The Economist had an article a few weeks ago about how the British are starting to realize that Brexit as it was explained to them does not exist. The magazine announced the article as "Descending Mount Brexit." There are similar phenomena in many places. Nation-states believe they are sovereign, but they are not. They believe they are independent, but they are not: "The Europeans also stand to lose from a shallow trade deal. Their hope is that Britain will seek to converge with EU rules once the regulatory trade-offs become apparent. Should the talks proceed relatively smoothly, in time the two sides may find themselves building, law by law, institution by institution, a regime not dissimilar from the one they are preparing to dismantle. There are signs of this already. It is an “absurd” exercise, says an EU official. We are reinventing many of the instruments we already have." It may thus well happen that an agreement will look very similar to the institutions that were in place just before the referendum, and that remain in place today, with the only difference that the UK government will not be sitting on the table where decisions are made. Donald Trump thought that he could also stop the rotation of the Planet building walls and backpedalling on trade deals, but he is realizing that most things he promised ("bring back coal") are not feasible in our interconnected world. Even Marine Le Pen I just heard that, as she is trying to broaden her appeal, has said that now she does not want to abandon the euro, just create a national currency that coexists with the common European one. She is trying to replace one type of monetary chaos with another one because she is realizing that most probably it would just be too costly to abandon the euro. The far left French candidate Melenchon cannot make his mind between Mrs. Le Pen, a Holocaust negationist, and a pro-European candidate, because he shares with the Front National the XIX-century notion that socialism, or any political project, can be built in only one country, as if François Mitterrand had not had to change policy in 1981 when he tried to do precisely that. In 2017 the world and France are much more interconnected than in 1981. All these national-populists keep promising impossible things in our global reality, but the things they say are simple and appealing to many voters. In Catalonia, a tourist guide just told an American friend of mine that the Spanish government does not allow a free and fair referendum about Catalan Independence. Although the Spanish government is handling the Catalan question very opportunistically (because extreme nationalisms feed each other), the Catalan government and the Catalan secessionists are not trying to call a free and fair referendum, but a referendum controlled by one side without a neutral media and without neutral rules, and not based on the legal framework and broad consensus that international institutions demand in the extreme cases where similar votes are necessary. "National" self-determination is an example of a superficially persuasive idea, but the fact is that most democracies in the world do not allow the self-determination of parts of their territory through binary referenda, that is through divisive plebiscites where lies and threats are exchanged (like in the Brexit referendum). He have in fact in our land more free and fair elections than any country in the world, but governments at different levels quite obviously cannot call a referendum on any topic that crosses their mind and that goes beyond their responsibilities. But democracies only split or unify through broad consensus and international agreement, and if they do so the issues are very complex and can be traumatic. Many of our voters are open instead to hear simplistic messages because they were raised in a frame of mind where the relevant unit was one country, with one flag, one language, one currency, one army and one football league. That world is gone. If we do not build a multi-level democracy for our complex Planet, we will not have democracy any more.
Two sets of problems make collective decision-making difficult, as well understood by economists and political scientists for a long time: collective action problems and social choice problems. Collective action problems arise because of free-riding: when some good or action benefits a broad collective, individuals have an interest in waiting for the others to incur the costs of providing the good or doing the action. Social choice problems arise from the difficulties of going from individual preferences to social decisions. We know from Condorcet and Kenneth Arrow that the rankings that individuals make of different alternatives are very difficult to translate into social decisions that satisfy a minimum list of desirable conditions (or axioms). In particular, it is very difficult to come up with examples where individually transitive rankings of (at least three) alternatives can be converted by some voting rule into a collectively transitive ranking. That is a big cause of political instability in democratic societies. There are cases where the problems identified by Condorcet and Arrow can be overcome. For example, if the alternatives can be summarized into only two, then the cycles induced by majority rule disappear and a stable solution exists. If the preferences of individuals are "ideological" in some stable sense, this also facilitates stability. Experts in the theory and history of political parties explain that these organizations have over history helped to alleviate both collective action and social choice problems. By reducing the costs of political organization for individuals, they were more willing to join collective efforts to fight for common causes, overcoming the free rider problem. Also, by organizing through shared identities, they facilitated the identification of people with stable ideologies, therefore balancing the tendency of democratic politics to instability. I would conjecture that technological change has an asymmetric effect on these two phenomena. On the one hand, the Internet and social networks facilitate political organization. Party-like organizations are very easy to set up these days. The personal costs of being involved into anything are minimal. Collective action is easier. However, smaller and smaller party-like organizations are possible. Small echo-chambers are very easy to organize, and for some reason that I don't fully understand they set a premium on disagreement and small identities. Political entrepreneurs appear from nowhere when things look stable, organizing around hardly coherent "ideologies", like left-wing nationalists or pro-working class tycoons, thus complicating social choice.
