Tuesday, June 28, 2011

The lights were definitely on but there was no one home: Brussels Economic Forum

One of the songs I have been listening to on and off this year is an oldie by Donovan, called “The season of the witch”. It’s a great number but it also echoed with some of my thinking. It is as we are in the season of “witchcraft”, in fact we are in the season of a lot of “bad witchcraft”. There is a kind of bewitched charade being played out on issues that are at the root of why we are living in an “age of crisis”.
I say bewitched, because everywhere there is in fact a healthy assessment of the shit we are in, BUT reaction/response/struggle are somewhat muted.
Take the big crash, that’s what we’ve had, its not just another “crises” as our leaders would have us believe , what we have had is a crash that leaves the model fundamentally broken, even on its own terms. No amount of patch work remedial repair work will put it back together again. A lot of people know this and yet we buy the policy of our respective governments. We are in effect “bewitched” into accepting solutions that will impact badly on our own children as well as ourselves. At EU level we have the EU 2020 strategy as our guiding light when its predecessor the “Lisbon strategy” so spectacularly failed. We are accepting coca cola light when in actual fact its not coca cola we need.

Recently,I went along to the Brussels Economic Forum which according to its publicity "offers a unique opportunity to discuss the new era of EU economic governance. High level decision-makers, economists, social partners and the media will gather at the Forum on 18 May to debate and exchange ideas".
High level decision makers were clearly present so too were some economists and people from trade unions and business (this is what social partners means in eurospeak).The majority of participants (based on the participants list provided to delegates ) were from EU institutions and from within the Brussels “bubble”.

What this meant is that there was no debate or even exchange of ideas. It was largely about information sharing. There were no disagreements between presenters and indeed there was kind of “gentleman’s” agreement (and yes they were overwhelmingly men speaking) that all was well, the EU economy was recovering from the crisis. Steps were being taken (like Basel 3 and the Stabilisation fund) which would ensure that we would not be faced again with such a crash. Indeed what really struck me was the way in which those who had not seen the crash coming were so enthusiastically talking about how they had dealt with the crisis and thus created a “blue print” for future bureaucrats faced with a similar problem. These were your DIY guys talking about how there was no procedure that could have followed when the “shit hit the fan”. They had to create new procedures. The crash was thus a challenge in that there was no road map for dealing with it.

The real irony is that their DIY solutions simply focused on better regulation of the financial sector. While the crises initially appeared in the financial sector, the origins of the problem are much deeper and cannot be addressed simply by repairing the “plumbing” of the financial sector.
NO mention of the underlying problem of income inequalities. It is now widely recognized that in most advanced industrial countries, median wages stagnated during the last 30 years, while income inequalities surged in favour of the top 10% and indeed 1%. In effect money was transferred from those who would have spent to meet basic needs to those who had far more than they could easily spend, thus weakening aggregate effective demand. We know how this played out. The negative impact of stagnant real incomes and rising income inequality on aggregate demand was largely offset by “financial innovation” and cheap credit that allowed households to increase consumption by borrowing.
On the other hand, the search for yield by the higher income classes to invest their increased incomes supported the formation of non sustainable asset bubbles.

NO mention that there have been policy failures at both the micro- and macro- economic levels. Loose monetary policy, inadequate regulation and lax supervison interacted to create financial instability. “Reforms” over the last three decades have infact exposed countries to greater instability and reduced the impact of “automatic” stabilizers.

NO mention about the lack of “accountability”. Its like as if the house got trashed but we are not going to discuss who trashed it. Not only that, we are going pay for the house to be fixed whilst the perpetrators will get our support in helping themselves to trash the house again. Not one voice which asked why have we socialised private losses. Why are young people and those less well off being asked to pick up the price of a rich peoples party that got out of hand.

NO mention of the fact that in the post crash context, the financial sector is even more concentrated, the problems of “too big to fail “ have actually increased.

No discussion about how in the post crash context global imbalances remain unabated.Indeed the current receipe is the same as the old one..growth through increased consumption…though ,now we simply want the Chinese to consume more.This is simply crazy. You cannot cure obesity by consuming more. We will not prevent another crash by simply encouraging countries to consume like us . Our plant cannot simply sustain a global lifestyle based on our patterns of consumption.


