Where do you come from, or where are you coming from?

The recent controversy about the appointment of the chief economist in the part of the EU commission that deals with competition is instructive. And not in a good way. DG Competition wanted to appoint a US citizen to the post, Dr. Fiona Scott Morton, who is a distinguished professor at Yale and has been advisor to many US IT companies such as Apple and Microsoft.

There was uproar, and Ms Morton pulled out of the appointment. But people have missed the point. The outrage of France in particular was confused by President Macron’s diversionary question, asking didn’t we have any suitable Europeans, and wasn’t it a problem if we didn’t. He also suggested he would be happy with the appointment if a European would get a similar job in China or the US, as if nationality were the key issue and could be resolved by some kind of international trading of posts.

 Many people pointed to the expectation that, once in the job, the new chief economist would have to recuse themselves from most decisions, because of having worked with so many of the companies that are likely to be involved. This is also true, but again is missing the big point.  The controversy was further confused by the many eminent economists who rallied to Ms Morton’s support, emphasising what a great economist she was. Obviously true, but once again missing the big point.

So what is the big point? Well, it’s this: the perspective on industrial policy that the EU has or should have.  Most western economists, and all US politicians take the view that the state should not intervene unless there is clear market failure. Let the market decide. If there are big mergers, let’s see how they would affect market competition. And that’s it. But the EU, through the detail, scope and frequency of its legislation, is on a different tack. More like “the state should intervene unless it can be shown that the market is functioning properly”. That’s a big difference. The conventional view says that unless you can show that the market is not operating fairly, we should leave it alone. The radical view, which is driven by technological and geopolitical change, says that today’s market is not tomorrow’s and we need to get ready for the latter. That’s the priority. This implies not spending too much time on elegant analysis of what will soon be yesterday.

You’re fine, it’s just a scratch

Now that the summer has arrived in Europe, it’s time to think about car hire. This is a subject of anxiety and controversy for many. Electric cars are making things worse. The industry has been affected both by Covid and problems in the car industry itself. Covid reduced tourism and thus demand for transport. But Covid increased fears about trains and planes, so the share of car hire increased. At the start of Covid, car hire companies did not renew their fleets, and when they finally went to do so, cars were not available, due to shortages of the electronic chips that are now key components of modern cars. This led to reduced availability and higher rental charges.
These compound the traditional anxieties anyway faced by consumers in renting a car. In the EU, taking a hired car across national boundaries requires specific permission of the hire car company. And extra fees, perhaps. So much for the Single Market. But a big consumer concern is that of insurance cover, and liability for damage. You have to sign a form saying that you have inspected the car when you take it over. Existing damage will be marked on it. But have all the scratches been identified? It’s late, you’re tired, and the guy from the company is impatient….
Car rental is one of the top areas of consumer rights complaints in the European Union, especially in relation to damage charges, insurance coverage, and fuel policies. In Europe, the major car hire companies have a dispute resolution service, ESRCS. In 2022, damage was the biggest reason for disputes handled, at 37 per cent of the total. Maybe AI can help? There could be an automatic scan of the car with an identification of any deviations from the correct surface area, before and after the rental. All the better if it was to an agreed international technical standard, so that disputes would be kept to a minimum. And potential fraud also eliminated.
But in a way this would be missing the point. Car hire companies charge users for any scratches on the car. The charges are notionally the cost of repair. But the car companies do not repair, as long as the car can still be rented out. They simply pass on the car to the next customer at the same price and make no reduction. Hence there is no loss to them. The new customer receives notification from the company that so many existing scratches on the car are in place. But he receives no notification of a reduction in price as a consequence. The car companies do not make the corrections to the car for which they have charged the previous customer. They keep accumulating scratches or sell the scratched car at the end of its life, in which case the loss to them is the difference between the selling price of a scratched and unscratched car. This is the real loss to the company. It ought to be spread over all the customers who have caused the scratches, rather than saddling each of them with high charges for the scratches each have made. It could also be that the car hire company waits until there are enough scratches and gets them all repaired at the same time. This will surely be cheaper than the individual repairs.
Maybe a new model is needed. Car sharing is increasing. Uber has a new initiative.

