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The unemployment rate in the UK is now one of the lowest (4.6 %) since the early 1970s. Even during the global boom of the mid -2000s, one did not witness such low rates of unemployment.

One could argue that the UK is experiencing full employment. Yet, when one looks at living standards from the perspective of real wages, a rather different – and disturbing – picture emerges. Real wages today are lower than they were in 2007. So, the average Briton is now poorer than she/he was ten years ago. Hence, a low unemployment rate does not signify full employment in a meaningful sense. Any job is not necessarily better than no job. What one needs are plentiful supply of good jobs that are productive and pays enough to escape poverty and meet ones material needs. Hence, as far back as 1964, the ILO adopted the convention (C.122) that ‘…each Member (state) shall declare and pursue, as a major goal, an active policy designed to promote full, productive and freely chosen employment.’

The devastating fire that engulfed the high-rise housing estate of Grenfell Tower in London and claimed 79 claims emerged from a toxic combination of bad policies and poor govenance. One of the culprits appear to be the proclivity to pursue a deregulatory agenda in the mistaken belief that reducing the regulatory burden on business would unleash private sector growth and economic prosperity. Instead, what it does is inflate profits by reducing compliance costs. These profits do not necessarily translate into better jobs and greater prosperity for all.

The UK government embraced the so-called ‘one in, three out’ approach with respect to regulation. In other words, every piece of new regulation can only be accommodated if three existing ones are eliminated. Thus, as a New York Times editorial points out:

“…a British law first passed in 2011 … requires the elimination of regulations as each new one is enacted. At first, one rule had to be ended for every new rule passed. That was later expanded to “one in, two out,” ….In 2015, British law became “one in, three out.”

The editorial argues that this diluted basic safety standards (such as lack of sprinklers in a high rise housing estate that was built in 1974) that enabled the Grenfell tragedy. Other countries, and especially those in the developing world, should pay heed to the perils of deregulation.

The conventional (and conservative) wisdom is that free markets needs inequality to create incentives for ‘wealth creators’. Chris Dillow, one of my favourite bloggers, argues instead that free markets need equality. As he puts it:

If you are serious about wanting free markets you must put in place the conditions which are necessary for them – namely, greater bargaining power for tenants, customers and workers. This requires not just strong anti-monopoly policies but also policies such as a high citizens income, full employment and mass house-building.

In short, free markets require  egalitarian policies. Free marketeers who don’t support these are not the friends of freedom at all, but are merely shills for exploiters.

(21 June, 2017)

I was recently invited by ILO, Moscow and the Ministry of Labour and Social Affairs of the Armenian government to present my report on macroeconomic policy, growth and employment. I focused on the growth and employment consequences of fiscal consolidation in Armenia.  The report – which was very well received by local stakeholders when it was presented at a workshop in Yerevan, Armenia (26 May, 2017) – will be released soon through ILO, Moscow and will be available in three languages – English, Armenian, Russian. A brief account is available in the following link:

Fiscal consolidation: An Armenian case study

This blog seeks its inspiration from an excellent example of an institution-specific study of fiscal policy as viewed through the prism of finance ministries. This is represented by a thorough and independent review of the UK’s Treasury. It was commissioned by the Shadow Chancellor of the UK, John McDonnell MP and led by a high-powered panel of academics and practitioners.

The study begins by noting that the Treasury is a ‘small department’ by UK standards but wields ‘immense power’. This is largely because of its role in managing government finances, but also because of the power and status associated with the UK Chancellor (equivalent to finance ministers in other parts of the world) in the government hierarchy. The study makes the cutting observation that the Treasury is often seen as ‘arrogant, overbearing and insensitive to other departments’. It is also criticized by the study for becoming an avid advocate of fiscal austerity and for seeking to take control of the policy agenda under the guise of exercising its financial and prudential obligations. The Treasury is criticized for failing to take the leadership in responding to UK’s multiple economic challenges as reflected in low productivity and underinvestment that has held back fair and sustainable growth.

The study recommends that the Treasury be reformed to become a truly independent and impartial source of macroeconomic policy advice, especially given that the Bank of England, in common with other central banks in advanced countries, have assumed the primary role of short-run macroeconomic stabilization. This would mean encouraging diversity of economic views, playing the role of an ‘honest broker’ in initiating debates on UK’s long-term economic challenges and how to respond to them, devolution of fiscal authority, and encouraging a culture of inclusion towards other departments.

Is this characterization of the UK Treasury a reasonable depiction of finance ministries across the world, especially in developing countries? There are some general principles that seem to emerge from the study. First, it is probably the case that finance ministries in developing countries wield significant influence, if not actual power, largely because of their role in managing government finances and the status enjoyed by finance ministers in the government hierarchy. This influential role is enhanced by the fact that they are the traditional interlocutors to the international financial institutions, most notably the IMF. Second, in cases where central bank independence is constrained and inflation targeting regimes are not fully embedded, the finance ministry ends up becoming the preeminent voice in managing the macro-economy. Third, the relationship between the finance ministry and the other spending departments can indeed turn out to be unequal, creating scope for a corporate culture of arrogance and overbearing proclivity. Fourth, and perhaps the most important, finance ministries can become bastions of fiscal conservatism to the neglect of broader developmental concerns.