Zombie companies walk among us

Tim Harford in The Financial Times


For vampires, the weakness is garlic. For werewolves, it’s a silver bullet. And for zombies? Perhaps a rise in interest rates will do the trick. 

Economists have worried about “zombie companies” for decades. Timothy Taylor, editor of the Journal of Economic Perspectives, has followed a trail of references back to 1989, noting sightings of these zombies in Japan from the 1990s, and more recently in China. The fundamental concern is that there are companies which should be dead, yet continue to lumber on, ruining things for everyone. 

It’s a vivid metaphor — perhaps a little too vivid — and it is likely to be tested over the months and years to come if, as almost everyone expects, central banks continue to raise interest rates back to what veterans might describe as “normal”. 

Claudio Borio of the Bank for International Settlements recently gave a speech in which he worried about the tendency of low interest rates to sustain zombie companies. Mr Borio has consistently been concerned about the distorting effects of low interest rates, but the zombie element of his argument adds a new twist.

Researchers at both the BIS and the OECD, the club of wealthy nations, have found evidence that low interest rates seem conducive to the existence of zombies, which they define as older companies that don’t make enough money to service their debts. As interest rates have fallen around the world, such zombies have become more prevalent and have also shown more endurance. 

On average, across the US, Japan, Australia and western Europe, the proportion of firms that are zombies has risen fivefold since 1987, from 2 to 10 per cent. The zombies walk among us. 

Why should we worry? One obvious answer is that zombies absorb resources. If a zombie retailer occupies a space on the high street, that makes it harder and more expensive for a start-up or a successful competitor to move in. The same goes for any resource from advertising space to electricity, and of course it goes for staff, too. 

We would usually expect a thriving company to be able to outbid the walking dead for anything necessary, from a finance director to a unit in an industrial estate. But the status quo always has a certain power, and in some cases, the zombie might be at an unfair advantage. 

Consider a zombie bank, propped up by a government guarantee but basically insolvent. Gambling on resurrection, it tries to expand by offering high rates to depositors and cheap loans to creditors. In the late 1980s, Joseph Stiglitz — later to win a Nobel memorial prize in economics — proposed a “Gresham’s law” of savings-and-loan associations based on this tendency: bad associations crowd out good ones. 

More recently, the collapse of Carillion, a large British outsourcing and construction firm, showed a similar dynamic. The more Carillion struggled, the more desperate it became to win new business — which meant aggressive bids in competitive auctions, dooming Carillion while starving competitors of business. 

Having written an entire book about the importance of failure, I am naturally sympathetic to Mr Borio’s argument. Modern economies have a low failure rate — probably too low. Still, one should not be too cavalier about this point. To ordinary ears, bankruptcy sounds unambiguously bad. If you spend too much time thinking about zombie firms and economic dynamism, bankruptcy starts to sound unambiguously good. 

Cut down those zombies and let highly productive new firms grow in the rich soil, fertilised by those zombie corpses, sounds like — forgive the play on words — a no-brainer. But should we really be so pleased that so many of the UK’s coal mines, or the auto suppliers of Detroit, have been successfully killed off? If nothing has replaced them, there is nothing to celebrate. 

One of the lessons of recent economic research by economists David Autor, David Dorn and Gordon Hanson has been that productive new firms do not necessarily spring up as we might have hoped. Mr Autor and his colleagues have, in a series of influential papers, tracked local areas subject to the sudden shock of competition from imported Chinese products. Their conclusion: recovery is neither quick nor automatic. 

Nor is it always easy for laid-off workers to stroll into fresh jobs: if you have worked for several years stitching soft toys, then the obvious next step when the toy factory lays you off is to start stitching shirts or trousers instead. Unfortunately, that is also the obvious next move for the importers, or the robots. 

We can make a long list of policies that might help new productive firms to get started and expand: education, infrastructure, flexible regulations, small-business finance and so on. There is some evidence in favour of these policies, but no checklist can guarantee results. 

Still, that is where to focus our attention as the zombies start to expire. The easier it is to start a new idea, the more hard-nosed we can be about killing off the old ones. It is necessary that the zombies must die, but that cannot be where the story ends.

