The Assessment: EMU, Four Years On

This paper reviews the functioning of the Economic and MonetaryUnion over the first 4 years of its existence. Monetary policyis viewed as having been of the ‘inflation-targeting’type, but with a tendency towards delay and conservatism inadjustment, which may also reflect over-optimistic output growthforecasts. The resulting pressure on the Stability and GrowthPact (SGP) illustrates the weakness in the ‘consensusview’ of the harmonious interaction of monetary, fiscal,and supply-side policies, which requires policy in all threeareas to be ‘correct’. In discussing reform of theSGP, a looser but still constraining form of fiscal agreementis advocated. The supply-side and balance-of-payments issuesinvolved in inter-country adjustment also interact importantlywith the SGP and are identified as key areas of difficulty ina still ‘immature’ monetary union, with separatelabour-market structures. Here the mechanisms for coordinationare more or less absent.     

Tactical Coordination in Plurality Electoral Systems

Simple plurality election systems (commonly known as ‘firstpast the post’) are often associated with the dominanceof two political parties. Such systems tend to reward leadingparties with a disproportionately large number of seats (the‘mechanical’ effect) and provoke tactical voting,where voters switch away from trailing parties (the ‘psychological’effect). We view tactical voting as a coordination problem.A group of voters wish to prevent a win by a disliked party(such as the Conservatives in recent UK elections) and mustpartially coordinate behind a single challenger (such as Labouror the Liberal Democrats) in order to do this. Crucially, votershave limited information on the situation within their constituencyand hence there is no common knowledge of the game being played—tacticalvoting is a global game. We show that in this setting, voterswill only partially coordinate. Furthermore, tactical votingexhibits negative feedback—tactical voting by others reducesthe incentive for an individual to vote tactically, since theybecome concerned that they may switch in the wrong direction.We calibrate our model, and apply it to the UK General Electionof 1997. Throughout England, we find that the ‘mechanical’and ‘psychological’ effects tend to offset eachother: tactical voting serves to reverse the Conservative biasthat results from the geographic distribution of preferences.     

The Evolving Accidental Information Super-Highway

The technology of the Internet is not static. Although its ‘end-to-end’architecture has made this ‘connection-less’ communicationssystem readily ‘extensible’, and highly encouragingto innovation both in hardware and software applications, thereare strong pressures for engineering changes. Some of theseare wanted to support novel transport services (e.g. voice telephony,real-time video); others would address drawbacks that appearedwith the opening of the Internet to public and commercial traffic—e.g.the difficulties of blocking delivery of offensive content,suppressing malicious actions (e.g. ‘denial of service’attacks), pricing bandwidth usage to reduce congestion. Theexpected gains from making improvements in the core of the networkshould be weighed against the loss of the social and economicbenefits that derive from the end-to-end architectural design.Even where technological ‘fixes’ can be placed atthe networks' edges, the option remains to search for alternative,institutional mechanisms of governing conduct in cyberspace.     

Economic Organization, Innovation Systems, and the Internet

How can public policy best promote successful innovation inthe Internet sector? This paper creates a typology of differenttypes of Internet software firms. Institutions associated withthe ‘Silicon Valley Model’ are a strong driver ofsuccess for some key Internet technologies. However, patternsof human-resource development and knowledge management varywidely across Internet technologies, necessitating the developmentof very different commitments between managers and employees.Institutional frameworks associated with ‘organized’economies, such as Germany or Japan, might provide superiortool-kits to help some types of Internet firms to innovate.Furthermore, our analysis suggests that the creation of institutionalincentives is not the only way to promote patterns of technologicallyintense innovation associated with Silicon Valley. Technologicalstrategies of dominant firms are often equally important. Regardlessof institutional environment, the development of entrepreneurialsoftware firms can be strongly influenced by the activitiesof large firms working within core network telecommunicationtechnologies.     

An ideal Kyoto protocol: emissions trading, redistributive transfers and global participation

We demonstrate that an interregional policy scheme featuringtrading of carbon dioxide emissions, redistributive resourcetransfers and global participation, a scheme which we call ‘IdealKyoto Protocol’, yields an efficient equilibrium allocationfor a global economy. An altruistic international agency—say,the Global Environment Facility—should operate the resourcetransfer mechanism. In addition, regional governments shouldbe able to make independent policy commitments regarding howto control regional emissions of carbon dioxide in anticipationof the redistributive transfers. Our efficiency result suggeststhat the USA should be ‘bribed’ to reverse its decisionof not participating in the Kyoto Protocol.     

