figure><img src="https://images.theconversation.com/files/239477/original/file-20181005-72127-1d65knd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cyril Ramaphosa's economic stimulus package shows that he and his political allies are in charge of economic policy.</span> <span class="attribution"><span class="source">GCIS</span></span></figcaption></figure><p>The economic <a href="https://www.ujuh.co.za/exocyril-ramaphosa-on-south-africas-economic-stimulus-and-recovery-plan/">stimulus</a> package announced by South African President Cyril Ramaphosa shows that he and his political allies are, contrary to much analysis in recent months, in charge of economic policy.</p>
<p>Ramaphosa insists that it is a ‘bold’ attempt to initiate economic change which will particularly benefit youth, women and small businesses. It rests partly, he adds, on ‘significant regulatory reform’.</p>
<p>But the package is more interesting for what it says about the politics of economic decision-making in South Africa’s governing African National Congress (ANC) than for its likely impact on the economy.</p>
<p>Certainly, it does not signal readiness by Ramaphosa and his allies to use their power to introduce much-needed reforms. In an <a href="https://www.timeslive.co.za/news/2018-09-22-its-not-votes-but-economic-growth-that-drove-stimulus-package-cyril-ramaphosa-tells-business-times/">article</a> in the financial press explaining the thinking behind the package, Ramaphosa acknowledged that it rested not on new ideas but on trying to get the government to do what it has already said it will do. He wrote that it was “tempting to unleash novel policy directions” but it was far more important “to build a track record of successful implementation.”</p>
<p>Much of the package depends, therefore, on trying to ensure that government lives up to commitments it has already made – on, for example, funding infrastructure and allocating broadband spectrum licenses – rather than striking out in a new direction.</p>
<p>It is hardly surprising, then, that critics to the President’s left complain that there is no change in the government’s market-friendly approach. Indeed, a business chamber noted that it <a href="https://www.fin24.com/Economy/ramaphosa-stimulus-package-it-has-been-heard-before-chamber-20180923">repeated</a> much that the government had been promising to do over the past five years. The package does not depart from the policy framework which has guided government thinking on the economy for more than two decades. </p>
<p>This might make it seem like a non-event. In reality, the background to the package means that it is politically important.</p>
<h2>Timing</h2>
<p>The package’s details were <a href="https://www.ujuh.co.za/ramaphosa-our-people-want-the-constitution-be-more-explicit-about-expropriation-of-land-without-compensation/">announced</a> in late September two months after Ramaphosa first
announced it was on the way. At the time, he also revealed that the ANC had changed its mind and would seek <a href="https://theconversation.com/changes-to-the-constitution-may-boost-not-weaken-south-african-property-rights-100979">a constitutional amendment</a> to allow it to expropriate land without compensation, having previously insisted that it did not need to change the constitution to do so. Both announcements followed a meeting of the ANC’s national executive committee which makes decisions between conferences. This strongly suggested that the national executive committee had insisted on both the land and the stimulus decisions.</p>
<p>This seemed to send an important message on the balance of power within the national executive committee on economic issues - that Ramaphosa and his allies had been caught off guard by supporters of former president Jacob Zuma.
Ramaphosa narrowly won the ANC presidency whose leadership, including the national executive committee, is divided almost evenly between his supporters and those who backed Zuma. His backers, who are inclined towards a market economy approach, are opposed to the patronage politics of Zuma’s faction, which has come to be associated with corruption and ‘state capture’ (using government for personal enrichment). </p>
<p>Ramaphosa’s chief mandate was to tackle corruption and ‘state capture’ and it was assumed that the Zuma group would try to stop him. But his opponents seem to have shifted their strategy. Instead of, as expected, complaining that anti-corruption measures were doing the bidding of white-owned corporations, they demanded change on policy issues such as land. This seemed to have wrong-footed Ramaphosa and his supporters, forcing them to react rather than to steer the ANC’s agenda. </p>
<p>The stimulus package seemed to stem from the same source as the land announcement – a push by the Zuma group to shape economic policy. All of this suggested that the Zuma faction was successfully pushing ANC policy in a less market-friendly direction.</p>
<p>But the fact that the package is firmly within the current framework signals clearly that Ramaphosa and his supporters are, after all, in charge of economic policy. It shows that they decide the government’s response to economic challenges despite the Zuma faction’s strong presence.</p>
<p>This does not mean that they are directing the ANC and government economic agenda. They still seem to be reacting to pressures for policy change from their rivals. </p>
<p>This is not surprising. Poverty and inequality are still strong realities in South Africa and many black professionals and business people still believe that they do not enjoy equal opportunities. If Ramaphosa and those who agree with him simply dismiss the calls for change, they will appear to be defending the indefensible. This allows its opponents to insist on government action – but they do not control the details when the decision to take action is turned into a concrete policy or programme.</p>
<p>That they were able to decide the details of the stimulus package is important if we bear in mind that the economy is in recession, which should increase pressure for more government spending – a pressure which they resisted. And, if they are able to shape the details of the stimulus package, it seems likely that they are equally able to shape policy changes on land and other issues, such as national health insurance, which are likely to be sources of pressure for change in the near future.</p>
<p>What is not clear is whether they are able to decide what will change – rather than just react to what their opponents want. To do this, they need to move beyond their current framework and to seek to take the economy in a new direction, which would tackle the exclusion of millions from its benefits while preserving, and strengthening, its ability to produce.</p>
<h2>Need for a new path</h2>
<p>It is now widely agreed that a new path is needed. Ramaphosa’s group will, therefore, remain on the defensive as long as the voices insisting that change is needed are those of their opponents. There is no contradiction between taking seriously the need for growth and investment and steering the economy in a direction which will open opportunities for many more people. On the contrary, the one depends on the other.</p>
<p>Given this, the voices calling for change – as well as those deciding what form it should take – should be those of the faction which insists it wants to get the economy working for all. It should not wait for the group which sees calls for radical change as a means of siphoning off the public’s resources to a small group of connected people to place the need for change on the government’s agenda.</p><img src="https://counter.theconversation.com/content/104418/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ramaphosa’s stimulus package is more interesting for what it says about the politics of economic decision making than for its likely impact on the economy.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1010252018-08-17T04:50:20Z2018-08-17T04:50:20ZThis is what policymakers can and can’t do about low wage growth<figure><img src="https://images.theconversation.com/files/232208/original/file-20180816-2921-d4vzvn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Households feeling the pinch from frozen wages feeds into slower economic growth, and policymakers need to find a solution.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/man-woman-calculating-how-will-they-410400709?src=ACpzMQNBjz2BAIjw8MiF1w-1-4">Bacho/Shutterstock</a></span></figcaption></figure><blockquote>
<p><a href="https://www.smh.com.au/business/the-economy/rbas-philip-lowe-says-australians-fear-foreigners-and-robots-20170619-gwtr20.html">The crisis really is in real wage growth.</a> <strong>– Reserve Bank Governor Philip Lowe, 2017</strong></p>
</blockquote>
<p>Increased inequality and low wage growth are constraining economic growth. But why is wage growth so low? And how should policymakers respond?</p>