I would have liked that a pro-European socialist candidate finished in the first position in the French election. But it will not happen. At this hour it seems that Macron and Le Pen will dispute the second round of the French presidential election. The choice is clear: either a pro-reform agenda of France in Europe, or a europhobic racist option. In the last hours before the election it was sad but not surprising to see the current holder of the US presidency cheering for Le Pen from Twitter after a terrorist attack. It was also sad to see a leftist Spanish politician (Pablo Iglesias of Podemos) supporting a euro-sceptic candidate in the last hours of the campaign. Of course two of the losers of the first round, the socialist candidate Hamon and the conservative Fillon, have done the decent thing of asking their voters to support Macron in the second round. The favourite to win the second round has been the only candidate to argue that France must transfer more sovereignty to the European Union. That is very good news. But now all the energies should go to support him in the second round. The left has a future in trying to advance its agenda in a European context, and accept that the nation-state is obsolete in Europe. France needs reforms, and needs to present more energetically a pro-European frame of mind to defeat the extreme right. Trump, Putin, and all the national-populists in Europe and the world would be very happy with a victory of Le Pen in France. It will not happen because the young and the decent majority of French voters will stop the demagogs. Let's make with our energies and support the next two weeks a period to remember in the fight to mobilize everybody in France, and especially the young, in favor of a better and united Europe.
We have been raised in modern times as having one nation with one flag,
one anthem, one army, one currency, one language... and also one soccer
national team and one soccer national league. In the last decades, the
notion has been eroded, at least in Europe, by the creation of a shared
common currency, shared military alliances, the expansion of
multilinguism and the integration of societies and economies... and the
UEFA Champions League in soccer. The recent surge of nativist movements
is perhaps a desperate reaction against these trends. Still, national
soccer teams and national leagues have too much appeal (to my taste) to
believe that the forces of internationalism are prevailing. Although
soccer has become a global industry and fans follow all great games from
any place in the world, national institutions still have too much power
and are a barrier to the expansion of a more attractive soccer. Of
course, the removal of these barriers should go hand in hand with a
removal of the absolute power of FIFA, perhaps with the creation of a
more professional and globally regulated body. I am relatively
optimistic about the decline of most national leagues. Only a few of
them can survive as relevant in an integrated industry. Even if now the
English Premier League looks as dominant, we still have to see how it
will survive if Brexit becomes a true hard Brexit (to be seen). If it
does survive, the other European leagues will have to decide how to put
up a better European league, perhaps a super-league where we see all
year around games like the ones we see from the quarter finals to the
final of the Champions League every year (only two months of really good
games). I am more pessimistic about the decline of national teams.
Tournaments between national teams have become more and not less
competitive and interesting, because as Branko Milanovic
once argued, the institutional rules are such that all good players
from any country can only play for one national team, so most of them
benefit from having a more competitive industry at the club level, which
delivers best top players for every country. Hopefully, games between
national teams will become like games of "Calcio Storico" in Florence or
Siena: fights between two teams wearing clothes with meaningless
Stephen Sackur and his excellent programme Hard Talk of the BBC (a symbol of free speech) have been in Venezuela recently. They had to enter the country in a clandestine way, but they managed to conduct interviews and to show the miserable condition in which citizens live today, despite having the resources and the potential to be the richest society of Latin America. Sackur and his team show in the documentary that resulted from their visit the disasters of the governments of Chavez and Maduro:
-Violations of human rights. One of the opposition's leaders, Leopoldo López, is in jail, black lists are frequent and the free press is in danger (Sackur himself had to leave the country and the producer of Hard Talk was arrested and interrogated for 24 hours before being deported).
-Macroeconomic mismanagement. Today the inflation rate is around 2000% and there are three exchange rates.
-Microeconomic mismanagement. There is scarcity of essential goods and medicines and people have to spend hours queuing for basic necessities suchs as bread and other food.
-Violence and insecurity. Caracas has become one of the most dangerous cities in the world, violent branches of the followers of Maduro are free to move, and kidnapping bands are one of the few prosperous businesses (Sackur himself managed to interview one of these gangs with the interviewed showing their guns).
