George Osborne promised a ‘march of the makers’ but as yet there is little sign that a resurgence of manufacturing is helping the economy to rebalance

As late as 1980, manufacturing represented around 30 per cent of the UK’s gross value added (GVA) and employed around a quarter of the workforce. But it now represents around 12 per cent of GVA and employs less than 10 per cent of the workforce.

It would be naïve to assume that manufacturing in the UK will return to its former glory in the foreseeable future. However, a smaller manufacturing sector need not be equated with poorer performance. Retention of high-skilled manufacturing jobs, as low-skilled jobs migrate to emerging economies, would mean higher manufacturing productivity and a focus on ‘advanced’ production.

Such a transformation would also improve the tradability of the UK’s manufacturing output and enhance the dispersion of skills and technology from manufacturing to other areas of the economy. Currently, as the coalition government’s 2011 ‘plan for growth’ acknowledged, just over 40 per cent of UK manufacturing firms are involved in technological innovation, lower than Germany at over 70 per cent, and Sweden and Finland at around 50 per cent.

Crucially, the growth plan also promised a reduced reliance on financial services. The first SPERI British Political Economy Brief, ‘Pay in Manufacturing and Finance’, published yesterday, therefore assesses the extent to which a rebalancing of this nature is evident, by examining levels of pay across different sectors.

From the perspective of economic rebalancing, the news is not good. It is worth reflecting for a moment, however, on some of the good news that has come out of the manufacturing sector in recent weeks. A recent survey of the CBI’s manufacturing members found 35 per cent of firms reporting ‘above normal’ orders, compared to 23 per cent reporting ‘below normal’ – a positive gap of 12 percentage points, bigger than any point since February 1995. Manufacturing output has grown alongside the general economic recovery evident in 2013.

Yet if there were rebalancing (as well as recovery) of the economy towards manufacturing and away from financial services, we would also expect to see a closing up of the pay gap between the two sectors. Higher pay in manufacturing would also demonstrate the sector was becoming more productive.

Unfortunately, the latest data offers little suggestion of rebalancing. At the beginning of 2000 manufacturing workers were paid around 20 per cent more than the national average. By September 2013 this had fallen to around 15 per cent, although there has been a slight closing up since 2008. In contrast, the pay gap between the finance and insurance sector and the national average has largely been maintained. It fell from around 90 per cent in January 2000 to around 70 per cent in September 2008, but has since recovered to around 85 per cent.

An even more worrying trend is the receding gap between pay in manufacturing and pay in real estate activities (that is, housing market-related employment). In September 2003 manufacturing workers were paid 13 per cent more than real estate workers, but this has now fallen to 9 per cent. In the past five years alone, real estate workers have gone from being paid 2 per cent below the national average, to 6 per cent above.

High-skilled workers are therefore more likely to be attracted away from the tradable and technology-intense manufacturing, to an industry requiring lower, generic skills which is highly prone to frequent downturns. This helps to explain the paradox whereby manufacturing output is growing, but exports are falling. We are making more stuff, but not enough of the high value-added products that other countries want to buy.

Evidence on pay points us to another important trend: the failure of sectoral rebalancing in the UK economy is also the failure of geographical rebalancing. Manufacturing is concentrated in the North and the West Midlands. London has a lower proportion of people employed in manufacturing than any other region, but of course dominates employment in finance and the housing market.

In fairness to the coalition government, it may of course be premature to conclude that they have failed to rebalance the economy. The rhetoric of party politics and demands of 24-hour media invite us to imagine that governments are omnipotent, and therefore exclusively to blame should their policies fail to deliver immediate results. Clearly, this is not the case, and it may take many years – even decades – for sectoral rebalancing efforts to bear fruit. Indeed, there is evidence that the coalition government has sought to direct more investment to manufacturing in the UK.

However, this support pales in comparison with the much more significant effort to boost the housing market, and by implication financial services, through Help to Buy, Funding for Lending and low interest rates. It seems, therefore, that not only is sectoral rebalancing yet to materialise, but the government has largely abandoned efforts to bring it about.

This post originally appeared on The Conversation.

It was another full house on Thursday 20 February, when Andrew Haldane (Executive Director for Financial Stability at the Bank of England and University of Sheffield alumnus) returned to Sheffield.

The audience at Firth Hall at the University of Sheffield listened intently to Professor Andrew Gamble (Chair of SPERI International Advisory Board and Professor of Politics at the University of Cambridge) engaging with Andrew Haldane in a fascinating conversation.

You can follow what was said on the night by searching #HaldaneSPERI on Twitter.

The event has also been covered in two Yorkshire Post articles.