The Humbug of Finance

Prabhat Patnaik in The Economic and Political Weekly


The renowned economist Joan Robinson (1962) had referred to the view that the government’s budget should always be balanced, as the “humbug of finance,” namely, as a false proposition with no theoretical merit which was nonetheless promoted by finance capital. These days, of course, the insistence is not exactly on balancing the budget as was the case during the pre-second world war years. A certain amount of fiscal deficit relative to gross domestic product (GDP), usually 3%, is considered “permissible,” though it is not clear what is so sacrosanct about the figure 3 and why 3 is better than zero. But this shift from zero to 3% does not signify any change in theoretical position: it still invokes the same logic that underlay the insistence on balancing the budget. In Robinson’s words, it still constitutes “the humbug of finance,” though with a slightly, and inexplicably, different number for the percentage of fiscal deficit to the GDP.

The argument which the insistence on balancing the budget advances is that a fiscal deficit “crowds out” private investment. Now, for this to happen there must be a fixity of supply of some economic variable, so that the government taking more of it (via a fiscal deficit) leaves less for the private sector. What exactly is this variable? Pre-Keynesian theory believed that this given variable (assuming for simplicity, a closed economy) was the magnitude of “savings”: a fiscal deficit, by drawing more “savings” towards the government would leave less “savings” for the private sector, and hence reduce private investment via a rise in the interest rate. (Even if the rise in the interest rate itself contributed towards an increase in “savings” so that their magnitude was not exactly fixed, this would still mean a partial crowding out of private investment because of the rise in the interest rate.)

This argument, however, was obviously false, since “savings” depended not just on the interest rate but also upon the level of income (and on the distribution of income too, though we shall not go into the question of distribution of income here). Since a fiscal deficit in an economy that was demand-constrained—namely, had unemployed labour and unutilised capacity—raised the level of income, it also increased “savings.” In fact at any given interest rate (as Richard Kahn’s famous proposition on the multiplier showed), a fiscal deficit (in a closed economy) generated an amount of private “savings” in excess of private investment that was exactly equal to itself. Hence private investment did not get “crowded out;” additional private savings got generated. And to believe otherwise was to subscribe to Say’s Law—that there could never be a deficiency of aggregate demand—which was absurd.

The other economic variable whose fixity is invoked these days to argue the “crowding out” proposition (since none can seriously profess a belief in Say’s Law today) is money supply. A rise in the fiscal deficit raises income; but, if money supply is fixed, then the interest rate rises which “crowds out” private investment. But, even leaving aside the fact of the endogeneity of money supply—namely, the fact that in a modern economy money supply simply adjusts to the demand for it at a given interest rate—and accepting this assertion for argument’s sake, such a situation can only arise if a government that is pursuing an expansionary fiscal policy is simultaneously pursuing a tight monetary policy. This is a mistake in policy and not any inherent flaw of the fiscal deficit itself.
There is therefore no logical reason why in a situation of deficiency of aggregate demand the government should not resort to a fiscal deficit to boost demand and hence output and employment.1 To be sure, a fiscal deficit is not the best way to finance larger government expenditure for stimulating demand in such a situation. Larger government expenditure financed by a tax on profits even within a balanced budget is better than a fiscal deficit for overcoming a deficiency of aggregate demand, for one obvious reason, namely, that it keeps down wealth inequality. Since a fiscal deficit generates an amount of private savings in excess of private investment exactly equal to itself, taxing away this excess rather than leaving it in the hands of capitalists, who are primarily the savers, keeps down wealth inequality (as savings constitute addition to wealth). But increasing government expenditure financed by a fiscal deficit is better than keeping down government expenditure and balancing the budget, as the “humbug of finance” would advocate.

A new consideration however intrudes here. Even though there may be nothing wrong with a fiscal deficit, and the view that the budget must be balanced (or nearly balanced with at most a 3% fiscal deficit) is no more than the “humbug of finance,” since finance capital does not like fiscal deficits, whatever the reason, in an economy open to cross-border financial flows, running such a deficit would lead to an outflow of finance that is obviously harmful to the economy. Hence the fiscal deficit has to be controlled, even though the arguments advanced for doing so are wrong, simply in deference to the caprices of globalised finance. Let us explore the implications of this argument a little further.

