I will be speaking on the End of the East Asian miracle? at the Battle of Ideas at 5.30pm on Saturday 17 October. Come along to the session or, better still, to the whole weekend.

This is my latest book review for the Financial Times.

It is hard to imagine how the rapid development of many poorer economies in recent decades could have happened without the emergence of super-rich individuals. No doubt for most Financial Times readers the two go together. The rise of popular prosperity depends on the vibrancy of wealth- creating entrepreneurs.

But it is important to remember that many people do not see it that way. For some critics, the existence of the super-rich alongside many millions in poverty is immoral. For many others, life is inevitably a zero-sum game: more riches for the few must, by definition, mean less wealth for the many.

Rich People Poor Countries should be understood against the backdrop of this debate. Caroline Freund, a senior fellow at the Peterson Institute for International Economics, a Washington DC-based think-tank, begins the book with an exchange that encapsulates the contrasting views. At the World Economic Forum in Davos this year, Winnie Byanyima, executive director of Oxfam International, referred to the relief charity’s findings that the richest 1 per cent of the world’s population would own more than 50 per cent of the world’s wealth by 2016.

In response, Sir Martin Sorrell, chief executive of WPP, the advertising group, said: “I make no apology for having started a company 30 years ago with two people and having 179,000 people in 111 countries and investing in human capital each year to the tune of at least $12bn a year.”

The first part of Freund’s work is essentially a taxonomy of the super-rich in the emerging world. Her study’s starting point was an examination of the changing composition of the Forbes list of the world’s billionaires. From there she worked with an assistant, Sarah Oliver, to research every individual to determine how they achieved their fortune and the sectors with which they are associated.

On this basis, she determined that extreme wealth in emerging markets is largely self-made. Although some wealth is acquired by inheritance, its importance is declining. The typical emerging market billionaire builds a globally competitive mega-company that also plays a role in transforming their home country.

There are, of course, variations by region and sector. East Asia is, not surprisingly, the most dynamic. Mainland China went from being unrepresented in 1996 to making up 40 per cent of east Asian billionaires by 2014. The Middle East was exceptional in a negative sense, as the only region where inherited wealth had increased.

The second part of the book argues strongly that the rising prosperity of poorer countries has been closely associated with the growth of large companies. As countries have grown richer, so have companies and, in many cases, individual entrepreneurs.

In 1996, fewer than 3 per cent of global Fortune 500 companies were from emerging markets. By 2014, the figure was nearly 30 per cent. These large companies have played a central role in generating employment and exports for poorer countries. They have also helped economies shift from an emphasis on agriculture to industry and services. Of course, it is always possible some individuals will accrue great wealth by corrupt means. For Freund, an important way to guard against this is to ensure companies operate in a competitive environment.

This includes making it easy for individuals to set up businesses and maintaining an openness to trade. In such conditions, she argues, it is harder for powerful forces to hijack the wealth creation process for their own benefit.

Although Rich People Poor Countries clearly shows how the development process is closely connected to the rise of large companies, it is unlikely to convince sceptics. It is doubtful that those with a moral aversion to the accumulation of extreme wealth will be convinced simply by facts. And those who believe development is tightly constrained by scarce resources will continue to insist that more for some must necessarily mean less for others.

Winning the debate on the benefits of popular prosperity requires a culture war waged on several fronts. It means, among other things, showing through the force of argument that everyone can benefit from a wealthier society. It is also necessary to tackle the moral qualms about mass affluence. The fight cannot be won with evidence alone.

I’ll be back!

22 Aug 2015

I haven’t updated this website for a while as I’ve been incredibly busy with various tasks. However, I hope to be back before too long.

Since this is my last blog post for Fundweb allow me to indulge a little. I want to try to unravel a debate that has increasingly preoccupied policymakers, as well as myself, in recent years. That is the discussion of excessive inequality.

The arguments on the subject can be incredibly frustrating because they are often at cross-purposes. Few take the trouble to listen carefully to what others are saying.

Anyone who has read some of the key discussions on the topic should first of all be clear that no influential voices are calling for equality. They certainly do not advocate the removal of material inequalities or the abolition of social classes. On the contrary, they often make the point explicitly that they are not calling for an equal society.

