Warning signs

A running theme throughout this blog has been the quality of governance, particularly in the UK. As concerned citizens this is something we should all care about but as an economist this normally has only tangential relevance for the way in which mature western economies operate – at least in the short-term. But the alleged failings in the handling of the biggest health crisis in a century has had a huge economic impact, with only Spain amongst the major economies registering a worse output collapse in 2020 than the UK. There is also some evidence to suggest that the quality of national governance has an impact on corporate social performance. Good governance therefore continues to matter.

Pandemic pandemonium

Having spent much of the spring reporting on allegations of corruption in government, the British press had yet another field day this week following the testimony by Boris Johnson’s former adviser Dominic Cummings before a parliamentary committee on the handling of the Covid crisis. One of the unremarked ironies of the saga was that those media outlets which have been criticised for giving Johnson an easy ride over issues such as Brexit were happy to directly report Cummings’ allegations that the government mishandled the process from the start which resulted in many thousands of excess deaths. He was scathing of the competence of many members of government, including the prime minister (“he made some terrible decisions, got things wrong, and then constantly U-turned on everything”) and the health secretary (he “should’ve been fired for at least 15-20 things, including lying to everybody on multiple occasions”).

As much as people might wish to believe Cummings’ version of events, the fact that he was effectively sacked from government last November suggests he has an axe to grind. Whilst revenge is as good a motive as any to stick the boot into someone else’s political career, we should be very wary of taking his seven-hour testimony at face value. It is indeed ironic that many of those who had previously viewed Cummings as the devil incarnate were quick to accept his version of events, largely because they have an even bigger problem with Johnson. As the journalist Jonathan Freedland points out “Cummings is an unreliable witness”, as anyone who listened to his risible defence as to why he flagrantly breached lockdown rules last year will recall.

Nonetheless, the many independent fact checks (here and here for example) that have been conducted into Cummings’ claims conclude that there is some truth to them. The single most damning is that Johnson failed to take mounting evidence of the pandemic sufficiently seriously and that the government reacted too late. It is possible that in January and early February 2020 the government was basking in the glow of finally having delivered Brexit which may have caused it to take its eye off the ball (not that this is any excuse). Moreover, the advice from the SAGE committee was not as unequivocal as is often remembered today (as I pointed out in this post).

One of the bigger criticisms which Cummings failed to bring up was that many senior politicians believed there to be a trade-off between protecting the economy and protecting the health of the nation. This has been widely debunked. The greater the ring fence that can be put up to prevent the virus from taking hold, the smaller the hit to the economy – as Germany has demonstrated. It is certain that all these issues will be debated again when a public inquiry into the handling of the pandemic is established. However, since its terms of reference will be decided by the government it is a safe bet that it will not be allowed to undermine the government’s position (for one thing it will deliver its report sufficiently far in the future that it is unlikely to derail Boris Johnson’s front line career in politics).

The bigger picture

Much of what we learned from this testimony merely repeats what has been said at various times by other people. It was given added significance by the fact that Cummings was in the room when the decisions were made. Aside from the political points scoring, the evidence reveals that the political culture in which we now operate is one in which truth has become an elastic concept. As Freedland points out, Cummings is one of the fathers of this culture, particularly since he knowingly plastered the false claim on the side of the Brexit battle bus that the UK would save £350 million per week by leaving the EU. It is therefore ironic (to say the least) that he should accuse the health secretary, Matt Hancock, of lying.

All of this intrigue makes for good copy and has kept journalists busy in recent days but as we discovered with the furore surrounding financial impropriety allegations at the heart of government, this may not have much cut-through with voters. But there is evidence to suggest that governmental culture matters for the way in which the economy is run. In particular, there is solid empirical evidence to suggest that the quality of overall governance matters for corporate social performance. The authors of the study[1] identify a series of good governance attributes (accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption) and explore the relationship between these factors and corporate social performance for a number of OECD countries. They find a positive correlation between the two and conclude that “policymakers that want to stimulate the transition toward a more sustainable society should consider their country’s overall governance quality.” What is significant about this study is that it does not simply focus on emerging markets where this pattern has long been observed – it holds for the industrialised economies too.