Opposition to State Intervention

The basic proposition established by the Keynesian Revolution was that in a capitalist economy, where all economic agents acted “rationally” in the sense of maximising some objective function subject to certain constraints that are given, the overall outcome could be socially “irrational” in an obvious sense, namely, that it could be characterised by both unemployment and unutilised capacity. In such a case, the outcome, quite apart from the fact that it did not satisfy Pareto-optimality, would not even satisfy private “rationality.”

What Keynes suggested, therefore, was that the state should intervene in the economy in order to realise social rationality, in the sense of an avoidance of what he called a state of “involuntary unemployment.” Implicit in this suggestion was the assumption that the state itself was free to act according to its own wisdom, unconstrained by the demands or pressures from any agency acting in accordance with its private rationality. The state, in other words, could fulfil its role of being an agency for realising social rationality only if it was external to the world of private rationality and was unconstrained by, and non-imitative of, the agents belonging to this world. (The Marxist critique of Keynesianism argued that this was not possible, but let us leave this aside for the present.)

The state’s being non-imitative of private agents, which is an obvious condition for its intervening successfully to achieve social rationality (for otherwise it will simply replicate the same result that is achieved through the mere agglomeration of private decisions), implies a fundamental break from a certain analogy that is often drawn. This analogy states that just as an individual cannot go on accumulating debt, likewise, the state too cannot simply go on piling up debt; that the state too has to tighten its belt in order to ensure that it does not fall irredeemably into debt. This analogy is doubly wrong: it is wrong in the sense that the state, because it has sovereign powers of taxation, is on a different footing from individuals; and it is also wrong in the sense that if the state acted like any individual does, then it would be incapable of achieving social rationality by overcoming the deficiency of aggregate demand.

Forcing the state to bow to the caprices of globalised finance, by making it “fiscally responsible” (namely, by keeping it within a fiscal deficit ceiling), makes it constrained by private rationality, and hence prevents it from being an instrument for the achievement of social rationality. Fiscal responsibility legislation enacted by the state, to which the state adheres, amounts therefore, to robbing capitalism of any means of achieving social rationality, particularly in the sense of overcoming “involuntary unemployment.”

The question immediately arises: since overcoming “involuntary unemployment” represents a Pareto-improvement in the sense that everybody stands to gain from it—the capitalists through obtaining higher profits and the workers through obtaining higher employment (and hence incomes)—why should finance capital be opposed to state intervention by fiscal means which serves this end? This opposition incidentally is not something that arises only in the age of globalised finance, it existed even before finance capital became globalised. The globalisation of finance only means that the demands of finance necessarily get accepted by the nation state, for fear that otherwise there would be a capital flight; but the demand for “sound finance” itself is characteristic of finance capital per se. This is the reason why Keynes’ proposal in 1929, put forward by Lloyd George, the leader of the Liberal Party to which Keynes belonged, for a scheme of public works financed by a fiscal deficit to alleviate unemployment in Britain, was turned down by the British Treasury under pressure from the City of London, the seat of British finance capital. The question therefore is, why is finance capital so opposed to fiscal deficits even when there are no palpable ill-effects of such deficits, other than those that might be caused by its own opposition to them?

The answer, I believe, lies in the fact that accepting the need for intervention by an agency entrusted with upholding “social rationality” undermines the social legitimacy of the economic system presided over by finance capital. Any demonstration that the universal pursuit of private rationality, which is what capitalism entails, leads to a socially irrational outcome, subverts the power of financial interests, which is why they vehemently deny the need for such direct state intervention. They would rather have the state intervening by creating a better situation for the play of private rationality. In short, indirect instead of direct intervention, or jogging private rationality instead of acting independently of it, is what they prefer.

Monetary policy is the pre-eminent means for such indirect intervention, apart of course from other means like guaranteed rates of return, tax concessions to the capitalists (which also enlarge the fiscal deficit but which are not frowned upon by them). Monetary policy acts through inducing the capitalists to invest more (or generally through making the affluent who constitute the “creditworthy” segment of the population to spend more). Changes in monetary policy as the means of overcoming “involuntary unemployment” do not give the impression of there being something intrinsically wrong with the system; they rather give the impression of creating the right atmosphere for its smooth functioning.