<p><a href="https://wir2018.wid.world/">Income inequality has increased significantly</a> in most advanced economies since the early 1980s. In particular, very low rates of wage increase are widely blamed for the weak growth in aggregate demand this century and <a href="http://larrysummers.com/2016/02/17/the-age-of-secular-stagnation/">secular stagnation</a> since the Global Financial Crisis. The GFC was itself brought on by the rise in consumer debt that was used at first to support demand in an attempt to offset the impact of weak wage growth.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-rising-inequality-is-stalling-economies-by-crippling-demand-99075">How rising inequality is stalling economies by crippling demand</a>
</strong>
</em>
</p>
<hr>
<p>Fairfax columnist Ross Gittins recently <a href="https://www.smh.com.au/business/the-economy/with-wage-growth-on-the-blink-it-s-time-to-restore-union-bargaining-power-20180727-p4ztym.html">noted</a> that “many economists were disappointed by this week’s news … that consumer prices rose only 2.1%”. That was because low inflation is “usually a symptom of weak growth in economic activity and, in particular, of weak growth in wages”.</p>
<p><iframe id="tJ5vC" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/tJ5vC/2/" height="500" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Thus, today it is widely agreed that wages need to increase faster. The <a href="http://www.oecd.org/social/in-it-together-why-less-inequality-benefits-all-9789264235120-en.htm">OECD</a>, the <a href="http://www.imf.org/external/pubs/ft/weo/2015/02/">IMF</a>, leading US scholars, former US Treasury Secretary <a href="https://www.foreignaffairs.com/articles/united-states/2016-02-15/age-secular-stagnation">Larry Summers</a>, Nobel prize winner <a href="http://evonomics.com/joseph-stiglitz-inequality-unearned-income/">Joseph Stiglitz</a> and most recently Stephen Bell and I in our book, <a href="https://www.mup.com.au/books/9780522872279-fair-share">Fair Share</a>, have all argued that increasing inequality is bad for economic growth. </p>
<p>To solve this problem, the critical issue for policymakers is what is causing this rising inequality and weak wage growth? Unless we better understand the causes, we are unlikely to achieve an effective policy solution.</p>
<p>First, we can quickly dismiss the <a href="http://www.abc.net.au/radio/programs/am/treasurer-says-tax-cuts-for-big-business-will-boost-wages/9399324">explanation offered</a> by federal Treasurer Scott Morrison, whose so-called “economic plan” assumes present low wage growth will respond positively to higher company profits. According to Morrison, a company tax cut will lead to more investment and thus more jobs, so eventually the benefits will trickle down and increase wages. </p>
<p>Unfortunately, this logic is the reverse of reality. It ignores the evidence that slow wage growth across all the developed economies has been a problem over a couple of decades now. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/232195/original/file-20180816-2924-1yqkxof.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/232195/original/file-20180816-2924-1yqkxof.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/232195/original/file-20180816-2924-1yqkxof.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=857&fit=crop&dpr=1 600w, https://images.theconversation.com/files/232195/original/file-20180816-2924-1yqkxof.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=857&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/232195/original/file-20180816-2924-1yqkxof.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=857&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/232195/original/file-20180816-2924-1yqkxof.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1077&fit=crop&dpr=1 754w, https://images.theconversation.com/files/232195/original/file-20180816-2924-1yqkxof.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1077&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/232195/original/file-20180816-2924-1yqkxof.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1077&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Slow wage growth is a continuing long-term problem in the developed economies.</span>
<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>In fact, the evidence strongly suggests higher profits will not drive higher wages. The benefits of a company tax cut will largely be returned to shareholders, while the only wages that increase will be those of senior management.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-shareholder-value-drives-income-inequality-100324">Why shareholder value drives income inequality</a>
</strong>
</em>
</p>
<hr>
<p>Instead, higher investment will require increased consumer demand. And that in turn depends on stronger wage growth. In short, aggregate demand in a flat economy, like ours, is wages-led. Wages drive investment, not the other way around.</p>
<p>Broadly speaking, there are two serious schools of thought about what is causing weak wage growth and rising inequality. </p>
<p>One explanation puts most of the blame on a weakening of trade-union power. </p>
<p>The other explanation emphasises the impacts of technological change and, to a lesser extent, globalisation on the labour market. Together technology and globalisation are said to have changed job structures and demands for skills. They have reduced the share of middle-level jobs, which has directly increased income inequality, and they can depress the demand for labour more generally and thus wages in developed countries, but especially for less skilled labour.</p>
<p>These two explanations are not mutually exclusive – both may have played a role. However, I want to consider their relative significance as the basis for arguing which policy responses should be given priority.</p>
<h2>Trade union power in Australia and its impact</h2>
<p>A very distinguished professor of labour economics and former Industrial Relations Commission deputy president, Joe Isaac, <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/1467-8462.12270">recently argued</a> persuasively that an important explanation of slow wage growth is “to be found in the change in the balance of power in favour of employers and against workers and unions”.</p>
<p>Isaac starts by noting that union membership in Australia has fallen from about 50% of all employees in the 1970s to the present 15%. This is one of the lowest rates in the OECD. </p>
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<p>Isaac also finds some correlation between income inequality (measured by the Gini coefficient) and trade union density for 11 OECD countries. More relevant, though, would be the change in inequality relative to the change in union membership, especially as Australia has always had a relatively high Gini coefficient. </p>
<p>Isaac argues that this loss of membership and the reduced authority of the Fair Work Commission has weakened the bargaining power of organised labour in Australia. Employers are now able “to determine no wage increase or an increase less than their profits would warrant, with less resistance from workers and unions”. Although Isaac admits that “this conclusion is based on the association over time of union power decline and slow wages growth”, he concludes that “it seems reasonable to claim, at least prima facie, a causal connection between them”.</p>
<p>I am more sceptical. While I wouldn’t rule out any impact on wages and employee conditions from a decline in trade union membership and the possibly associated changes in the power of the Fair Work Commission, I question Isaac’s analysis for the following reasons.</p>
<p>First, it is uncertain how much trade union power has declined as a result of loss of membership. Another test of trade union power is the proportion of wages determined by awards and collective agreements – as Isaac shows, this proportion has largely remained the same in Australia. Indeed, in some countries, such as France, trade union membership has always been very low, but they have a highly centralised system of wage determination, which allows the unions a lot of influence.</p>
<p>Second, other countries have also experienced increases in inequality – much greater than in Australia in most cases – but don’t seem to have experienced any notable loss of union power. For example, some of the biggest increases in inequality over the last 30 years, as measured by the Gini coefficient for final disposable income, have <a href="https://data.oecd.org/inequality/income-inequality.htm">occurred in countries like Sweden, Finland and Germany</a>, which are not associated with any loss of trade union power.</p>
<p>Third, Isaac’s analysis of wage inequality focuses entirely on a decline in the wage share of total <a href="https://www.investopedia.com/terms/f/factor-income.asp">factor income</a>. This ignores changes within the distribution of earnings. These latter changes are more important in many countries, and certainly for Australia.</p>
