Month: October 2018

A belated reply to Fazi and Mitchell on Brexit

Bruno Bonizzi and Jo Michell

In a Jacobin article earlier this year, Thomas Fazi and Bill Mitchell argued in favour of a hard Brexit. We published a reply, also in Jacobin. Fazi and Mitchell (FM) responded with accusations of strawman arguments, false claims, bias and muddled thinking. We intended to write a reply at the time, but other commitments got in the way. However we believe that FM’s reply was sufficiently inaccurate – and in places, dishonest –  that a reply is required, even if belatedly.

Brexit predictions

In our Jacobin article we noted that pre-referendum predictions of immediate recession following a Leave vote were produced for political effect, while economists emphasised the likely longer run costs. FM dispute this interpretation, citing as evidence a letter signed by over 200 economists, warning of the likely economic effects of Brexit. One of us (Jo Michell) has some knowledge of this letter, having not only signed it but also having played a role in coordinating signatories – signatories which include a good cross-section of the UK heterodox economics community.

FM quote the letter as follows:

Focusing entirely on the economics, we consider that it would be a major mistake for the UK to leave the European Union …

The uncertainty over precisely what kind of relationship the UK would find itself in with the EU and the rest of the world would also weigh heavily for many years. In addition, there is a sizeable risk of a short-term shock to confidence if we were to see a Leave vote on June 23rd. The Bank of England has signalled this concern clearly, and we share it.

Compare FM’s edit with the original text of the letter below (our bold text).

Focusing entirely on the economics, we consider that it would be a major mistake for the UK to leave the European Union.

Leaving would entail significant long-term costs. The size of these costs would depend on the amount of control the UK chooses to exercise over such matters as free movement of labour, and the associated penalty it would pay in terms of access to the single market. The numbers calculated by the LSE’s Centre for Economic Performance, the OECD and the Treasury describe a plausible range for the scale of these costs.

The uncertainty over precisely what kind of relationship the UK would find itself in with the EU and the rest of the world would also weigh heavily for many years. In addition, there is a sizeable risk of a short-term shock to confidence if we were to see a Leave vote on June 23rd. The Bank of England has signalled this concern clearly, and we share it.

Can you see what they did there?

The first substantial paragraph of the letter — conveniently deleted by FM – focuses on the long-term costs. Midway through the second paragraph, is the following sentence: “In addition, there is a sizeable risk of a short-term shock to confidence…” (our emphasis). The letter is clearly worded: we believe that Brexit entails long-term costs and, additionally, a risk of negative short-term effects.

FM also comment – referring to the first line of the letter – “And nothing ‘entirely’ economics about that. They were trying to influence the Referendum outcome in favour of Remain.”

Of course we were trying to influence the referendum outcome – that was the point of the letter – because, on the basis of the economics, we believe Brexit to be a mistake.

Finally, FM state, “This letter was published in the Times newspaper and so received widespread coverage.” This is genuinely funny. The (paywalled) letter was almost universally ignored by the UK press – to the point that Tony Yates’ frustration became a running joke on UK economics Twitter.

FM then highlight a report published by NIESR shortly before the vote. Again FM edit their quote carefully, removing the qualifier “albeit not unanimous” from the sentence “there is a degree, albeit not unanimous, of consensus that leaving the EU would depress UK economic activity in both the short term (via uncertainty) and the long term (via trade).” Aside from the quotation, FM devote no attention to the actual contents of the report, which summarises various Brexit macro modelling exercises, include the Treasury’s long term forecasts and both long and “near term” forecasts from the OECD, LSE and NIESR themselves. With the exception of the LSE modelling exercise, all are produced using NIESR’s NiGEM model.

What do the projections show? First note that the “near term” projections run until 2020, while the longer term projections run till 2030. The long-run projections of a hard Brexit do indeed predict a large hit to GDP. The shorter run scenarios suggest a smaller hit to GDP, of between 2.6% and 3.3%, by 2020. Does this prove, as FM argue, that economists “catastrophically failed in relation to the short-run impacts of the Brexit vote”?

