Tag Archives: Super regions

Updates from McKinsey

How purpose-led missions can help Europe innovate at scale
By Ilan Rozenkopf, Pal Erik Sjatil, and Sebastian Stern – Europe is at an important economic inflection point. The continent has the required assets for future prosperity, including leading economically in worldwide sectors such as automotive and pharmaceuticals, and is making progress in important innovations that will help it compete. Nonetheless, European business faces a challenge that is eroding its economic position relative to other global powers: building new leading clusters or companies that can innovate at scale. Addressing this challenge is vital to the continent’s economic future.

We suggest building on Europe’s economic strengths and social capital to tackle the challenge. European business leaders should raise their sights and set new ambitions, both for their own organizations and for collaboration across private and public sectors on fundamentally important projects for the future. Building on a concept originally proposed by Professor Mariana Mazzucato, we call these “missions”—bold and inspirational initiatives to collaborate at scale on socially and economically important topics capable of attracting public support.

This approach can help Europe address its innovation challenge in its own distinctive way, marshalling resources and harnessing ideas and diverse cultures in a set of common ambitions. It could also compensate for structural disadvantages relative to China and the United States, such as a comparatively fragmented domestic market and a less cohesive system of government action.

In sum, missions offer a significant opportunity for European business leaders to take an even stronger lead for more innovation at scale in Europe. Fostering ambition-led collaboration enables scaling of disruptive innovation and proven ideas in a way that leverages Europe’s strength in diversity and, thus, the harmony underpinning its social market economy. more>

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There is No Economics without Politics

Every economic model is built on political assumptions
By Anat Admati – There is absolutely no way to understand events before, during, and since the financial crisis of 2007-2009 while ignoring the powerful political forces that have shaped them. Yet, remarkably, much of the economics and finance literature about financial crises focuses on studying unspecified “shocks” to a system that it largely accepts as inevitable while ignoring critical governance frictions and failures. Removing blind spots would offer economists and other academics rich opportunities to leverage their expertise to benefit society.

The history of financial economics is revealing in this regard. By the second half of the 20th century, when modern finance emerged as part of economics, the holistic approach of early thinkers such as Adam Smith—which combined economics, moral philosophy, and politics—was long gone. Narrow social-science disciplines replaced the holistic approach by the end of the 19th century. In the 20th century, economists sought to make economics formal, precise, and elegant, similar to Newton’s 17th-century physics.

The focus in much of economics, particularly in finance, is on markets. Even when economists postulate a “social planner” and discuss policy, they rarely consider how this social planner gets to know what is needed or the process by which policy decisions are made and implemented. Collective action and politics are messy. Neat and elegant models are more fun and easier to market to editors and colleagues.

Lobbyists, who engage in “marketing” ideas to policymakers and to the public, are actually influential. They know how to work the system and can dismiss, take out of context, misquote, misuse, or promote research as needed. If policymakers or the public are unable or unwilling to evaluate the claims people make, lobbyists and others can create confusion and promote misleading narratives if it benefits them. In the real political economy, good ideas and worthy research can fail to gain traction while bad ideas and flawed research can succeed and have an impact.

Having observed governance and policy failures in banking, I realized that the focus on shareholder-manager conflicts is far too narrow and often misses the most important problems. We must also worry about the governance of the institutions that create and enforce the rules for all. How power structures and information asymmetries play out within and between institutions in the private and public sectors is critical. more>

Updates from McKinsey

How smart choices on taxation can help close the growing fiscal gap
The growing fiscal gap has policy makers in a difficult position. Swift action in a few areas can help them improve the operational efficiency of fiscal systems.
By Aurélie Barnay, Jonathan Davis, Jonathan Dimson, and Marco Dondi – Governments around the world have implemented a range of fiscal and debt measures to fund policy initiatives over recent decades. As a result, tax revenues as a proportion of GDP have risen four percentage points across Organization for Economic Cooperation and Development (OECD) countries since 1980. However, many governments remain inadequately funded. Despite higher tax revenues, spending is rising faster than income, leading to widening budget deficits and higher levels of debt.