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<p>While the wage share in Australia has declined since the 1970s and early 1980s, this was at least partly a result of deliberate policy under the Hawke/Keating governments’ Accord with the trade unions, when it was accepted that the wage share had been too high. Even today the <a href="http://ace2017.org.au/wp-content/uploads/2017/07/Declan-Trott-Full-Paper.pdf">wage share is still higher than in 1960</a>, when the economy was generally considered to be performing exceptionally well.</p>
<p>Fourth, the changes in the distribution of earnings largely reflect changes in the structure of occupations rather than changes in relative wage rates. But trade unions seek to influence wage rates, and it is difficult to see how they can exert much direct influence over the structure of jobs.</p>
<p>For these various reasons, I don’t think the loss, if any, of trade union power can explain much of the increase in inequality in most countries over the last 30 years. It is necessary to look elsewhere for the explanation, and the main driver seems to have been the impact of technological change.</p>
<h2>Impacts of technology and globalisation</h2>
<p>In <a href="https://www.mup.com.au/books/9780522872279-fair-share">Fair Share</a>, Stephen Bell and I examine the causes of increased inequality over the last 30 years in most of the advanced economies. A critical starting point is to distinguish between changes in the job structure and changes in relative wage rates. As we <a href="https://books.google.com.au/books?id=CwtNDwAAQBAJ&pg=PT135&dq=%22no+change+in+relative+wage+rates,+but+employment+increased+faster%22&hl=en&sa=X&ved=0ahUKEwjo7u3o7evcAhUI7bwKHTz_AO4Q6AEIJzAA#v=onepage&q=%22no%20change%20in%20relative%20wage%20rates%2C%20but%20employment%20increased%20faster%22&f=false">note</a>:</p>
<blockquote>
<p>Even if there were no change in relative wage rates, but employment increased faster for both high-paid and low-paid jobs, the earnings distribution would show up as more unequal. What would have happened is that the composition of the top and lowest deciles of earnings would have altered, which would increase the median income of the top decile and reduce the median income of the lowest decile, which would in turn be reported as an increase in the inequality of earnings.</p>
</blockquote>
<p>The consensus in the studies we reviewed is that increased inequality of earnings largely reflects the impact of technological change. Globalisation and increased participation in global value chains may also have played a role, but less so in Australia, which we attribute to Australia having a more flexible labour market than, say, America. </p>
<p>We also surmise that <a href="https://theconversation.com/finance-drives-everything-including-your-insecurity-at-work-101107">increased financialisation</a> and the capture of rents generated by technological change may help explain the very large increase in remuneration for the top 1%. </p>
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Read more:
<a href="https://theconversation.com/who-owns-the-world-tracing-half-the-corporate-giants-shares-to-30-owners-59963">Who owns the world? Tracing half the corporate giants' shares to 30 owners</a>
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<p>Interestingly, the OECD specifically rejected the hypothesis that regulatory changes have helped drive any significant increase in inequality. It <a href="http://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrising.htm">found</a> that “the net effect of regulatory reforms on trends in ‘overall earnings inequality’ remains indeterminant in most cases”.</p>
<p>The principal impact of technological change, and globalisation to a lesser extent, has been to reduce the share of middle-level jobs. In particular, new <a href="https://www.oxfordmartin.ox.ac.uk/publications/view/1314">information</a> and <a href="http://ceda.com.au/Research-and-policy/All-CEDA-research/Research-catalogue/Australia-s-future-workforce">communications technology</a> has had its <a href="http://www.urbanvillageworld.com/resource_center/Offshoring%20Article%20-%20Foreign%20Affairs1.pdf">greatest impact</a> on <a href="http://www.imf.org/en/Publications/WEO/Issues/2017/04/04/world-economic-outlook-april-2017">relatively routine tasks</a> <a href="https://ideas.repec.org/p/mlb/wpaper/1192.html">involving middle-level jobs</a>, such as clerical occupations and the operation of basic machinery. </p>
<p>Technological change has also driven the fall in the relative price of capital goods. This has led to some substitution of capital for labour. Again, this is “particularly pronounced in industries with a high predominance of routine tasks”, as the <a href="http://www.oecd.org/els/oecd-employment-outlook-19991266.htm">OECD notes</a>. </p>
<p>These changes in job structure and the relative decline in the middle-level jobs have been the most important cause of increasing inequality in many countries, including Australia. Technological progress has also led to an increase in the demand for skills. In some countries that has increased the premium paid for skilled labour, but the extent of this depends upon the policy response affecting the supply of skills. </p>
<p>In Australia’s case, Bell and I <a href="https://www.mup.com.au/books/9780522872279-fair-share">find</a> that the premium for skills, and consequently relative wage rates, did not change much because of the increase in education and training effort. Accordingly, much of the increase in earnings inequality in Australia reflects changes in the job structure rather than changes in relative wage rates (see also <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-8462.2003.00296.x">Keating</a> and <a href="https://ideas.repec.org/p/mlb/wpaper/1192.html">Coelli & Borland</a>).</p>
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<h2>So what does this mean for policy?</h2>
<p>Consistent with his view that a weakening of trade union power has driven the increase in inequality, Isaac <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/1467-8462.12270">recommends</a> changing the Fair Work Act to rectify “the unbalanced industrial power in the labour market”. I can support most of Isaac’s recommended changes, and especially greater rights of union entry, which should help better police adherence to awards and wage agreements. </p>
<p>I also agree that Isaac’s recommended legislative changes are unlikely to result in unions abusing their increased power. This is because, as he puts it, “there are now prevailing forces, such as global competition and structural changes, which will continue to keep union power in check”. </p>
<p>However, these “prevailing forces” are what really caused most of the increase in inequality, as discussed above. I therefore doubt that these legislative changes will do much to reverse the increase in earnings inequality.</p>
<p>Instead, the best way to respond to the impact of technological change on the job structure and possible associated changes in wage premiums is to improve education and training. Enhanced education, training and labour market policies will help workers adjust to the challenges posed by new technologies and will also spur the adoption of those technologies. </p>
<p>In addition, if the supply of skills thereby increases in line with the increase in their demand, there should not need to be any change in relative wage rates. Although these types of reforms take time, in the end they can boost both aggregate demand and potential output, with benefits all round.</p>
<p>In short, as Thomas Piketty, in his <a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674430006">major study on inequality</a>, <a href="https://books.google.com.au/books?id=T8zuAgAAQBAJ&pg=PA313&dq=%22the+best+way+to+increase+wages+and+reduce+wage+inequalities%22&hl=en&sa=X&ved=0ahUKEwiepIuH--vcAhVEVLwKHa5_D6EQ6AEIJzAA#v=onepage&q=%22the%20best%20way%20to%20increase%20wages%20and%20reduce%20wage%20inequalities%22&f=false">concluded</a>:</p>
<blockquote>
<p>To sum up: the best way to increase wages and reduce wage inequalities in the long run is to invest in education and skills.</p>
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<p class="fine-print"><em><span>Michael Keating is the former Head of the Departments of Employment & Industrial Relations, Finance, and Prime Minister & Cabinet.</span></em></p>Governments can’t undo the technological changes behind frozen wages and rising inequality. The best policy is to invest in education and training to give workers skills of value in the new economy.Michael Keating, Visiting Fellow, College of Business & Economics, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/982632018-06-29T10:31:04Z2018-06-29T10:31:04ZCentral Asia is the new economic battleground for the US, China and Russia<figure><img src="https://images.theconversation.com/files/225470/original/file-20180629-117385-l1wiu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com">Shutterstock</a></span></figcaption></figure><p>As the threat of a trade war escalates between the US and China, all the talk has centred on the tariffs that each side might impose on the other. But another important battleground is in Central Asia where both are fighting for strategic control.</p>
