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.

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.

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.

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.

Which came first, the chicken or the competition?

In anticipation of Brexit, the United States has outlined its objectives for a trade agreement with the UK. Among other things, it wants to see access for its agriculture to the UK market. But US agriculture includes products such as chlorinated chicken, banned in the EU. Will the UK let these chickens in, if it “takes back control” and can make its own trade agreements?

For the US, the EU ban on chlorinated chicken is seen as a protectionist measure rather than a health protection measure. The US ambassador to the UK in an angry article in the British newspaper “Daily Telegraph” has attacked the EU approach : “Inflammatory and misleading terms like ‘chlorinated chicken’ and ‘hormone beef’ are deployed to cast American farming in the worst possible light…..It is time the myths are called out for what they really are: a smear campaign from people with their own protectionist agenda.” Even a moderate  US journal such as “The Atlantic”  states that “The European Union banned antimicrobial baths in 1997. That ban created a protected market for European and British chicken producers.” 

In fact, the picture is a good deal more nuanced. In production terms, the EU is self-sufficient in poultry meat: from 2009 onwards production has always exceeded consumption.  But the EU imports lots of chicken from other parts of the world, and exports a lot also. It imports chicken from Brazil, Thailand, the Ukraine, among others, to a total of 786 thousand tonnes in 2018, which is about 5.3 per cent of EU production, and it  exports chicken to Ukraine, Philippines, Ghana, China (Hong Kong) and others, to a total of 12 per cent of EU production.

Looking at these other countries, the UN trade statistics tell us that the EU and the US are both selling them chicken in increasing amounts. Quite frequently, the EU is selling more. The EU outsold the US in Ghana (2015-2017), Japan (2014-2016), South Africa and Ukraine (2014-2017). Only in Hong Kong and the Philippines is the EU clearly behind the US, with sales at 56 per cent and 69 per cent of the US total in 2017. It’s also interesting that the EU chicken sometimes does quite well in price terms also, with the average price per kilo higher than that for the US product in the Hong Kong, Japanese,  and South African markets in 2016 and 2017.

So, in third countries, where the EU and US are head-to-head, the EU chicken seems rather competitive. Which means that if the EU really were protectionist, it wouldn’t need to be.


Competitiveness Liga

People like numbers, as long as there are not too many. And people have a broad grasp of rankings: they know the difference between coming first in a race and coming last. From this comes some of the appeal of competitiveness rankings. I understand this appeal: I worked myself in that area for many years, supporting the National Competitiveness Council in Ireland, and also involved in policy benchmarking at EU level and being part of an international competitiveness network. However, in our NCC reports we resisted the temptation to have an aggregate ranking, because we felt that it would conceal more information than it revealed.
Nevertheless, competitiveness rankings are well established. The two big ones, the IMD and the World Economic Forum rankings, are widely quoted and governments and businesses appear to take them seriously enough. Both reports work in the same basic way, gathering indicators of what are believed to be the factors of competitiveness and putting them together in composite sub-rankings which are then combined into a single ranking for those who want an overview. The key results are here:

RankIMD 2017IMD 2018WEF 2017-2018
1Hong Kong USASwitzerland
2SwitzerlandHong Kong SARUSA
6IrelandDenmarkHong Kong SAR
7Denmark UAE Sweden
8Luxembourg Norway UK
9Sweden Sweden Japan
10UAE Canada Finland


Clearly there are similarities, but also surprises.  For IMD,  the United Arab Emirates ranks seventh in the world, and, unlike WEF, IMD finds no places in the top ten for large advanced economies such as Germany, the UK and Japan.

The IMD 2018 Report came out in May 2018 and the website gives the rankings for 2017 and rankings and scores for both 2017 and 2018. By scores is meant a composite index prepared in order to provide a ranking. A quick look at these shows three things
1. First of all the top ten doesn’t change very much. As in a football league, two drop out (Ireland and Luxembourg) and two are promoted (Norway and Canada).
2. If we look at all 43 countries covered by IMD, we find that the most competitive countries are most similar. The top ten are closer to each other than lower groups are.
3. These single rankings actually don’t tell us very much: the underlying data is probably far more interesting.

The euro, again

Paul Krugman had a strange piece in the New York Times yesterday. He said that many of Europe’s problems came from the “…disastrous decision, a generation ago, to adopt a single currency. …. And while countries like Iceland that retained their own money were able to quickly regain competitiveness by devaluing their currencies, eurozone nations were forced into a protracted depression.”

There are a lot of things wrong with this kind of thinking, and Krugman is not the first to come up with it. Many US and UK economists think the euro is a bad idea. But to point to Iceland, without ever considering the very specialised nature of its economy and resource endowment, makes little sense. And to talk about exchange rates as the key to competitiveness, without ever mentioning taxation, or skills, or education, or regulation, or infrastructure, or science and technology policy, or telecommunications, or connectivity, or language, or legal systems, or any other factor, is very odd.