Brexit won't affect only the UK – it has lessons for the global economy

Exiting the EU highlights the risks of economic and political fragmentation writes Mohamed El Erian in The Guardian 

 

Brexit will have an impact on the global economy, not just the UK. Photograph: Fabian Bimmer/Reuters


The singular issue of Brexit has consumed the United Kingdom for two-and-a-half years. The “if”, “how” and “when” of the country’s withdrawal from the European Union, after decades of membership, has understandably dominated news coverage, and sidelined almost every other policy debate. Lost in the mix, for example, has been any serious discussion of how the UK should boost productivity and competitiveness at a time of global economic and financial fluidity.

At the same time, the rest of the world’s interest in Brexit has understandably waned. The UK’s negotiations with the EU have dragged on through multiple déjà vu moments, and the consensus is that the economic fallout will be felt far more acutely in Britain than in the EU, let alone in countries elsewhere.

Still, the rest of the world is facing profound challenges of its own. Political and economic systems are undergoing far-reaching structural changes, many of them driven by technology, trade, climate change, high inequality and mounting political anger. In addressing these issues, policymakers around the world would do well to heed the lessons of the UK’s Brexit experience. 

When Britons voted by a margin of 51.9% to 48.1% to leave the EU, the decision came as a shock to experts, pundits and Conservative and Labour party leaders alike. They had underappreciated the role of “identity” as a driving force behind the June 2016 referendum. But now, voters’ deeply held ideas about identity, whether real or perceived, can no longer be dismissed. Though today’s disruptive politics are fuelled by economic disappointment and frustration, identity is the tip of the spear. It has exposed and deepened political and social divisions that are as uncomfortable as they are intractable.

Experts also predicted that the UK economy would suffer an immediate and significant fall in output following the 2016 referendum. In the event, they misunderstood the dynamics of what economists call a “sudden stop” – that is, abrupt, catastrophic dysfunction in a key sector of the economy. A perfect example is the 2008 global financial crisis, when financial markets seized up as a result of operational dislocations and a loss of mutual confidence in the payments and settlement system.

Brexit was different. Because you cannot replace something with nothing, there was no immediate break in British-EU trade. In the absence of clarity on what type of Brexit would ultimately materialise, the economic relationship simply continued “as is,” and an immediate disruption was averted.

It turns out that when making macroeconomic and market projections for Brexit so far, “short versus long” has been more important than “soft versus hard” (with “hard” referring to the UK’s full, and most likely disorderly, withdrawal from the European single market and customs union). The question is not whether the UK will face a considerable economic reckoning, but when.

Nonetheless, the UK economy is already experiencing slow-moving structural change. There is evidence of falling foreign investment and this is contributing to the economy’s disappointing level of investment overall. Moreover, this trend is accentuating the challenges associated with weak productivity growth. 

There are also signs that companies with UK-based operations have begun to trigger their Brexit contingency plans after a prolonged period of waiting, planning, and more waiting. In addition to shifting investments out of the UK, firms will also start to relocate jobs. And this process will likely accelerate even if Theresa May manages to get her proposed exit deal through parliament.

The Brexit process thus showcases the risks associated with economic and political fragmentation, and provides a preview of what awaits an increasingly fractured global economy if this continues: namely, less efficient economic interactions, less resilience, more complicated cross-border financial flows, and less agility. In this context, costly self-insurance will come to replace some of the current system’s pooled-insurance mechanisms. And it will be much harder to maintain global norms and standards, let alone pursue international policy harmonisation and coordination.

Tax and regulatory arbitrage are likely to become increasingly common as well. And economic policymaking will become a tool for addressing national security concerns (real or imagined). How this approach will affect existing geopolitical and military arrangements remains to be seen.

Lastly, there will also be a change in how countries seek to structure their economies. In the past, Britain and other countries prided themselves as “small open economies” that could leverage their domestic advantages through shrewd and efficient links with Europe and the rest of the world. But now, being a large and relatively closed economy might start to seem more attractive. And for countries that do not have that option – such as smaller economies in east Asia – tightly knit regional blocs might provide a serviceable alternative.

The messiness of British party politics has made the Brexit process look like a domestic dispute that is sometimes inscrutable to the rest of the world. But Brexit holds important lessons for and about the global economy. Gone are the days when accelerating economic and financial globalisation and correlated growth patterns went almost unquestioned. We are also in an era of considerable technological and political fluidity. The outlooks for growth and liquidity will likely become even more uncertain and divergent than they already are.