The war in Ukraine

I heard recently from a reliable source that the cost to the world economy of the war in Ukraine is estimated so far at $1 trillion. I’ve seen much higher estimates as well. This is not to minimize the human cost of those killed cruelly and needlessly. But figures such as these show us that the true human cost of the war is very great. Money that could have been spent on poverty alleviation, on climate change mitigation and on public health is being spent instead on weapons and explosives, and the shock to the world economy has further reduced resources everywhere. Also, competitiveness challenges for Russia are emerging. Apparently Russia is now dependent on arms and equipment supplies from North Korea and Iran. This shows an unprecedented level of technological weakness on the part of a country known for its good scientists and engineers, and reasonable manufacturing capabilities. (This was the country that brought us the Kalashnikov). Russia’s exploitation of its natural resources may have caused neglect of the manufacturing sector.

UNCTAD has an interesting index of a country’s readiness for using, adopting and adapting frontier technologies. China and Russia appear not to be far apart. But if we look at the sub-indices, a different picture emerges. Russia is ahead of China in terms of skills and of ICT deployment, but China is far ahead of Russia in things that are arguably more important now: relevant industrial activity, R&D, and access to finance.

With the ability of countries to switch supply sources for oil and gas ( whose future is in the long term very limited) Russia’s weakness can only grow. Already the price cap on Russian crude is having dramatic effects. This ingenious scheme forces all countries who wish to buy Russian oil at a price higher than the cap to do so without using any western-based services, whether shipping, insurance, logistics, finance and otherwise. The effect has been striking. Oil is now trading from Russia at half world prices. The wider effects are that the long-term move away from oil is given further encouragement.

Should governments help the airlines? (part 2 of 2)

There’s another problem when governments rescue companies and get them back up on their feet: they may quickly forget the favours they have received. Ingratitude is a fact of commercial life, but there’s no reason for governments to set themselves up for it.   If an important airline collapses, and its assets are taken over, the successor airline may not maintain all the routes to and from the country concerned. So the rescue package may not help national competitiveness after all.

But wait, you say, surely if the route is profitable it will be maintained? No, because the new airline has a finite number of planes and other routes may be more profitable. Also, the new airline may be more interested in feeding passengers to its existing routes or hubs than in maintaining the old route.

 An important option for governments is to go out to tender for air service provision. They can invite competitive bids for a subsidy to operate the route. The lowest bid, if it meets the quality requirements, gets the contract and the subsidy. Countries typically do this to maintain connectivity between the centre and remote regions: the airline in question is paid to maintain the regional route, and this is usually called a public service obligation. In 2019, there were 12 EU countries following this option, for a total of 143 routes. Greece had the biggest number of PSOs at 28, followed by France at 27. In general PSO routes connect outlying islands or distant regions with the capital or other key cities in the country concerned.

But there’s no reason why a PSO can’t be used to maintain or increase international connectivity as well. It can be an easier way to improve national competitiveness than rescuing a whole airline. But in fact, of the above PSOs, only 8 of the 195 were for international routes. Cyprus’s single PSO route was to connect it with Brussels. All of Czechia’s 3 tenders were to connect its cities with other European cities. France had 3 PSO routes connecting Strasbourg with other European cities.

Countries might usefully consider using PSOs specifically to target missing links in their international connectivity, including intercontinental links. A small country that wants better links with another part of the world could go out to tender and see what it might cost. The price might look good in the light of the possible wider economic benefits (tourism, business links, FDI, etc.)

Full disclosure: I took one of these routes last month (In Greece: Rhodes to Karpathos). The plane actually goes on to Kasos, an additional 10 minute flight, which must be one of the shortest commercial flights in the world.

Africa needs a lot more private investment

Progress in Africa continues slowly, in spite of political instability, the pressure of other concerns, corruption, and natural disasters. Some companies have been active in manufacturing for more than a century, and improvements in infrastructure education and telecommunications have allowed new entrepreneurial development. The problem is that the pressure of other concerns (health and food, for instance), has not relaxed.