The video will be available to watch on the website very soon but for now, why not check out the photos on our Facebook page?

If you missed ‘In Conversation with Andrew Haldane (Executive Director for Financial Stability, Bank of England)’ on Thurs 20 February 2014, you can now watch the video in full below.

You can also find out more about the event here.

You can now download the next in the SPERI Paper series Paper No.10 – The Hollande Presidency, the Eurozone Crisis & the Politics of Fiscal Rectitude by Ben Clift (SPERI Honorary Research Fellow & Professor of Political Economy, University of Warwick).

The paper analyses the political economy of the Hollande Presidency in France, evaluating the economic policies pursued by the French Socialist President since May 2012. It explains the limited coherence and success of economic policy under Hollande in terms of constraints operating at domestic and European levels, and through credibility concerns of financial markets. Domestically, it highlights difficulties managing the presidential majority, notably due to presidentialised factionalism within French Socialism. At the European level it explores disagreements within the Franco-German relationship over which economic ideas should underpin macroeconomic policies to tackle Europe’s recession and efforts to resolve the Eurozone crisis.

Download the paper, free, below.

SPERI Paper No.10 – The Hollande Presidency, the Eurozone Crisis & the Politics of Fiscal Rectitude (PDF 335KB)

By actually meeting and listening to people in New York I learnt much about how important the rating agencies were to the financial crisis, and how little has since changed in their world

Timothy Sinclair

What is it that distinguishes an academic from a school teacher?  For me the defining feature is that we create knowledge.  That can be by reinterpreting a text or, as I generally prefer, by going out into the world and talking to people to find out what’s going on, then coming back and thinking about this systematically.  Like most political economists I spent my early education reading books, The Economist and newspapers.  But the truly exciting part of my academic career began when I did fieldwork for the first time.  When I say fieldwork I mean going somewhere, looking at things, soaking up the atmosphere and talking to people.  I first acquired a flavour of this by reading Lewis Anthony Dexter’s Elite and Specialized Interviewing, first published in 1970.  Dexter taught me how to approach people and get them to tell me things they wouldn’t normally.

There is a lot of myth-making in academia about fieldwork. Many new to the activity seem to start out with the idea that closed-ended questions and a very specific agenda will elicit good usable data from interview subjects.  This might seem sensible in surveys, but it doesn’t make any sense when talking to bankers and politicians, or indeed any other educated decision-making individual.  It might help those new to fieldwork to abandon the objective of getting ‘answers’ to their questions,  and instead embrace simply finding out how things work  – at least as far as participants are concerned.  That’s a hard thing for a lot of academics to do.

It’s with this background and approach to fieldwork that I went to New York last December.  This time I didn’t go to the Wall Street financial district as I have in the past.  Given the difficulties since 2007 the rating companies have ‘circled the wagons’ and are more closed to outsiders than ever.  Instead, I spent my time in midtown Manhattan where a lot of start-ups and consultancies are located.  These were the people I wanted to talk to: the ex-rating agency officials, the former bankers, people who had gotten out of the ‘big money’ and were now operating somewhere on the fringes of the financial system.

These people are attractive because they don’t want to sell me an image of the rating system and banking.  It’s true, they are often quite cynical people, but their experience is precious.  My knowledge of their business environment helps me make the meetings interesting and fruitful for them too.  I know I need to abandon academic jargon and avoid telling them what their business is and how it works.  This is instead what we need to discover together.  When this works well, we do.

New York is a great place to do fieldwork, of course.  The subway system helps and several million people crammed into a small space means that interesting things are everywhere and there isn’t the gap between, say, Mayfair and Canary Wharf.  The American business culture is also more verbal and less secretive than London, and this helps a great deal too.

For the first time in more than 20 years of going to New York I made use of the fabled Rose Main Reading Room at the New York Public Library at Bryant Park.  What a wonderful facility this is, especially when compared to using a hotel room or a crowded coffee shop as a base for fieldwork.  I could read and think and listen to my interviews with all the facilities at hand and for free.  The New York Public Library at Bryant Park also has a meeting room available.  I did one of my interviews in this room and, apart from the presence of a modern telephone, it looked like it was unchanged from the 1880s.  The interview was one of the best ever.

What did I discover on this trip?  I came away with a much better sense of the roots of the financial innovation behind the global financial crisis. The people I talked to agreed that the agencies were there at the creation of this innovation and not the spectators they would have you believe.  It was clear that the agencies are a much bigger part of the story about financial change than I thought possible.  Part of this of course was an account of the rise of individual careers and particular groups within the agencies.  According to my interviewees, the agencies should be understood to have created structured finance to a great degree.

