‘Photographs are a way of imprisoning reality’, wrote Susan Sontag in her 1977 collection of essays, On Photography. Photos capture a moment in time, presenting a portion of the world trimmed neatly into a single frame. The information omitted from the image vests great power in the artist behind the lens.

What does this observation imply for economists? Working with data, like taking pictures, requires us to make choices and accept limitations. Just as a photographer has to decide what is in the frame and what is not, data scientists, economists and policy-makers must choose what questions to ask and which data to collect, analyse and present.

Like photos, data become less relevant to the present day from the moment they are collected. Every day, thousands of people die and thousands more are born. As a result, the national census is out of date when it is only a day old.

Recognising the strengths and limitations of data was the subject of a talk by Hannah Fry (University College London) at Bristol Data Week. Hannah’s talk – hosted by the University of Bristol’s Jean Golding Institute – explored a collection of her favourite data stories, focusing particularly on cases of where things were not as they first appeared.

One example was the 1989 Challenger space shuttle mission, a disastrous episode for the National Aeronautics and Space Administration (NASA). The story goes that the American space agency was deciding whether to launch on a scheduled date. Conditions were set to be very cold, at around 40°F (about 4°C). Thinking this could be risky, the team’s engineers presented their superiors with the spacecraft’s performance data from various launch tests, using a chart that plotted system failures against air temperature.

During the tests, the shuttle had failed seven out of 24 times, at varying temperatures. To illustrate this, the engineers plotted the number of incidents on the y-axis against the air temperature on the x-axis. The points showed no clear trend beyond a vague u-shape, with failures seeming unrelated to weather conditions (see Figure 1).

Figure 1: Number of incidents of damage by temperature

Source: Fry, 2021

The decision went to a vote and almost everyone on the NASA team chose to go ahead with the launch. No one looked at the chart and asked what had happened to the 17 missing data points – the results from the tests that did not end in system failure.

Figure 2 shows the updated chart. As soon as the missing data (highlighted in blue) are added, the picture becomes clear. Flying in cold temperatures is extremely risky compared with temperatures above 65°F (around 18°C). In fact, the shuttle had never taken off without the systems failing at temperatures below this point.

Figure 2: Number of incidents of damage by temperature (all data)

Source: Fry, 2021

Launched in dangerously cold conditions, the Challenger’s O-rings leaked, causing a joint in the solid rocket boosters to fail. As a result, less than two minutes after taking off, the shuttle broke apart, killing all seven crew members.

This example, first used by Edward Tufte (Yale University and author of The Visual Display of Quantitative Information), clearly illustrates the similarity between data science and photography. The NASA team’s decision rested on flawed data, caused by a failure to recognise the limitations of presenting information in a particular way.

By only focusing on the system failures and not looking at the successful tests, the team were blind to the reality of the situation. It was what was out of frame that mattered for the safety of the launch.

One solution to these dangerous blind spots is getting people to cross-reference and verify the data in question. This requires work to be open source and replicable. Our Data Hub – as well as the charts used in all of our articles – is built on this philosophy. Anyone can download and check the numbers, view the code used to construct the chart and find links to the original data source.

Wealth and health

On Monday, we posted a piece by Ricky Kanabar (University of Bath) on the level of wealth inequality in the UK and, in particular, the causes of the UK’s racial wealth gap. Citing data from the Office for National Statistics (ONS), Ricky shows that at £243,700, the average level of total household net wealth holdings among Pakistani and Bangladeshi households is £201,500 lower than that of white British households.

One of the main drivers of differing wealth in the UK is home ownership. The article explains that according to survey data, 74% of British Indians report owning their home (either outright or with a mortgage). This is 11% higher than the average level across all ethnic groups. The equivalent figure stands at only 20% and 40%, respectively, among the black African and black Caribbean groups.

Looking at social housing, the pattern is reversed. Only 7% of Indians report living in social housing, compared with 44% and 40% for black African and black Caribbean groups, respectively.

On Thursday, we posted a follow-up piece by the same author, looking beyond the underlying causes of the racial wealth gap and focusing on the impact of Covid-19. In this article, Ricky explores how the pandemic brought the vast differences in wealth among different groups in the UK into sharp focus.