At risk of stating the obvious, 2020 is four and half years after the referendum vote and beyond the Article 50 period: Brexit will have happened (this is the assumption in the projections, anyway). A 3% hit to GDP by 2020 seems perfectly plausible. But saying something is plausible is not the same as saying it is certain. In the case of both the economists’ letter to the Times and FM’s next piece of evidence, an Observer poll of economists, FM choose to ignore a crucial word: risk. Stating that there is a risk something will happen is not the same as saying it will happen. Fazi is a journalist. But Mitchell, an economics professor, really should understand the distinction between risk and certainty.

So, what of those statements that a hard Brexit increases the risk of a negative economic shock by 2020? Is the projection of 3% hit to GDP by 2020 in the wake a no-deal Brexit a “catastrophic failure”? How is the UK doing since the referendum?

GDP growth came to a halt in the first quarter of 2018 after declining steadily in the wake of the Brexit vote. Despite a bounce back in the summer, the UK growth rate is currently the lowest of the G7 economies. Of course, we don’t have the counterfactual — and since UK growth is pretty much entirely dependent on household spending, consumer credit and retail, this slowdown could have come at almost any point. But with the household savings rate and net lending now negative — and clearly unsustainable — further reductions in consumer demand seem inevitable.

What of manufacturing – the great hope of the pro-Brexit Left? Corbyn recently made the case that pound devaluation in the wake of Brexit will lead to a revival of manufacturing. But the UK pound has been depreciating for decades — alongside a widening current account deficit and a steady decline in manufacturing. Investment spending in car manufacturing has halved since the Brexit vote. Several major manufacturers including BMW, Siemens and Airbus have warned that they will cease manufacturing in the UK in the event of a hard Brexit. The Society of Motor Manufacturers and Traders (SMMT) issued a warning that 860,000 skilled manufacturing jobs are at risk in the event of a hard brexit. Leaked government reports predict that low-income, Leave-voting ex-manufacturing areas of the UK will be hardest hit by a hard Brexit. This week, the European boss of Ford warned that a no-deal Brexit would be “disastrous” for UK manufacturing. AstraZeneca has announced a freeze in manufacturing investment in the UK. We could go on.

Booming Brexit Britain?

In our original reply to FM, we took issue with their attempt to paint the post-referendum period as a boom. FM claim we have misrepresented them: “to their discredit, Bonizzi and Michell are just making stuff up when they make that claim about us.” Here is the section of FM’s original article we referred to:

UK exports are at their strongest position since 2000. As the Economist recently put it: “Britain’s long-suffering makers are enjoying a once-in-a-generation boom,” as the shifts induced by Brexit engender a much-needed “rebalancing” from boom-and-bust financial services towards manufacturing. This is also spurring a growth in investment. Total investment spending in the UK — which includes both public and private investment — was the highest of any G7 country during 2017: 4 percent compared to the previous year.

The reader can decide if we are “just making stuff up”.

Having attacked us for our interpretation of the above quote, FM even go on, without a hint of irony, to quote the same Economist sentence – arguing that pound devaluation and growing export demand has led to a “virtuous circle” in which manufacturers are experiencing a   “once-in-a-generation boom … manufacturing is seeing its strongest growth since the late 1990s …”

This reinforces a point we made in our Jacobin article: FM seem to have trouble with the distinction between levels and growth rates. Manufacturing may have grown strongly in 2017 – before going into reverse and contracting at the start of 2018 – but this is in large part the result of “base effects”. Because UK manufacturing is now so small – output is still below pre-crisis levels – even small increases register as large percentage growth rates. This is not the same thing as a manufacturing “boom”.

FM made the same error in their original piece when discussing investment, where they incorrectly stated that “Total investment spending in the UK … was the highest of any G7 country during 2017” – actually it was the lowest. Now, we are prepared to accept that FM believed they were claiming that investment growth was highest – it was just a typo – but that isn’t what they wrote. Upon investigation, we discovered that FM’s error was in fact the result of carelessly pasting together two directly quoted half-sentences from the FT. Pointing out this error is not sleight of hand, and discussing base effects isn’t “throwing in some cloud” – whatever that means. (It is also good form to use quotation marks when cutting and pasting someone else’s text.)