Green and Brown? Globalization and the Environment

Globalization—viewed as a process of economic integrationthat embraces governance as well as markets—could leadto worldwide convergence toward higher or lower environmentalquality, or to environmental polarization in which the ‘greening’of the global North is accompanied by the ‘browning’of the global South. The outcome will not be dictated by aninexorable logic. Rather it will depend on how the opportunitiescreated by globalization alter balances of power within countriesand among them.     

Liberalisation, FDI, and productivity spillovers--an analysis of Indian manufacturing firms

The objective of the intensification of reforms in India's trade,technology and industry policies in 1991 was to make Indianindustry competitive. In the light of these attempted changes,the present paper tested two hypotheses, namely (a) whetherliberalisation has improved the productivity of local firms;and (b) whether the spillovers from technology transfer haveincreased in the liberal regime. To test these, techniques frompanel data and stochastic production frontier were employedon 487 firms belonging to 24 three-digit manufacturing industriesfor the period 1989–90 to 1996–97. The results showedthat after liberalisation, the productivity of Indian industry,especially the foreign owned firms, has improved. The econometricresults suggested that only ‘scientific’ non-FDIfirms have benefited from the liberalisation. For the ‘non-scientific’firms, the impact is found to be productivity depressing. Withrespect to spillovers, only those domestic firms, which investedin R&D to decode the spilled knowledge, could benefit.     

An enduring need: multilateralism in the twenty-first century

That the global economy has been hugely successful over thepast 50 years is unquestionable. A major underpinning of thatsuccess has been the open multilateral system, which has enabledthe emergence of a truly international financial system, reciprocalreduction of trade barriers, and the emergence of many previouslypoor countries into the status of ‘emerging markets’or even ‘developed’. The open multilateral system,however, is increasingly under-appreciated and taken for granted.Preferential trading arrangements have proliferated, and withthem the possibility of discriminatory arrangements for capitalflows. The absence of an international regime for capital flowspermits this development and poses a threat to the system, asdo all of the issues on which countries' governments assert‘their’ interests, and ignore their interests inthe overall health of the system. It is to be hoped that thebenefits of multilateralism are more greatly appreciated, andthat the current trend toward increasing regionalism and departuresfrom the post-war system is reversed.     

MULTI-PRODUCT COST ATTRIBUTES: A STUDY OF U.K. BUILDING SOCIETIES

A translog multi-product cost function is estimated jointlywith a derived input cost share equation to obtain estimatesof overall economies of scale and ‘augmented’ overalleconomies of scale for the United Kingdom building society industry.The ‘augmented’ measure takes into account inducedchanges in the number of building society branch offices asthe outputs vary. The parameter estimates are then used to computethe derivatives of the marginal costs of each product to testfor product-specific economies of scale and economies of scope.     

Redesigning Regulation of Pensions and Other Financial Products

We observe that financial regulation is ever-growing, with thelatest area to experience increased supervisory attention beingpensions. Yet this has not made the financial world or consumerssafer, and for pensions in particular there are unexpected andundesired consequences. We explore the current policy approachto supervision, which is ‘bottom up’, i.e. assessmentand regulation of individual institutions, with the aim ofmakingthe financial system safe by making each institution safe. Weshow that this is both damaging (because it stifles innovation)and does not work (because risk will always be squeezed fromthe regulated institutions to the less regulated and less seen).Instead, we advocate a ‘top-down’ approach, whichfocuses on making the system safe first. We conclude that onceyou have made systems safe, detailed supervision of individualinstitutions is less necessary, thus reducing the burden ofsupervision. We believe that this approach will lead to a moresuitable and diverse treatment of different risks that willincrease both systemic and consumer safety. ‘If you haveten thousand regulations you destroy all respect for the law’,Winston Churchill (1931). ‘The ultimate result of shieldingmen from the effects of folly is to fill the world with fools’,Herbert Spencer (1891). Footnotes ¹ E-mail addresses: n.barr{at}lse.ac.uk; john_nugee{at}ssga.com     

Active citizen's income, unconditional income and participation under imperfect competition: a welfare analysis

Various types of basic income schemes are considered to compensatethe allocative inefficiencies induced by unemployment benefits.A dynamic general equilibrium model of a unionised economy isdeveloped in which participation to the formal labour marketis endogenous and the budget of the State has to balance. Itis shown that basic income schemes reduce the equilibrium unemploymentrate. Assuming that job-search is costly to monitor, the normativeanalysis suggests that only the active population should beeligible to the basic income. Introducing such an ‘activecitizen’s income’ can be a Pareto-improving reform.     

THE CAMBRIDGE CONTROVERSIES: OLD WAYS AND NEW HORIZONS--OR DEAD END?

