Saturday, July 26, 2014

Independence is not what it used to be (a brief comment about McCrone's book)

The book by Gavin McCrone "Scottish Independence. Weighing Up the Economics" is a comprehensive account of the economic issues involved in the referendum about the independence of Scotland that will take place in September. There are chapters on welfare, on monetary policy, on financial regulation, on energy, on fiscal issues, and others. Two of the main ideas are i) that even in the case of "independence" the Scottish powers will be strongly constrained by the realities of economic links, and ii) that the intention of the Scottish nationalists to remain in a currency union with the UK after independence is contradictory with other objectives of secession. On the first issue, the constraints of an independent Scotland, it is quite clear that an "independent" nation-sate in the European Union in the XXI century is not the same as an independent nation-state say in 1922, when Ireland became independent (and as the author explains, started a long and painful road until becoming a rich nation), let alone when Scotland was independent until 1707. Many of the discontinuities between national borders in the past have today disappeared in Europe, and a national government is today constrained by flows of people, capital, and by the rules of the European Union. Relatedly, many policies that the Scottish nationalists claim that would be possible under independence are possible today and are not being implemented, or would be possible under enhanced devolution. On the second issue, the problems of a currency Union with the UK, McCrone stresses the difficulties of keeping a currency union and at the same time pretending to have fiscal sovereignty, something that was also pointed out by the Governor of the Bank of England, Mark Carney. This is an excellent and very balanced book by one of the persons that better knows the Scottish economy. He claims that an independent Scotland would be a perfectly "viable" state, and does not use any scaremongering arguments at all. But his conclusion is clear: the uncertainties and contradictions of the project for Scottish "independence" are such that the alternative of a better devolution scheme in the context of a rebalanced (federal?) United Kingdom is much stronger.

Thursday, July 24, 2014

Two very promising books

I bought and started reading two very promising books, one on the economics of Scottish independence, and another one on the politics of banking crises. The first is the essay written by Gavin McCrone, "Scottish Independence. Weighing Up the Economics" according to many the most objective and neutral analysis of the economic aspects of the independence debate in Scotland. I couldn't resist the temptation of reading the conclusions: they are basically pro-federalist, that is, no to "independence," no to "devolution max," but yes to "devolution plus." More details when I finish reading the rest of the book (with chapters on fiscal issues, banking crises, energy and others). The other book I bought and started reading is the one on the history, economics and politics of banking regulation and banking crises, by Calomiris and Haber "Fragile by Design. The Political Origins of Banking Crises and Scarce Credit." The book is basically in the tradition of Douglas North and the New Institutional Economics, and it argues that banking institutions are the result of political forces and lobbying coalitions that manage to entrench arrangements that are not necessarily efficient or in the common good. A minority of countries (including Canada) have produced institutions that avoid banking crises, but most countries (including the United States) have not been able to do so. The book seems to tackle head on the tensions between democracy, populism and sound regulation. I am sure that I will not agree with everything, because at the end of the book they confess their admiration for two personalities: Alexander Hamilton (I have nothing against him) and Margaret Thatcher.

Sunday, July 20, 2014

This is the debate we should have: what kind of federalism?

Peter Singer says in an article that "The European Union has brought 28 countries into a closer political and economic union. Paradoxically, it has also made it more feasible to contemplate the breakup of some of those countries. Independence for a small state outside of a political and economic group like the EU would be risky nowadays. Within the EU, however, the barriers between states – and thus the economic and political risks of independence – are lower." He explains much better than I did how the nationalist elites of these small old nations are free-riding on the idea of Europe: "if Scotland and Catalonia ever become independent countries, it will only be because the UK and Spain permit it. All states have an interest in stability, so it is hard to imagine that, in the absence of widespread, grave, and undeniable human rights violations, other states would recognize a region that, after being part of a state for many centuries, declared itself independent without the acquiescence of the country from which it secedes. The EU is also unlikely to accept Scotland or Catalonia as a member if the UK or Spain rejects their claims to independence. Indeed, European Commission President José Manuel Barroso has said that the EU may reject Scotland and Catalonia's applications, or at least delay them considerably, even if the UK and Spain do accept their independence. And, without EU membership, it is hard to imagine that a majority of people in Scotland or Catalonia would take the plunge into economic uncertainty that independence would bring. The role of a referendum in a region seeking to secede can therefore only be a form of persuasion aimed at the government of the existing state. A large turnout showing a clear majority for independence would be a way to say: See how strongly we feel about this issue. We are so dissatisfied with the status quo that most of us now favor secession. If you want us to stay, you need to address the grievances that have caused a majority of us to want to leave." I strongly agree with Singer's arguments. Given that secession cannot be justified in democratic countries where human and many other rights (including the right to self government) are widely respected, the debate we should be having is the debate that is typical in civilized societies like the USA or Canada: what kind of federalism should we have in Europe and its member states?