Defenders of mainstream macro?

Next up, FM try and paint us as defenders of mainstream economics, arguing that “Bonizzi and Michell’s defense of the economics professions is thus very hard to comprehend.” This comes at the end of a long and incoherent section in which FM conflate DSGE modelling, gravity models of international trade, support for austerity and a number of other things – while, of course, stating that “it was obvious to Modern Monetary Theory (MMT) economists as early as the late 1990s that a crisis was brewing”.

FM appear to think that, because we find negative long term Brexit predictions to be plausible, we are defending every failure of economics modelling and policy over the last three decades. Clearly they haven’t bothered to check our views on this. When they conflate these issues by writing, “same models, same approach, same catastrophic errors”, they demonstrate their ignorance. DSGE macro models and gravity models may both have important flaws – but they are not the same.

Trade graphs, EU utopianism, nativism and the Irish border

There are multiple further sections in FM’s reply – on the interpretation of trade graphs, the importance of racism and the far-right, and whether the EU is a “utopia”. These are as incoherent and inaccurate as the points refuted above. To give just one more example, FM state that “… the contention by Bonizzi and Michell that the EU is the only thing preventing the UK from plunging into a quasi-fascist dystopia is untenable.” – a contention that is nowhere to be found in anything we have written. Elsewhere, FM abandon even the pretence of debate, and resort to throwing in statements like, “Hello! Is anyone there?”

FM claim – inaccurately – that in their articles and book, they have covered all the points we raise. But we raised one issue in our Jacobin article that FM conspicuously ignore in their reply: the Irish border. We wrote:

The UK government’s current position of aiming to leave the customs union without creating a hard border in Ireland is akin to a Venn diagram in which there is no intersection between the circles. For this reason, Theresa May is currently proposing two incompatible approaches, both of which are unacceptable to the EU.

As has since become overwhelmingly apparent, those who want to argue for a hard Brexit need to spell out a solution to the Irish border issue. Perhaps now would be a good time for FM to tell us theirs?

Finally, we note that in their incoherent attempt to conflate mainstream economics and opposition to Brexit, FM quote Ann Pettifor. In response to FM’s attack on us, Ann tweeted the following: “Bill Mitchell & Fazi need reminding that it is rise of nationalism & even fascism in Europe that is the threat. Progressives should lead – not walk away & vacate political space to the Far Right.”

Fazi and Mitchell have not engaged with our arguments in good faith. Their attack is not a serious attempt to engage in debate or respond to the points we raised. In a number of places it is transparently dishonest. Anyone who follows Fazi and Mitchell’s lead on these crucial issues should take a long hard look.

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The World Bank’s new Maximizing Finance for Development agenda brings shadow banking into international development – open letter

Last month, central bankers and politicians around the world remembered the global financial crisis and the lessons learnt in its wake. The consensus goes at follows: we have done a great deal to reform banks and protect tax payers from their aggressive risk taking but we haven’t done enough on shadow banking. At this point, the consensus fragments. Central banks claim that they need more power to deal with systemic risks stemming from the shadows, whereas politicians worry about the moral hazards involved in future rescues of shadow banks like Lehman.

We are all the more concerned that the same authorities have been actively promoting shadow banking in the Global South. Under headings such as Billions to Trillions and the World Bank’s new Maximizing Finance for Development (MFD) agenda, the new strategy for achieving the Sustainable Development Goals is to use shadow banking to create ‘investable’ opportunities in infrastructure, water, health or education and thus attract the trillions in global institutional investment.