<p>Central Asia offers an array of economic opportunities for major powers, including access and control of valuable natural resources, favourable terms of trade and efficient trade routes. In seeking to shape the region, the US, China and Russia are all trying to regulate the international order in their image. The region might be more commonly associated with <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-2346.2011.00992.x">danger and security interests</a>, such as Islamic radicalism, but what gets ignored is the region’s role as a strategic economic battleground.</p>
<p>Central Asia is at the centre of two new initiatives for regional economic integration by China and Russia that run against a longstanding economic vision of the US.</p>
<p><a href="https://www.sciencedirect.com/science/article/pii/S187936651630001X">Russia’s Eurasian Economic Union (EEU)</a>, was established in 2015. It consists of Russia, Belarus, Kazakhstan, Kyrgyzstan and Armenia, and is modelled on the European Union. There is free movement of goods, capital, labour and services, and common economic and industrial policies.</p>
<p>Second, <a href="https://www.tandfonline.com/doi/abs/10.1080/01436597.2016.1153415">China’s Belt and Road Initiative (BRI)</a> was proposed in 2013 and aims to create a trade and infrastructure network connecting Asia with Europe and Africa along ancient trade routes, such as the land and maritime Silk Road. Since then, many Central and South Asian countries have signed <a href="http://centralasiaprogram.org/wp-content/uploads/2017/12/OBOR_Book_.pdf">cooperation agreements with China</a> to invest in energy and transport infrastructure.</p>
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<span class="caption">China’s Belt and Road trade route.</span>
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<p>Russia’s EEU and China’s BRI contrast with the dominant Washington Consensus model of free market economic thinking. This is promoted by <a href="http://www.kentikelenis.net/uploads/3/1/8/9/31894609/babbkentikelenis2018-international_financial_institutions_as_agents_of_neoliberalism.pdf">US-backed international financial institutions</a>, such as the International Monetary Fund. Since the collapse of the Soviet Union in 1991, neoliberal reforms have been <a href="https://www.wiley.com/en-gb/Transition+Economies:+Political+Economy+in+Russia,+Eastern+Europe,+and+Central+Asia-p-9780470596197">standard economic prescriptions</a> in Central Asia and other parts of the world.</p>
<h2>Different motives</h2>
<p>These three ways of imagining the economic future of Central Asia are attempts by the major powers to address specific economic contradictions and crises at home. The US has been trying to open up other countries to its trade, investment and finance since <a href="http://journals.sagepub.com/doi/abs/10.1177/0309816812472968?journalCode=cnca">its post-war economic model</a> began to unravel in the early 1970s. </p>
<p>Russia’s strategy evolved in response to the devastating economic and political effects of <a href="https://link.springer.com/chapter/10.1057/9781137472960_1">radical neoliberal reforms (or “shock therapy”)</a>, which were implemented after 1991. China, meanwhile, has sought to invest its vast amounts of surplus capital into other countries’ infrastructure and productive projects, largely in response to fewer profitable opportunities at home.</p>
<p>Each economic strategy seeks a different outcome. The US and other Western countries want to <a href="https://www.opendemocracy.net/od-russia/balihar-sanghera/economic-dystopia-in-kyrgyzstan">extract wealth</a> through the ownership and control of valuable assets, including natural resources and money. </p>
<p>In creating a customs union, Russia hopes to gain a <a href="https://www.tandfonline.com/doi/abs/10.1080/00128775.2015.1105672">competitive advantage</a> over other trading partners, so as to protect its faltering industries. China wants to <a href="https://www.tandfonline.com/doi/abs/10.1080/01436597.2016.1153415">shorten delivery times</a> and to access emerging markets.</p>
<p>Each great power has had varying degrees of economic success. Meanwhile, their political legitimacy has been weakened in different ways due to their negative effects in the region. </p>
<p>For instance, there has been a backlash of social discontent <a href="https://www.opendemocracy.net/od-russia/balihar-sanghera/economic-dystopia-in-kyrgyzstan">in Kyrgyzstan</a> over foreign and elite acquisition of assets, predatory lending practices and household indebtedness. And, after entering the EEU, Kazakhstan experienced <a href="http://foreignpolicy.com/2015/01/06/putins-eurasian-dream-is-over-before-it-began/">economic difficulties</a>, resulting in strained relationships with Russia. In Tajikistan, some Chinese-financed projects have been <a href="https://www.chinausfocus.com/finance-economy/one-belt-one-road-a-new-source-of-rent-for-ruling-elites-in-central-asia">embroiled in controversies</a> over kleptocracy.</p>
<h2>US upper hand</h2>
<p>There are also various <a href="https://www.tandfonline.com/doi/abs/10.1080/17405900410001674506">non-economic elements</a> at play. Despite ethnic and religious differences, Russia’s EEU member countries have strong cultural, linguistic and symbolic ties because of their shared Soviet history. China, meanwhile, has reinvented the historical connections between China and Central Asia, by comparing the BRI to the Silk Road’s ancient network of trade routes.</p>
<p>But there are three reasons why the US is likely to be more successful than Russia and China. First, the US has considerable economic and financial resources to make cooperation beneficial for Central Asian elites. Recently Kazakhstan’s president <a href="https://thediplomat.com/2018/01/nazarbayev-goes-to-washington/">Nursultan Nazarbayev met the US president, Donald Trump</a>, and business leaders in Washington DC to appeal for more American investment and technology.</p>
<p>Secondly, the US also has the political and military power to sabotage its rivals’ plans. For instance, the US and the European Union were instrumental in pulling Ukraine away from Russia’s orbit. <a href="http://www.lse.ac.uk/ideas/Assets/Documents/reports/LSE-IDEAS-Geopolitics-of-Eurasian-Economic-Intergration.pdf">Without Ukraine’s participation</a>, the EEU is considerably weakened. Plus, the US navy poses a threat to China’s trade routes through <a href="https://jamestown.org/program/chinas-malacca-dilemma/">the South China Sea</a>.</p>
<p>Thirdly, the US has been able to manage its economic contradictions and crises by drawing upon wider economic governing structures, including <a href="http://www.kentikelenis.net/uploads/3/1/8/9/31894609/babbkentikelenis2018-international_financial_institutions_as_agents_of_neoliberalism.pdf">international financial institutions</a> like the IMF and the World Bank. The <a href="https://socialistregister.com/index.php/srv/article/view/5790">US dollar as the world currency</a> has also enabled the US to sustain an excessive military and consumer spending without undertaking austerity cuts.</p>
<p>The power that wins in Central Asia will shape the nature of global capitalism in the future and the economic and political crises the world will face. The 2007-08 global financial crisis, for example, showed how destructive and damaging American capitalism can be – and its full ramifications are still to be felt. </p>
<p>Since then, two alternative forms of economic arrangements have been built by Russia and China which could prevent history repeating itself. Inadvertently, Central Asia finds itself at the centre, as rival great powers seek to stamp their form of capitalism on the region and the world.</p><img src="https://counter.theconversation.com/content/98263/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Balihar Sanghera was a George F. Kennan Scholar from September to December 2017. The authors are grateful to the staff at the Kennan Institute, Woodrow Wilson Center, Washington, D.C. for their generosity and support during their stay at the Center.</span></em></p><p class="fine-print"><em><span>Elmira Satybaldieva does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Central Asia is at the centre of two new initiatives by China and Russia that run against a longstanding economic vision of the US.Balihar Sanghera, Senior Lecturer in Sociology, University of KentElmira Satybaldieva, Research Fellow, Conflict Analysis Research Centre, University of KentLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/817132017-07-31T15:41:59Z2017-07-31T15:41:59ZWhat’s in a name? Towards genuine economic transformation in South Africa<figure><img src="https://images.theconversation.com/files/180170/original/file-20170728-23788-qc9ppz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">'Radical economic transformation' in South Africa needs to move beyond rhetoric.</span> <span class="attribution"><span class="source">Flickr/Ryan McFarland</span></span></figcaption></figure><p>While much froth and babble has accompanied the debate over <a href="https://mg.co.za/article/2017-07-02-00-lets-embrace-radical-economic-transformation">“Radical Economic Transformation”</a> in South Africa, the bottom line remains: the country urgently needs <em>real</em> economic transformation. Calling it “radical” is to invite politicking and <a href="https://blackopinion.co.za/2017/07/26/floyd-shivambu-jeremy-cronin-two-sides-anti-black-coin/">point-scoring</a> and take our eyes off the ball – the need for real economic transformation.</p>