Four distinct trends are playing out: increasing automation in the workplace, leading to pressure on employment; the evolution of global trade through the proliferation of e-commerce and digital business, raising questions over cross-border taxation; rising self-employment; and an aging population. Each of these could further widen the fiscal deficit in the years ahead. Moreover, we see all four accelerating, placing policy makers in an ever-tightening fiscal bind.

Basic economics provides two options for balancing the books: either increase revenues or decrease spending.

The bottom line for governments is that there are no easy answers. Whether they seek to increase taxation or boost efficiency, they are likely to face headwinds. Still, decisive and rapid action is essential to optimize tax collections and keep pace with an inevitable rise in demand for services.

Tax revenues in OECD countries have risen slightly over the past 35 years. However, spending has risen more, leading to widening deficits that governments have bridged with debt. OECD tax revenues were 34 percent of GDP in 2017. Because of tax deficits and the effects of the 2008 financial crisis, the average ratio of gross debt to GDP rose from 66 percent of GDP in 1995 to 88 percent in 2017.

Sources of tax revenue have remained stable over time. Over three decades, personal income and consumption together accounted for 82 to 89 percent of revenues. The biggest single contributor was payroll and income tax, accounting for 50 to 55 percent of revenues (even though the contribution of personal income tax declined by nearly 7 percentage points). Consumption and excise duties remain little changed at 32 to 34 percent of revenues.

More people are working for themselves, either as a contractor to several companies or a single company. This emerging gig economy accounts for an estimated 28 percent of EU and US employment. The proportion would rise to 46 percent if everyone had their preferred working arrangement, according to MGI research.

However, the gig economy creates challenges for tax authorities. First, independent workers are generally less compliant than their employed peers, and in some countries are required to pay less taxes. Evidence from the US suggests that workers subject to limited information reporting, such as the self-employed, have an around 50 percentage point lower rate of tax compliance than traditional workers. There are also ongoing legal debates in some jurisdictions over whether gig economy workers are employees for the purposes of worker classification and social security contributions.

Governments can close the widening gap between revenues and expenditures in a variety of ways through tax revenues, nontax revenues, and spending optimization. In addition, some governments are either implementing or considering approaches based on monetary finance.

The gap between government revenues and spending has widened and is likely to continue to do so. The onus, then, is on tax authorities to act now. more>

We’re All Free Riders. Get over It!

By Nicholas Gruen – Anathematized and stigmatized today, free-riders built the lion’s share of the prosperity we enjoy today.

Does that mean we should ‘share’ or ‘pirate’ more copyrighted things on the internet? Not necessarily. The free rider problem is real enough.

But here’s the thing. In addition to the free rider problem, which we should solve as best we can, there’s a free rider opportunity. And while we whine about the problem, the opportunity has always been far larger and its value grows with every passing day.

The American economist Robert Solow demonstrated in the 1950s that nearly all of the productivity growth in history – particularly our rise from subsistence to affluence since the industrial revolution – was a result not of increasing capital investment, but of people finding better ways of working and playing, and then being copied. A little of this innovation was fostered by intellectual property rights which give temporary monopolies in technology. But much less than you’d think.

Most innovation can’t be patented. And after patents expire in 20 years (it used to be less) it’s open slather. We’re not paying royalties to the estates of Matthew Bolton and James Watt for their refinements to the piston engine. But we’re still free riding on their work. In other words, free-riding made us what we are today.

At the birth of modernity Thomas Jefferson spoke of the free rider opportunity more eloquently than any statesman then or since:

He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation.

Far from wanting to ignore the free rider problem, Jefferson was on top of that too, spearheading the institutionalization of intellectual property. But having done so, throughout his life, including in his administration of patents, he sought balance between dealing with the problems and seizing the opportunities presented by free riding. more>

The Adaptive Age

No institution or individual can stand on the sidelines in the fight against climate change
By Kristalina Georgieva – When I think of the incredible challenges we must confront in the face of a changing climate, my mind focuses on young people. Eventually, they will be the ones either to enjoy the fruits or bear the burdens resulting from actions taken today.