The other thing that came across very strongly was the sense that things were back to normal in the rating world. Too many people in too many spheres had too much to gain by keeping things as they are.  The only thing that might upset this was an unexpected legal reversal. This latter finding is very much what I had previously concluded myself, but my subjects talked about how the culture within the agencies is, in their view, unchanged by events since 2007.  I didn’t anticipate this and it does say a lot about how institutions react to threatening events.  Denial is cheap in the absence of a smoking gun.

I’m looking forward to going back to New York this coming September when I will do another round of fieldwork in the city.  This time, I will read in advance a lot of documents the people interviewed in December pointed me towards.  So I’ll be able to develop deeper relationships with them as I will meet many of them again, as well as new people. While my interest is in creating social science, that doesn’t mean I adopt a combative or closed approach.  Fieldwork is a human activity that requires some of the same social skills we bring to the rest of our lives.  It’s exciting and stressful, hard work if you do it well, listen and let the other person open up.  It questions your assumptions, poses new puzzles and broadens your view.

The European economy has been financialised, rather than ‘Lisbonised’

Guest post by Kean Birch

By 2010, the European Union was supposed to be the world’s ‘most competitive and dynamic knowledge-based economy’ according to Europe’s grand strategy – the Lisbon Agenda.  It was meant to turn Europe into the world’s hub of innovation and technology-driven growth.

This strategy emerged from the European Council’s Lisbon Summit in 2000 – hence the name – and established a series of targets for the European Union to achieve over the next 10 years. These included:

• Increasing Europe’s GDP growth rate to 3% per year
• Increasing Europe’s employment rate to 70%
• Increasing Europe’s R&D spending to 3% of GDP.

It’s now 2014 and Europe is far from the bright, futuristic, techno-wonderland imagined in the Lisbon Agenda.  So, what happened?

Even before the global financial crisis derailed things completely, the Lisbon Agenda had already been found wanting by the mid-term review held in late 2004, known as the Kok Review.  The subsequent re-launch led to a reduction in the number of targets, but still emphasised the need to transform Europe’s economy in order to ‘save’ (or reform) the European Social Model. As before, we know that even the revised Lisbon Agenda failed to turn Europe into a hub of high-technology industries and innovation.

In light of this failure it’s interesting and important to analyse what the Lisbon Agenda has actually done to the European economy. What I present below is one possible answer to that question drawing from a recent co-authored article.

Europe’s economy changed quite significantly between 2000 and 2008 when, of course, the global financial crisis changed everything.  However, these changes, when compared with the specific Lisbon targets, show that Europe didn’t turn into the world’s ‘most competitive and dynamic knowledge-based economy’:

• Europe’s labour productivity didn’t improve; it actually fell further behind so-called competitors like the USA and Japan.
• GDP growth didn’t reach 3% per year, but stayed around 1.8%.
• The employment rate rose to almost 68%, but didn’t hit the 70% target.

• The new jobs that were created, however, were more likely to be part-time and temporary than new jobs created in the USA and Japan.
• Average pay fell further behind the USA.
• There was no increase in high-tech employment, which remained stagnant.
• R&D spending stayed remained at about 2% of GDP.

What’s most surprising, though, in light of the Lisbon Agenda’s purported goal to stimulate and support high-tech, innovative industries and employment were the following two trends:

• Europe’s fastest growing employment sector was finance, insurance and real estate.
• Europe’s best-paid employees worked in finance as well, not in high-tech sectors.

These trends imply that Europe’s economy had actually financialised during the 2000s, rather than Lisbonised.  In order to understand these changes, it’s important to look at how the Lisbon Agenda was tied to the restructuring and transformation of Europe’s financial sector and financial markets.

The Lisbon Agenda was underpinned by a number of assumptions about what made the American economy so dynamic and innovative. In particular, there was considerable emphasis on the role of venture capital and financial markets as the critical driver of innovation, especially in high-tech sectors. This is evident in how the Lisbon Agenda characterised financial markets:

Efficient and transparent financial markets foster growth and employment by better allocation of capital and reducing its cost. They therefore play an essential role in fuelling new ideas, supporting entrepreneurial culture and promoting access to and use of new technologies … Furthermore, efficient risk capital markets play a major role in innovative high-growth SMEs [small and medium-sized enterprises] and the creation of new and sustainable jobs.