NO mention that the crash exposed the underlying problem with the free market model that has driven and is driving economic policy. Take the example of Iceland, the deregulation of the banks and the unleashing of a free market regime tore apart a country that had been performing well . The bank meltdown was directly linked to the free market model that was introduced in the 1990’s. Take Ireland. This too has faced a crisis largely because it followed the standard free market orthodoxy: unfettered markets led to a bloated financial sector which put at risk the entire economy; while politicians boasted of the growth (the benefits of which were not uniformly shared) they took little note of the risks to which they were exposing the economy. The core lesson of Ireland’s experience – and that of the US – is that we cannot rely on unfettered markets or self-regulation. Joseph Stiglitz has called this system” ‘ersatz capitalism’, the essential ingredient of which is the socialisation of losses and the privatisation of gains. This ersatz capitalism is closely related to the corporate capitalism that flourished under Bush and Reagan. In some cases, who pays for these gifts to corporations is not so transparent: in the end, of course, it is ordinary citizens, whether as taxpayers or consumers who pay, but often in ways that are not easy to detect, for example, through tax expenditure or through higher prices on the goods they purchase.
NO mention that the belief that light touch regulation, limited government, low taxes, labour market deregulation and weak labour market institutions are all necessary ingredients of economic success has proved to be a recipe for volatility, excessive risk taking, growing income inequality and, in some countries, the rise of precarious employment. While the richest in many parts of the OECD saw their relative position improve – sometimes dramatically – the poorest saw their relative position deteriorate. The OECD itself documented the rise in inequality in its landmark publication Growing Unequal in 2008 (OECD 2008).

NO Mention also that it is NOT true that the policies that we might usefully label as “market fundamentalist” ,led to better economic performance before the crisis broke.This troublesome fact was recognised by the OECD in their reassessment of the 1994 Jobs Study, published under the title Boosting Jobs and Incomes in 2006 (OECD 2006). It was accepted that two groups of countries had achieved ‘good results’ (defined as a high employment rate, moderate inflation and apparently robust growth): those pursuing ‘market reliant’ policies, such as the US and the UK, and those pursuing policies with higher taxes, stronger employment protection legislation, more generous unemployment benefits and much higher investment in active labour market programmes (including Austria, the Nordic countries and the Netherlands).

As I have written elsewhere, we are in grip of the “Positive Illusion Front”(PIF).

http://povertyofpolitics.blogspot.com/2010/10/mission-impossible-why-eu-strategy-for.html

This is the loose and not so loose (interlocking) coalition of willing interests who are all in some way implicated in the “crime of the century” though which we have all been collectively robbed by the very people who we “trust” to ensure that our human rights are preserved.The message of the PIF is simply this “we’ve had a rough time, we have to put our house in order, it means sacrifices for all, it means we must get more competitive (reduce pay and conditions of employment and increase dividends for shareholders), we have to grow through innovation and stimulating consumption , we have to pull together”. The PIF infact seeks to depoliticize reality and just present it a requiring a technical fix. AS such the PIF embodies the idea of “end of history/end of ideology”. Whilst it may be true to say that an ideological distinction based on “left” and “right” party political configurations is in fact redundant, what patently is not true is that the debate about “good” and “bad” capitalism has even really started, except in our public squares not inside gathering such as the BEF.

Thursday, June 23, 2011

Smart Specialisation: a new insight or just more policy blah blah.

Regions for Economic Change is a “programme” launched some 4 years ago which has its annual high point each year in the form of a conference and doling out of some trophies to good practice .Since its initiation, the world has changed but the REC event remains the same the only difference being is that when it was launched it was focused on the (now failed) Lisbon strategy, whereas today it is focused on EU2020( which has yet to fail).

So naturally the focus this year was on one of the 3 key pillars of EU2020, namely “smart growth”. Indeed its obligatory these days inside the Brussels bubble to prefix everything with the adjective “smart”. So we have now got smart cities, smart growth and now smart specialisation to go along with the smart and not so smart people inside the Brussels bubble.

Dirk Ahner, who I like very much, hit the nail on the head when he highlighted that the use of “smart” meant that we also needed to define what “stupid” meant. I suspect in the nature of such discussions it will end up being “scales “of smartness. Smart level 1(another way to say dumb) to Smart level 5.

Smart specialisation (SS) is the new “bullet” in regional policy. But what is it? Professor Foray, who is credited as one of the academics who have “fast tracked” this new concept from the lecture hall and academic journals into the core of Cohesion policy, tried to spell out why we need SS and what were its key ingredients .
Here is what he said. We need SS because regions cannot do everything, they have to concentrate their resources by developing distinctive and specific specialisations and in so doing, avoid regional competition.
The key ingredients he said are:
• Entrepreneurial discovery
• Supportive regional policy
• Decentralised market development
• Emulation/multiplication possibilities

So in a nut shell, its about finding a market niche by specialising in something that already goes on and that through a process of transition can become something that creates SS.