It is important to stress that the UK is not some ungovernable basket case economy. Like (nearly) all western economies, it retains a strong institutional framework that is able to impose some checks on the way in which government operates. But the warning signs flashed by efforts to prorogue parliament in 2019 or the NAO’s findings that the pandemic “laid bare existing fault lines within society, such as the risk of widening inequalities, and within public service delivery and government itself” suggest there is clear room for improvement. Mounting concerns about the cost of Brexit in those areas which were initially most enthusiastic (notably farming and fishing) have done little to enhance trust in the government’s operating methods.

We should discount some of the more rabid media commentary which focuses on personality rather than policy. But there are creeping signs that a decade of fiscal austerity, a pandemic and the bitter Brexit fall out are eroding the quality of governance. This trend needs to be nipped in the bud for otherwise we will all pay the price.

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[1] Kaufmann, W. and A. Lafarre (2020) ‘Does good governance mean better corporate social performance? A comparative study of OECD countries’, International Public Management Journal, DOI: 10.1080/10967494.2020.1814916

 

Lockdown: The sequel

When the history of Britain in 2020 is written historians may well look back at Saturday 31 October as the point at which something changed. Not only did it mark the last weekend before the most momentous Presidential election in modern US history, which will have a big bearing on the UK (see below), but it was the day something else snapped. It was the day Boris Johnson was forced to introduce a second lockdown in England – a policy so deeply unpopular that he spent weeks denying it would be necessary despite calls from the scientific community that it was inevitable.

We can debate whether it is the right thing to do. My own view is that it is, and in the absence of effective medical treatment the government has little choice. But it represents yet another U-turn by a government which has continued throughout this year to follow a particular policy course despite evidence suggesting it was on the wrong track, only to do a 180 degree turn at the last minute. I suspect yesterday was the point when the government lost much of the little credibility it had left.

Other European governments have, of course, introduced second lockdowns and they are also unpopular. But the UK situation is different because it is led by a prime minister who is deeply distrusted by a large part of the electorate, despite winning a convincing victory in an election just over 10 months ago. Johnson carries so much baggage as a result of Brexit that he has to over-deliver in order to persuade his critics that he is up to the job.  Unfortunately for him, he has spent the last year over-promising and under-delivering. 

The domestic context 

Twelve months ago it was very different. Johnson had finally secured the go-ahead for the election he craved and went on to win a thumping majority in December, allowing him to deliver on his promise to "get Brexit done." The Conservatives promised to "level up" the regional imbalances in the UK, which gave a glimmer of hope to those outside the south east that they would finally get a fairer share of the national economic pie. It all sounded very promising. Then along came Covid-19.

Any government would have struggled in the face of this event. It represents the sort of exogenous shock that is talked about in economic textbooks with blithe authority but the reality of dealing with such shocks is a very different matter. It was inevitable that mistakes would be made. But it is the nature of the mistakes that has so undermined trust, giving rise to accusations of a lack of joined-up thinking.

One of the criticisms aimed at Johnson's government is that as the pandemic took hold the lockdown should have been introduced earlier. Maybe it should. But the scientific evidence at that time was not unanimously in favour and I would give the government a pass. But what was less forgivable was the decision to empty hospitals to make space to treat Covid cases without adequately testing whether those being sent out into the community were Covid positive. This allowed the disease to take hold in old age care homes and contributed to the UK's high mortality rate (this mistake was also repeated in Belgium). Nor did the government recover from the Dominic Cummings incident which gave the impression that there was one rule for those who were part of the inner circle and another for those who were not. The moral authority of the lockdown was at this point shot through.