These assumptions legitimated and supported ongoing efforts to restructure Europe’s internal financial markets, especially in terms of promoting the liberalisation and integration of them across borders.  As a result, the Lisbon Agenda helped to promote the Financial Services Action Plan (FSAP, 1999-2004) and the Markets in Financial Instruments Directive (2007).  This transformation of European finance was meant to encourage and support high-tech innovation and high-tech sectors, as exemplified by the European Commission’s position in the 2005 Financial Services Policy white paper:

Financial markets are pivotal for the functioning of modern economies. The more they are integrated, the more efficient the allocation of economic resources and long-run economic performance will be. Completing the single market in financial services is thus a crucial part of the Lisbon economic reform process; and essential for the EU’s global competitiveness.

What happened, then, was that the Lisbon Agenda became tied to the expansion and liberalisation of finance as the dominant sector of the European economy. It has in effect helped to embed a finance-driven regime at the heart of Europe’s economy.  Despite the best-laid plans of the visionaries of a post-industrial future, it seems that it’s not the scientists or inventors who have inherited the earth; it is instead the bankers and their ilk.

Kean Birch

About the guest author

Kean Birch teaches social science at York University, Canada. His new book We Have Never Been Neoliberal: A Manifesto for a Doomed Youth is forthcoming from Zer0 Books.

The Conservative government’s promotion of financialisation is transforming citizenship in the UK

While the New Labour-ish language of ‘financial inclusion’ and ‘asset-based welfare’ has been quietly eschewed, since 2010 the Conservative Party has continued its predecessor’s agenda around promoting more extensive and intensive participation in the financial system, through asset ownership, in order to enable individuals to play an enhanced role in ensuring their own long term financial security.

This agenda is, understandably, usually assessed in terms of the impact on financial well-being. Yet its implications for the meaning and practice of citizenship may be just as significant.

The immediate context in which financial inclusion has been pursued is the apparent financialisation of UK society. Financialisation refers to the increased role of finance in individuals’ daily lives as well as the economy in general. Financial inclusion has invariably been presented as a progressive ‘response’ to financialisation. This leads to the suggestion that financial inclusion policies represent a new form of citizenship-based entitlements. As the economy evolves, so the argument goes, welfare-based protections must evolve too. The threat we are being therefore protected from is financial exclusion.

However, it must also be pointed out that by increasing participation in the financial system, and subjecting greater numbers of people to risks associated with engaging with the financial system, financial inclusion also serves to advance the process of financialisation. As such, financial inclusion policies contribute to exposing the financially excluded to new forms of risk, and intensifying financial risks for the already included.

The promotion of individualised ‘defined contribution’ pensions – by all recent governments in the UK – is a telling example. Under the guise of providing a new right to a workplace pension, the coalition government accepted New Labour’s support for this highly individualised form of pensions saving, dismantling the risk-sharing mechanisms that had already existed in private pensions at the behest of employers, as well as simultaneously reducing state pension entitlements.

So, the right to support in saving is established, yet immediately superseded by a duty to shoulder more of the risks of capital market participation. Indeed, the Conservative government is in the process of taking this agenda to its logical extreme, by ‘liberating’ pensions saving by relaxing tax restrictions on how savings can be accessed and used, before and after retirement. Again, the language of entitlement is part of the justification here – but the reality for most people will be a greater burden to make complex, risky financial decisions.

Policies designed to increase prospects for home-ownership also typify the real intent of financial inclusion. Help to Buy and its predecessor schemes claim to be unlocking the dream of home-ownership for disadvantaged groups, yet they have to be understood in a context in which the state’s role as a housing provider – through social housing – has been delegitimised and dismantled.

Even privately-run social housing is not immune from this agenda, as the government extends ‘right to buy’ to housing association tenants. That the private firms which dominate the housing association sector are opposed to this policy tells us definitively that the government’s objective here is not simply to privatise social housing, because that process is largely complete. They want to de-socialise housing altogether.

As I argue in more detail in my article ‘Citizenship in a financialised society: financial inclusion and the state before and after the crash‘, the implication of this agenda for citizenship is quite clear: it intensifies the ‘responsibilisation’ of citizenship. Despite the rhetoric, our ‘right’ to a pension or housing has been significantly diluted; by default, individuals become more responsible for providing for their own welfare in these regards. The state may appear to be supporting our capacity to shoulder this burden through financial inclusion policies, but in practice it is merely facilitating greater exposure to the associated financial risks to serve its over-riding objective of securing economic growth at all costs.

The right to participate in the financialised economy is, from the perspective of citizenship, no kind of right at all, insofar as participation intensifies rather than alleviates threats to individual well-being. What is missing from the financial inclusion agenda is any sense that we, as citizens of a liberal democracy, have any right to shape financialisation through collective decision-making processes.

This post was originally published by the Politics and Policy blog.