Having done the why and the what, the professor naturally had to deal with the how. Here’s where the concept became somewhat problematic. Here is the recipe for creating an SS.

First establish an “entrepreneurial process of discovery”. This means establishing a “learning process to discover the research and innovation domains in which a region can hope to excel. In this learning process, entrepreneurial actors are likely to play leading roles in discovering promising areas of future specialisation, not least because the needed adaptations to local skills, materials, environmental conditions, and market access conditions are unlikely to be able to draw on codified, publicly shared knowledge, and instead will entail
gathering localized information and the formation of social capital assets.”
The problem is that the recipe is silent on how you would undertake this step, apart from the fact that participation by entrepreneurs would need to be incentivised. Infact the professor acknowledges that this poses a “public policy problem.”


Second,( and here I am now drawing on the professors briefing paper quoted above as in his presentation he glossed over this step) use “specific properties of General Purpose Technologies (GPTs) ..(to)..define aframework that helps to clarify the logic of Smart Specialisation (SS).”

You can easily find a GPT because ,”in fact, the characteristics of a GPT are horizontal propagation throughout the economy and complementarity between invention and application development. Expressed in the words of an economist, invention of a GPT extends the frontier of invention possibilities for the whole economy, while application development changes the production function of a particular sector.”

Third, create a grouping of leader regions and follower regions. The “leader region(s)” will have to “invest in the invention of a General Purpose technology (GPT) or the combination of different GPTs , follower regions often are better advised to invest in the « coinvention of applications » - that is – the development of the applications of a GPT in one or several important domains of the regional economy.

Fourth and finally, you need lots of government to do the following:

• “Supplying incentives to encourage entrepreneurs and other organizations (higher education, research laboratories) to become involved in the discovery of the regions’ respective specialisations.
• Evaluating and assessing effectiveness so that the support of a particular line of capability formation will not be discontinued too soon, nor continued so long that subsidies are wasted on otherwise non-viable enterprises.
• Identifying complementary investments associated with the emerging specialisations (educational and training institutions, for example) in the case of a region investing in the co-invention of applications of a General Purpose Technology (GPT). Supporting the provision of adequate supply-responses (in human capital formation) to the new “knowledge needs” of traditional industries that are starting to adapt and apply the GPT, by subsidizing the follower region’s access to problem-solving expertise from researchers in the leader region, and by attending to the development of a local personnel that can sustain the incremental improvement, as well as the maintenance of specialised application technologies in the region.”


In discussion with other delegates at the coffee break, it became clear that I was not the only one to be left about confused by what exactly is SS? What make it different from what “smart” entrepreneurs already do? How can you create this entrepreneurial discovery process? What about would be entrepreneurs? What makes it different from existing “smart” strategies? How transferable is it to the real policy context? How viable is it?

These questions , I thought would emerge in the post coffee session. Indeed, John Bensted-Smith, Director IPTS, asked some key questions to an assembled panel: Given financial retrenchment is SS viable? Can all regions engage in SS? He also added some additional requirements for SS. In particular the need for finance, an integrated approach, recognition of local strengths and weaknesses and using the phrase from Schumpeter, the need for “creative destruction”.

Unfortunately the panel that responded to these questions simply were not able to add anything more substantial. Indeed, some of the contributions were just vacuous. I must quote here the rapporteur for Innovation Europe from the EP who said “competition is good, finding each other is better”. She must be a facebook fan to come out with such banality . More significantly, though, one of the other two politicians on the panel highlighted the problem of “timescale”. How can you realise the SS recipe within a political short term cycle? No one answered that point.
In addition the politician from PACA, like most of us, had failed to understand what the hell SS is as he equated the 29 clusters that have been regionally created as SS’s. The bad news is an SS is not a cluster as the professor was at pains to state. Clusters are in fact “bureaucratically”driven forms of specialisation and co-operation. They do not have the SS “umph” which is all in the iterative process of top down and bottom up.

I left still wholly unclear about SS. Indeed, I left with a view that SS is best left as an academic tool and not one that can be transferred into the policy domain in the way envisaged. The world as envisaged from the SS perspective does not correspond to the reality of the economic and political crisis that we are in the grip of. Moreover, SS has a purely, functionalist approach to growth. SS offers simply a technological fix , when its not the technology we lack its actually an appropriate model for economic growth in a post crash Europe that is facing multiple challenges which requires a different value base to the way we do economics. Smart growth cannot simply be about economic development. We have had not so smart growth for the last 30 years , for SS to work we have to change the way we do politics and pursue economic development that reduces the huge inequalities that EU2020 is creating and Lisbon and its predecessors have created.