Over the summer the government was understandably desperate to get the economy back on its feet. The policy of gradual reopening appeared to be working as case numbers continued to fall. But the Eat Out to Help Out scheme is now viewed as one of the catalysts of the second wave, with an economic paper by Thiemo Fetzer providing evidence that it “had  a  large  causal  impact  in  accelerating the  subsequent  second  COVID19 wave,” whilst the reopening of schools has accelerated the process. To some extent there is an air of retrospective criticism involved. However, whilst cautiously opening the economy was not necessarily a bad policy at the time, it may have been pursued too aggressively.

More damaging for the government has been the dispute between urban centres in northern England and the Westminster government about the introduction of regional lockdowns and the degree of financial support they can be expected to receive in return. The Mayor of Greater Manchester’s call for a package of measures costing a mere £65 million was rejected as being too expensive. But yesterday the government extended for another month the national furlough scheme, covering 80% of the wages of furlough workers, which is likely to cost around £10bn. To compound the problems, the footballer Marcus Rashford’s campaign to persuade the government to provide free school meals during holiday periods to children of low paid families has generated a huge groundswell of support. This comes after Tory MPs voted against the proposal on 21 October. In terms of the signals being sent, the electorate does not like what it sees. 

The international context 

This brings us inevitably to Brexit. The government has already achieved its aim of leaving the EU but so far has not secured the trade deal with the EU that it claimed a year ago was “oven ready.” What is more concerning is that its handling of the Covid crisis betrays a government that is not fully in control of its brief. Worse still, people are now beginning to wake up to the prospect that it cannot be trusted to deliver a Brexit that delivers what its proponents promised, as latest survey evidence suggests. Whilst not absolving the EU for part of the blame, the UK’s petulant negotiating tactics have made things far more difficult than they need have been. I have long believed that the government would be forced to do a deal with the EU because not to do so would be economic suicide. But the “skinny” Brexit deal which is the best the government is likely to get, is insufficient to help large parts of the economy even in the absence of Covid. In the words of former civil servant Ivan Rogers “we are talking about the difference between a very hard Brexit and an ultra-hard Brexit.”

And so to the US election. You may think this is tangential to the UK but it is not. A Biden presidency would likely seek to normalize relations between the US and its traditional European allies. But the UK is increasingly out of step with the rest of the EU and the current British government is viewed with deep suspicion by the Biden camp. Johnson leads a government with a nationalist, (semi) populist agenda which is viewed favourably by Donald Trump. This is one factor likely to count against it. Biden has also come out in favour of supporting the Good Friday Agreement which the UK’s Internal Market Bill threatens to undermine. With Joe Biden in the White House, the UK can forget any preferential treatment in getting a trade deal with the US, which makes it all the more imperative that it can reach an agreement with the EU.

The bottom line 

It is difficult to make any objective assessment of how well the current UK government has performed against its predecessors or indeed against its peers in other countries. But the degree to which the electorate is split on important issues such as Covid and Brexit is in my experience unprecedented. That said, four decades of polling evidence suggest that the government’s approval ratings have not suffered as much as the headline writers might have us believe (chart above). Indeed the current approval/disapproval rating is bang in line with the average on data back to 1977 (at 30% and 60% respectively). Do not forget that in summer 2019 the government’s approval rating fell to an all-time low of just 8% yet six months later it secured a big election win. Whilst it is too early to write off Boris Johnson this early in his term of office, he needs some good news if he is to have any chance of leading his party into a second election.

Good governance matters: Part 2

In my last post I looked at why the quality of governance is important for the wellbeing of the economy. In this post I look at some specific problems in the UK. Governance issues are something we associate with emerging markets where the institutions required to maintain the separation of government interests and those of the wider economy are often not embedded within a solid framework which protects their independence. Increasingly, however, western economies run the risk of falling into the same trap as nationalist politicians seek to undermine the framework in order that they can achieve their narrow objectives. 