Acknowledging the redundancy of silo governance will be a vital first step in creating the new macroeconomic institutional arrangements we need

The most distinguishing feature of the macroeconomic governance frameworks that emerged throughout the world in the 1990s was the creation of a number of narrowly focused institutional silos (fiscal, monetary and financial regulation). In the aftermath of the financial crash of 2008, the boundaries, this silo form of governance represent, have come under increasing pressure.  Together with growing criticisms that many of the formal targets for macroeconomic policy have not provided a reliable guide for policy for close to a decade, the sustainability of current macroeconomic governance arrangements are increasingly questionable.

Macroeconomic governance in institutional silos was the product of number of distinct impulses. In monetary policy, policy debate focused on how best to overcome persistent and sticky inflationary expectations as a hangover from the 1970s.  Pre-committing to an inflation target based on some measure of consumer and retail prices, communicated authorities’ good intentions and was seen to effectively dampen inflationary expectations.  At the same time, using monetary policy to hit a specified inflation target was thought to be most effective when central banks could set monetary policy free from political interference.  Thus the central bank monetary policy silo was born.

In fiscal policy, following a number of flagship examples in the late 1980s, notions of expansionary fiscal consolidation became popular.  In this formulation reducing fiscal deficits, usually at a time of economic growth, created the space for monetary easing, thus making investment and credit cheaper, and producing market-led expansions.  Authorities could therefore signal their good intentions and contribute to stable market-led growth by making a deficit/GDP ratio a primary guide for fiscal policy, and move to lock in a commitment to medium term fiscal discipline.

The third leg of silo governance, involved creating specialist regulatory agencies to supervise financial institutions (for example the Financial Services Authority in the UK), ensuring their risk management models followed good practice.  Sophisticated financial institutions with sophisticated risk management practices would then make good investment decisions, with financial stability resulting from such sound practice.

These silo policy solutions became the very definition of good macroeconomic governance. For politicians, it is easy to understand why they were attractive .  They produced neat, compartmentalised policy making, that absolved them of responsibility for difficult distributional decisions, allowing macroeconomic governance to run on autopilot.  At the same time neat delegation contracts created simple but clear lines of accountability, specifying who was responsible for what.

Finally, all of the above made intellectual sense in the terms of the dominant strain of macroeconomic modelling – Dynamic Stochastic General Equilibrium (DSGE) modelling – where the financial cycle and instability were not included.  In a DSGE model the macroeconomic role of government becomes about stabilising the expectations of rational dynamic private agents by delivering low inflation and fiscal discipline.

It is true that the financial crash shook the third leg of the silo governance stool.  Financial stability is now recognised as an important strand of macroeconomic governance, with some responsibilities being relocated to central banks through macroprudential policies (the Financial Policy Committee in the UK case).  Yet silo governance and its mentalities persist.

However, silo governance is coming under significant pressure from numerous sources. First it is now widely recognised that DSGE modelling was not all it was cracked up to be.  The search for alternatives is very much under way.  Different models, using different assumptions, under different sets of conditions will likely point to a different set of necessary roles and suitable targets for macroeconomic policy.  Neat compartmentalization may no longer be possible, or optimum.

Second, silo governance was a product of its time and was a form of institutional design to reflect a very specific set of conditions. Inflation targets are not much use if inflation is no longer the pressing global macroeconomic problem of the age.  Likewise, a deficit reduction focus in fiscal policy makes little macroeconomic sense in a liquidity trap with interest rates stuck at record lows, constraining expansionary monetary policy space, while government borrowing costs are at record lows and economists talk of secular stagnation.  In such circumstances, the autopilot system of silo governance is no longer capable of steering the ship.

Third, growing political frustration with and criticism of central banks (see recent public utterances on Mark Carney in the UK) from all parts of the political spectrum are a direct function of the growing dysfunctionality of silo governance.  Seemingly frozen low interest rates in a context of very low inflation, combined with quantitative easing are fuelling claims that central banks are no longer fulfilling their mandates by following unorthodox policies, while also playing distributional politics.  Allegations of creeping politicisation mushroom, due to the lack of direction and outright confusion produced by inadequate silo governance mandates.

Fourth, the real game changer and biggest challenge to silo governance, comes from the recognition that financial stability is a macro, rather than a microeconomic issue, most appropriately handled by central banks.  This comes with unintended consequences.  In the UK, senior Bank of England staff are being drawn into a range of issues from climate change to Brexit, as part of new financial stability responsibilities, further fuelling the politicisation narrative.