"Prime Minister Modi Knows About the GIFT City Scandal but has Done Nothing About it."

Shane Warne in conversation with Mike Atherton

Why good forecasters become better people

Tim Harford in The FT

So, what’s going to happen next, eh? Hard to say: the future has a lotta ins, a lotta outs, a lotta what-have-yous. 

Perhaps I should be more willing to make bold forecasts. I see my peers forecasting all kinds of things with a confidence that only seems to add to their credibility. Bad forecasts are usually forgotten and you can milk a spectacular success for years. 

Yet forecasts are the junk food of political and economic analysis: tasty to consume but neither satisfying nor healthy in the long run. So why should they be any more wholesome to produce? The answer, it seems, is that those who habitually make forecasts may turn into better people. That is the conclusion suggested by a research paper from three psychologists, Barbara Mellers, Philip Tetlock and Hal Arkes. 

Prof Tetlock won attention for his 2005 book Expert Political Judgment, which used the simple method of asking a few hundred experts to make specific, time-limited forecasts such as “Will Italy’s government debt/GDP ratio be between 70 and 90 per cent in December 1998?” or “Will Saddam Hussein be the president of Iraq on Dec 31 2002?” 

It is only a modest oversimplification to summarise Prof Tetlock’s results using the late William Goldman’s aphorism: nobody knows anything. 

Yet Profs Mellers, Tetlock and Don Moore then ran a larger forecasting tournament and discovered that a small number of people seem to be able to forecast better than the rest of us. These so-called superforecasters are not necessarily subject-matter experts, but they tend to be proactively open-minded, always looking for contrary evidence or opinions. 

There are certain mental virtues, then, that make people better forecasters. The new research turns the question around: might trying to become a better forecaster strengthen such mental virtues? In particular, might it make us less polarised in our political views? 

Of course there is nothing particularly virtuous about many of the forecasts we make, which are often pure bluff, attention-seeking or cheerleading. “We are going to make America so great again” (Donald Trump, February 2016); “There will be no downside to Brexit, only a considerable upside” ( David Davis, October 2016); “If this exit poll is right . . . I will publicly eat my hat” (Paddy Ashdown, May 2015). These may all be statements about the future, but it seems reasonable to say that they were never really intended as forecasts. 

A forecasting tournament, on the other hand, rewards a good-faith effort at getting the answer right. A serious forecaster will soon be confronted by the gaps in his or her knowledge. In 2002, psychologists Leonid Rozenblit and Frank Keil coined the phrase “the illusion of explanatory depth”. If you ask people to explain how a flush lavatory actually works (or a helicopter, or a sewing machine) they will quickly find it is hard to explain beyond hand-waving. Most parents discover this when faced by questions from curious children. 

Yet subsequent work has shown that asking people to explain how the US Affordable Care Act or the European Single Market work prompts some humility and, with it, political moderation. It seems plausible that thoughtful forecasting has a similar effect. 

Good forecasters are obliged to consider different scenarios. Few prospects in a forecasting tournament are certainties. A forecaster may believe that parliament is likely to reject the deal the UK has negotiated with the EU, but he or she must seriously evaluate the alternative. Under which circumstances might parliament accept the deal instead? Again, pondering alternative scenarios and viewpoints has been shown to reduce our natural overconfidence. 

My own experience with scenario planning — a very different type of futurology than a forecasting tournament — suggests another benefit of exploring the future. If the issue at hand is contentious, it can feel safer and less confrontational to talk about future possibilities than to argue about the present. 

It may not be so surprising, then, that Profs Mellers, Tetlock and Arkes found that forecasting reduces political polarisation. They recruited people to participate in a multi-month forecasting tournament, then randomly assigned some to the tournament and some to a non-forecasting control group. (A sample question: “Will President Trump announce that the US will pull out of the Trans-Pacific Partnership during the first 100 days of his administration?”) 

At the end of the experiment, the forecasters had moderated their views on a variety of policy domains. They also tempered their inclination to presume the opposite side was packed with extremists. Forecasting, it seems, is an antidote to political tribalism. 

Of course, centrism is not always a virtue and, if forecasting tournaments are a cure for tribalism, then they are a course of treatment that lasts months. Yet the research is a reminder that not all forecasters are blowhards and bluffers. Thinking seriously about the future requires keeping an open mind, understanding what you don’t know, and seeing things as others see them. If the end result is a good forecast, perhaps we should see that as the icing on the cake.