‘[T]he established critics of a theory have nearly asmuch interest in the survival of the theory they criticize asits supporters; for when it is abandoned they are transportedfrom the exciting forefront of current scientific debate toa dignified but unexciting position in the museum of the historyof the subject’ (Nuti [1974, p. 364]). ‘If anything explains the heat of debates in growth [andcapital] theory, it is the difficulty thinkers in the scholastictradition have in appreciating that, for workers in the scientifictradition, it makes sense to entertain a model and use it withoutbeing committed to it; while the scientists cannot imagine whymere models should be the object of passion’ (Mirrlees[1973, p. xxi]).     

Assessing inflation targeting through intervention analysis

The aim of this paper is to deal with the empirical aspectsof the ‘new’ monetary policy framework, known asInflation Targeting. Applying Intervention Analysis to multivariateStructural Time Series models, which avoids certain biases encounteredin the use of conventional regression estimators, new empiricalevidence is produced in the case of a number of OECD countries.These results demonstrate that although Inflation Targetinghas gone hand-in-hand with low inflation, the strategy was introducedwell after inflation had begun its downward trend. But, then,Inflation Targeting ‘locks in’ low inflation rates.The evidence produced in this paper suggests that non-InflationTargeting central banks have also been successful on this score.     

Agricultural productivity, trade, and industrialisation

Traditional development economics states that industrialisationmust be positively correlated with agricultural developmentas in the American and many European cases. However, some recentindustrialisation experiences suggests a negative link whichcan be supported by a simple Ricardian argument Yet this argumentis not consistent with the agricultural ‘leap forward’that often occurred before industrialisation took place. Here,we develop a model in which, for a closed economy, industrialisationfollows rising agricultural productivity. For a small open economy,multiple equilibria are possible and industrialisation tendsto be associated with low agricultural productivity, but istriggered by sudden changes in it.     

KEYNES AND LEIJONHUFVUD

The main thesis is that Keynes' theory is quite distinct fromthe ‘Keynesian’ income-expenditure theory (Leijonhufvud(1968), p. 8).     

Addendum: Gender discrimination and intergenerational transmission of preferences

The paper ‘Gender discrimination and intergenerationaltransmission of preferences’ was published in Oxford     

Multiparty Competition, Founding Elections and Political Business Cycles in Africa

Political business cycle (PBC) theory and empirics typicallyassume that elections are competitive. Yet, as empirical workon PBCs turns increasingly to developing countries for evidence,this assumption becomes untenable. We propose and test two empiricalhypotheses regarding PBCs: first, we should only see cycleswhen elections involve multiparty competition; secondly, weshould see larger cycles in ‘founding’ elections.Using a new indicator of multiparty competition and macroeconomicdata from Africa, we find strong support for our first hypothesisand moderate support for the second. These findings have implicationsfor democratic transitions and the compatibility of economicand political reform in nascent democracies.     

INVESTMENT AND GROWTH: PART 1: THE MAIN CONCEPTS AND THEIR IMPLICATIONS

‘Change is not made without inconvenience, even from worseto better.’(Richard Hooker, quoted by Samuel Johnson inthe Preface to the English Dictionary.)     

UK Transport Policy 1997-2001

The 1997 government announced policies and changes in administration,but the statistics show that little else was achieved. Road-trafficgrowth was temporarily tamed by an increase in the price offuel, which integrated policies on transport, environment, andland-use. This was not sustained, so there will be more congestion,and more road capacity must be provided. A coherent policy oncharges was absent, though congestion charging will help ifeventually implemented. Little freight was transferred to rail.Neither ‘integration’ nor ‘social inclusion’was improved. London became less integrated and policy on theUnderground was a failure. Administration of the railways remainsconfused. There are doubts about the technical, managerial,and financial feasibility of the expansion envisaged. The buswas given inadequate attention. The Treasury dominates throughthe public-spending control process, which fetters local authoritiesand impedes infrastructure investment. Proven borrowing mechanismsoffer alternatives for locally accountable capital financing.     

Building Programme Evaluation into the Design of Public Research-Support Programmes

There is wide agreement that the high social rate of returnto research and innovation justifies government support forresearch. There is, however, only limited evidence on the effectivenessof different public research programmes. Reliable measurementof programme effectiveness is hampered by the ‘selectivity’problem (public funding goes to proposals judged in advanceto be likely to succeed) and the question of ‘additivity’(whether public funding increases total spending on researchor merely displaces funding from other sources). The selectivityproblem can be mitigated by building evaluation into programmedesign, either by partial randomization of the grant process,or by recording the rankings used in grant evaluation and makingthis information available to researchers. The additivity questionreflects the more fundamental problem that the ultimate objectiveof these programmes is to have long-term effects that are inherentlyvery difficult to measure and attribute to particular programmes.