Indeed a focus on monetary policy goes much further; it even suggests that if there is “involuntary unemployment” then the reason for it lies not with the system itself but with the central bank whose monetary policy happens to be out of sync with the needs of the situation. The culpability for involuntary unemployment is thus neatly shifted from the system itself whose functioning is flawed, to the shoulders of the central bank.

The absurdity of such inverted thinking becomes particularly clear in times like the present, when in the United States (US), for instance, the long-term rate of interest has been pushed down close to zero, and yet there is no sign of a recovery from a state of substantial involuntary unemployment. In Europe, the central bank is even charging negative interest rates on loans to banks, provided these are given out as credit for certain purposes by the banks; and yet there is no sign of a recovery from the crisis that afflicts Europe. So inadequate has monetary policy become for stimulating the economy that some authors are now saying that pervasive negative interest rates even on deposits (and not just on central bank lending to banks) are the need of the hour, and, for achieving this, there must be an abolition of cash altogether, since the possibility of holding cash in lieu of bank deposits puts a floor to the interest rate at zero (Rogoff 2016).

This amounts to carrying the inversion of thought to an extreme degree: the flaws of the system are according to this argument blamed on the very existence of cash; and rather than having direct state intervention through fiscal means, including a fiscal deficit, as a way of achieving “social rationality,” what is advocated is “sound finance” combined with the very abolition of cash. The lengths to which reified thinking can be carried can be imagined from this.

What globalisation of finance has achieved, in short, is that the opposition of finance to fiscal deficits, or more generally to direct state intervention for increasing the level of activity, has become effective once again. This had been overcome, albeit temporarily, in the context of the changed correlation of class forces in the post-war period with the emergence of a militant (pre-Blairite) social democracy. The fact that finance is globalised while the state remains a nation state, ensures that the writ of finance runs; and this strips contemporary capitalism of any potential instrument for achieving even a semblance of social rationality.

There are only two possible ways that, even potentially, a semblance of social rationality can be achieved in contemporary capitalism. One is through a global state, or through a set of nation states globally coordinating their actions, providing a fiscal stimulus to the world economy by overcoming the opposition of globalised finance. The other is through individual states providing such a fiscal stimulus within their own particular economies by delinking themselves from the vortex of financial flows and thus withdrawing from the entanglements that contemporary globalisation entails. In either case, however, the opposition of globalised finance has to be overcome, and this requires a broad class alliance of working people which has to be organised in a manner appropriate to each case.

Whether such a class alliance can achieve a semblance of social rationality within the confines of capitalism itself, that is, whether capitalism will adapt itself to the new situation by making appropriate concessions, as it had done over large stretches of the capitalist world in the post-war years, or whether it will transcend capitalism in the process of introducing a semblance of social rationality, is a matter for the future. But the point is that until such an effort is made, world aggregate demand will remain constricted, and the world economic crisis will persist, apart from possible occasional “bubbles” that may cause temporary revivals, to be followed by collapses into crisis once more.

Legitimacy Crisis

Donald Trump’s economic strategy has to be understood in this context where he remains as tied to fiscal conservatism as other governments in advanced capitalist countries. Committed to increasing employment in the US, but unwilling to do so by expanding government expenditure, he is taking recourse to protectionism, which, in a situation where world aggregate demand is not increasing, amounts to a “beggar-my-neighbour” policy, that is, a policy of exporting unemployment to other countries.

True, Trump has said that he is not averse to increasing the fiscal deficit; but he is willing to do so only as a means of effecting a tax cut on the corporate sector (from 35% to 15%). This amounts to increasing the fiscal deficit for the sake of putting more purchasing power in the hands of capitalists. But putting more purchasing power in the hands of capitalists hardly increases aggregate demand: their marginal propensity to consume out of income is small, and they do not invest more, even if they have larger post-tax profits, as long as the market is not expanding. Hence, the Trump strategy really amounts not to an increase in aggregate demand in the US, but to a beggar-my-neighbour strategy imposed upon the rest of the world.

This strategy presupposes that the rest of the world would simply sit tight and tolerate an import of unemployment from the US: its success, in other words, depends upon the US action not facing any retaliation, that is, upon the US being able to impose “one-way free trade” upon the rest of the world, as Britain had done in the colonial period. But if other countries do retaliate, then competitive “beggar-my-neighbour” policies would ensue, which would increase uncertainties associated with investment, and hence aggravate the crisis.