Instead the near universal call is for the allegedly damaging implications of extreme inequalities to be contained in some way. This is the thrust of the argument made by leading politicians (such as Barack Obama), religious leaders (including the Pope and Justin Welby), central bankers (Mark Carney and Janet Yellen), influential economists (James Heckman, Thomas Piketty and Joseph Stiglitz), international organisations (including the IMF and the OECD), philosophers (such as Michael Sandel and the late John Rawls) and the billionaires who attend the World Economic Forum at Davos.

It should be clear from this glittering roll call that this argument is thoroughly mainstream. Although some may favour a limited degree of redistribution there is nothing inherently radical about their obsession with inequality. On the contrary, it could reasonably be described as an elite preoccupation.

The primary concern is about what is sometimes called social cohesion. That is a fear that the super-rich at the top of the hierarchy (rather than the merely rich) and the socially excluded at the bottom could between them pull society apart. There is also a secondary and related worry that high levels of inequality could damage economic growth.

Although I disagree with the conclusions drawn by Mark Carney, the governor of the Bank of England, he succinctly expressed the mainstream view in a speech to last year’s Conference on Inclusive Capitalism in London. Using sociological jargon he argued the debate was really about “social capital” which he defined as “the links, shared values and beliefs in a society which encourage individuals not only to take responsibility for themselves and their families but also to trust each other and work collaboratively to support each other.” (For those who are interested, he took the concept from Robert Putnam, a Harvard sociologist).

Carney then went on to say: “My core point is that, just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself. To counteract this tendency, individuals and their firms must have a sense of their responsibilities for the broader system.” He therefore introduced a limited form of anti-capitalism – in the sense of opposition to an unconstrained free market – into his scheme.

Although Carney was careful not to call openly for state regulation of people’s lives, that is where this fearful outlook inevitably leads. That is why it embodies a potent drive to restrict individual freedom. But the premise on which the argument is built is false. The anxiety about social disintegration is greatly overdone. It reflects the outsize insecurities of a technocratic elite rather than the realities among the bulk of the population.

On that note, I would like to wish the best to all my readers.

Democracy in America

12 Jul 2015

I will be introducing a discussion of Alexis de Tocqueville’s Democracy in America at the Institute of Ideas Economy Forum on Wednesday evening. Details can be found here.


There follows my Fund Strategy Polemic column for July.

For all the talk of a possible bubble in US technology stocks, the rise in the Nasdaq over the past year is dwarfed by the surge in the Shanghai and Shenzen stockmarket indices. Draw lines on the same graph representing percentage change over the past year or so and the American index’s rise seems ever so gentle. Of course things could change quickly.

At the time of writing there were already signs of wobbles in the Chinese markets. Sharp corrections have also happened before. The Shanghai Composite dropped precipitously in the months following its late 2007 peak. The problem is that comparisons between China and America, or indeed other developed economies, can be misleading. Although it is possible to use the same metrics in both China and the West, such as price-earnings ratios, the context is entirely different. The Chinese economy still works according to different dynamics than its western counterparts. Although most commentators pay lip service to these differences they tend to downplay their significance.

China is seen as in many respects similar to the western economies but with an oversized state and a different cultural context. As it happens the Chinese state is smaller than those of western economies, at least according to one widely accepted metric. The IMF estimates total government spending as a proportion of GDP at 29.6 per cent in China compared with 41.5 per cent for Britain and 36.8 per cent for America. This is a salutary reminder that, despite all the talk of free markets, the state plays a substantial role in western economies. 

Despite nearly four decades of economic reform it is misleading to describe China as a market economy. State-owned enterprises still play a substantial role and the leadership of the Chinese Communist Party (CCP) remains paramount. The ruling elite is focused more on maintaining order than in creating the conditions for profitable businesses. From this perspective the main purpose of promoting economic growth is to maintain the government’s legitimacy. Rising prosperity is a powerful incentive for the population to conform but the CCP offers relatively little else.

The recent focus on managing an orderly slowdown in growth is designed to maintain growing affluence while avoiding an economic crash. To be sure a consistent annual growth rate of even 6 per cent – that the IMF forecasts for China in the latter part of this decade – would be beyond the wildest dreams of the western economies. But expectations among the Chinese population are high and the official figures could well overstate the rate of expansion.