Bringing shadow banking into development doesn’t just promote the privatization of public services, but may usher in permanent austerity along the lines of ‘privatizing gains, socializing losses’. More fundamentally, it seeks to re-engineer poor countries’ financial systems around capital markets that can attract global investors. This deliberate re-engineering of financial systems threatens progress on the SDGs. We call on governments and international institutions gathering in Bali for the WB/IMF, G20 meetings and the Global Infrastructure Forum to take a step back and assess carefully the developmental impact of the MFD agenda.

The MFD agenda will be tested in infrastructure, with plans spelled out in the “Roadmap to Infrastructure as an Asset Class”, under Argentina’s G20 presidency. These plans promote shadow banking in two ways.

First, the World Bank plans to use securitization to mobilize private finance. The WB would bundle infrastructure loans, its own or across the portfolios of multilateral development banks, issue senior and junior tranches to be sold to institutional investors with different risk appetites. Securitization, we learnt from Lehman’s collapse, is a shadow market easily prone to mis-incentives, aggressive leverage, aggressive promotion of underlying loans onto customers that cannot afford them. It generates systemic interconnectedness and fragility. Yet none of these issues have been addressed in the MFD plans. Instead, the MFD, through the so-called Cascade Approach, asks poor countries to use scarce fiscal resources and/or official aid to ‘de-risk’ bankable projects, by for instance providing guarantees/subsidies for demand risk or political risk. Since the WB will retain a share of the junior tranche, poor countries may easily be pressured to keep up de-risking payments or guarantees, even if it means cutting essential social spending.

Second, the MFD agenda doesn’t just express an ideological preference for private provision of public goods. It also purports to change poor countries’ financial systems around liquid capital markets that can attract global institutional investors. But the WB’s recipe for engineering liquidity in local securities market requires the promotion of the same shadow markets (the repo and derivative markets) that turned Lehman’s collapse into a global financial crisis. It is also a recipe for reduced policy autonomy. As the IMF recognizes, encouraging poor countries to join the global supply of securities exposes them to the rhythms of the global financial cycle over which they have little control, as shown by recent events in Argentina.

We call on the World Bank Group to recognize that the preference for the private sector should not be automatic, but rather chosen only when it can demonstrably serve the public good. When it meets this test, we call for the WBG to develop an analytical framework that clearly sets out the costs of de-risking and subsidies embedded in the MFD agenda in a way that allows a broad range of stakeholders, including civil society organizations and other public interest actors, to closely monitor results as well as fiscal costs in order to ensure transparency and accountability.

Should the MDBs adopt the proposals for securitization of development-related loans, it should first develop a credible framework that protects the SDG goals from the systemic fragilities of shadow banking. But this will not be enough. To ensure that it does not shrink developmental spaces and that is advances sustainable development, the MFD agenda should only be adopted in conjunction with (a) a well-designed framework for project selection that is aligned with the global sustainable development goals and the Paris Agreement; (b) a careful framework for managing volatile portfolio flows into local securities markets and (c) a resilient global safety net.

List of signatories

Daniela Gabor, Professor of Economics and Macrofinance, UWE Bristol

Ewald Engelen, Professor of Financial Geography, University of Amsterdam

Daniela Magalhães Prates, Professor of Economics, University of Campinas, Brazil

Gunther Capelle-Blancard, Professor of Economics, University of Paris 1 Pantheon-Sorbonne

Pablo Bortz, Professor of Macroeconomics, IDAES-National University of San Martín, Argentina

Kevin Gallagher, Professor of Economics, Boston University

Alicia Puyana, Professor of Economics, FLACSO Mexico

Laurence Scialom, Professor of Economics, University of Paris Nanterre

Jayati Ghosh, Professor of Economics, Jawaharlal Nehru University, India

P. Chansrasekhar, Professor of Economics, Jawaharlal Nehru University

Ilene Grabel, Professor of International Political Economy, University of Denver

Cornel Ban, Reader in International Political Economy, City University

Carolina Alves, Girton College and Faculty of Economics, University of Cambridge.

Jérôme Creel, Associate Professor of Economics, Sciences Po, Paris.