This appears to be a particular problem in the UK which is undergoing a form of political revolution, though quite to what end and in whose interests is unclear. A few days ago I listened to an interview with Adrian Wooldridge of The Economist newspaper whose forthcoming book is titled The Wake-Up Call in which he explores how the Covid crisis has exposed the flaws in the model of western governance. He noted that we can trace the problems in the UK as far back as the 1960s when the hubris associated with being on “the right of history” meant governments took their eye off the ball. Wooldridge further made the point that over the past 40 years, as governments have tried to reduce the role of the state by contracting out service provision, they have also lost a lot of in-house expertise. This chimes with my long held view that the obsession with finding private sector solutions to state service provision often results in sub-optimal outcomes and is not proven to generate value for money for the taxpayer. 

Problem 1: Outsourcing government functions to the private sector 

There are numerous examples of how the outsourcing of public services to the private sector has resulted in less-than-ideal outcomes. Examples include the history of rail franchising where the main East Coast franchise covering the London to Edinburgh route has failed three times in a little over 20 years (one of these days I intend to look more closely at the issue of rail travel, since many of the flaws inherent in the current system were evident from the start way back in the 1990s). More widely, the National Audit Office two years ago issued a report on the Private Finance Initiative. Under this scheme a private finance company sets up a Special Purpose Vehicle (SPV) which then borrows to construct a new asset such as a school, hospital or road. This is repaid by the taxpayer over the contract term (typically 25 to 30 years). The NAO found “no evidence of operational efficiency” in the hospital sector and it is at best arguable whether private sector participation has delivered the benefits which its proponents promised. 

One of the biggest problems is transparency, or the lack of it. This takes two forms. The first is relatively trivial – the hidden costs associated with PFI schemes and the fact that off-balance sheet vehicles mean that debt does not appear on the public sector balance sheet. Such structures have been criticised by the OBR as a “fiscal illusion” since the debt burden associated with the provision of public services is higher than the official figures suggest. The second form of transparency is more nebulous and relates to the way in which public sector contracts are awarded. The law states that the government must produce details of any contract within 30 days of being awarded but as The Good Law Project notes, this requirement is routinely flouted. Over the course of recent months, there have been numerous examples of contracts being awarded to firms with links to government (see here for an example) whilst the FT reported last month that the government has awarded £1.7bn of contracts to private sector firms during the Covid crisis without a competitive tendering bid, as required by law. It may be that there is no case to answer here. But the evidence appears to suggest that due process is not being followed, which not only undermines the propriety of the scheme but is unfair on other companies with an interest in tendering for contracts. 

Problem 2: Pandering to special interest groups 

A further problem is that successive UK governments have allowed themselves to be distracted from the bigger picture by the demands of special interest groups which have exploited dissatisfaction with the status quo in the wake of the 2008 financial crisis. In 2014 the government was focused on the Scottish independence referendum, which David Cameron was confident he could win. But the government’s handling of the referendum betrayed the complacency of an administration that had made no provisions for what to do in the event that the result went against them. A similar complacency was evident in the run-up to the Brexit referendum but this time the result did indeed go against them.

On both occasions the government made the mistake of asking a question to which it did not already know the answer. It got lucky in 2014 but nonetheless gave momentum to the Scottish nationalists which they retain to this day. But it failed in 2016 and in so doing changed the character of the Conservative Party from a nominally inclusive party of national unity to, in effect, an English nationalist party. And it is here that the governance problem really starts to become a critical issue.

For all that Theresa May was not a great prime minister she at least tried to strike a balance between the moderates in her party and the strident Brexiteers (the nationalist wing). Unfortunately, this also meant putting the unity of the Conservative Party ahead of the national interest. But because the Brexit vote effectively ended the era of consensus politics, it also brought an end to her tenure in Downing Street. We now have a prime minister in the form of Boris Johnson who is the figurehead for the nationalist wing. Whilst Johnson may be a very effective campaigner he is not a good administrator, as foreshadowed by his tenure as Foreign Secretary. Worse still, he leads a government of campaigners rather than governors and his key advisers are radicals who want to overturn the status quo. 