High expectations among the Chinese population point to a second important difference with the West. Amid all the talk of China as an economic giant it is often forgotten that it is still an emerging economy. Its huge population means that it can have a large GDP even when income per person is relatively low. Even on a purchasing power parity basis, that is taking into account lower prices, GDP per head in China is far lower than in the West. According to the latest figures from the IMF the US was on about $55,000 in 2014, the UK $39,000 and China $13,000. That puts China slightly below the likes of middle-income countries such as Colombia, Serbia and South Africa in terms of income per head.

The existence of a still sizeable rural sector also indicates that China still remains a developing economy. According to official figures from the World Bank just under half of the population is rural. In some respects this gives a misleading impression since many who live in the countryside work in services or industry. But the proportion of the labour force that still works in agriculture is many times that of America or Britain.

China’s massive scale represents another important difference between China and the West. In many respects the Asian giant is better seen as a continent rather than a country. Regional differences can therefore taken on more importance than might be expected The hukou system is one indication that the ties between the different regions are often different from what might be expected of a fully unified state. Essentially an individual’s access to education, healthcare and housing is tied to their hometown or village. In effect this amounts to an internal system of control on the huge numbers of migrants who travel from their homes to other regions of China to work. The movement of labour within China is far from free.

Just because it is possible to use the same economic and financial indicators it does not follow that China is essentially the same as the developed economies. Despite the extensive reform process set in motion in 1978 it should not be forgotten that fundamental differences remain.  

Multimedia links

10 Jul 2015

The debate on social justice I participated in this week at the City of London Festival is now available to listen to as a podcast.

 It is also appropriately topical that my debate on European austerity from last year’s Battle of Ideas is now available to watch on video.

While most European eyes are focused on Greece’s economic turmoil a potentially more significant development is unfolding on the other side of the world. In Beijing delegates from 50 countries have recently attended the signing ceremony of the new Asian Infrastructure Investment Bank.

The bank will lend billions of dollars to help develop Asian infrastructure but that is not the main reason its foundation is so important. It is rather that America made a concerted attempt to block the bank’s creation but failed. So the AIIB’s establishment represents a crack in the long-standing US-led global order.

Many leading figures within America saw Washington’s actions as a monstrous blunder. The US put its influence and prestige on the line, without having any necessary reason to do so, and lost. China was keen for America to participate in the institution but the Obama administration declined the invitation. Nevertheless, many other countries, including Britain, resisted American pressure and agreed to participate. Indeed the UK government was publically rebuked by an American official.

Larry Summers, a former US Treasury secretary, was blunt in his criticism of US policy towards the AIIB in an assessment published in the Financial Times in April. “This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system,” he said.

Robert Zoellik, a former president of the World Bank and US Trade Representative, referred to it as “a strategic mistake” and an “embarrassing experience”.

Stephen Roach, one of the leading American experts on the Asian economy, said the Obama administration had made a “major strategic blunder” . He also helped to put US opposition to the new institution into its broader context: “The US Congress has repeatedly dragged its feet on IMF reforms. And lending programs of the US-dominated World Bank have done little to address infrastructure deficiencies in any part of the world.”

Both of these points are important. For years the US – often working in concert with Europe – blocked proposals for the developing world to have a greater say in the International Monetary Fund and the World Bank. Both institutions reflected the realities of the mid-twentieth century, when the poorer countries had marginal economic weight, rather than the early twenty first century.

China was not the only country to be kept marginalised within these institutions. For example, in 2012 all African states backed Ngozi Okonjo-Iweala, the Nigerian finance minister and a former World Bank managing director, to be the new president of the World Bank but the US stuck by the convention that every head of the organisation should be American. Similarly Europe has insisted on maintaining the tradition that the IMF chief should always be European.

The lack of infrastructure lending by the World Bank also helps provide the backdrop to the creation of the AIIB. Global demand for infrastructure investment is enormous according to the World Bank’s own estimates. Yet in relative terms its lending is modest.

Of course China’s promotion of the AIIB is at least partly motivated by a desire to increase its own influence in East Asia. Beijing is not acting out of altruism. But Washington’s clumsy attempts to contain China have, paradoxically, weakened the global order that America created.

