Financial Times Europe - 19.10.2019 - 20.10.2019

19 October/20 October 2019 ★ FT Weekend 9

Opinion

3 Facebook’s digital currency Libra is a

threat to national sovereignty

The company has shown economic and

political ambitions, writesBruno Le Maire

Top reads at FT.com/opinion

3 Central banks have started tuning in to

climate change

Investors need to understand that the

conversation is moving, writesGillian Tett

I

as delighted to see Abhijit Baner-w

jee, Esther Duflo and Michael Kre-

mer announced as winners of the

Nobel memorial prize in econom-

ics. By championing the use of ran-

domised controlled trials in develop-

ment projects, they have added large

and useful doses ofrigorous evidence ot

a discipline that can be overfond of rea-

soning from a comfortable armchair.

The spotlight this week has under-

standably been onProf Duflo. She is a

superb economist, highly charismatic

and the youngest winner by far. She is

also only the second woman to win the

prize, afterLin Ostromin 2009. Since

Prof Ostrom was a political scientist,

and not as well known in the economics

profession as she should have been, Prof

Duflo is arguably the first female econo-

mist to win the prize. That has huge

symbolic importance for a profession

that continues to struggle with diversity.

All three winners have made major

contributions beyond the championing

of randomised trials that won them the

prize. Prof Kremer, in particular, has

made an unusual series of insights.

With Seema Jayachandran, he pro-

posed a way to constrict funding to

oppressive or corrupt regimes. An inter-

national court could declare that their

borrowing as “odious” and need not bew

repaid by a successor government. This

declaration would dissuade banks from

lending in the first place.

With his wife, Rachel Glennerster,

now chief economist of the UK’s Depart-

ment for International Development, he

set outthe case or an “advanced marketf

commitment” to fund the development

of vaccines and medicines that the mar-

ket would otherwise be unlikely to pro-

vide. That proposal later took shape as a

$1.5bn fund to pay for a pneumococcal

meningitis vaccine that did not yet exist.

Several hundred million children have

since received the vaccine.

Then there’s Prof Kremer’sO-ring

Theoryof Development, which demon-

strates just how far one can see from

that comfortable armchair. The failure

of vulnerable rubber “O-rings”

destroyed the Challenger space shuttle

in 1986; Kremer borrowed that image

for his theory, which — simply summa-

rised — is that for many production

processes, the weakest link matters.

Consider a meal at a fancy restaurant.

If the ingredients are stale, or the sous-

chef has the norovirus, or the chef is

drunk and burns the food, or the waiter

drops the meal in the diner’s lap, or the

lavatories are backing up and the entire

restaurant smells of sewage, it doesn’t

matter what else goes right. The meal

is only satisfactory if none of these

things go wrong.

Once you start to think about O-ring

problems, you see them everywhere. A

bank is useless if you can’t trust it to

keep your money safe from hackers.

The most stylish and comfortable car is

worth nothing without reliable brakes.

You can build a sophisticatedfactory in

a jungle ut your efforts will be in vain ifb

you can’t keep the road to it open.

What’s less obvious is that the logic of

O-ring problems dramatically changes

the way an organisation — or an entire

economy — works. Because a single fail-

ure can doom an entire project, several

things follow. The first is that like

attracts like the best chef does his or her

best work with the best suppliers and

the best waiters in the best kitchen. It is

pointless to ask the best waiter to serve

poisonous slop made by an incompetent

chef, and pointless to ask the best chef to

prepare meals into which an incompe-

tent waiter will sneeze. To spread out

the talent is to squander it.

(Prof Kremer’s own career offers an

example: he was a research assistant for

a paper co-authored by Larry Summers,

future US Treasury Secretary. Another

assistant was Sheryl Sandberg, future

Facebook chief operating officer. High

performers seek out high performers.)

The second implication is that ine-

quality is endemic. Since the most

skilled workers have the most skilled

colleagues and the best equipment, they

are vastly more productive than others

who are only fractionally less skilled. A

modest variation in skills leads to a huge

variation in wages. This is why blue-

chip companies recruit only from elite

colleges and universities. Why take a

chance on someone whose face doesn’t

fit? Policymakers trying to create a more

equal society must find some way to

swim against this tide.

Third, O-ring economies are self-per-

petuating. If an economy has undrivea-

ble roads, unreliable electricity, impass-

able queues at customs, corrupt courts,

and untrained workers... well, where

is progress to come from? Improve the

roads and you’ll still be foiled by the

electricity; train the workers and

the crooked legal system will still

take you down.

For an individual, the question is how

much education should I try to acquire?

It depends on how much skill others

have. If I can’t reach a job market full of

highly competent people, there is little

point in wasting time and effort devel-

oping skills that will be wasted.

The O-ring model is merely a simple

way of thinking about how an economy

might work — albeit one that seems

packed with insight. Prof Kremer didn’t

stay in his armchair for long. He and this

year’s other winners have been demon-

strating just how much economics,

wisely used, can deliver.