Figure 3: Total net household wealth by ethnic group relative to the white British group

Source: ONS, 2022

Note: Estimated difference in total net household wealth after controlling for age, sex, education level, socio-economic classification of the head of household, housing tenure and household composition; April 2018-March 2020 prices.

In particular, the surge in house prices caused by the pandemic has meant that groups with a higher level of home ownership have seen their wealth swell, while those without bricks and mortar assets fell further behind. Others have argued that quantitative easing has had the same effect.

On top of this, ethnic minorities were more likely to work in sectors most affected by lockdowns, such as shops and restaurants. This meant that they were at greater risk of seeing their incomes fall due either to being furloughed or having to work fewer hours. And due to the nature of their work, people belonging to these groups also faced higher risk of infection, and thus hospitalisation or death.

Given the composition of ethnic minority households before the pandemic, it is likely that differences in household wealth have widened during the crisis, Ricky concludes. This is partly a result of the way that the crisis has affected both labour and financial markets, with jobs in contact-intensive areas being slashed, while the values of houses and other assets have soared.

The crisis has revealed structural weaknesses and inequalities that were present long before the first coronavirus case was detected. As the worst of the pandemic subsides and the country faces new economic challenges like the cost of living crisis, this gulf in wealth is likely to play a part in who is hit hardest by rising prices.

Author: Charlie Meyrick

Picture by Scyther5 on iStock

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For the government in Kyiv, military aid and security are immediate needs, but since membership of the North Atlantic Treaty Organization (NATO) is unlikely at present, the EU application is a symbolic move designed to strengthen the security of Ukraine against Russian aggression.

Georgia and Moldova submitted similar applications on 3 March 2022 creating an ‘association trio’. While the inclusion of these two states makes geopolitical sense – given their own political vulnerability to Russian influence and hostility – discussions about incorporating three countries of such different size, political outlook and economic development could hamper Ukraine’s urgent request.

Visiting Kyiv on 5 April 2022, the European Commission president, Ursula von der Leyen, together with the high representative of the union for foreign affairs and security policy, Josep Borrell Fontelles, presented President Zelensky with a pre-accession questionnaire. This stated: ‘It will not, as usual, be a matter of years to form this opinion but I think a matter of weeks’. President Zelensky laughed, replying that it would take his team only a week to answer the questions. A second questionnaire was completed on 9 May 2022.

It remains to be seen whether Ukraine will join the EU. This article looks at the current relationship and considers how this might change if Ukraine were to become a full member.

What is Ukraine’s current relationship with the EU?

Ukraine already has a sophisticated association agreement (AA) with the EU, which has been in place since September 2017. Additionally, since January 2016, it has been part of a deep comprehensive free trade area (DCFTA) with the EU.

The key elements of the DCFTA include:

• Mutual abolition of import duties on the majority of goods imported into each other’s markets.
• Introduction of rules of origin of goods, to facilitate trade preferences.
• Bringing Ukraine’s technical regulations, procedures, sanitary and phytosanitary measures, and food safety measures in line with EU rules, so that Ukrainian industrial goods, agricultural and food products do not require additional certification in the EU.
• Establishment of the most favourable conditions of access to the services markets of both Ukraine and the EU.
• Introduction of EU rules into public procurement by Ukraine, which will allow gradual opening of the EU public procurement market for Ukrainian businesses.
• Simplification of customs procedures and prevention of fraud, smuggling and other offences in cross-border movement of goods.
• Strengthening protection of intellectual property rights in Ukraine.

The AA also allows for goods originating in EU member states to be processed in Ukraine and re-exported back into the EU – for example, food processing.

When signing the economic section of the AA in June 2014, after the Revolution of Dignity, the (then) Ukrainian president, Petro Poroshenko, saw this moment as Ukraine’s ‘first but most decisive step’ towards EU membership. Similarly, the then president of the European Council, Herman Van Rompuy, stated that ‘In Kyiv and elsewhere, people gave their lives for this closer link to the European Union. We will not forget this’.

The economic and political aims of the AA and DCFTA were to divert trade from Russia towards the EU. This occurred alongside a process of aligning Ukraine’s laws with the EU’s acquis communautaire, modernising its financial and political institutionsand developing closer political ties.

It is often described as Ukraine ‘choosing to look west’. At the same time, it is an example of the EU using its soft power of trade as a foreign policy tool.