This is my latest blog post for Fundweb.

This is my latest article for the FT.

Has the global preoccupation with extreme inequality peaked? This key question, posed by Labour’s unexpectedly poor performance in the recent UK general election, received little attention. The opposition party’s avowedly egalitarian stance failed to resonate with the electorate in sufficient numbers despite discontent at the government’s austerity programme.

The British public’s preferences apparently ran counter to influential voices worldwide warning of the widening gap between super-rich and poor. These range from US president Barack Obama and the Pope to the heads of the Bank of England and the International Monetary Fund.

Anxious discussions about the inequality divide have also become a regular fixture at the World Economic Forum in Davos. The forum even published a report, introduced by former US vice-president Al Gore, identifying rising income inequality as the most dangerous trend for 2015.

This difference in perceptions raises the awkward possibility that ordinary people may not share the concern with widening inequality expressed by the trend’s elite critics. Although the public often tells pollsters it sees the gap between rich and poor as a big problem, this may not shift voting intentions. Or maybe the public is simply more preoccupied with other questions.

Perhaps the dearth of comment on this mismatch is because it is seen as a specifically British enigma. But this ignores Labour’s close ties with fellow egalitarians across the Atlantic. David Axelrod, who was instrumental in Obama’s 2008 and 2012 presidential campaigns, advised Ed Miliband, then Labour’s leader, to focus on inequality. Jacob Hacker, a Yale political science professor, had earlier inspired Miliband to promote “predistribution” — the idea of attempting to pre-empt the emergence of excessive inequalities.

The connections have also gone in the opposite direction. Ed Balls, Labour’s former shadow chancellor, was co-author with Lawrence Summers, former US Treasury secretary, of a report on inclusive prosperity published by the Center for American Progress, a centre-left think-tank in Washington DC. Yet Balls lost his seat in the election.

Lane Kenworthy, professor of sociology at the University of California-San Diego, says opinion polls showing public concern about the inequality gap can be misleading. He accepts most such surveys show that most people see inequality as too high. However, when pollsters ask the public what the government’s priorities should be, the topic is rarely near the top of the list.

“When push comes to shove it’s something most people don’t really care a whole lot about,” Kenworthy says. In his view people are more concerned with absolute living standards, economic security and opportunity. He says social democrats and those on the centre left would be better off focusing on these areas. Policies addressed to improving performance in those spheres tend to have the side-effect of helping to reduce income inequality.

Michael Barone, a fellow at the American Enterprise Institute, a conservative Washington DC-based think-tank, takes a harder line, saying people, with the possible exception of those in Greece, are seldom concerned with inequality. He argues it is often those who live in the most unequal communities, such as New York and San Francisco, who “yelp loudest” about inequality. “The sympathetic analysis of the reason is that these people are more aware of inequality,” he says.

It could be, Barone argues, that those who live in such areas make the mistake of projecting their concerns on to the general population. “The ordinary person in America, and I guess in the UK too, is not angry and full of anguish because they cannot afford to spend $2,000 on a pair of shoes,” he says.

Of course, there were other factors in Labour’s poor electoral performance besides its focus on extreme inequality. Nevertheless it is worth looking carefully at what Labour, and indeed most other critics of inequality, argue. It is a common misconception to assume they are advocating equality in relation to outcomes or wages. Such proposals went out of fashion long ago.

Instead, the consensus is that inequality is rising to the extent it is already causing, or may soon cause, damage to society. In other words, it is widely accepted a substantial degree of inequality is inevitable and probably desirable. The increasingly common criticism, at least among policy-makers, is that the trend is reaching the stage where it is damaging the social fabric.

From this perspective it is worth remembering British prime minister David Cameron too has criticised extreme inequality in some circumstances — for example, where people do not have the opportunities to make the most of their talents. The Tories may not be as closely associated with inequality as a campaigning theme as Labour, but the differences on the question can be exaggerated.

A peculiar paradox seems to have emerged: the topic of inequality no longer sharply divides left and right. Instead, a gap seems to have opened up between policy-makers preoccupied with extreme inequality and the public, which is less concerned.

I will be debating social justice at 6.30pm on 6 July at the Bishopsgate Institute as part of the annual City of London Festival.