In 2020, Africa had 17 per cent of the world’s population, having risen from 13 per cent in 2000. But its share of world GDP was just 3.1 per cent, having risen from 2.5 per cent in 2000. And the position of manufacturing is even worse, at just 2.1 per cent, having risen very slightly from 1.9 over the twenty-year period.

Only a few African countries are globally significant in terms of manufacturing. In UNIDO’s Industrial Competitiveness Index, there is no African country in the top quintile.  The highest-ranked African country is South Africa, in the second quintile, at position 52 worldwide (and that represents a fall from 2010, when South Africa was in position 40). Then come just three African countries in the third (middle) quintile, with Egypt at position 64, Eswatini at position 84, and Mauritius at position 90.

Investment is a key issue. In practice, the big need in Africa is for greater business activity. How much investment is needed? One rough indication is given by comparing investment levels in Africa with those in developing Asia, using UNCTAD’s database. Africa invests 25 per cent of GDP, while developing Asia invests 36 per cent. If Africa were to reach Asian levels, it would need to invest 274 billion US dollars extra per year. And it would need to do so for a long time: fast-developing Asian countries managed to keep the investment share at high levels for many decades.  Of course, this is total investment, not just for industrialisation, though most investment actually helps industrialisation. And some of the Asian investment is replacement investment, with a much bigger stock.

To give a sense of the numbers, there is a target of 100 billion dollars annually for aid to combat climate change, but this has not been met. And this target is to cover the entire developing world. If the governments of rich countries are so casual about an existential threat to human life on the planet, they are not going to provide multiples of that for African development. Also, even if Africa had an extra 275 billion available annually, it could not all be spent at once. But the figure nevertheless shows the scale of the problem. Development assistance alone could not address this investment gap, even if it were to be greatly increased and become incredibly effective. Africa has huge resources for growth in the future: mineral wealth, arable land, renewable energy and human resources are there in abundance, although they’re unevenly distributed. Climate change has increased the urgency of action, and also increased the opportunities. Private investment will be the key. But to mobilise the capital required needs new approaches.

Shop Till You Drop: New Strategies

The news that Philip Morris International, the cigarette people, was trying to buy Vectura, a company that makes equipment to relive sufferers with asthma, COPD and so on, aroused some controversy: “If PMI were to acquire Vectura, PMI could then profit from treating the very illnesses that its products cause.” The sale has now been finalised.

Well, it’s a matter of recognising the linkages at the consumer level. It’s an approach that has already been taken by the makers of a herbicide, who also sold the seeds for crops that were resistant to it. So if you used it to get rid of your weeds, you would also kill your crop, unless it had been grown with the seeds from the same people. And they didn’t miss a trick: they patented those pesticide-resistant seeds. If you bought those seeds, it was with the condition that you were not to use any of the crop as seed for next year: you had to buy new seeds. It was a way of doubling up on the investment.

One man’s conflict of interest is another man’s synergy. The concepts of vertical integration and horizontal integration are well known, but the type of strategy we’re talking about breaks new ground. It catches out the consumer at every stage while ensuring that every stage occurs. We could call it life-cycle integration.
Apparently Philip Morris plan to have more than half their revenues arising from no-tobacco activity. Perhaps they’re going to make another logical investment. The prospects look good for the funeral industry.

Free trade and workers’ rights: we need to talk

Bringing workers’ rights into trade negotiations is necessary and it’s not impossible. Trade questions and employment questions are intrinsically linked. In the US, there is an obsession with the idea that free trade has destroyed jobs.  In the UK, trade unions have criticised their government for making trade agreements with countries that abuse workers’ rights. Their research suggests that more than a third of the non-EU nations with which the UK has secured trade deals are abusing workers’ rights.