Problem 3: Make sure you know how to deliver the changes you promised

There is nothing wrong in wanting change: It is how one goes about it that matters. Brexit has been the defining issue of the last four years and after three years of political wrangling, the first thing Johnson did as prime minister was to prorogue parliament in a bid to force the policy through. As I noted a year ago, this was a profoundly undemocratic action. Worse was to follow as the Johnson government took action to expel Conservative MPs – the governing party, lest we forget – who dared oppose it. This is not how parliament is supposed to work: Its role is to hold the executive to account and such actions undermine the basis of the parliamentary system.

One of the defining features of the Johnson government is cronyism – the appointment of like-minded individuals to office irrespective of their ability and who are defended to the hilt even when they make big mistakes. We see this in the Brexit debate where the negotiating team is led by those who seem to think that the EU loses more from a no-deal Brexit than the UK. Precisely because they are true believers who have never doubted the righteousness of their cause, they may simply never have stopped to consider whether they might be wrong. That in itself is a dangerous trait as it promotes ideology over rational, evidence-based policy – an approach which has a habit of ending badly.

We also see cronyism in action in two more policy areas. The first – and perhaps least important – concerns the recent exam debacle (here for a sober assessment of the issue). It now transpires that the government was warned about the problems of the algorithm used to provide grades in the absence of sitting the exams. However, the government is trying to distance itself from the problems and appears to be laying the blame on civil servants for the problems rather than accept its own failings. 

We see it in the way the government has handled the Covid-19 problem. This article from The Atlantic Magazine suggests there was institutional failure, as large parts of the state mechanism were insufficiently prepared for the scale of the crisis and were slow to adapt. Whilst it is true that the government cannot be blamed for all that went wrong,  the article fails to mention that the changes imposed on the health system by the reforms introduced in the  Health and Social Care Act of 2012  crippled its ability to respond. Moreover, the law was changed in 2012 in the teeth of opposition from health professionals who warned that it risked undermining the operability of the health service. The government’s response to the failings has been poor. It is set to abolish Public Health England in what looks like an attempt to deflect the blame onto the health service (never mind that PHE is an executive agency that actually reports to the health minister – it is not some out-of-control quango). And to add insult to injury, the new replacement body will be headed by Baroness Dido Harding - a Tory insider with a chequered business career who has no background in public health. 

At some point, however, the government will run out of ways to deflect the blame for its shortcomings. It will have to stop operating as if it were running a campaign and start to govern effectively. It cannot afford any more missteps and needs to get Brexit right. For if not, the economic as well as the political costs will be very high indeed.

Good governance matters: Part 1

The quality of government and governance matters like never before. It is the foundation stone of the institutional framework around which our economies operate, and the liberal democratic model which has done so much to generate prosperity over the last 70 years is very much in the firing line. Scarcely a day goes by without a reminder of how failure to execute good governance undermines the institutions necessary for the generation of prosperity. In the first of two posts, I will take a look at the bigger picture and why good governance matters for the economy before looking more closely at events in the UK where a series of government missteps threaten to pose major economic damage.

Different types of mismanagement but all have the same result

There have been numerous examples in recent years of the consequences of government failure. We need cast our minds back only a few weeks to the huge explosion which destroyed the port of Beirut. This was attributable to a government which in 2014 confiscated a large quantity of ammonium nitrate and failed to store it properly. Clearly the safety of the people was not high on its list of objectives and the episode demonstrates what can happen if governments pursue their own interests rather than those they are paid to represent. In the wake of this disaster, many people now see Lebanon as a failed state.

There are many slower-burning examples of what can happen when a prolonged period of mismanagement results in decay which can be covered up for a long time but eventually results in an inevitable collapse. An example of such a process is evident in Venezuela following the catastrophic failure of governance under the Chávez and Maduro presidencies. Another example is the policy paralysis and corruption in South Africa following years of misrule by President Zuma who mismanaged the economy to such a degree that it has registered an economic and social collapse comparable with wartime. Neighbouring Zimbabwe provides another example, where the Mugabe government ran the economy into the ground many years ago.