But if the US individually or several (or all) countries on their own increased the fiscal deficit to expand government expenditure, and imposed protection only to the extent of preventing a leakage outwards of the additional demand so generated within their economies, without actually curtailing their imports in absolute terms, namely, without exporting any unemployment to other countries, then all countries would be Pareto-wise better off. No one country’s employment increase in such a case would be at the expense of some other country.

What comes in the way of such a move which would improve the employment situations in all countries without their adversely affecting one another, is the opposition of finance to fiscal deficits and to taxes on capitalists (taxes on workers would not raise aggregate demand as they already have a high propensity to consume). Unless finance capital’s hostility to fiscal deficits is overcome, which in turn requires that unless the hegemony of finance capital on the world economy is overcome, the world would remain mired in crisis.

Either way, therefore, world capitalism will be facing a legitimacy crisis in the coming days: on the one hand, if it remains committed to the “humbug of finance” then its legitimacy is threatened because of the persistence of the economic crisis, and with it of high unemployment; on the other hand, if it “permits” direct state intervention through fiscal means for overcoming the crisis, then its legitimacy is threatened because the flawed nature of the system gets exposed, thereby, opening the prospects of growing state intervention.

Murder capitals of the world: how runaway urban growth fuels violence

San Pedro Sula, Honduras, is the most dangerous city on the planet – and experts say it is a sign of a global epidemic

• John Vidal, environment editor
• The Observer, Saturday 1 November 2014 23.33 GMT

People on their way home in the Chamelacon suburb, considered one of the most dangerous ares San Pedro Sula. Photograph: Juan Carlos/Juan Carlos/Corbis

It was relatively quiet in San Pedro Sula last month. A gunfight between police and a drug gang left a 15-year-old boy dead; the body of a man riddled with bullets was found in a banana plantation; two lawyers were gunned down; a salesman was murdered inside his 4x4; and a father and son were murdered at home after pleading not to be killed.

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One politician survived an assassination attempt and around a dozen people were found dead in the street. The number of killings is said to have fallen in the last few months, but the Honduran city is officially the most violent in the world outside the Middle East and warzones, with more than 1,200 killings in a year, according to statistics for 2011 and 2012. Its murder rate of 169 per 100,000 people far surpasses anything in North America or much larger cities such as Johannesburg, Lagos or São Paulo. London, by contrast, has just 1.3 murders per 100,000 people.

Now research by security and development groups suggests that the violence plaguing San Pedro Sula – a city of just over a million, and Honduras’s second largest – and many other Latin American and African cities may be linked not just to the drug trade, extortion and illegal migration, but to the breakneck speed at which urban areas have grown in the last 20 years.

The faster cities grow, the more likely it is that the civic authorities will lose control and armed gangs will take over urban organisation, says Robert Muggah, research director at the Igarapé Institute in Brazil.

“Like the fragile state, the fragile city has arrived. The speed and acceleration of unregulated urbanisation is now the major factor in urban violence. A rapid influx of people overwhelms the public response,” he adds. “Urbanisation has a disorganising effect and creates spaces for violence to flourish,” he writes in a new essay in the journal Environment and Urbanization.

Muggah predicts that similar violence will inevitably spread to hundreds of other “fragile” cities now burgeoning in the developing world. Some, he argues, are already experiencing epidemic rates of violence. “Runaway growth makes them suffer levels of civic violence on a par with war-torn [cities such as] Juba, Mogadishu and Damascus,” he writes. “Places like Ciudad Juárez, Medellín and Port au Prince … are becoming synonymous with a new kind of fragility with severe humanitarian implications.”

Simon Reid-Henry, of the Peace Research Institute in Oslo, said: “Today’s wars are more likely to be civil wars and conflict is increasingly likely to be urban. Criminal violence and armed conflict are increasingly hard to distinguish from one another in different parts of the world.”

The world’s most dangerous cities Photograph: Giulio Frigieri/Guardian

The latest UN data shows that many cities may be as dangerous as war zones. While nearly 60,000 people die in wars every year, an estimated 480,000 are killed, mostly by guns, in cities. This suggests that humanitarian groups, which have traditionally focused on working in war zones, may need to change their priorities, argues Kevin Savage, a former researcher with the Overseas Development Institute in London.