Business schools help create a culture where the profit justifies the means

Business students learn accounting techniques, but not ethical decision-making. This is why corporate scandals persist writes Berend van der Kolk in The Guardian

 

‘When I hear about the complex transfer pricing schemes at companies such as Amazon and Starbucks, I start wondering whether the accountants knew they were avoiding tax.’ Photograph: Mike Blake/Reuters


As a university teacher of accounting, I see the world through a particular lens. When I read about the sales scandal at Wells Fargo, I can’t help but think about the people who naively designed the incentive schemes that triggered this type of unethical behaviour. When I hear about the complex transfer pricing schemes at companies such as Amazon and Starbucks that enable them to avoid tax, I start wondering which accounting techniques they used. In short, I see the strong connection between unethical business practices and accounting techniques.

One reason why these problems persist is that the textbooks used in most elementary management accounting courses ignore this connection. They tend to focus on the technical aspects of accounting – understanding the formulas, definitions, mechanics and calculations – while ignoring its ethical aspects. The ethical dimension is usually nothing more than an add-on in an isolated chapter, introduction paragraph, or in a separate course on business ethics. This makes ethics an afterthought detached from the topics it is intended to reflect on.

Take the example of transfer pricing – the practice of setting a price for a good or service delivered by one part of an organisation to another. When these units are located in different tax regions, the chosen transfer price affects the amount of tax that has to be paid. Various accounting textbooks discuss the technical aspects of transfer pricing, framed with questions such as “how can multinationals minimise their taxes payable?”. The ethics of whether it’s fair to avoid paying taxes – like how many developing companies are harmed by tax-avoiding multinationals - are rarely discussed.

This may lead students to believe that business decisions are only technical, and bear no ethical implications. In fact, business decisions almost always bear ethical implications: they may deteriorate work conditions elsewhere in the supply chain, create a profit-justifies-the-means culture or increase inequality on a global level.

We need to see a much stronger integration of ethical considerations into business education. This is how managers make real-life business decisions. This could be achieved through a discussion on the techniques and ethics of transfer pricing in one and the same accounting class, using a case that highlights both aspects. Business education should also challenge its own underlying assumptions about human behaviour, and bring in other disciplines such as the humanities to help students think critically about business practices that are taken for granted.

Of course it’s important that business students acquire technical skills, and universities shouldn’t be paternalising students by dictating what is and isn’t ethical. Instead, a more critical and integrated debate about the moral implications of financial instruments, accounting techniques and new technologies should play a central role in business education.

In the film Jurassic Park, Dr Ian Malcolm says: “Scientists were so preoccupied with whether or not they could, they didn’t stop to think if they should.” I would like us – business educators, but also students, managers and accountants – to not make that same mistake. Let’s take that step back every once in a while to reflect on the ethics of the technics.

The Craft of Writing Effectively

In Britain’s boardrooms, Brexit is already here. And the warning is stark

For Westminster, leaving Europe is months away: for business, it’s the present. And our prospects are already dwindling writes Aditya Chakrabortty in The Guardian 

 

Part-built private housing development project on the outskirts of Llanelli, Wales, which was abandoned after the developer went bust. Photograph: Alamy


On the one hand, you have the self-inflating chaos at Westminster, the fever dreams of Jacob Rees-Mogg’s gang and the rehearsed rage of the Democratic Unionists. And on the other, you have the truth nailed by Philip K Dick. “Reality,” he wrote, “is that which, when you stop believing it, doesn’t go away.” So let’s remind ourselves of some reality.

While Tory MPs jostled over a replacement for Theresa May the head of the Confederation of British Industry, Carolyn Fairbairn, warned that millions of pounds were “flooding out” of business investment and into preparing for Britain crashing out of Europe with no deal. Food warehouses said they were running out of space. And auto-parts manufacturer Schaeffler announced that it would shut factories in Plymouth and Llanelli, leaving more than 600 workers facing the dole.


An entire rotten political-corporate regime is crumbling away – and its replacement threatens to be even worse

Even as politicians and the press fantasise about how Britain will leave Europe, big business is already at the departure gate. For Westminster, Brexit is months in the future; for boardrooms making plans, it is the present. Big carmakers have this year halved their investment in new models and factory machinery. The consultancy EY records a 31% slump in the number of foreign businesses setting up headquarters in Britain. Boris Johnson certainly makes good copy – but money talks much louder.