Bringing “outside” issues into trade negotiations is difficult. These are already very complicated. Apart from the parties directly involved, each side knows that concessions made will have consequences for any other agreement that they are going to enter into. And trade negotiations have now gone far beyond questions of tariffs and quotas to include all sorts of other issues, from technical barriers to trade, investment conditions, not to mention the very contentious questions in services trade. Trade negotiators themselves might say that the last thing they need is another dimension to the arguments in the form of workers’ rights.  And they might also say well. what about human rights, the environment and climate change? Let’s not forget also that the UK, after Brexit, is just beginning to learn how to negotiate trade agreements, since that was a task that for the last forty years and more was delegated to the European Commission.

But even if a thing is difficult, it is not necessarily impossible. And trade purists must recognise that when countries deny workers rights, this is unfair competition and thus a market distortion.

Help is at hand. The International Labour Organization (ILO) has been at work since 1919. The UK was a founder member and contributes to its programmes. The other side of the trade negotiation will also be a member. The ILO is well aware of what is the status of worker’s rights not just in different countries but in different sectors also. Some formal way of involving ILO advice in advance of the negotiations can be found. The participants will then have an independent view of where are the most burning questions (in both countries). When different sectors are under discussion, at least some of the necessary improvements in workers’ rights can then be built into the relevant chapters of the agreement.

Indices the HUAWEI way

Huawei have published what they call the global connectivity index. It’s a global IT competitiveness index, basically. It uses 40 indicators to measure the relative performance of different countries in key areas of IT and the information society. They are grouped in four technology “enablers” which are broadband, cloud, AI, and IoT, and in four “pillars” which are supply, demand, experience, and potential.

This index has several attractive features. First of all it’s a comprehensive set of indicators in a crucial field of competitiveness. Secondly Huawei covers 79 countries, rather than spreading themselves over more countries and having to sacrifice some indicators. Thirdly, and this is the really interesting part, when they change the definitions of particular indicators or the combination thereof, they have recalculated the indices for preceding years. This allowing sensible comparisons of progress over time.

The index itself out to be less interesting, at least in the top ten. The United States is number one every year from 2015 to 2020. Singapore is always in second place, with Switzerland always in third and Sweden always in fourth place. Below this it gets more interesting: most notable is the case of Japan. For the first two years it’s in 5th place but then begins to slip: 6th in 2017, 10th in 2018, 7th in 2019 and 9th in 2020. It’s a shaky performance at best: contrast this with Denmark. This was in sixth place for the first two years but then jumped up to 5th and stayed there consistently for the remaining years until now. Note that the index value for Japan and Denmark increased each year, but the performance of Denmark was better. Places 6 to 10 in the rankings in 2020 were Finland, the Netherlands, the UK, Japan, and Norway.

You would expect Huawei to have good data on China. It puts its home country at position 22 in the rankings with an index value of 62. This is not very high compared to the US in first place at a value of 87. However it is one index point ahead of a country that has always been highly regarded in IT terms, Estonia. Also China has a population of maybe one and a half billion people. Parts of China on their own would score much more highly. And it has improved its position. In 2015 it was at position number 34 with an index value of43. The US has also been showing growth in the index while maintaining its number one position. But if China maintains this relatively stronger growth, it will overtake the US by 2031. At least in this ranking.