<p>How far South Africa has moved in altering the economic landscape is open to debate. It certainly has moved, but how far, and at what point will monopolistic tendencies <a href="http://www.sahistory.org.za/archive/monopoly-capital">be challenged</a>?</p>
<p>While much has <a href="https://www.idc.co.za/reports/IDC%20R&I%20publication%20-%20Overview%20of%20key%20trends%20in%20SA%20economy%20since%201994.pdf">been achieved</a> in many areas – meeting basic needs for example – there’s still an enormous distance to travel, and impatience is growing.</p>
<p>For the democratic period, economic growth has been singularly anaemic. Unemployment has been <a href="https://tradingeconomics.com/south-africa/unemployment-rate">rising consistently</a>, and <a href="https://theconversation.com/south-africa-needs-to-fix-its-dangerously-wide-wealth-gap-66355">income inequality</a> has worsened. This despite a plethora of policy documents, the most recent being the <a href="http://www.gov.za/ISSUES/NATIONAL-DEVELOPMENT-PLAN-2030">National Development Plan</a>.</p>
<p>However, the real causes of the economic crisis are obscured by the current <a href="http://pari.org.za/betrayal-promise-report/">political crisis</a>. It has allowed mainstream economists to reinforce the call for <a href="http://www.thenewage.co.za/fiscal-discipline-vital-for-economic-growth-economist/">“fiscal discipline”</a> as if that were the only factor stifling growth and development.</p>
<p>In business and government, economic policy is reduced to the maintenance of macroeconomic stability. Fiscal discipline is an important precondition for economic growth, but not a sufficient condition.</p>
<p>We must ask: who is in charge of economic policy? </p>
<h2>Driving economic policy</h2>
<p>Radical economic transformation suggests, at the bare minimum, that government must take charge of economic policy, including macroeconomic policy, so that the country’s real development needs can be addressed.</p>
<p>It’s correctly noted in the National Development Plan that the country’s economy needs to grow at a much faster rate, 6% at least, to begin to address its socioeconomic challenges, high unemployment, inequality and poverty. The current growth trajectory, measuring 2-3% over the <a href="https://tradingeconomics.com/south-africa/gdp-growth">past 20 years</a> is just not enough. It will not deliver inclusive growth to address the challenges. Rather, it will merely accentuate inequalities in the country. </p>
<p>And, if sustained, the prevailing recession spells disaster. Serious transformation is required.</p>
<p>If radical economic transformation is to serve the needs of the bottom 60% of the population, it needs to move beyond the catchy political slogans of <a href="http://www.biznews.com/asset-management/2017/04/17/nationalise-gigaba/">nationalising land, banks and mines</a>, and <a href="https://www.thesouthafrican.com/anti-white-monopoly-capital-propaganda-will-lead-sa-to-ruin-telkom-chairman/">“kicking out” whites</a>. It requires a rigorous analysis of why economic and social policy have not delivered growth and development.</p>
<p>There seems to be consensus that the country needs industrial development. It is largely considered the solution to overcoming commodity dependence. However, there is no consensus on who must drive it - the private sector or a strong “developmental state”?</p>
<p>South Africa has to find the right balance between the power of market forces and private initiative on the one hand, and the obligation of governments to provide an enabling framework and to intervene in favour of the public interest on the other.</p>
<p>In spite of being a late starter on industrial policy, considerable progress has been made; but much more can be done with increased funding for growth in and greater diversification of manufacturing.</p>
<h2>Combating monopolies</h2>
<p>Almost everyone agrees that small business has to be a critical component of any development strategy. But the sector has been characterised by a singular lack of success. The country needs to ask why.</p>
<p>One reason is the domination of markets and exploitation of the small business sector by big business. The history of large supermarkets and their ruthless <a href="https://www.businesslive.co.za/bd/opinion/2017-06-23-suppliers-at-a-huge-disadvantage-when-dealing-with-supermarkets/">exploitation of small suppliers</a> tell the story of the highly unequal and exploitative relationship that exists in virtually all sectors of the economy. What is government doing to ensure that small business can survive in the monopolistic environment which characterises contemporary South African capitalism?</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/180172/original/file-20170728-18243-j9g2lk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/180172/original/file-20170728-18243-j9g2lk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/180172/original/file-20170728-18243-j9g2lk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/180172/original/file-20170728-18243-j9g2lk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/180172/original/file-20170728-18243-j9g2lk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/180172/original/file-20170728-18243-j9g2lk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/180172/original/file-20170728-18243-j9g2lk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Predatory tendencies of conglomerates stifle township businesses.</span>
<span class="attribution"><span class="source">Flickr/Anne-Sophie Leens</span></span>
</figcaption>
</figure>
<p><a href="http://www.dti.gov.za/economic_empowerment/bee.jsp">“Black economic empowerment”</a> needs to progress beyond an elite few who are closely linked to the ruling party. Sectors such as tourism - overwhelmingly white-owned - offer opportunities for creative thinking about new, broadly beneficial forms of ownership.</p>
<p>And real black economic empowerment is clearly linked to the question of <a href="https://theconversation.com/a-10-point-plan-to-accelerate-orderly-land-reform-in-south-africa-80841">land reform</a>. The country needs to break up monopolistic ownership, but also to ensure that land is used productively.</p>
<h2>Developmental state</h2>
<p>Given the current political climate, there’s a great deal of scepticism about the potential of the developmental state. This comes on the back of the <a href="https://theconversation.com/corrupt-state-owned-enterprises-lie-at-the-heart-of-south-africas-economic-woes-79135">pervasive governance crises</a> afflicting parastatals such as, among others, the power utility Eskom and South African Airways. </p>
<p>However, there is no alternative to the developmental state. The country cannot leave economic development to the private sector, whose immense wealth has been built on its version of the free market and exploitation of cheap labour.</p>
<p>But for the developmental state to be effective, it has to be competent. There are numerous global examples of success in this area that can be followed. But is South Africa learning from them?</p>
<p>Building the developmental state does not imply a return to “yesterday’s socialism” of state control of the means of production. Rather, the country should focus on an appropriate mix of roles, with the state as the driver of development coupled with truly competitive markets producing goods and services.</p>
<h2>Driving fundamental economic change</h2>
<p>Clearly, fundamental economic change is required, and soon. But saying so, and achieving it, are very different. South Africans must separate the current political noise around radical economic transformation from the basic fact that business as usual is not an option. A lot has to change, and fast.</p>
<p>Going back to the tenets of quasi-socialism of the 1950s – nationalisation of mines and banks, land seizures and so on – are not “radical” in the <a href="http://www.iol.co.za/news/opinion/how-to-break-monopoly-white-capital-8779291">21st century economy</a>.</p>
<p>It follows to then ask if and how the country can jump from the current state of <a href="https://theconversation.com/south-africas-in-a-recession-heres-what-that-means-78953">recession</a> to radical economic transformation – ensuring that the “radical” equates with positive outcomes for the poor, not for existing or new elites? Which “radical” elements can help make that leap?</p>