“The banks and insurers are moving, the big pharmaceutical firms are investing abroad,” says Paul Drechsler, who was CBI president until June and now chairs London First. “These trains are leaving the station, and when they leave, they won’t come back.” The country he describes is already shrinking, its job opportunities dwindling, its reputation abroad in eclipse.

This is the real national emergency. An entire rotten political-corporate regime is crumbling away – and its replacement threatens to be even worse. It will be worse, specifically, for those parts of the country, like Llanelli and Plymouth, that voted leave as the ultimate kick against the pricks of a hollow economy and a deaf government.

The succinct definition of our current model comes from the head of the Bank of England. The UK relies, said Mark Carney in 2016, on the “kindness of strangers”. The willingness of overseas investors to keep ploughing in their cash keeps us in the style to which we’ve grown accustomed. Out of all the 28 members of the European Union, the UK is second only to Ireland in its dependence on investment from abroad. Margaret Thatcher’s eagerness to sell off whatever she could get her hands on and her mandarins’ carelessness over ownership has turned us into one of the biggest foreign-capital junkies in the developed world. 

Those investors don’t come here out of charity. Our government competes with others around the world to lure in cash from overseas. But look what inducements we offer. Just weeks before the Brexit referendum, David Cameron’s government published its Invest in the UK brochure, promising “the most competitive” labour costs in western Europe, and “the least strict regulation in the EU.”. Why buy euros when you can have Poundland?

No other country does this. Analysis by Kevin Farnsworth at York University shows that, while all states assure investors they’re competitive locations, Sweden boasts of its “anti-corruption” and “good industrial relations”, while Germany highlights its “efficiency” and “training”. The UK, he writes, “uniquely competes for international capital by offering a package of a low-tax, low-cost, low regulatory business environment”.

Here, whether Conservative or Labour, successive governments have marketed us as the open-all-hours, bargain-basement landing strip off mainland Europe. Until, that is, Britons vote in a referendum to kick away two of the three legs of the post-Thatcherite economic model, namely openness and closeness to the continent. What’s left then is our cheapness – in taxes, in wages and in regulation.

This is Britain in 2018, paying the price for decades of underinvestment and cutprice competition. We have a highly skilled workforce, with almost half of Britain’s young people holding a university degree. And yet in 2014, Charlie Mayfield, former boss of John Lewis and then head of the UK Commission on Employment and Skills, pointed out that over one in five British jobs required only primary-school education. We have a world-class car-manufacturing industry, yet over half of the components in the cars that roll off the lines in Sunderland or Ellesmere Port come from abroad.

This is the point at which the kindness of strangers starts to get rather strained. In a survey this spring, well before the chaos of the past few weeks, EY found that 30% of foreign investors now expect to move money out of the UK after Brexit. The current value of foreign direct investment in the UK is estimated by the government to be over £1 trillion. If even a quarter of that were to move abroad, then £75 billion of assets are already at risk. No wonder the Welsh government is offering sweeteners to Ford to stay at Bridgend. No wonder when Nissan made noises about scaling back at Sunderland, May immediately opened the door of No 10 and offered some kind of deal – although precisely what, the voting public was never told.

You can expect a lot more of this over coming months and years: panicky politicians paying your tax money to grumpy-looking corporate executives. You can expect other countries to try to poach our businesses, just as after the 2016 vote Paris began advertising itself as the ideal post-Brexit corporate headquarters. Their posters read: “Tired of fog? Try the frogs”

You can also expect this government to press even harder the case that Britain is the low-tax, low-wage capital of the rich world. But ministers will get a disappointing response from businesses, believes EY’s chief economist in the UK, Mark Gregory. He thinks multinationals will shift away from using Britain as a stepping stone into Europe and the rest of the world – which is logical, given that any new trading arrangements will take years to settle and will almost certainly not be as smooth as the regime Britain currently has. Instead of building factories to make things to sell to the world, big businesses will instead put their money into storage and showrooms to sell things to Britons. The UK will become, Gregory says, “a warehouse economy: low skills, low productivity and low growth”.

That projection was already a reality for lots of people I met who plumped for Brexit in 2016. They were on minimum wage and had minimum rights and minimum prospects. If Brexit is to be radically changed now, it is those voters – the disenfranchised Labourites, the sod-them-all brigade – whose support is needed. A second referendum, in which well-meaning metropolitans offer those in the Rhondda the status quo, probably deserves to fail. Instead, any remain option will have to come with a worked-out argument about rebalancing power in this country. And that means reshaping the relationship between capital and the rest of us.