Thursday, July 17, 2014

Andorra or Denmark? Secessionists free-riding on the idea of Europe

Secessionists in Catalonia and Scotland pay lip service to the European ideal: they want, so they claim, to be "independent" member-states in Europe. They want to be "like Denmark", small countries with a very high standard of living and high quality institutions. However, it is hard to see how they can build these institutions, which in the case of Denmark have their origins in an era where financial and trading transactions across borders were much lower than today. It is hard to see how they will build better institutions than those that they enjoy today, when they are in fact capturing their democratic institutions to promote the project of a part of their societies, instead of spending their time using the important bunch of the state they already control to improve the quality of life of all their citizens. It is hard to see how an independent Scotland will have better democratic institutions than British institutions. That is why even those in favour of the yes vote in the September referendum want to retain some key UK institutions, such as the Monarchy, the currency or the public television. By seceding from countries that have gone to great lengths to decentralize in the last decades, and that are integrated in the European Union and in a global economy, they run the risk of actually leaving the EU and becoming like Andorra (a small fiscal haven) rather than like Denmark. Europe is in the process of advancing towards a closer Union and creating new borders is clearly a step backwards in this process. Better institutions are build by efficiently using the current instruments of democratic government. Secessionists in Quebec also claimed for a long time (before the majority stopped listening) that Canada was a failed country. If Canada, one of the most civilized, democratic and decentralized countries in the world, is a failed country, what are all the others? In fact, when they are hard pressed, secessionists have no interest in the idea of a Union that leaves nation-states behind, and they reveal that their preferred option to solve Rodrik's trilemma is either to abandon democracy de facto (by retaining globalization and the nation-state) or to abandon globalization (they must know how).

Tuesday, July 15, 2014

What kind of Europe

Now that a new European Commission will be appointed, it may be the right time to ask what kind of Europe do we want to build from an institutional point of view. It is more and more clear to many people that a confederal Europe based on the sovereignty of the nation states is not feasible any more, although some (like the British or French sovereignist right) may not like it. To me, the kind of Europe that we need is one that solves Rodrik's trilemma by progressively reducing the importance of the nation state. National and jurisdictional fragmentation has been the biggest problem of Europe since the fall of the Roman Empire, a problem that culminated in the devastating wars of the XX century. The European Union is precisely an attempt to overcome such fragmentation and make war unthinkable in our continent. Thus we need a Europe that avoids market and infrastructure fragmentation, and that reaps the economies of a scale of an appropriately regulated large market. But it must also be a Europe that allows institutional diversity in a common framework. Markets have fuzzy borders, and jurisdictions should be fuzzier than the dominant nationalistic rhetoric allows. Some aspects of the idea of the Swiss economist Bruno Frey and his co-authors about Functional Overlapping and Competing Jurisdictions are worth paying attention to. Leagues of euro-cities, euro-regions, jurisdictions that transcend traditional borders to address specific problems and internalize externalities, are ideas that should be promoted by the new Commission to create a new European demos that helps build a democratic federalism.

Friday, July 11, 2014

The ultimate commitment problem

Today I discussed in a workshop in Barcelona a paper by Jon Stern and Martin Cave on regulatory options for Scotland under two scenarios: independence and enhanced devolution. I said that I agreed on most of what the paper says, and I added a few more insights. I said that it is a paradox that the drive for independence, which is largely based on a rejection of the UK inherited from the Thatcher years, actually a priori says nothing about removing the main aspects of the Thatcher model of utilities regulation, based on privatization, independent regulation (from government) and a license system. The Scottish government only plans to slightly change the structure of regulatory agencies by merging the sectoral regulators. However, in the long run, a sovereign Scotland could in theory change much more, like the ownership of the companies and the degree of regulatory autonomy from government. If a new country can be created by majority rule, the new country will probably be able to do many more simpler things by the same rule. It is an interesting paradox that there is so much discretion embedded in the British legal system that the same prime minister can call a referendum to break the country and another one to abandon the institutions of the single market. The high regulatory quality of British regulatory agencies exists (and would hardly be replicated by Scottish agencies) because there is general awareness that utilities face an underinvestment problem due to time inconsistency of regulatory promises. But actually investors (not only utility investors, but also investors in human capital) face more basically the threat of expropriation of their specific investments by a government that can suddenly facilitate reneging on the basic structure of the state. By the way, today The Economist has pronounced his final verdict on the idea of Scottish independence: it is a bad idea.

Wednesday, July 9, 2014

Don't make predictions

Before commenting on predictions and the world cup, it is healthy to stress the obvious: as John Carlin says in his twitter today, it is a bad morning to wake up in Brazil, but it is much worse in Gaza: Israel puts the German massacre in perspective. My apologies to the reader.
Nate Silver, the author of "The Signal and the Noise" had correctly predicted the result of the last US presidential election in all 50 states. That gave him confidence to expand his almost "solo" web page in the New York Times "five thirty eight" into an industrial project where he hired lots of full time experts and was sold to the ESPN network. Now the whole enterprise looks more like an example of over-confidence bias.
Silver and his expanded project are devoting a lot of effort and space to the soccer World Cup in Brazil, with plenty of interesting material. The main message of their predictions, though, was that Brazil were the favourite, much more than what betting markets were predicting. Even yesterday, Silver argued that the probability of Brazil beating Germany was 65% percent, accounting for the injury of Neymar and the suspension of Silva. After the 1-7 defeat of Brazil, the famous statistician has reacted to his own failure with this interesting piece.
It turns out that soccer is more difficult to predict than electoral politics. Political events in general are also difficult to predict: the Great War, the fall of the Berlin Wall, and others, were hardly predicted by anyone some months in advance. To avoid bombings and disasters, better spend your time mobilizing against them  than trying to predict them.