“Some urban zones are fast becoming new territories of conflict and violence. Chronically violent cities like Abidjan, Baghdad, Kingston, Nablus, Grozny and Mogadishu are all synonyms for a new kind of armed conflict,” he said. “These urban centres are experiencing a variation of warfare, often in densely populated slums and shantytowns. All of them feature pitched battles between state and non-state armed groups and among armed groups themselves.”

European and North American cities, which mostly grew over 150 or more years, are thought unlikely to physically expand much in the next few decades and are likely to remain relatively safe; but urban violence is certain to worsen as African, Asian and Latin American cities swell with population growth and an unprecedented number of people move in from rural areas.

More than half the world now lives in cities compared with about 5% a century ago, and UN experts expect more than 70% of the world’s population to be living in urban areas within 30 years.

The fastest transition to cities is now occurring in Asia, where the number of city dwellers is expected to double by 2030, according to the UN Population Fund. Africa is expected to add 440 million people to its cities by then and Latin America and the Caribbean nearly 200 million. Rural populations are expected to decrease worldwide by 28 million people. Most urban growth is expected to be not in the world’s mega-cities of more than 10 million people, but in smaller cities like San Pedro Sula.

“We can expect no slowing down of urbanisation over the next 30 years. The youth bulge will go on and 90% of the growth will happen in the south,” said Muggah.

But he and other researchers have found that urban violence is not linked to poverty so much as inequality and impunity from the law – both of which may encourage lawlessness. “Many places are poor, but not violent. Some favelas in Brazil are among the safest places,” he said. “Slums are often far less dangerous than believed. There is often a disproportionate fear of crime relative to its real occurrence. Yet even when there is evidence to the contrary, most elites still opt to build higher walls to guard themselves.”

Many of these shantytowns and townships were now no-go areas far beyond the reach of public security forces, he said.

“These areas are stigmatised by the public authorities and residents become quite literally trapped. Cities like Caracas, Nairobi, Port Harcourt and San Pedro Sula are giving rise to landscapes of … gated communities. Violence … is literally reshaping the built environment in the world’s fragile cities.”

Why are Asians under represented in English cricket?

by Girish Menon

A recent ECB survey found that 30 % of the grass root level cricket players were of Asian origin while it reduces dramatically to 6.2 % at the level of first class county cricketers. Why?

When this question was asked to Moeen Ali, he opined among other things, "I also feel we lose heart too quickly. A lot of people think it is easy to be a professional cricketer, but it is difficult. There is a lot of sacrifice and dedication," While some may view Ali's views as suffering from the Stockholm syndrome, in my personal opinion it resembles the 'Lazy Japanese and Thieving Germans' metaphor highlighted by the economist Ha Joon Chang. Hence, Ali's views should not be confused with what in my perspective are some of the actual reasons why there is a dearth of Asian faces in county cricket.

The Cambridge economist Ha Joon Chang has acquired a global reputation as a myth buster and is a must read for all those who wish to contradict the dogmatic neoliberal consensus. Chapter 9 of Ha Joon Chang's old classic Bad Samaritans actually discusses this metaphor in detail. He quotes Beatrice Webb in 1911 describing the Japanese as having 'objectionable notions of leisure and a quite intolerable personal independence'. She was even more scathing about the Koreans: '12 millions of dirty, degraded, sullen, lazy and religionless savages who slouch about in dirty white garments...'  The Germans were typically described by the British as a 'dull and heavy people'. 'Indolence' was a word that was frequently associated with the Germanic nature.

But now that the economies of Japan, Korea and Germany have become world leaders such denigration of their peoples has disappeared. If Moeen Ali's logic was right then Pakistanis, Sri Lankans and Indians living in their own countries should also not amount to much in world cricket. But the evidence is to the contrary. So the right question to ask would be why has English cricket not tapped into the great love for cricket among its citizens from the Indian subcontinent?