Moreover, the evolving experimental practice of enacting financial stability is producing an even more fundamental challenge to silo governance. Recognising that the highly pro-cyclical repo market, where financial institutions can issue shadow money (or claims to repay on demand) was and remains a key source and amplifier of systemic instability, as in 2008, central banks including the Bank of England and European Central Bank have revealed they stand ready to place a floor under the price of collateral required to operate in that market.  That collateral is primarily sovereign debt, with central banks making purchases in the name of systemic stabilisation.  In one fell swoop the boundaries between monetary, fiscal and financial stability policy blur and the institutional fictions of silo governance are revealed.  Such practices are indicative of the cross-cutting nature of macroeconomic management in a global economy displaying disequilibrium properties.  They also create a need to co-ordinate relations between finance ministries and central banks to allow co-operative management of various categories of debt and their increasingly complex inter-relationships for some defined purpose.  Silo governance essentially denies the possibility or desirability of such an enterprise, but it is already happening implicitly and informally.

Silo governance is consequently revealed as resting on institutional fictions of declining relevance in the contemporary context, given messy complex current realities. The lens of silo governance does however illuminate the need for wholesale institutional re-design of macroeconomic governance.  Unfortunately, many political and intellectual elites remain oblivious, or in denial.  Acknowledging the redundancy of silo governance, would however be a vital first step in edging us closer to the kind of new macroeconomic thinking and governance arrangements the current context requires.

The practice of saving has been complexified, but the concept has until recently retained discursive significance as part of an ‘asset-based welfare’ agenda. The 2017 election may, however, have signalled a significant shift in British economic statecraft

The value of saving has been preached by the leaders of both main political parties in the UK for a considerable period of time, as part of an ‘asset-based welfare’ agenda. The financial crisis of 2008 paradoxically seemed to reinforce the perceived need for individuals to provide for their own financial security by engaging intimately with the financial system through accruing private savings – and then investing the capital generated.

Whither saving?

This is despite the fact that saving, seemingly the most simple of financial behaviours, has been complexified beyond recognition, to the point, perhaps, of having become redundant as a meaningful term for understanding the financial system as we know it today. Most importantly, the transformation of banking – the rise of investment banking and securitisation, the role of ‘shadow’ banking in financing banks, and the concomitant importance of central banks in underpinning the balance sheets of private banks – means deposits by individual savers are now far less significant to banking sector business models.

Policy-makers, particularly in the UK, have ostensibly sought to increase saving by other means, principally pension schemes. However, in an era of earnings stagnation, there is no evidence that quasi-mandatory pensions saving is increasing overall saving rates, since such policies generally displace other forms of saving, and there are few incentives for individuals (or their employers) to make contributions above the legally specified minimum.

In practice, ‘asset-based welfare’ has always been equated with increasing levels of household indebtedness – technically, the polar opposite of increasing household saving. As such, housing-related debt is often described as if it were a form of saving or insurance – and products such as equity release, where people sell their house to fund a retirement income, help to materialise this rather odd cognitive contortion. I discuss the withering of saving in more detail in my contribution to the University of Warwick’s International Political Economy of Everyday Life project (available here).

Given its ambiguous materiality, it is the moral and ideological connotations of the saving concept which have played a more significant role in asset-based welfare; proselytising the importance of responsibility and thriftiness even while the macro-economy become more dependent on debt. Since 2010, the austerity narrative has reinforced this moral economy. But my new British Political Economy Brief, The Declining Salience of ‘Saving’ in British Politics (available here) presents evidence that even the discursive force of saving may be waning in the UK.

‘Saving’ in British political discourse

The Brief presents evidence on the different ways in which saving was discussed in the manifestos of the Conservative Party and Labour Party at the 2005, 2010, 2015 and 2017 elections. In 2015, the Conservative manifesto contained a significant number of positive references to savers, in terms of protecting or rewarding savers as a specific category of voters. By 2017, there were far fewer such references.

Furthermore, the positive references in 2017 were counteracted by negative references to savers, insofar as the proposed system of social care finance was justified on the basis that saving should be decumulated in later life rather than hoarded:

‘One purpose of long-term saving is to cover needs in old age; those who can should rightly contribute to their care from savings and accumulated wealth, rather than expecting current and future taxpayers to carry the cost on their behalf.’

The last time that a main party manifesto included significant reform of social care finance (Labour in 2010), the document was adamant that the new system would protect, rather than utilise, people’s savings – despite the fact that the proposed policy was not dissimilar to that proposed by Theresa May in 2017.

Accordingly, while positive references to savers featured in the 2005 and 2015 Labour manifestos, this discourse spiked in 2010 – many of these references were linked to attempts by Labour to connect its action in the wake of the financial crisis to the protection of savers’ accumulated wealth. By 2017, however, positive references to savers had almost entirely disappeared from Labour discourse.