<p>The global economy is going through its own radical transformation, as blue collar and white collar jobs are giving way to <a href="http://www.businessinsider.com/ibm-automated-future-new-collar-jobs-2017-1">“new collar” jobs</a>.</p>
<p>The world is looking at single digit economic growth, and the workplace is undergoing dramatic transformation. Those propagating radical economic transformation must explain how it fits into the broader global change.</p>
<p>It has been a hallmark of the ANC government – from the time of the <a href="https://www.nelsonmandela.org/omalley/index.php/site/q/03lv02039/04lv02103/05lv02120/06lv02126.htm">Reconstruction and Development Programme</a> - to see economic growth as the driving force for change across society. That programme suggested that by meeting basic needs – such as clean water, housing and sanitation – much of the damage of apartheid would be dealt with and dignity restored. Economic growth would harness the energies of the “healed” black population and a positive future would flow seamlessly. </p>
<p>This was wishful thinking. The damage done to all people by racist violence and apartheid will take far more than economic growth to repair. Radical social transformation is needed.</p>
<p>There are other key elements which must be dealt with to realise inclusive growth. Fixing the <a href="http://www.gcro.ac.za/outputs/map-of-the-month/detail/proximity-of-rdp-housing-in-relation-to-major-economic-centres/">spatial landscape</a> is one of them. Apartheid deliberately separated “races” into different spaces, divided by natural or man-made barriers. The economy - even a radically transformed one – won’t change this. </p>
<p>A truly “radical” vision would have to encompass all these aspects of change, and specify them in detail.</p>
<p><em>Article adapted from a position paper delivered at the OR Tambo Debate on radical economic transformation recently held at Wits School of Governance.</em></p><img src="https://counter.theconversation.com/content/81713/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The Wits School of Governance receives funding from donor organisations.</span></em></p><p class="fine-print"><em><span>Pundy Pillay does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s governing ANC has always seen economic growth as the driving force for change. This was wishful thinking as the damage done by apartheid will take far more to undo.Pundy Pillay, Professor of Economics and Public Finance, School of Governance, University of the WitwatersrandDavid Everatt, Head of Wits School of Governance, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/773182017-05-09T09:38:57Z2017-05-09T09:38:57ZBudget 2017: bank populism will be paid for by Australians<p>Treasurer Scott Morrison used to like to say Australia “doesn’t have a revenue problem, we have a spending problem”. It turns out this sentiment was true in 2016.</p>
<p>Now this year’s federal budget is a big-taxing, populist, and nakedly political one. It’s not all bad news, or even all bad policy, but it marks a break from the rhetoric and policy attempts of the past.</p>
<p>The treasurer referred to the A$13 billion “zombie” measures the Senate has failed to pass as a “Senate tax”, in justifying the tax increases in this budget.</p>
<p>The first major tax increase is a 0.5% increase in the Medicare levy from 2.0% to 2.5%. This raises over A$4 billion a year on a run-rate basis. It’s also a major slug on the bulk of Australian taxpayers.</p>
<p>The treasurer has a point that both major parties agree the NDIS should be fully funded, but two other points remain. First, the government previously wanted to do it without raising taxes. They have raised a white flag on that. Second, it’s unclear that it really will cover the full costs. Treasury is flying blind trying to forecast the take-up rates and eventual cost of the NDIS. The estimates look low to me.</p>
<p>If it does end up costing a lot more, what then? Another 50 basis point tax hike? Based on Morrison’s logic today that it’s an “insurance scheme” that a decent society has to fund, there is no alternative.</p>
<p>The most extreme measure is the new “bank levy”. This is painted as a “modest” six basis point tax on banks with liabilities of more than A$100 billion. In reality, it’s a A$1.6 billion per annum slug paid for by the big four banks, plus Macquarie. The treasurer made a big deal of how it’s “not a tax on deposits”, but this is nonsense. It’s a tax on 70% of the funding structure of the big banks; it amounts to roughly 4% of their annual profits being yanked away.</p>
<p>Worse still, given the lack of competition in the sector, it won’t be the banks’ shareholders who pay. It will be mortgage holders and other customers. It’s ironic that this nakedly populist bank-bashing attack will end up slugging average Australians.</p>
<p>Last year I was highly critical of the almost absurdly optimistic growth assumptions—particularly nominal GDP. This year’s budget is a little better, but still involves a fair amount of heroics.</p>
<p>Nominal GDP is forecast to grow at 6% this year, and then between 4.0% and 4.75% in the latter years of the forward estimates. If the iron ore price doesn’t hold up, then that 6% number might be missed, perhaps by a lot.</p>
<p>This year the treasurer is putting the rabbit back into the hat with wage price growth. This has been stuck at around (or below) 2% for years, yet the budget has this going from 2.5% to 3.0%, then to 3.5%, and then 3.75%. There is no real reason to believe this will happen.</p>
<p>And the overall faith in global economic recovery that’s mentioned in the treasurer’s speech certainly could come about, and there are some positive signs. But it’s a lot to bet on so heavily. The US Federal Reserve is clearly nervous, China is still heavily indebted. There’s a lot that can still go wrong with global growth.</p>
<p>A welcome change to the way the budget is presented is the distinction between “good debt and bad debt”. This is something I have argued in <a href="https://theconversation.com/vital-signs-why-the-government-still-thinks-it-can-grow-away-the-deficit-77108">favour of for some time</a>. The treasurer has clearly distinguished between recurrent expenditure—such as for Medicare, welfare payments, and schools — and spending that is more capital in nature, such as infrastructure.</p>
<p>Many commentators, myself included, have rightly pointed out in recent days that investments come in many forms, including in human capital. In other words, good debt is not just for bridges, but includes better teachers, more educational resources, preventative medicine, and other things the treasurer left out. Still, the move away from a mantra of “all debt bad” is certainly a welcome one.</p>
<p>Another forward-looking measure is to not “raid” the Future Fund, but preserve it for another 10 years. This will allow, on current projections, it to fully fund the pension liabilities it was designed to, past the year 2100. Raiding it early would have, by way of reverse compound interest, left a huge unfunded liability. As the treasurer said, if you can borrow at 3% but earn 7% (as the Future Fund has), why pull money out? Quite so.</p>
<p>The general reaction in the budget lockup today was that this was a “ho hum” budget. I disagree. </p>
<p>The budget was extraordinary in many ways. It is an abandonment of restraint on taxes by a liberal government. It is nakedly populist. It also acknowledges that government debt can be productive, and that raiding the Future Fund for short-term reasons would be a terrible idea.</p>
<p>There is a little bit to like, quite a bit to dislike, and some heroic assumptions about the future. But boring this budget is not.</p><img src="https://counter.theconversation.com/content/77318/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>The budget was extraordinary in many ways. It is an abandonment of restraint on taxes by a liberal government. It is nakedly populist and it also acknowledges that government debt can be productive.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/728312017-02-10T19:57:30Z2017-02-10T19:57:30ZDoes it matter if Trump doesn’t like economists?<p>When President Donald Trump formally <a href="https://www.whitehouse.gov/the-press-office/2017/02/08/president-donald-j-trump-announces-his-cabinet">announced his Cabinet</a>, one of the surprises was that the list of 24 Cabinet-level officials did not include the chair of the Council of Economic Advisers (CEA). </p>
<p>There is no formal requirement that an economic adviser be part of the Cabinet. However, Barack Obama started a new trend by appointing the last four council chairs as <a href="https://www.wsj.com/articles/donald-trumps-cabinet-wont-include-chairman-of-cea-1486670755">part of his Cabinet</a>. Being part of the Cabinet is important because it ensures economic as well as political considerations are part of presidential decisions.</p>