Biden’s trade policy issues

What are Biden’s trade policy issues? Let’s assume that he takes office and that there is no Democratic majority in the U.S. Senate. What does all this mean for international trade? Firstly, it’s not clear that policy will change very much directly. The reason is that the Democratic Party concerns about international trade are rather like those of the Trump administration. The Democratic Party platform contains very similar emphases on the unfair activities of other countries. The Democratic Party platform does not approve of the way the Trump administration has been handling China, but it seems to share the same concerns. There is slightly more emphasis on workers’ rights in other countries, but to some extent these issues are also being taken up by Republicans in the Senate, at least as regards forced labour.
In one respect however the new administration may help international trade, if only indirectly. International engagement, and U.S. involvement in multilateral agreements, will be restored to some extent. This means that WTO may see a revival if the U.S. helps to restore its role in dispute resolution by allowing the appointment of new tribunal members. There will be less resort also to trade measures as a tool of general policy. Countries will always introduce countervailing duties in response to antidumping or subsidy activity, but tariffs mean pain for consumers immediately while hurting producers only in the longer term. If the United States wishes to punish some other country for perceived misbehaviour that is not trade-related, it could do so more effectively by financial measures, freezing of assets, and control of movement, or more positively although less easily through new investment agreements.
Another way in which things may change is in government spending. Infrastructure was supposed to be improved under President Trump but little actually happened. Now it may be the only way a stimulus package can be agreed politically. This would not be as beneficial for international trade as a consumer-based stimulus would be, but if the emphasis was on climate there would be more to it. Advances in transport systems, renewable energy, food production and manufacturing processes and recycling technologies will encourage innovation that will benefit the world economy as a whole.
Biden’s trade policy issues also include two outstanding questions on pluri-lateral agreements. Firstly, will the US re-join the Trans Pacific Partnership (TPP), now slightly transformed into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)? The new administration is more committed to international cooperation, but the CPTPP agreement does not include provisions that the US had insisted on in the original agreement, so membership would have to be re-negotiated.
The second question is that of an agreement with the EU, the Transatlantic Trade and Investment Partnership (TTIP). This will take longer to be realized. There is not so much enthusiasm on the EU side, and, precisely because the scale of economic integration between the U.S. and Europe is already very large, it is not so easy to identify and agree on very beneficial improvements. Furthermore, Brexit complicates the dynamics: the UK had been a strong TTIP advocate. However, Canada already has an agreement in operation with the EU, the Comprehensive Economic and Trade Agreement (CETA). Canada is also a member of CPTPP. This may provide a stimulus to negotiations and a model for some aspects of TTIP, especially in the area of investment dispute resolution, which was one area of difficulty in earlier TTIP negotiations.

Should governments help the airlines? (part 1 of 2)

In the early stages of the pandemic, international flight linkages were actually the main transmission channel for the virus. In fact, flight connections proved to be an even more accurate predictor of infection spread between two countries than the presence of common land borders or trade connections.

Aviation is an interesting but volatile sector. And now the economic destruction wrought by the corona virus has battered the airline industry. Passenger travel has almost disappeared.  Many large airlines have grounded their fleets altogether.  How long can the airline companies survive?  Some are already sending out SOS messages, saying that their collapse is imminent and calling for government support. In the US, the historic $2.2 trillion stimulus bill signed into law on March 27 included $61 billion in relief for the airline industry. More support is part of the current negotiations in the US Congress. Many other governments have also provided relief to their own country’s airlines. In Singapore, for example, the government-owned investment fund has extended credit of $19 billion to Singapore Airlines. In Europe, the fees that airlines pay for air traffic control have been deferred.

Should governments rescue airlines?  The idea is that these are strategic services, essential to providing international linkage not only for emergency supplies but to maintain and enhance existing trade and Investment links.  But if you think about it, there is nothing very special about an airline.  It provides more or less standardized services, using more or less standard capital goods, and more or less standard human resources. There is of course some differentiation, but nothing fundamental: an airline may have a more sophisticated planning and pricing mechanism than its competitors, or it may become well known for the quality of its food, or the kindness of its cabin crew. A few airlines have a poor safety record, but they always (understandably) have a small share of world markets. 

Airlines come and go: do you remember PanAm, TWA, BOAC, UTA, Sabena, and Swissair?   If an airline collapses, what often happens is that its assets (planes, landing slots, etc.) are taken over by some other airline. The planes are repainted. The staff get new uniforms. And flights continue. And so why should governments rescue airlines and what are the alternatives? (More to come on this)

You want your own airline?

What’s your aviation strategy? Entry into the airline business is easier than you might expect.  You might think that you must first of all buy an airplane.  Not true: you can lease one.  And everything in the way of services that you might need can all be provided by service companies, whether for ground handling, catering, machine maintenance, and so on: everything can be outsourced.  (In American Airlines, outsourcing was 29 per cent of total non-fuel expenditures in 1995: by 2019 the share was 50 per cent). And some services, such as ticket offices, are no longer needed: you can just sell your tickets online. You don’t need crew either: you can rent those from staff agencies (or as part of the deal when you lease the plane, a so-called “wet lease”).  So what will make you distinctive?