-Political and institutional chaos. Recenty the Maduro-dominated Supreme Court tried to shut down the Parliament but retracted hours later amidst local and international pressure.
It is ridiculous that some in the left still support or do not condemn disasters like the one happening in Venezuela.
Reading together the reedition of Amartya Sen's book on social choice and Scott Page's book on diversity, a coherent picture emerges of the challenges and promise of diverse societies. Societies where individuals have different instrumental or fundamental preferences have difficulties in making collective choices that are stable, rational and efficient. That is the message from Arrow's impossibility theorem. Sen takes these difficulties very seriously and argues that they can be to some extent overcome by having more information about the concerned individuals, and by reasoned discussion with facilities for fact checking. In a footnote in page 276 (which deserves to be expanded in a whole new book) Sen argues that "there may be something unsatisfactory even in political problems in the possibility of going for a vote-based resolution instead of having further discussion, thereby neglecting the need for any required clarification and understanding of the issues involved. Voting on underdescribed -and sometimes misdescribed- alternatives, for a quick resolution, can go against a better informed -and wiser- social choice. There may be good reasons for restraint before going for a vote." David Cameron probably did not know about it. Individual preferences are not exogenous, but depend on social structure and the evolution of institutions, technology and culture. The genesis
of individual preferences deserves scientific and cultural scrutiny. As we move from committees to nations to global issues, the need exists for
examining ethical claims from a certain distance. Then Scott Page also argues that diverse preferences, although presenting social choice challenges, also offer the opportunity for diverse perspectives that help to solve problems with uncertain solutions. Diverse communities or groups do not succeed automatically, as cycling is not something that one learns without some training. But once you learn, cycling goes much faster than running, which is much easier.
There is a fascination among secessionist groups in Catalonia for US presidents that support the self-determination of small nations. Thus, a group of Catalan nationalist economists decided to call themselves Wilson Group, in memory of the US president that after World War I promoted the idea of small nations self-determination (idea that some can interpret as at the root of much of national instability in Europe in the XXth century). Last week, the Catalan regional government, one of the sub-central governments with more power and resources of the world, decided to spend some of these resources organizing a surprise expedition of the Catalan president to Georgia (USA) to meet for 25 minutes with former US president Jimmy Carter. Although there was no picture from the meeting, and although initially there was no statement from the Carter Center, the Catalan government and secessionist circles sold the event as a great diplomatic victory. They needed such a victory, because so far the expensive efforts to gather international support for the independence campaign have been an absolute failure, unless we deem a success the support of extreme right-wing parties such as the Italian Northern League or the Party of the True Finns. However, today the Carter Center has released a statement distancing itself from the call for a self-determination referendum in Catalonia, probably realizing that most mature democracies, especially in the European Union and in the Euro zone, do not organize divisive sovereignty referendums. Carter probably also had in mind in those 25 minutes the possibility of finding other solutions for the existing problems about the institutions of Catalonia and Spain. These other solutions have worked pretty well in the US, since the times of the Federal Convention in Philadelphia that resulted in the US Constitution. According to a press release signed by Deanna Congileo, head of communication of the Carter Center, neither Carter himself nor the center could be involved with this issue. The same day, the US embassy in Spain released a statement expressing its support for the unity and strength of Spain. Catalan secessionists have replied by saying that this statement was probably the result of pressure from Spanish diplomats. But that is what the diplomacies of democratic strong countries are supposed to do, right?