<p>Not only has the position now been eliminated from Cabinet meetings, but the council’s website has also been turned off. Only <a href="https://obamawhitehouse.archives.gov/administration/eop/cea">archival versions</a> from <a href="https://georgewbush-whitehouse.archives.gov/cea/about.html">past administrations</a> remain. </p>
<p>This apparent sign of disrespect for the role of the CEA, along with the fact that President Trump has yet to actually nominate a council chair, <a href="https://www.nytimes.com/2017/01/11/upshot/why-most-economists-are-so-worried-about-trump.html">has caused some to worry</a> that he won’t be getting much economic advice from actual economists. A <a href="https://www.predictit.org/Market/2788/Who-will-be-Council-of-Economic-Advisers-Chair-on-Feb-28,-2017">website that takes bets</a> on who will fill various posts in Trump’s Cabinet suggests he may not even fill the position. </p>
<p>There are presently only eight candidates listed for the post. Bettors think there is a less than 30 percent chance that anyone from the group will even get the job. The current favorite to win is Kevin Hassett, a scholar at the American Enterprise Institute, a conservative think tank. He has less than a 10 percent chance presently of filling the position. These are very low odds for a post that was very influential in past administrations.</p>
<h2>How the CEA was created</h2>
<p><a href="http://www.federalreservehistory.org/Events/DetailView/15">Congress created</a> the Council of Economic Advisers in 1946 because <a href="http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.10.3.3">there was great concern</a> that the U.S. might fall back into depression following World War II. </p>
<p>To ensure continuation of the heady growth experienced during the war, Congress wanted to be sure the president got the best possible guidance on economic policy.</p>
<p>The Employment Act of 1946 establishing the council required the president to hire three people who are “<a href="https://obamawhitehouse.archives.gov/administration/eop/cea/about">exceptionally qualified to analyze and interpret economic developments</a>.” </p>
<p>While there is no requirement that these three people be trained economists, the vast majority of council members have come from academic economic departments. Backing up these three advisers is a staff of roughly <a href="http://federal-agencies.insidegov.com/l/82/Council-of-Economic-Advisers">30 people</a>.</p>
<h2>What is the CEA expected to do?</h2>
<p>The council has <a href="https://obamawhitehouse.archives.gov/administration/eop/cea/about">only a few formal activities</a>. </p>
<p>First, for the <a href="https://fraser.stlouisfed.org/title/45">last 71 years it has released a book</a> called the “Economic Report of the President.” This annual publication explains the current administration’s domestic and international economic priorities. It also backs up these priorities with detailed data and analysis.</p>
<p>Another task is to forecast the future state of the economy. The forecasts are important because government revenues and spending are directly based on economic conditions. When the economy is doing well, the government’s tax collections rise and spending on social programs fall. When the economy is doing poorly, revenues decline and spending rises. Predicting future economic conditions can guide federal plans.</p>
<p>It’s also supposed to provide unbiased advice. Since the council comprises three presidential appointees, it has <a href="https://georgewbush-whitehouse.archives.gov/cea/about.html">no ties to any particular constituency</a>. Presidents need advice from neutral parties because many times <a href="http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.6.3.65">government agencies will have competing interests</a>.</p>
<p>For example, in the debate over whether to increase the minimum wage, the Commerce and Labor departments may be on opposite sides of the issue. Employers will petition the Commerce Department to keep wages low, while union leaders and low-income workers will petition the Department of Labor to boost people’s pay. The optimal solution is to let a neutral adviser determine what is best for the country, which has often been the job of the council.</p>
<p>Of course, the president doesn’t have to select advisers who have neutral, unbiased opinions. Nor does the president always follow their suggestions. Often the president has not.</p>
<p>One famous chairman was Charles Schultze, who headed the council during the Carter administration. While Jimmy Carter <a href="http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.6.3.65">frequently met with Schultze</a>, most of the council’s proposals and ideas “<a href="https://www.nytimes.com/2016/09/28/business/economy/charles-l-schultze-91-dies-advised-presidents-on-economic-policy.html">were blocked on political grounds</a>.”</p>
<p>Herbert Stein, who led the council in the early ‘70’s, wrote an overview of the CEA in 1996 detailing many of its <a href="http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.10.3.3">successes and failures</a>. In his view, the CEA-proposed tax cut during the Kennedy-Johnson era in the 1960s, which spurred a period of strong economic growth, was one of the council’s great successes. Unfortunately, that home run was long ago.</p>
<p>The council has also served as a training ground and recruiting pool for other key economic posts in the federal government, particularly the Federal Reserve, which has a huge impact on economic conditions because of its control over interest rates and the country’s money supply. Four out of the <a href="https://fraser.stlouisfed.org/timeline/federal-reserve-chair">past six Fed chairs</a> previously served as a <a href="https://obamawhitehouse.archives.gov/sites/default/files/docs/appendix_a-report_to_president_on_activities_of_council_2017.pdf">CEA chair</a> (Arthur Burns, Alan Greenspan, Ben Bernanke and Janet Yellen). </p>
<p>Lastly, the <a href="https://georgewbush-whitehouse.archives.gov/cea/about.html">council has helped</a> presidents and department secretaries craft budget proposals for Congress by providing <a href="https://www.gpo.gov/fdsys/browse/collection.action?collectionCode=ECONI&browsePath=2016&isCollapsed=true&leafLevelBrowse=false&ycord=0">economic guidance</a> and contributed portions of the State of the Union speech that deal with economic issues.</p>
<h2>Economic lifeguards</h2>
<p>While <a href="https://twitter.com/JustinWolfers/status/829796206687576064">some commentators</a> have shown concern about the Trump administration’s downgrading of the CEA, a <a href="http://www.usnews.com/opinion/economic-intelligence/articles/2017-01-18/donald-trump-doesnt-need-economists">recent U.S. News article</a> explained why “Trump Doesn’t Need Economists,” as the headline declared. The author, an economist herself and voluntary adviser to Trump, suggested the president is not interested in and doesn’t need the advice of professional <a href="http://businessmacroeconomics.com/">economists</a> to make sound decisions. </p>
<p>If this is true, then why even bother wasting time and money filling the position of Council of Economic Advisers chair?</p>
<p>The answer’s simple: Filling the position is important for the same reason Congress created the council after World War II. There is always the chance the U.S. could experience another economic catastrophe. The council is like a crew of firemen or lifeguards who tend to be invisible until a disaster or emergency occurs. While <a href="http://www.jstor.org/stable/3872491">economists are very poor</a> at <a href="https://www.ft.com/content/14e323ee-e602-11e3-aeef-00144feabdc0">predicting recessions</a> and depressions, proper post crisis management likely <a href="https://www.americanprogress.org/issues/economy/news/2012/05/29/11593/10-reasons-why-public-policies-rescued-the-u-s-economy/">shortens</a> the duration and severity of a downturn.</p>
<p>Even Trump may find that having a few professional economists in the White House at his beck and call in case a disaster strikes is a cheap insurance policy for the world’s economy – and his future employment prospects.</p><img src="https://counter.theconversation.com/content/72831/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>President Trump downgraded the chair of the Council of Economic Advisers from its perch on the Cabinet. Should we care?Jay L. Zagorsky, Economist and Research Scientist, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/711802017-01-16T15:02:49Z2017-01-16T15:02:49ZA new deal with capitalism requires a revolution in politics and markets<figure><img src="https://images.theconversation.com/files/152878/original/image-20170116-19298-11djhzn.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C1280%2C758&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/dayland/2434145217/in/photolist-pb5ySW-4H6CyZ-tzNyDQ">Dayland Shannon/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Many people feel that the capitalist economic system delivers wealth to a few and somehow cheats the rest of opportunity. I agree: our market system is being looted by a small minority and the only real solutions call for courageous measures.</p>