The only way that you will succeed and make a profit is by a comprehensive aviation strategy.   This will have to cover marketing, pricing, fuel purchasing, and destinations, interconnections, and the like. These are all crucial but the necessary skills are on the market, in the form of experienced people in the aviation industry who are ready to change job.

Of course, unless you or your new planners can come up with some really original and really clever ideas for the strategy, the danger is that the existing airlines will see you come and go. Arrivals and departures in the airline industry are frequent. A total of 275 airlines started life in the years 2010 to 2019, and just under 500 airlines disappeared in the same period. Using data from the wonderful website Aviation Fanatic, the average lifespan was 16.5 years for 489 airlines over the ten-year period.

Another problem is an external shock, such as a big change in fuel prices, a war, a natural disaster, or a coronavirus pandemic. Even if you ground your planes, you will be losing money, not only because you’re paying the for the lease, but because planes cost money for storage and maintenance even when inactive. Oil prices might go through the roof, making your flights too expensive, unless you had the foresight to buy forward. Or the opposite: prices might fall and you might be stuck with a contract for expensive fuel while some competitor is not. You need more money. Maybe the government would help?

The thing is…..

The pandemic has had many tragic impacts, and the economic effects are secondary. But they are enormous. The IMF expects global economic activity to decline on a scale not seen since the Great Depression, with 170 countries seeing income per capita decline this year. There have been striking changes in the value, volume and direction of trade. WTO expects world merchandise trade to fall by between 13 and 32 per cent in 2020, with exports from North America and Asia hit hardest. There have also been changes in the relative importance of different forms of infrastructure. Take airlines for instance. Passengers are vanishing, flights are cancelled, and this means that air freight capacity is also reduced, because much air freight has actually been carried in passenger planes. However, some airlines are now using passenger planes to carry freight. Rail is also beginning to come into its own: trains are now carrying the post from China to Europe. A 12-14day journey is a lot quicker than sending goods by sea, especially when demand is high. Another vital infrastructure, telecommunications networks, is under pressure. Voice has seen a resurgence, and network disruptions have been reported across Europe. With remote working, as well as the general population staying at home, the strain on internet services is severe. Video streaming has been reduced in technical quality in order to relieve the pressure on the systems. (As for the quality of the films themselves, this is the same as it was.) And some further pressure on the system is on hold for the moment: there is a global shortage of webcams.

Unlimited Data

The field of data is an interesting illustration of the way in which some driving forces of the world economy are interacting. Data will always keep on growing, because there are always new things to be measured and new ways of measuring. The scope and frequency of measurement continues to increase. Hardware advances allow for further improvements in data collection, and software advances encourage analysis and new secondary data. The Chinese company Tencent has become the first Chinese company to have over a million servers. Akamai has more than 240,000 servers in over 130 countries.

Hardware advances and server advances are part of the picture. So are the growth in data and the development of software that needs more and more data (data analysis, AI). But there’s a third factor: regulation in its broadest sense. It includes trade agreements (insofar as they cover data and telecommunications) as well as specific regulations on data within a country or region. The best known example of the latter is the EUI’s GDPR, which is often responsible for those irritating website notices about cookies. However GDPR has had important effects also on investment patterns: service providers are locating servers within the EU so that EU customers and others can have the additional security that GDPR provides.

Brexit on the beach

Brexit has consequences for an eclectic collection of territories that are attached in different ways to the UK. They are mentioned in the Withdrawal Agreement, and they include

  • Gibraltar (which took part in the Brexit referendum in the UK, and voted overwhelmingly to remain.)
  • the Channel Islands and the Isle of Man
  • the “Sovereign Base Areas” in Cyprus
  • and finally the  “UK Overseas Territories”, a diverse collection, mostly islands, scattered around the world: Anguilla, Bermuda, British Antarctic Territory, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Montserrat, Pitcairn, Saint Helena, Ascension and Tristan da Cunha, South Georgia and the South Sandwich Islands, and Turks and Caicos Islands.