Sunday, July 6, 2014

Louis Van Gaal, a free man

The Dutch manager does not care about what public opinion thinks. That does not mean he does not care about what others think, since it is not infrequent to see him talking to his players or his assistants. The Netherlands may not win the World Cup, although at several times during the Cup they have been the non-American team with the highest probability to do so, despite clearly not having the best individual players. No, but they will not win, because otherwise it is a whole industry of Van Gaal critics, headed by Cruyff and Valdano (who have not managed a team for almost 20 years now and who spend most of their time playing golf or talking to a microphone), that would be discredited. And also, because the impossible Leo Messi plays for Argentina, and not for The Netherlands. That, the Dutch winning, cannot happen, there is too much at stake.
Enough has been said about Van Gaal's work and his tactical decisions, including yesterday's in replacing the goal keeper to improve the odds at the penalty shoot-out (Cruyff is one of the fathers of the theory that shoot-outs are a lottery and that nothing can be done to prepare for them, according to Ben Lyttleton in "Twelve Yards"). But one thing that is happening in front of everybody and no-one has mentioned is that, as opposed to all other managers, Van Gaal spends all the match seated on his bench, instead of walking or standing nervously in the "technical area" provided for managers next to the pitch. All other managers, instead of observing and taking notes like Van Gaal, shout and move propelled by "action bias", because the social norm is that it should seem that they try to improve the performance of their teams -although there is nothing they can do once the ball starts rolling. I am sure managers did not behave like this before all games were on live TV. But the Dutch manager is free from social norms, and that gives him another edge to make more rational decisions.
My happiness will not be absolute because of course it is impossible that The Netherlands win the World Cup, but in the meantime, I enjoy the best experts in world and Dutch soccer praise the genius of Van Gaal, like Simon Kuper in this article or David Winner in this interview.
(Post scriptum 1-July 10th: even free men make mistakes. Van Gaal should not have decided that a defender kicks the first penalty in the shoot-out against Argentina. According to Apesteguia and Palacios Huerta, kicking first gives a psychological advantage that obviously you lose if you fail to score. That's why the best players should be the first to kick. The Argentinian manager, Sabella, knew that and decided that Messi had to kick the first penalty.
Post scriptum 2 -July 11th: Louis van Gaal says two of his Netherlands players refused to take the first penalty against Argentina; against Costa Rica, the first penalty was kicked by Van Persie, but against Argentina he had been substituted because he was exhausted.
Post scriptum 3 -July 13th: The Netherlands finish third after beating Brazil by 3-0 and not losing a single game -they were beaten by Argentina in a penalty shoot-out. They have scored 15 goals and conceded 4 in the whole World Cup).

Thursday, July 3, 2014

What do we know about PPPs

An interesting academic article:  
Iossa, E.; Martimort, D. (2013), “The simple microeconomics of public-private partnerships”, CEIS Tor Vergata Research Paper Series, 6 (12), 139. 
This article presents a basic theoretical framework that is extended to analyze a variety of important topics in PPPs. The basic theory and its extensions are used to examine stylized facts and empirical evidence on the topic.
A PPP is defined in the context of this article as a long term project (15 to 30 years) for which the public sector contracts with a private consortium, bundling construction of the infrastructure and provision of the service in the same contract.
The basic model merges the literature on PPPs based in incentive theory with more than one dimensions of effort, and the literature based on property rights. In the basic model a key issue is the complementarity or substitutability of tasks. For example, if an investment effort in the quality of the infrastructure contributes to reducing the costs of operating the service, then providing incentives for this effort in a bundling contract contributes to less costly operation. However, if the externality of quality investment on operation costs is negative, then bundling is counterproductive.
The insights from the basic model can be used to analyze what proportion of the revenue risk should be transferred to contractors. If the contractor cannot influence demand (like with prisons), then the contractor should not bear demand risk at all. In cases where the contractor can influence demand risk, this should be borne accordingly by this contractor. This happens with leisure centres, with transportation projects being in-between.
Each section presents either the basic model or an extension of it, and finishes with how the existing theoretical literature has covered this particular issue and what is the empirical evidence about it. In this way, the paper is a good survey of the empirical literature as well, although it reveals an excessive variety of empirical approaches and a lack of strong conclusions as to the impact of PPPs on costs and quality.
The extensions cover quality issues, uncertainty and renegotiations, cost overruns and political problems concerning lack of commitment. In all these cases, it is shown that PPPs have the potential to increase efficiency, but their success depends always on the details of contractual conditions and execution.
This is the paper that provides a more comprehensive review of the existing theoretical literature on PPPs and at the same time of the existing empirical evidence. (The full note can be read here, in the second PPPs newsletter of the Public-Private Sector Research Center at IESE).