References to supporting and encouraging the act of saving, including policies designed to incentivise saving, were a permanent feature of the Conservative Party’s 2005, 2010 and 2015 manifestos. In the 2017 manifesto, in contrast, there was only a single pro-saving reference.

In terms of Labour’s pro-saving discourse, having barely featuring in the 2005 manifesto, Labour’s 2010 manifesto contained a very large number references to supporting or encouraging saving – many of these references were connected to Labour policies in this area focused on enabling saving by low-income households. Remarkably, this pro-saving discourse had entirely disappeared by the time Labour’s 2015 manifesto (there were also no pro-saving references in the 2017 manifesto).

Pensions, housing and investment

The Brief also charts the connections made in manifestos between the discourse on saving and other economic activities. The Conservative Party has consistently connected its discourse on saving and savers to pensions provision, retirement and population ageing (with little discernible change between the Cameron and May governments in this regard). The connection between saving and pensions was also an important feature of Labour’s 2005 and 2010 manifestos, particularly 2010 as the party associated its discourse on saving with the introduction of ‘automatic enrolment’ into workplace pension schemes.

As noted above, however, Labour’s 2015 manifesto contained no pro-saving messages. Its references to pensions generally instead offered a pro-saver message, insofar as the party vowed to protect savings that had already been accumulated from high pensions management fees. Remarkably, despite a lengthy section on pensions provision, including a paragraph on workplace pensions which echoed the 2015 agenda, Labour’s 2017 manifesto made no connections between pensions provision and the act of saving.

The Conservative Party’s 2015 manifesto made several connections between saving and purchasing a home. This discourse undoubtedly relates to the coalition government’s attempt to stimulate the housing market in order to trigger an economic recovery (there were no such connected references in the 2010 Conservative manifesto). But this discourse had largely fallen away by 2017.

The saving/housing link had never been a significant feature of Labour manifestos. Indeed, the 2015 manifesto introduced a negative connection between saving and housing, by proposing a requirement that would have seen ‘the billions of pounds saved in Help-to-Buy ISAs [a scheme introduced by the coalition] invested in increasing housing supply’).

Interestingly, most recent main party manifestos have neglected to highlight the (potential) macro-economic significance of saving by individuals. The Conservative Party’s 2010 manifesto, however, contained a large number  of references to saving in relation to economic ‘rebalancing’, insofar as saving would enable more private investment.

Yet this discourse had entirely disappeared by the time of the party’s 2015 manifesto – as references which instead connecting saving to the housing market spiked. It is worth noting, finally, that Labour’s 2017 manifesto encompassed a significant emphasis on increasing private investment – but without making a single connection between investment and saving by individuals or households.

Whither asset-based welfare?

The positive discourse on saving which has been a significant feature of British political discourse since at least the mid-2000s has now largely disappeared. It is worth reiterating that this discourse was most strongly promoted by the two main parties at slightly different times: Labour in 2010, and the Conservative Party in 2015. It is telling that both parties were in government rather than opposition at the time, insofar as this suggests that asset-based welfare is an endemic feature of British economic statecraft, irrespective of which party is in government, and irrespective of what parties say while in opposition.

But the 2017 general election appears to have signalled a significant shift. Whereas Ed Miliband’s 2015 agenda can now be seen as an important ‘gateway’ between New Labour and Corbynism, the shift in Conservative discourse has been more abrupt. However, we should be careful before declaring the onset of a new era in economic statecraft around saving; neither party won a majority at the 2017 election. It is possible that both parties – particularly the Conservatives – will revive a positive discourse around saving in order to reassemble a compelling electoral offer. Asset-based welfare is down, but not necessarily out.

International development is increasingly being financed in innovative new ways. Public aid money is critical and its role should be celebrated more

I was delighted to read that Professor Mariana Mazzucato has recently launched a new Institute for Innovation and Public Purpose (IIPP) at University College London. The Institute describes its mission as to ‘rethink how public value is created, nurtured and evaluated’ and in particular how the public sector and public finance can drive innovation and actively co-create and shape the markets of the future (and not simply fix market failures or de-risk business ventures). As Professor Mazzucato argued in her inspiring work ‘The Entrepreneurial State’, the role of public finance and the state in fostering some of the innovations we now take for granted (such as the Internet and GPS) is frequently (and some would argue deliberately) overlooked.