All these cases have one feature in common: The government in question used the resources of the state to personally enrich its members whilst ignoring the interests of the people they were put in office to serve. Government failure can also occur through the pursuit of ideological objectives, such as nationalist politics or a religious agenda, which also result in the erosion of the institutional framework. We see this in a number of countries where, as FT columnist Gideon Rachman put it the likes of India and Turkey are pursuing policies that “seek to fuse religion, the nation and the leader.”  For example, Narendra Modi has long campaigned in India on the basis of Hindu nationalism whilst in Turkey, Recep Erdogan’s government has moved away from the secularism of the country’s founding father, Kemal Atatürk. China and Russia have eschewed the religious element but both are engaged in a process of fusing the nation and the leader. We thus see Chinese nationalism expressed in the form of the “great rejuvenation” whilst the recent claims by Vladimir Putin that Russia has developed a COVID-19 vaccine reflect his efforts to score propaganda victories reminiscent of the Soviet Union.

The west is not immune to mismanagement and the US and UK have fallen prey to a nationalist/populist agenda which threatens to impose significant long-term damage to the institutional framework. Words barely do justice to the ineptitude of Donald Trump with Barack Obama criticising him for turning the presidency into “one more reality show that he can use to get the attention he craves.” The United States is the biggest economy and most technically sophisticated nation in the world, and is home to a great number of very smart people. Yet the government is headed by a man who cannot engage in intellectual debate and appears to have nothing positive to offer the electorate. Trump got by in 2016 on the back of the slogan “make America great again” by dog-whistling to an angry electorate that felt it had been left behind. The polls do not suggest he can pull the same trick in 2020 although we should not rule him out just yet.

Why government matters

Most of us in our day-to-day lives do not notice governmental ineptitude until it becomes a critical systemic problem. We are too busy just trying to get by. But the institutions which underpin our economy are often taken for granted and we only notice them if they are no longer there. Take, for example, access to the legal system. Article 7 of the Universal Declaration of Human Rights (UDHR) states: "All are equal before the law and are entitled without any discrimination to equal protection of the law.” But if access to the legal system is prohibitively expensive, as it is for many in poorer countries, they are unable to enjoy that equal protection. Restricting access in this way means that the legal process becomes the preserve of the well-off and entrenches inequality of opportunity. This does not just happen in emerging economies. In the UK, the government took the decision to restrict access to Legal Aid in 2012 which has reduced access for many lower-paid workers and resulted in many charities having to step in to help out those with problems related to housing and access to social benefits.

There is then an issue of the judiciary’s honesty and independence. In many emerging markets, the integrity of the judiciary is questionable. But even in the US, where honesty is not in question, successive US presidents have packed the Supreme Court with nominees reflecting their own ideological bent, thereby ensuring that their political philosophy can echo long after they have left office. This ideological stance matters because it shapes the way people behave which then impacts on the operation of the economy.

Restricting equality of opportunity, either indirectly by hindering access to the legal system or directly via other forms of discrimination, soon translates into inequalities in wealth and income. This has far wider reaching economic consequences. The economic literature suggests that high levels of income inequality have adverse consequences for health, particularly for those lower down the income scale. There are also impacts on educational achievement which is vital in delivering the skills relevant for modern, service oriented economies. Segregating children on the basis of parental income tends to perpetuate educational underachievement for poorer families since the evidence suggests children’s school success depends at least partly on the interests and aspirations of their peers.  

These examples clearly demonstrate the history of post-industrial revolution economies whereby they become richer when equality of opportunity is enhanced, thus generating positive externalities for the economy as a whole. It is thus no surprise that poorly governed economies, in which the government is focused on maximising its own interests at the expense of the electorate, tend to be economically poor. Western economies are not immune. Although Donald Trump has not been in office long enough to do real damage to the US institutional framework, his actions have damaged the US’s standing on the world stage. At least the damage caused by Trump may partially be reversed if he is voted out of office after four years. But in the UK, where the government imposed a permanent shift in the institutional framework on the basis of a dubious referendum, the economic and political damage will be longer lasting. That will be the subject of my next post.