Kai Koddenbrock, Interim Professor of International Political Studies, University of Witten-Herdecke, Germany

Nuno Teles, Professor of Economics, Federal University of Bahia, Brazil

Marco Veronese Passarella, lecturer in Economics, University of Leeds

Jesus Ferreiro, Professor of Economics, University of the Basque Country UPV/EHU

 Elisa Van Waeyenberge, Senior Lecturer in Economics, School of Oriental and African Studies, UK

Phil Mader, Research Fellow, Institute of Development Studies, Sussex.

Manuel B. Aalbers, Professor of Economic Geography, KU Leuven/University of Leuven, Belgium

Cédric Durand, Associate Professor of Economics, Université Paris 13

Sandy Hager, Senior Lecturer in International Political Economy, City University London

Ben Fine, Professor of Economics, School of Oriental and African Studies, UK

Galip Yalman, Assoc. Prof. Dr. (EM), METU

Hansjörg Herr, Professor of Economics, Berlin School of Economics and Law

Vincenzo Bavoso, Lecturer in Commercial Law, University of Manchester

Kate Bayliss, Senior Research Fellow, University of Leeds

Melissa García-Lamarca, Postdoctoral researcher, Universitat Autònoma de

Barcelona, Spain

Andreas Nölke, Professor of International Political Economy, Goethe University

Duncan Lindo, Research Fellow, University of Leeds

Brigitte Young, Professor of International Political Economy, University of Muenster, Germany.

Christoph Scherrer, Director, International Center for Development and Decent Work, University of Kassel

Hans-Jürgen Bieling, Professor of   Political Economy, University of Tübingen

Eve Chiapello, Professor of Economic Sociology, EHESS Paris

Dr Caroline Metz, University of Manchester

Birgit Mahnkopf, Prof. Em. of International Political Economy, Berlin School of Economics and Law

Alessandro Vercelli, Professor of Economics, University of Siena

Susanne Soederberg, Professor of Global Development Studies, Queen’s University

Ipek Eren Vural, Associate Professor, Department of Political Science and Public Administration, Middle East Technical University, Ankara

Yamina Tadjeddine, Professor of Economics,  Université de Lorraine

Thomas Wainwright, Reader, School of Management, Royal Holloway, University of London.

Anders Lund Hansen, Associate Professor Department of Human Geography, Lund University

Malcolm Sawyer, Emeritus Professor of Economics, University of Leeds, UK

Jeff Powells, Senior lecturer in economics. University of Greenwich

Raquel Rolnik, University of São Paulo – Brasil.

Jo Michell, Associate Professor, University of the West of England

Jan Kregel, Professor of Economics, Levy Economics Institute

Irene von Staveren, Professor of Pluralist Development Economics, International Institute of Social Studies, Erasmus University Rotterdam

Stavros D. Mavroudeas, Professor (Political Economy), University of Macedonia

Ray Bush, Professor of African Studies and. Development Politics, University of Leeds

Lucia Shimbo, Professor of Architecture and Urban Planning, University of São Paulo.

Sérgio Miguel Lagoa, Assistant Professor, ISCTE- Instituto Universitário de Lisboa, Lisboa

Carlos Rodríguez González , Professor, University of the Basque Country (UPV/EHU)

Ingrid Harvold Kvangraven, Lecturer in Politics, University of York.

Ewa Karwowski, Senior Lecturer in Economics, Hertfordshire Business School, University of Hertfordshire

Anamitra Roychowdhury, Assistant Professor in Economics, Jawaharlal Nehru University

Hannah Bargawi, Senior Lecturer in Economics, SOAS University of London

Natalya Naqvi, Assistant Professor in International Political Economy, London School of Economics and Political Science

Firat Demir, Professor of Economics, University of Oklahoma, USA

Gilad Isaacs, University of the Witwatersrand, South Africa

Rohan Grey, Cornell University

Yannis Dafermos, Senior Lecturer, UWE Bristol

Kamal Mitra Chenoy, Professor, Jawaharlal Nehru University

Anuradha Chenoy, Professors, formerly Jawaharlal Nehru University

Kathleen McAfee, Professor, International Relations, San Francisco State University