Our efforts to reduce greenhouse gas emissions through various mitigation measures—phasing out fossil fuels, increasing energy efficiency, adopting renewable energy sources, improving land use and agricultural practices—continue to move forward, but the pace is too slow. We have to scale up and accelerate the transition to a low-carbon economy. At the same time, we must recognize that climate change is already happening and affecting the lives of millions of people. There are more frequent and more severe weather-related events—more droughts, more floods, more heat waves, more storms.

Ready or not, we are entering an age of adaptation. And we need to be smart about it. Adaptation is not a defeat, but rather a defense against what is already happening. The right investments will deliver a “triple dividend” by averting future losses, spurring economic gains through innovation, and delivering social and environmental benefits to everyone, but particularly to those currently affected and most at risk. Updated building codes can ensure infrastructure and buildings are better able to withstand extreme events. Making agriculture more climate resilient means investing more money in research and development, which in turn opens the door to innovation, growth, and healthier communities.

The IMF is stepping up its efforts to deal with climate risk. Our mission is to help our members build stronger economies and improve people’s lives through sound monetary, fiscal, and structural policies. more>

Updates from Chicago Booth

The evolution of economics and Homo Economicus
By Richard H. Thaler – Early in my teaching career I managed to inadvertently get most of the students in my microeconomics class mad at me, and for once, it had nothing to do with anything I said in class. The problem was caused by a midterm exam.

I had composed an exam that was designed to distinguish among three broad groups of students: the stars who really mastered the material, the middle group who grasped the basic concepts, and the bottom group who just didn’t get it. To successfully accomplish this task, the exam had to have some questions that only the top students would get right, which meant that the exam was hard.

The exam succeeded in my goal—there was a wide dispersion of scores—but when the students got their results they were in an uproar. Their principal complaint was that the average score was only 72 points out of a possible 100.

What was odd about this reaction was that the average numerical score on the exam had absolutely no effect on the distribution of grades. The norm at the school where I was teaching was to use a grading curve in which the average grade was a B or B+, and only a tiny number of students received grades below a C. I had anticipated the possibility that a low average numerical score might cause some confusion on this front, so I had reported how the numerical scores would be translated into actual grades in the class.

Anything over 80 would get an A or A-, scores above 65 would get some kind of B, and only scores below 50 were in danger of getting a grade below C. The resulting distribution of grades was not different from normal, but this announcement had no apparent effect on the students’ mood. They still hated my exam, and they were none too happy with me either. As a young professor worried about keeping my job, I was determined to do something about this, but I did not want to make my exams any easier. What to do?

Finally, an idea occurred to me. On the next exam, I made the total number of points available 137 instead of 100. This exam turned out to be slightly harder than the first, with students getting only 70 percent of the answers right, but the average numerical score was a cheery 96 points. The students were delighted! No one’s actual grade was affected by this change, but everyone was happy. From that point on, whenever I was teaching this course, I always gave exams a point total of 137, a number I chose for two reasons.

First, it produced an average score well into the 90s, with some students even getting scores above 100, generating a reaction approaching ecstasy. more>

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The EU’s rule-of-law test

By Tytti Tuppurainen – In his book The Origins of Political Order, the political scientist Francis Fukuyama argued that the rule of law is the most difficult pillar for a successful modern society to construct.

Organizing government administration and staging elections to a legislative body is relatively easy, and only a small number of failed states have no functioning public administration or legislature. But in far more countries, the absence of the rule of law is the primary source of instability and political decay.

For the EU, the rule of law is of central importance, because the EU is not simply a joint economic undertaking (although, as the economist Hernando de Soto has emphasized, the rule of law is also a prerequisite for a developed market economy). The EU’s raison d’être, like that of its predecessors, is to guarantee peace between European countries and to safeguard human rights within its member states. And the bloc is founded on common values enshrined in its treaties.

The EU’s commitment to the rule of law, set out in Article 2 of the Treaty on European Union, is straightforward. It stands for legality, legal certainty, the prohibition of arbitrary exercise of authority, the separation of powers, and an effective and independent judiciary. Respect for the rule of law affects different layers of society in very practical ways: at the level of the Union, the nation-state, companies, and citizens.

Within the EU, the rule of law is not a political statement or unattainable moral ideal, but a principle that public officials and courts are responsible for upholding. more>

The Unwanted Wars

Why the Middle East Is More Combustible Than Ever
By Robert Malley – The war that now looms largest is a war nobody apparently wants.