<p>It has been all too easy for things to slide to excess. Traders in financial markets manipulate prices to obtain higher bonuses. They and their managers take massive gambles with shareholders’ money because these are essentially one-way bets – governments and central banks <a href="https://theconversation.com/feds-focus-on-too-big-to-fail-wont-save-taxpayers-from-next-bank-bailout-61884">will bail them out</a> if things go awry. The management teams of large companies reward themselves with <a href="http://www.businessinsider.com/ceo-compensation-chart-2014-6?IR=T">larger and larger compensation packages</a> virtually independent of the performance of their enterprises. </p>
<p>In a more subtle strategy, and without perhaps considering the effects, business leaders can end up looting the future by investing insufficiently for the longer term. They are playing a game skewed towards the pursuit of short-term profits in order to achieve higher personal payouts. </p>
<p>In industry we see increasing forms of cartel-like behaviour everywhere. The big banks offer essentially similar services on similar terms and extract monopoly rents, often in egregious forms such as <a href="http://www.telegraph.co.uk/personal-banking/current-accounts/current-account-overdraft-fees-the-worst-offenders-among-popular/">massive charges</a> for late payments or unauthorised overdrafts for retail clients. Large pharma companies <a href="https://www.theguardian.com/society/2016/jan/26/big-pharmas-worst-nightmare">actively work</a> to extend patent protection on drugs and to limit the ability of generic drug makers to compete effectively. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bitter pill.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/ellenm1/6050529448/in/photolist-bTcUYM-8knpCN-adExBf-adEAp1-BGFo9-adBJDH-8FBhwK-8FBhKR-68UN7T-4HcEMQ-5YY7bW-dtbC6E-kuRqzY-2jWYBu-9VPR5A-53wpf4-nRfD5y-5zrEXc-7FgjJX-5zrF26-dfUAM1-4jT6gP-nnkxdP">ellenm1/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<h2>Underdone oversight</h2>
<p>But how can all this happen when the institutions of the market system are supposed to prevent them?</p>
<p>Companies are overseen by boards of directors who represent the shareholders and determine management compensation. Investors control the capital base of enterprises and have the power to replace the boards of directors. Market activity is undertaken within a framework of laws and regulations overseen by central banks and by regulatory agencies staffed by civil servants and, over them, sit the elected representatives of the people. In theory, it should work flawlessly, but too often the structure fails, and it’s not all that hard to explain why.</p>
<p>Let’s start with publicly traded companies. Many are actually controlled by their management rather than by independent directors. In the US it is still common for the CEO to <a href="https://corpgov.law.harvard.edu/2016/07/26/chairman-and-ceo-the-controversy-over-board-leadership/">also be the chair of the board</a> and so play a major role in choosing those supposed to provide oversight. In any case, we typically see the same people serve on multiple boards while the CEO of one company sits on the board of another. No wonder boards endorse egregious compensation schemes. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Investors are lost in the numbers.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/small-figure-prices-shares-newspaper-earn-130669775?src=2QxvVXXbHmD_-Aes3Ktd2A-1-60">Lisa S./Shutterstock</a></span>
</figcaption>
</figure>
<p>But shouldn’t the shareholders throw out all the rascals on the boards? If by a shareholder we mean someone with deep knowledge of a company and a commitment to enhance its long-term performance, then many large companies have no shareholders at all.</p>
<p>The investment logic of diversification and the <a href="https://www.ft.com/content/4cdf2f88-7695-11e6-b60a-de4532d5ea35">rise of passive investing</a> (where investors only track the performance of a share index like the S&P 500) drives individuals to spread holdings out on a global basis. Large investing institutions, often largely passive themselves, hold positions in too many enterprises to either understand or care about individual cases. </p>
<p>And a situation has emerged where <a href="https://www.ft.com/content/b450725c-7f2f-11e5-98fb-5a6d4728f74e">a handful of giant funds</a> own a large share of the total value of listed companies so that their executives become part of the same pattern of behaviour. The ultimate shareholders – pension plan holders like you and I – are often too busy, don’t care, or don’t understand. </p>
<h2>Revolving door</h2>
<p>Now let’s turn to the regulators. They have deep problems which we don’t like to acknowledge. First, they struggle to hire talent which can match the companies they are regulating. The ambitious and clever graduate can choose US$100,000 a year at a Central Bank or US$1m at the investment bank of their choice. This is made worse by the <a href="http://www.pogo.org/our-work/reports/sec-revolving-door.html?referrer=https://www.google.co.uk/">revolving door</a> problem. If you know that, in a few years time, you will be seeking a job at a bank, just how tough on them are you going to be now?</p>
<p>What of their political masters? Well, former politicians, <a href="https://www.washingtonpost.com/politics/how-the-clintons-went-from-dead-broke-to-rich-bill-earned-1049-million-for-speeches/2014/06/26/8fa0b372-fd3a-11e3-8176-f2c941cf35f1_story.html?utm_term=.4d3ce2d58868">ex-presidents</a> <a href="http://www.telegraph.co.uk/news/politics/labour/1575247/Tony-Blair-to-earn-2m-as-JP-Morgan-adviser.html">and ex-prime Ministers</a> perform the revolving door trick very well. </p>
<p>More important, it takes money to win elections. Who has the money to donate? The companies and their key executives. The US offers the <a href="https://www.opensecrets.org/overview/topindivs.php">extreme of this situation</a>. And the more regulated an industry is, usually the more concentrated it is among a handful of companies, meaning the reward for influencing regulation are concentrated in the enterprises that can do the most harm. The benign term for all this is <a href="https://knowledgeproblem.com/2013/01/04/what-is-regulatory-capture/">“regulatory capture”</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">In control? London’s banking centre in Canary Wharf.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/green76/6808476499/in/photolist-bnDdRR-hyUhyH-9cw7yo-bEWygc-6g2hAi-4KrBLK-FZ3ADh-hBfcmY-bnD9d8-bnDkF6-bnDiQV-bnDcqV-5PPRzP-NcUQB-4KvLwd-dut1tp-heMSma-bnD9Xx-bt48Do-bnDfuk-bpFtbS-bnD2uK-hyVSZT-b5eXQr-bnDpHK-hjD5Na-hAJVLp-nXWbCA-hyUwzQ-hyU8Zt-5H8dwU-hAKNmJ-bnDqF4-bnDjuF-hARD8o-9WW93e-5H3Wxx-CGRBHt-boj7fa-bnDaCF-9pKiFb-hyVQ6X-hyVVyk-hyUjXk-hyUTPG-4QSoUt-hAQufy-hyUXN3-6jJcDJ-hyUu6G">Barry Chignell/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<h2>Fishy business</h2>
<p>Enough said. As world leaders from business and politics prepare to meet at the <a href="https://www.weforum.org/events/world-economic-forum-annual-meeting-2017">World Economic Forum in Davos</a>, what should be done? Two cautions. Because the money and power in the system is controlled by the looters, every ameliorating action will be fought tooth and nail. And, there is no magic cure; the most we can aspire to is to make things incrementally, but materially better. </p>
<p>The fish stinks from the head so we should start there. We must dramatically curtail the role of money and patronage in politics. Only if this is done will it be feasible to rebuild the regulatory apparatus and break the cartels. </p>
<p>Now consider the comprehensive failure of corporate governance at large public companies. I suggest that the large public company has had its day. Public listing is not needed to raise essential capital, as was the case in its 19th and early 20th-century heyday. The stock markets today are for speculation, for games by competing algorithms and profit-taking for insiders. <a href="http://www.investopedia.com/ask/answers/06/ipoadvantagedisadvantage.asp">We should discourage “public” ownership</a> in favour of private ownership and partnerships. Then, more people with the power to control will also have an incentive to think long term and to contain risk.</p>
<p><em>This piece has been published in cooperation with the World Economic Forum to coincide with its annual meeting in Davos, Switzerland. <a href="https://www.weforum.org/events/world-economic-forum-annual-meeting-2017">You can read more here</a>.</em></p><img src="https://counter.theconversation.com/content/71180/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>George Feiger does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The system is rigged for a small minority to profit, but are we brave enough to deploy the solutions that would work?George Feiger, Executive Dean, Aston Business School, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.