If it wants the truth, English cricket should examine the issue raised by the Macpherson report on 'institutional racism in the police' and ask if this is true in county cricket as well. Immigrants, as the statistics suggest, from the subcontinent can be found in large numbers in grassroots cricket from the time they joined the British labour force. There are many immigrants only cricket leagues in the UK, e.g in Bradford, where players of good talent can be found. But, as Jass Bhamra's father mentioned in the film Bend it Like Beckham they have not been allowed access to the system. Why, Yorkshire waited till the 1990s to select an Asian player for the first time.

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Of course, if the England team is intended to be made up of players of true English stock only then we need not have this discussion. Some of the revulsion towards Kevin Pietersen among some of the establishment could be better understood using this lens. However, now due to its dwindling base if the ECB  wishes to get the support of Asian cricket lovers it will have to transform the way the game is run.

Secondly, to make it up the ranks in English cricket it is essential to have an expensive well connected coach. Junior county selections are based on this network and any unorthodox talent would be weeded out at the earliest level either because of not having a private coach or because the technique is rendered untenable as it blots the copybook. So, many children of Asian origin from weaker economic backgrounds are weeded out by this network.

This is akin to the methods adopted by parents in the shires where grammar schools exist. Hiring expensive tutors for their wards is the middle class way of crowding out genuinely academic oriented students from weaker economic backgrounds. Better off Asians are equally culpable in distorting the grammar school system and its objectives.

So what could be done. I think positive discrimination is the answer. We only need to look at South African cricket to see what results it can bring. My suggestion would be that every team should have two places reserved: one for a minority player and another for an unorthodox player. This should to some extent break up the parent-coach orthodoxy and breathe some fresh air and dynamism into English cricket.

Personally, I have advised my son that he should play cricket only for pleasure and not to aspire for serious professional cricket because of the opacity in the selection mechanism which means an uncertain economic future. He is 16, a genuine leg spinner with little coaching but with good control on flight and turn. Often he complains about conservative captains and coaches who were unwilling to gamble away a few runs in the hope of getting wickets. Many years ago, when my son was not picked by a county side, I asked the coach the reason and he said because, 'he flights the ball and is slower through the air'. With what conviction then could I have told my lad that you can make a decent living out of cricket if you persevere enough?

Why do UK rail fares keep rising?

With train companies, Network Rail and the Government involved, the answer is far from simple

Fed up: protesters against a rise in rail fares in King’s Cross Station Photo: AFP/Getty Images

By Christian Wolmar

7:47PM GMT 02 Jan 2013

 

Here we go again. It’s a new year but an old story. Commuters are up in arms about rises in rail fares and they’re looking for someone to blame.

Aside from the fact that central London was half empty yesterday and finding a seat on a train would have been no problem for most, they have a good point. This is the 10th successive year of above-inflation fare rises, and there is no sign of any change in policy coming until the next general election at least, and probably well beyond that.

But finding the right target for passenger anger is made difficult by the fact that transparency is not a feature of the rail industry and railway economics remains a dark art. The train companies, the Government, previous governments, and even Network Rail (responsible for the track and infrastructure) are all in the frame for blame. And actually, all of them deserve at least a bit of buckshot, if not a high-velocity bullet.

The railways may have been privatised in the mid-Nineties, but in reality they are a mix of private and state interests, with most of the purse – and other – strings still being pulled by the Government. Forget the notion of a raw capitalistic enterprise with energetic entrepreneurs seeking innovative ways to fleece the public: the train operating companies are pretend capitalists who have very little room for manoeuvre and invest very little. They complain that they make only a 3 per cent profit – or around £250 million annually – yet that is a misleading figure, based not on investment, as with a conventional company, but on turnover.

The train companies will receive a proportion of the extra fare income that yesterday’s rises generate, thanks to an opaque process that began last summer. Once the fare rises (which are based on July’s inflation figures) are known, the Department for Transport (DFT) and train companies begin negotiations over how the spoils should be divided. This is because rising fares will deter some passengers from travelling, and under the franchise agreements the DFT has to compensate the private companies for this loss.

However, given the recent inept performance of the DFT over the West Coast franchise, it would not be reckless to suggest that perhaps the train companies get rather more of this extra dosh than they need to cover any passengers lost as a result of the rises. The projections and the sums of money that follow are, of course, “commercially confidential”, and therefore not released to the great unwashed British public.