Martin Ravaillon has written an interesting review of two books I mentioned before in this blog, by François Bourguignon and Branko Milanovic respectively. His main criticism of the two books is that they have been publicized as establishing a causal link between globalization and global inequality, Ravaillon argues that it is not clear that global inequality has increased in the recent decades, because of data issues that prevent us from establishing firm statements and because different measures of inequality provide different conclusions. Global inequality is the combination of inequality between countries and inequality within countries. Althought inequality between countries may have decreased because of rapid growth of some large previously poor countries (like India and China), within country inequality has increased in some cases, although not in all as Ravaillon explains. In the famous graph of Milanovic's elephant, which is based on relative changes in income for the world's population, clearly the emeging middle classes from India and China have done better than the working and middle clases of the developed world (which means that between the 30% poorest and the 80% those closer to the 30% have done better, reducing global inequality), but the richest of the world have done much better than all those preceding them (increasing global inequality). If instead of using relative income we reproduced Milanovic's famous graph using absolute income, the elephant actually would become a giraffe, because the relative increase in income of the middle classes of the poor world is a very small amount of money in absolute terms (so the head of the elephant disappears), whereas the relative increase of the richest is a lot of money. Ravaillon argues that this may be at the root for why so many citizens have the perception that global inequality has increased when (perhaps) it has not. The advantages and disadvantages of relative versus absolute measures of inequality can be studied for example here. He also argues that the changes in global inequality cannot clearly be attributed to globalization, and therefore we should not easily blame this for any political consequences of the changes in inequality. Certainly lots of other things were happening at the same time together with globalization. At the end of the article he somehow unclearly argues that there are not many arguments to care about inequality at the global level more than we care about global poverty. But I find this unconvincing; just as national inequality may hurt growth and democracy nationally, global inequality may hurt global growth and welfare and distabilize the expansion of democracy globally.
Mohan Munasinghe, the co-winner of the Nobel Peace Prize with Al Gore some years ago, was in Barcelona on wednesday to give a very interesting lecture at the Water Economics Forum. He explained with detail why it is important that we try to combine economic growth with environmental protection and social concerns. He also addressed the specific issues of the pressure on water resources given by demographics and climate change. One idea he emphasized a lot was the urgency and necessity of striking the right balance between subsidiarity and integration in water policies. Climate change calls for enhanced policies of infrastructure investment and efficiency, coordinated with income distribution so that the poorest are protected from the price increases that are often needed to achieve these efficient changes. The levels of government that are closer to the citizens, as well as local communities themselves, have the information and the ability to manage policies of good resource use. At the same time, water is a scarce resource that is unequally distributed over time and space, which makes it necessary to share it in a coordinated way. Many experiences show that this is challenging to say the least. But unless we improve the balance between subsidiarity and integration of water policies it is going to be very difficult to develop the effective water policies that are necessary. In my participation in a roundtable of the same event, I tried to apply the lessons of Mohan Munasinghe to the case of Spain. The success of water policies in Spain clearly depends on this balance. Spain is integrated in the European Union and the euro zone, and has no plans of withdrawing. On the contrary, there is a political and public consensus on staying, and on participating in the core of the Union with those that are willing to integrate even more. And Spain is also a very decentralized country, with 17 powerful regions, more than 8000 municipalities and two metropolitan areas (Madrid and Barcelona) with justified international ambitions. Our water policies will remain very decentralized, but there is scope for improving how this decentralization works, and there is scope for achieving better inter-regional coordination and better coordination with European-wide policies and iniciatives. I suggested that at the Spanish level there is perhaps scope for a federal water regulator, not one that takes away powers from lower government levels, but one that provides a forum for agreements between users and territories, and that makes a systematic effort of information collection and difusion of good regulatory practices and standards.
This coming week I will talk at an interesting event, the Water Economics Forum, in Barcelona. I will briefly speak at a roundtable together with practitioners in water regulation from Portugal and the UK. Although I am no expert in water regulation, I plan to address some of the issues of governance in the regulation of water (as well as other network industries):
-The difficulties and challenges of regulation in a multilevel democracy (Spain being a decentralized country in the eurozone and the EU). Who should do what? Can we find room for an "independent regulator" or several of them? Strengths and weaknesses of each level in the case of the water industry in times of climate change and other challenges. Independent regulation is not a yes or no dimension and interacts in complementarity with other institutions. This complementarity is probably more important now than some years ago because of climate change and related challenges.
-The need to somehow involve the citizens in regulation, not in a radical democracy approach, but in ways that increase democratic quality. Akerlof would say that we need a better narrative, others would say we should incorporate a fourth P in PPP (for people or population). Otherwise the regulatory compact will be fragile and investment incentives will suffer. Mechanisms of resource allocation, including markets, must be embedded in a broader social compact, to have legitimacy and provide true long term incentives for investment.
-The reasons for the widespread lack of popularity of private ownership involvement in water, but at the same time its potential in terms of innovation and incentives: how to address these reasons and find a democratically accepted role for private ownership? In his last book, which I read in French ("L'Economie du Bien Comun"), Jean Tirole argued that the new role of the state in the economy did not include ownership. I am not so sure, or at least I am not sure that democratic polities are ready to accept it. But I hope I will have time to discuss that with Tirole himself, because he'll be at the event!