[email protected]

The weakest link and

the strong Nobel winner

Failure of the vulnerable

rubber ‘O-rings’ destroyed

the Challenger space

shuttle in 1986

Tim

Harford

The undercover

economist

D

onald Trump’s decision to

pull American forces out of

northern Syria, paving the

way for Turkey to attack the

Kurds, is the latest and most

tragic evidence that the transatlantic

link between America and Europe has

become meaningless.

In spite of the cynical “ceasefire”

announced by the US and Turkey, the

decision to leave the Kurdish allies of

the US-led coalition against Isis vulnera-

ble to an assault by a Nato member is

both morally questionable and a practi-

cal mistake.

The chaos could free thousands of Isis

suspects to escape from camps guarded

by the Kurds and bring mayhem to

western capitals. And the Kurds’ defen-

sive deal with Russia and the Syrian gov-

ernment allows Moscow to wield power

in a country and region where it has

largely been excluded.

Russian premier Vladimir Putin now

holds the future of the Syrian conflict

and the Iranian crisis in his hands. He

has put himself at the centre of the bal-

ance of powers in the Middle East, at the

expense of the US and the credibility of

its alliances.

Since the fall of the Soviet Union, the

strategic value of Europe has considera-

bly diminished for the US. Nato sur-

vived through the 1990s due to the com-

bined efforts of Europeans who were

still unable to ensure their own security,

and Americans eager to ensure that

Europe would not go its own way.

Then came the 9/11 terrorist attacks

in 2001. Europe invoked Article 5 of the

Nato treaty, which states that an attack

against one ally is an attack against all,

for the first and only time in its history.

That gesture of solidarity was met with

supreme indifference by then president

George W Bush. His secretary of

defence, Donald Rumsfeld, further

downgraded the importance of the

transatlantic alliance. “The mission

determine s the coalition,” he

announced, which is the perfect nega-

tion of a permanent alliance. Mr Bush’s

successor Barack Obama also appeared

uninterested in Europe.

Mr Trump has taken the relationship

to a new low. After announcing during

the 2016 presidential campaign that

Nato was “obsolete”, once in office he

argued that Europeans were not allies

but economic competitors. Just this

summer, he opined that “the EU is

worse than China, just smaller”.

Where his predecessors showed mere

indifference, Mr Trump argues openly

for the dismantling of the EU: he hailed

Brexit from the start. That means that

the US can no longer be seen as the ulti-

mate guarantor of Europe’s security.

Confronted with this situation, the

Europeans first reacted with a mixture

of anxiety, frustration and resignation.

Many were still hoping for a return to

the good old days of American leader-

ship. Then, as concern grew that “Amer-

ica First” is here to stay, European lead-

ers changed their tune. “We Europeans

must really take our destiny inour own

hands,” said Germany’s Angela Merkel,

and France’s Emmanuel Macron

defended the idea of “European sover-

eignty”.

These proclamations will remain

empty words unless the Europeans rein-

vent their approach to strategy by

agreeing on a definition of “European

interests” and act to defend them collec-

tively. This will not be easy. At least

three elements are necessary.

On defence, stop making abstract

statements about “European defence”.

There will be no European army for gen-

erations to come. Meaningful progress

can only be based on the military capa-

bilities, the political leadership and the

strategic culture of two countries:

France and the UK.

Britain faces a crucial choice as it

leaves the EU, comparable to the one

made after the Suez expedition fiasco in

1956: whether to remain a junior part-

ner to a less and less reliable US or

become a senior partner in the con-

struction of a new European power

strong enough to be heard on the inter-

national scene and not be condemned to

be caught in the US-China crossfire or

US-Russia competition.

Nato has also become irrelevant

because it does not address the new

components of power and security:

technology, trade, finance, cyber secu-

rity and the like.

Europe will certainly be more vulner-

able to Russia, China and the US if it lags

behind in new technologies or if it can-

not escape the combined effects of the

domination of the US dollar and extra-

territorial implementation of US sanc-

tions and legislation. Addressing these

Since the fall of the Soviet

Union, the strategic value

of the EU has considerably

diminished for the US

issues would require strengthening the

euro as an exchange currency and a

more assertive industrial policy at the

EU level.

Finally, values matter: liberal democ-

racy, human rights and respect for the

facts have been for 70 years the strength

and the basic foundation of the transat-

lantic alliance. Today, all three are

under threat. With all its shortcomings

and weaknesses, Europe is today in a

unique position to be the champion of

those values.

Values as well as geopolitics are pre-

cisely what matters in the Syrian trag-

edy. America’s retreat from a region on

Europe’s doorstep should be a wake-up

call to the continent’s leaders.

“History punishes those who come

too late,” Soviet premier Mikhail Gor-

bachev warned the East German leader

as the Berlin Wall crumbled in 1989.

Europe now needs to act to avoid the

same fate.

The writer has served as French ambassa-

dor to Nato and the UK

A warning to Europe from the latest Syrian crisis

veneer. The government’s almost total

silence about the services sector —

which makes up 80 per cent of our econ-

omy — is appalling.It needs to explain

what its vision is for services, where it

wants to diverge, and why.