A conflict could break out in any one of a number of places for any one of a number of reasons. Consider the September 14 attack on Saudi oil facilities: it could theoretically have been perpetrated by the Houthis, a Yemeni rebel group, as part of their war with the kingdom; by Iran, as a response to debilitating U.S. sanctions; or by an Iranian-backed Shiite militia in Iraq.

If Washington decided to take military action against Tehran, this could in turn prompt Iranian retaliation against the United States’ Gulf allies, an attack by Hezbollah on Israel, or a Shiite militia operation against U.S. personnel in Iraq. Likewise, Israeli operations against Iranian allies anywhere in the Middle East could trigger a regionwide chain reaction. Because any development anywhere in the region can have ripple effects everywhere, narrowly containing a crisis is fast becoming an exercise in futility.

The Middle East has become the world’s most polarized region and, paradoxically, its most integrated. That combination—along with weak state structures, powerful nonstate actors, and multiple transitions occurring almost simultaneously—also makes the Middle East the world’s most volatile region. It further means that as long as its regional posture remains as it is, the United States will be just one poorly timed or dangerously aimed Houthi drone strike, or one particularly effective Israeli operation against a Shiite militia, away from its next costly regional entanglement.

Ultimately, the question is not chiefly whether the United States should disengage from the region. It is how it should choose to engage: diplomatically or militarily, by exacerbating divides or mitigating them, and by aligning itself fully with one side or seeking to achieve a sort of balance.

Economically, it ranks among the least integrated areas of the world; institutionally, the Arab League is less coherent than the European Union, less effective than the African Union, and more dysfunctional than the Organization of American States. Nor is there any regional entity to which Arab countries and the three most active non-Arab players (Iran, Israel, and Turkey) belong.

Yet in so many other ways, the Middle East functions as a unified space. Ideologies and movements spread across borders: in times past, Arabism and Nasserism; today, political Islam and jihadism. more>

Updates from Siemens

Spaceport America Cup Student Competition Soars to 30,000 Feet, Now with Siemens Software Partnering
Siemens commitment to workforce development
By Chris Penny – Siemens Digital Industries Software’s academic partnering staff recently attended the Spaceport America Cup (SA Cup) for the first time as a sponsor. We are very excited to be working with these teams to provide software and training grants to help team excel in the design and manufacturing of their rockets. Leigh Anderson from the global academic team and Chris Penny from the US academic team met with virtually every team of 120 teams from 14 countries, and Chris gave two workshops on Siemens software featuring demonstrations in STAR-CCM+ for aerodynamic analysis.

We selected this competition to sponsor due to the sophistication of the student challenge, the opportunity to engage with and support these students, and the high level of industry support (many of which use Siemens software).

A great example of how this competition prepares students for the workforce could be seen when James Ferrese (University of Washington) who led the development of an advanced plasma actuator payload obtained on-the-spot job offers from Raytheon and Northrup Grumman after their design presentation. more>

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A European pivot from space to time

By Kalypso Nicolaïdis – Although Europe has never ceased to reinvent itself, we the peoples of Europe love to announce to the world that peace, like diamonds, is forever. That is a nice thought. But peace is never a done deal. Its foundations need to be reinvented by every generation, every polity, every era. Deep peace is not an inheritance but a way of life. It is not about harmony but struggle. It needs armies of defenders, with all sorts of clever strategies, all sorts of ingenious weapons, all sorts of parochial accents.

Journeys of reckoning often have to do with re-knowing something anew that we had almost forgotten. Can we know peace anew?

We can do so through many different paths. One such path is this: a European pivot from space to time. The EU and its critics have focused on the politics of space, a space made single by markets, regulators and judges, a space where free movement reigns supreme and from which we can choose who and how to exclude. What if the EU were to refocus on the politics of time, time when we reflect back and look ahead, time that can be slowed down better to engage with the needs of the next generation, time to allow for a hundred indecisions, and for a hundred visions and revisions …

Would it not be okay to renationalize space a little if we could radically Europeanize time? Inspired by the journey of Er, who at the end of The Republic comes back from the dead, can we shape our present life to serve future lives through the virtues we abide by? more>