Many of the UK Overseas Territories have benefited from the European Development Fund, but they will no longer have access to it after current commitments have been implemented. Some of these entities have tiny populations: Pitcairn, for instance, has a population of 50. Others, such as the Cayman Islands and Bermuda, are prosperous.

But when they have economies in a real sense, they are dependent on two main industries, financial services and tourism. Financial services are now the subject of growing international scrutiny. The UK territories are not independent sovereign countries and do not have a seat at the table in international negotiations., and the UK in the future may not be either as able or as willing to defend their interests.  Of course, financial services in a tropical island may be seen as just a way of working from home, when the home is sunny and sweet. But they are in competition with other attractive but less remote locations, and the outlook must surely be rather gloomy, given the slow but steady shift in international governance, international tax policy, and public opinion.

As for tourism, the territories are dependent on air and sea links, the latter often involving cruise ships. Both these forms of transport at present benefit globally from a bizarre exemption from fuel taxation. This will surely change.

Competition: it’s not me, it’s not you, it’s us

Last year, Toyota increased its shareholding in Subaru, and Subaru bought shares in Toyota for the first time.  There is no intention it is said of Toyota actually acquiring Subaru but they need to work more closely together in the light of global changes and autonomous cars. Similarly Ford and Volkswagen have joint shareholdings in each other and in another company for similar reasons. This kind of cooperation looks modest in comparison with the recent Fiat Chrysler merger with Peugeot. But it is nevertheless strategic and in fact it is a considered alternative to a merger.

Cross-shareholdings are the method by which companies try to increase their competitiveness by what looks like an anti-competitive maneuver. We can see similar patterns of small cross shareholdings in many internationalised industries, including airlines. (Here the purpose is not so much to improve technological advances as to reap the benefits of scale by enabling coordination of passenger transfer, including rationalization of routes.) Usually, competition law is only concerned with shareholdings that give effective control, and this allows structures of smaller cross-holdings to provide both companies with information and communication channels, formal and informal, for strategy and technology development.

Is all this anti-competitive? Perhaps, in that the companies are deterred, to a degree determined by the shareholdings, from competing with each other, but more importantly through the impetus given to alternative directions for each of them, which derives from the enhanced perceptions of the other’s strategy. Each may identify something better to do than going head-to-head. All the paraphernalia of international competition law, including that of the EU, is irrelevant in the face of this cleverness. Big companies are learning that there are better things to do than to seek dominant positions.

Trade agreements: breaking them up is hard to do

A possible trade agreement between the UK and the US has become a controversial issue in the UK elections. The Labour Party alleges that the UK’s National Health Service (NHS) is on the table in negotiations.  (In Northern Ireland, at least, the NHS seems to be on the floor, and in general is delivering no more than average results in European terms. Nevertheless it is much prized in the UK) . For the Conservatives, a trade agreement with the US is a big priority after Brexit. The US Secretary of State, Mr Pompeo, had earlier said that this will also be a priority for the US. The then US National Security Advisor, Mr Bolton, suggested that there could be a series of partial agreements on individual sectors. But this was a bad idea for lots of reasons. Let’s take just three of them. Firstly, no US-UK agreement, even partial, can be finalized until the nature of the future UK- EU relationship is clear, and those negotiations have not yet begun. Secondly, the tendency is always in modern economies for sectors to become more and more interrelated, and so it’s harder and harder to treat them separately. Thirdly, statisticians will recognise the related question of ” degrees of freedom”:  making a number of partial agreements ends up by putting an impossible burden of adjustment on the final sector to be negotiated.

For what it’s worth: evaluation

Evaluation plays a huge role in public policy. Or does it? Anyway, it takes up a lot of time and other resources, such as money and people. Evaluations take a look at interventions and try to see what effects they will have, or what effect they are having or, most commonly, have they done what they were meant to do, and are the negative effects less than, equal to or more than was envisaged. From big investments to programmes to grass-roots projects, everything that involves public money is being evaluated all the time. Which means business for consultants, hotels to house the review groups, editors to re-work the reports, travel for the delegates to assess the outputs, and so on. Within administrations there are then more groups and commitees to derive “learnings” and identify action areas, new guidelines and methodologies, and so on. But what are the substantive consequences of all of this activity? Are there changes in approach  as a result of the evaluation? Even if there are, are they perhaps swamped by other changes as a result of other considerations? Do the people who are preparing new interventions have time to read the evaluation reports in this field, let alone related fields, or are they even aware of them?