Mr Johnson clearly understands that

every version of Brexit threatens the

Union. His version of the Northern Ire-

land-only backstop will probably lead to

the gradual separation ofthe province

from the rest of the UK. I don’t know if

he accepts — as some Brexiters privately

do — that every version of Brexit will

make this country oorer. But if he isp

determined to see this through, and end

free movement of people, he must up

the government’s game.

He should be hiringnegotiators with a

deep understanding of the realities of

trade and investment. He should be

launchinga bureau ruthlessly dedicated

to attracting foreign direct investment

and dissuading businesses from moving

their operations. He should be revamp-

ing the Brexit department so that staff

working with different allies sit under

the same roof and can make trade-offs

explicit. He should be creating a govern-

ment of all the talents and listening seri-

ously to business.

Today, for a brief moment, Mr John-

son seems to be in a win-win situation.

Either he chalks up a victory by getting

his deal through parliament, or he can

blame MPs for blocking it and call an

election which he will probably win. But

he must stop pretending that we can just

“get Brexit done”, and put the kettle on.

The real fight has barely started.

The writer, a former head of the Downing

Street policy unit, is a Harvard senior fellow

possible competitive advantage. They

have agreed social and employment

rules, in order to win votes from moder-

ate Labour MPs. Moreover, by agreeing

to abide by EU state aid and competition

rules from whichMr Corbyn’s Labour

party wants to diverge, they can argue

that they are curbing the ambitions of

any future leftwing government. But

this is a far cry from the bonfire of red

tape envisaged by the Brexiters.

The fundamental tension remains

unresolved: between Brexiters who

have lauded the freedom to compete on

our own terms and business executives

in most sectors who want the stability

and profitability of alignment. No one in

the car industry, chemicals or aerospace

is yearning to diverge from EU rules that

ensure frictionless trade and integrated

supply chains. No business is rushing to

embrace the complexity and cost

involved in complying with multiple

standards in different jurisdictions. The

government’s lack of understanding

here is deeply alarming.

The Brexit saga has exposed a shame-

ful level of economic and business illit-

eracy in our politics. A few top-flight

chancellors — Gordon Brown, George

Osborne and Philip Hammond — have

understood how political decisions

affect the profitability and viability of

businesses. But they have been a thin

are the world’s top trade negotiators,

who we should already have hired to

land sector deals? Does the government

realise this is only the beginning of a

deadly serious process?

Mr Johnson must be congratulated for

persuading the EU to reopen the terms

of the withdrawal agreement and the

Irish backstop. But to leave both the cus-

toms union and the single market, as he

proposes, is to take an enormous gam-

ble with Britain’s future. The agreement

he has struck seems to presage a more

distant trading relationship than Mrs

May negotiated. If the ultimate destina-

tion is a Canada-style free trade agree-

ment with the EU, thegovernment’s

own analysissuggests that this could

reduce gross domestic product by up

to 6.7 per cent, and that we might

lose more in trade frictions with the EU

than we would gain in new deals with

other countries.

The small print therefore looms very

large. If the past three years have taught

us anything, it is that EU solidarity is

unshakeable. British ministerial bluster

has come up repeatedly against the

technocratic implacability of a very

large trading bloc. Dublin has been

stronger than London, possibly for the

first time in Anglo-Irish history.

Mr Johnson has climbed down over

the level playing field rules that are a

prerequisite to the zero-tariff, zero-

quota EU-UK free trade deal he hopes to

strike. The revisedpolitical declaration

lists rules to preserve open and fair com-

petition on everything from climate

change to state aid. Ministers are

relaxed about matching environmental

standards, since they aim to exceed

them, and even see them as a source of

T

o diverge or not to diverge?

That will be the question if

Boris Johnson’s Brexit

“deal” ets through the UKg

parliament. The relief that

no deal has probably been avoided

should not blind anyone to the fact that

this agreement represents a very hard

Brexit — and is merely a prelude to long

and complex negotiations. Mr Johnson’s

withdrawal agreement is no more a

“deal” than his predecessor Theresa

May’s was. MPs will again be asked to

support a divorce, without knowing

what the settlement will be until after

they have left the family home.

Those MPs minded to support the

prime minister will therefore have to

hope that he knows what he’s doing. If

Brexit is to happen, I would rather have

Mr Johnson negotiating on the other

side of it thanJeremy Corbyn, the

Labour leader. But achieving an ffec-e

tive settlement will require a level of

expertise hat is largely absent fromt

Whitehall and the current cabinet.

Put aside, for a moment, the mind-

numbing technicalities of the Irish

backstop and whether Northern Ireland

has potentially got for itself a better sta-

tus than Switzerland. Who will staff the

joint and specialised committees that

were supposed to have been set up long

ago to oversee the next phase? Where

This saga has exposed

a shameful level of

economic and business

illiteracy in our politics

Johnson’s Brexit deal is

a leap in the dark

The prime minister must level with the British people about his vision for the future

BRITAIN

Camilla

Cavendish

Gérard

Errera

OCTOBER 19 2019 Section:Features Time: 18/10/2019- 18:16 User:alistair.hayes Page Name:COMMENT USA, Part,Page,Edition:USA, 9, 1