Jan Priewe, Prof. Em. Economics, HTW Berlin, Germany

Piotr Lis, Associate Professor in Economics, Poznan University

Yavuz Yasar, University of Denver

Joscha Wullweber, Professor of International Politics, University of Vienna

Paula Freire, Santoro, Urban Planning Professor, São Paulo University

Manfred Nitsch, Professor emeritus of Economics, Freie Universität Berlin

Bunu Goso Umara, Borno State Public Service, Nigeria

Barbara Fritz, Professor, Institute for Latin American Studies, Freie Universität Berlin

Sally Brooks, Research Fellow, University of York

Danielle Guizzo Archela, Senior Lecturer in Economics, UWE Bristol

Feyzi Ismail, SOAS University of London

Florence Dafe,
 Fellow in International Political Economy, Department of International Relations, London School of Economics and Political Science

Alan B. Cibils, Professor of Political Economy, Universidad Nacional de General Sarmiento, Buenos Aires, Argentina

Rama Vasudevan, Associate Professor of Economics, Colorado State University

José Caraballo-Cueto, Associate Professor, University of Puerto Rico at Cayey

Debarshi Das, Associate Professor, Economics, IIT Guwahati, India

Genarro Zezza, Associate Professor of Economics, University of Cassino, Italy

Sara Stevano, Senior Lecturer in Economics, UWE Bristol

Dirk Bezemer, Professor of Economics of International Financial Development, University of Groningen, Holland

Barry Herman, Visiting Scholar, The New School for Public Engagement

Bruno Bonizzi, Lecturer in Political Economy, University of Winchester

Servaas Storm,  Senior Lecturer, Delft University of Technology, The Netherlands

Mona Ali, Associate Professor of Economics, State University of New York at New Paltz

Ajit Zacharias, Senior Scholar and Director, Distribution of Income and Wealth Program, Levy Economics Institute of Bard College

Vincent Guermond, Queen Mary University of London

Susan Engel, Senior Lecturer, Politics & International Studies, University of Wollongong
Australia\
Erdogan Bakir, Associate Professor of Economics, Bucknell University, USA

 

Shalu Nigam, Freelance researcher, activist and and advocate, India

Jo Walton, Research Fellow, University of Sussex

Redge Nkosi, Exec Director and Research Head at Firstsource Money (Researchers in Money, Banking & Macroeconomics),  South Africa

Sabri Öncü, Chief Economist, Centre for Social Research and Original Thinking

Fulya Apaydin, Assistant Professor, Institut Barcelona d’Estudis Internacionals

Daniele Tori, Lecturer in Finance,  The Open University

Erkan Erdil, Professor of Economics, Middle East Technical University

Robin Broad, Professor of International Development, American University, Washington DC USA

Giulia Zacchia, Sapienza University of Rome
Carolyn Sissoko, PhD, JD
Siobhán Airey, Marie Skłodowska-Curie Research Fellow, University College Dublin, Ireland
Radha Upadhyaya, Research Fellow, IDS, University of Nairobi
Maria Dyveke Styve, University of Bergen, Norway
Mange Ram Adhana President, Association For Promotion Sustainable Development, India
Carolyn Prouse, Assistant Professor of Geography, Queen’s University

Lorena Lombardozzi, Lecturer in Economics, The Open University

Andrea Lagna, Lecturer in International Management and Innovation, Loughborough University

Nick Bernards, Assistant Professor, University of Warwick

Ismail Lagardien, The University of Witwatersrand School of Governance

Nicolas Pons-Vignon, Senior Researcher, School of Economics and Business Sciences, University of the Witwatersrand

Bonn Juego, Postdoctoral Researcher in Development & International Cooperation, University of Jyväskylä, Finland

Pal Tamas, Hungarian Academy of Sciences, Social Science Research Centre, Hungary

 

If you wish your name to be added, please email your institutional affiliation to daniela.gabor@uwe.ac.uk, we will continue to update the list of signatories.