I’ve written a note here on what needs to change in evaluation itself if it’s to be of use in the future. In brief, evaluations need to take a longer view, they need to take a wider view, and they need to be quicker. (Also, as I’ve suggested above, we need to change the policy and administrative environment in which evaluations take place, if they’re to have any impact).

Inequality in the EU: less is more, more or less….

Among the many challenges facing the EU is income inequality. (I’ve added a page on the topic here.) The following are key points from it. Income inequality drives migration among the member states (and thus helps the single market to grow efficiently) but it can be a source of political instability. Since the big enlargement of 2004, there has been little change in income distribution in the EU as a whole. The top 1 per cent still draw about 10 per cent of the total income. The shares of the lower groups have hardly changed either.
Looking at individual countries, those that were above the average in 2009 were still above the average in 2017, while those below the average in 2009 were still below in 2017. However, it’s possible to have a low value and still improve. Latvia, Poland and Croatia are examples of this, as is Portugal.
In general, wealth inequality has increased in the majority of the countries over this period, but not enormously. The most improved country is Poland and the most dis-improved country is Hungary.

But there’s another way of looking at it that relates to the way that people mainly see themselves within Europe, as citizens of a particular member state. There is some progress in reducing income inequality between the member states. Adjusting for purchasing power, Luxembourg remains the highest-income country, and Bulgaria the lowest-income country, but the ratio between the two has fallen, and there has been a reduction, across all countries, in the variations between incomes. It’s important for the future of the EU that inequalities between countries are monitored and addressed, because otherwise existing tensions between northern and southern, eastern and western countries will be exacerbated. It’s also important that the progress made be highlighted. Inequality is now less, more or less, and the EU should make more of it.

Now, Voyager? Or maybe later….

Sending goods by sea is the norm. And, if you’re worried about CO2 emissions, you’ll initially be glad to hear that according to the World Shipping Council “Maritime shipping is the world’s most carbon-efficient form of transporting goods – far more efficient than road or air transport.” . They give figures of 10 grammes of CO2 to move a tonne of goods one kilometer. To do the same by rail (diesel train) takes 21, truck and trailer 59, and by air the figure is 470 grammes. But of course an electric train, depending on the source of the electricity, might do better, as might an electric truck in the future. The main problem is that world trade is so big that, even though most of it goes on ships, the total CO2 emissions are enormous.  (So are other pollutants: the fifteen largest ships produce more Nox and SO2 than all the cars in the world).

What can be done? The International Maritime Organisation, a UN specialised agency, has a target of reducing CO2 emissions from world shipping by 50 per cent by 2050. Continued technical progress in ships, engines, and fuels will all play a role. But there are also big benefits from ships going more slowly. This has been an increasing trend in any case as a cost saving measure, but it also reduces the CO2 emissions. An obvious additional step is to start taxing maritime fuel, which at the moment, like aviation fuel, is not taxed at all. The IMF has been looking at this and is quite excited about it:” In short, maritime carbon taxes are an economically and administratively promising instrument” 

Further steps to take include the electrification of rail lines, which opens up the possibility of using alternative energies in rail freight. What about trade wars? New tariffs on trade and “bringing the jobs home” should cut down on international sea freight, shouldn’t it? Well, producing locally of course reduces the need for imports and thus for freight. But it is almost certainly not the most efficient way to go. Tariffs impose a cost on consumers and they hinder growth and this means that there will be fewer resources for combatting climate change or for anything else.

There’s another development, an unfortunate by-product of climate change that may actually be useful. With global warming, new sea routes are opening up in the Arctic, the fabled Northwest and Northeast Passages. They could halve the time of sea freight voyages between some big markets.