There is a real irony here. The legislation to regulate season tickets and off-peak fares was designed, at the outset of privatisation, to protect passengers from greedy private companies exploiting their monopoly position. Originally, the rises for “regulated” fares were set at the RPI measure of inflation minus 1 per cent, as a way of encouraging rail travel. In fact, since 2003 – when the formula was changed by the Labour government to RPI plus 1 per cent – the legislation that supposedly protects consumers has been used against them.

However, the situation with unregulated fares – which represent about half the income of the train companies – is completely different. Train operators are free to set all other fares, which include the very expensive peak fares on intercity and other routes, first class and advanced, and all of the increase will go to them.

For their part, the train operators argue that the extra revenue from unregulated fares is needed in order to meet the financial arrangements that come with the franchise deals – most of the train companies pay an annual premium to the Department for Transport. They say these unregulated fares are set commercially because operators face competition from airlines or the roads. But many people making occasional journeys at peak times have no option but to travel then, and are therefore heavily penalised for their lack of flexibility.

A spokesman for the train operators justifies the situation by saying: “Train companies have to meet tough financial commitments agreed with the Government when franchise agreements are signed.” It is also the case that since 2007 there has been a cross-party policy of increasing the share of the cost of the railways paid by rail users, which is now around two thirds, compared with less than 50 per cent six years ago. Yet this does not negate the fact that the train operators decide the level of unregulated fares and many have gone up far more than regulated fares. A peak return from London to Manchester in standard class, for example, is now a stunning £308.

Provided the DFT gets its sums vaguely right, the Government therefore will receive a substantial proportion of the money from increased fares. Ministers’ explanation for the rises is that this money will be used for investment in the railways – but the relationship between investment and fare rises is a distant one.

In fact, the amount of investment going into the railway for extra capacity such as improved track and better signalling is determined by a complex process of negotiation involving Network Rail, the Office of Rail Regulation and the Department for Transport. Ministers set out an investment programme in five‑year periods – the current one runs out in March 2014 – and allocate funds accordingly, and then the Office of Rail Regulation assesses whether enough money is available to carry out the plans. Network Rail then undertakes the work, primarily through contractors.

New trains are provided through a different, and similarly tenuous, relationship. The Government will determine that there is a need for new trains and build this into franchise contracts. The trains are then leased, with the operators paying for them out of their income from the fare box and any subsidy they receive from the DFT. However, the level of fare rises is not linked to the acquisition of new rolling stock. As one angry rail traveller tweeted yesterday: “Why should I pay more to travel in Lincolnshire when the services and rolling stock are so bad?”

Overall, then, there is very little relationship between yesterday’s fare rises and future investment plans. Indeed, for the past two years, the Government, in the face of public pressure, has backed down from proposed fare increases of RPI plus 3 per cent to the current RPI plus 1 per cent, which has resulted in a reduced income of around £250 million annually – enough to kick-start an investment programme of, say, £2.5 billion. Yet there has been no suggestion from ministers that this cut in fares income will reduce the amount available for investing in the railways.

The position of Network Rail – a state-owned company in all but name – adds to the confusion. It spends around £6 billion a year on maintaining the railways but has been sharply criticised for excessive costs. A report in the spring of 2010 by Sir Roy McNulty, the former chairman of Short Brothers, the airline manufacturer, identified wasted spending amounting to 30 per cent.

Network Rail is therefore being required to cut costs; McNulty reckoned it could save £1.8 billion by 2019. Justine Greening, who was Transport Secretary until the autumn reshuffle, argued that if these reductions were made then fares could, in future, be held steady, but few industry insiders believe that such big cuts could be made without compromising performance or safety.

So the real blame for the fare rises must lie with us, the passengers, and our appetite for rail travel. Ever since the early Nineties, passenger numbers have kept on rising steadily. Remarkably, even the long-term trend of passenger numbers falling during recessions has been reversed, as numbers have continued rising except for 2009-10, and even then the fall was very small.

The one way to ensure that fare rises are lower in the future is for more people to shun the railways and use the alternatives – or simply not travel. While numbers keep rising, even in times of recession, why should either the train companies or their political masters change the policy?

Christian Wolmar is a writer and broadcaster specialising in transport.