In 2015, world leaders adopted the Sustainable Development Goals (SDGs) at the United Nations, a radical new action plan to eliminate poverty, tackle climate change, and build peaceful, equitable and prosperous societies everywhere by 2030. Governments convened in Addis Ababa, Ethiopia the same year to work out how to pay for it all.

Much of the discussion in Addis Ababa focused on ways to mobilise more private sector resources for development, and minimised expectations that taxpayer-funded development aid and other international public finance flows would play a prominent role in financing international development efforts. Official Development Assistance (ODA) (which comes in at around US$ 140 billion annually) is compared to foreign direct investment and equity flows to developing countries (which come in at about US$ 800 billion combined annually) to justify this argument.

This storyline however downplays aid’s role in driving financial innovation, leveraging finance from capital markets and using public money in creative ways to pilot new approaches, reduce risk, and build and shape new markets that in turn provide private investors with opportunities to invest in much-needed sustainable development interventions.

Government funded aid is, for example, increasingly being used to ‘crowd-in’ private investment in infrastructure, health and other sectors through mechanisms such as advance purchase agreements, guarantees, interest rate subsidies, insurance, incentives for successful performance and matching funds.  ODA can also be used to provide technical assistance and other advisory services, absorb transaction and project preparation costs. While the amount of public financing supplied for a particular project may be smaller in volume terms than that provided by private sector partners, many projects, especially those that are higher-risk or where finance is needed over the long-term, could not be realised without some form of public sector support. Many of these innovative financing (or ‘blended’ finance) approaches have provided opportunities for new collaborations between public and private actors in development. While the devil is always in the detail of any arrangement between public and private entities, such approaches when done well can make viable investments in developing countries that would not otherwise have been possible.

Another example is the green bond market. Green bonds are debt securities which tie the proceeds of a bond issue to environmentally-friendly investments. Issuers can be private companies, supranational institutions (such as multilateral banks) and public entities (municipal, state or federal). Ten years ago, this innovation barely existed; in 2016, over US$ 118 billion in green bonds were issued with this number projected to reach US$ 200 billion this year. Sovereigns, multilateral and national development banks have been the ones to kick-start and shape this market over the last decade. Public issuance has been essential to establish models, provide initial market liquidity and educate investors about the asset class. They have also been more easily able to absorb the additional transaction costs associated with this financing modality, since issuers must track, monitor and report on use of proceeds during the lifetime of the bond.

Other financial innovations championed by the public sector include the International Finance Facility for Immunisation (which sees donors issue bonds on international capital markets for immunisation programmes in poor countries, repayable by future streams of development aid), or countercyclical loans, implemented by the French Development Agency (AFD) (which allow for automatic reductions in debt service for up to five years when a major shock strikes). This can help avoid debt crises. Building on AFD’s experience, the private insurance industry is now developing a loan model whereby insurers service the debt on the sovereign issuer’s behalf for an agreed time, allowing the sovereign to allocate resources to responding to a catastrophe.

Donor funds are also playing a role in the rapidly-expanding market for sovereign catastrophe insurance. The much-lauded Caribbean Catastrophe Risk Insurance Facility (CCRIF) recently made a payout of US$19 million to Dominica following Hurricane Maria which tragically laid waste to the island in September this year. CCRIF is a public private partnership which was originally capitalised via contributions provided by a variety of official donors such as Canada, the EU, USA and Germany. In the case of Haiti, insurance premiums are paid in part or in full by official donors and sovereign catastrophe insurance which would be impossible without this support. Donors are showing increasing interest in supporting countries to access the sovereign insurance market.

Impact investment (investments made by private investors that have a positive social or environmental impact alongside a financial return) meanwhile has attracted much hype over the last few years as a promising strategy to finance development and the SDGs. Yet as Oxfam America has pointed out, some of the companies that have achieved impact and scale had previously benefited from millions of dollars in public aid support over many years, prior to securing (or sometimes alongside) private investment capital.

Finally, in 2014, UNDP established its Innovation Facility, which uses public aid resources to support pilot projects in developing countries that ‘test-drive’ alternative or emerging sources of finance to meet sustainable development challenges. These include social and development impact bonds, equity-based investments, crowdfunding and blockchain for example. The aim is to help countries to deepen and diversify their sources of financing for development, and to scale successful innovations.

Finance from official donors, often perceived as bureaucratic and stagnant, is on the contrary vibrant and undergoing a continuous process of change and innovation. It is supporting innovations in financing sustainable development, and many crucial development interventions would not be possible without it. The narrative needs to move away from an obsession over the ‘volumes’ of financing that the private versus the public sector can offer towards one that recognises that all sources of financing have a complementary role. Aid and international public finance flows help create and shape markets, fund innovation and leverage finance from other sources.