Russia immediately retaliated by raising tariffs against Ukrainian goods. More ominously, Russia’s president, Vladimir Putin, stated that making Ukraine choose between Russia or the EU would split Ukraine in two. The annexation of Crimea in 2014 and Russian support for separatists in eastern Ukraine were the consequence of this political shift. They were also the forerunners of the invasion in early 2022.

The AA has a political dimension to encourage dialogue between Ukraine and the EU. It requires regular summits between the president of the European Council and the president of Ukraine. Members of the Council of the EU and the cabinet of ministers of Ukraine must meet regularly, as well as members of the European Parliament and the Ukrainian parliament, and other officials and experts.

The EU has funded training programmes in EU law and lent officials for capacity-building. In hindsight, perhaps more could have been made of these political provisions in order to develop closer ties.

How have the AA and DCFTA affected Ukraine’s economy?

Statistics show that the AA and the DCFTA have had some impact on trade between the EU and Ukraine:

• The EU is now Ukraine’s largest trading partner. Conversely, Ukraine is the EU’s 15^th largest trading partner in terms of imports and 17^th in terms of exports. This accounts for around 1.1% of the EU’s total trade, reaching a value of €43.3 billion in 2019.
• Ukrainian exports to the EU amounted to €19.1 billion in 2019. The main exports are raw materials (iron, steel, mining products, agricultural products), chemical products and machinery. This figure has increased by 48.5% since 2016.
• EU exports to Ukraine amounted to over €24.2 billion in 2019, an increase of 48.8% since 2016. Machinery and transport equipment, chemicals and manufactured goods are the EU’s main exports to Ukraine.
• The number of Ukrainian companies exporting to the EU has also increased at an impressive rate: from approximately 11,700 in 2015 to over 14,500 in 2019 (European Commission).

Nevertheless, Ukraine exports only a third of its goods to the EU (World Trade Organization, WTO). In contrast, Moldova, which has a similar DCFTA with the EU, exports two-thirds of its goods to the EU (WTO).

The AA commits Ukraine to an agenda of economic, judicial and financial reforms and to gradual approximation of its policies and legislation to those of the EU. This includes conformity to the EU’s technical and consumer standards. Progress has been slower in these areas.

There have been general problems in Ukraine’s economic and social development. Writing in the Financial Times on 26 January 2022, Alan Beattie commented:

‘Ukraine, a dysfunctional economy with a woeful business climate, has failed to get itself in shape to take advantage. Nor has the EU been able to provide enough aid or crisis lending to rescue it from balance of payments problems and help it to develop. The EU has largely left it to the IMF [International Monetary Fund] to provide emergency external financing, and EU technical assistance has fallen short of expectations.’

What characteristics of the Ukrainian economy over the past three decades have hindered its progress?

The Ukrainian economy suffered severe dislocation after severing its ties with Russia in August 1991. At the time of dissolution, almost all industry and agriculture were publicly owned, with a large proportion of GDP devoted to the infrastructure of the communist state.

GDP per head in Ukraine fell precipitously until the turn of the century, before a substantial recovery in the 2000s (see Figure 1). But the period after 2007 was one of stagnation in GDP per head (as in many other countries), exacerbated by the Russian occupation of the Crimea and part of two eastern provinces of Ukraine in 2014.

Yet it should be noted from Figure 1 that this standard measure of GDP per head overstates the decline in living standards in the first and last decades. Throughout the period, the share of GDP devoted to consumption expenditure (rather than state activities, military spending and infrastructure) grew steadily, which insulated the Ukrainian population from some of the adverse economic trends.

Figure 1: GDP per capita in Ukraine (constant prices) and consumption share in GDP, 1989-2000

Ukraine GDP per capita

Consumption expenditure as % of GDP

Source: World Bank national account data

The period of stagnation in GDP from 2010 onwards also saw a sharp deterioration in Ukraine’s balance of payments on current account – the difference between the value of imports and exports of goods and services (see Figure 2). This culminated in a current account deficit of almost 9% of GDP in 2013.

Unlike some other states in Eastern Europe after the dissolution of the Soviet Union, Ukraine was unable to diversify substantially away from its traditional exports of agricultural products and raw materials. By 2014, its foreign exchange reserves only covered one month of imports, and the Ukrainian currency depreciated rapidly against the world’s major currencies, such as the dollar (see Figure 3).

Ukraine was also hindered by a lack of foreign investment. Investors were reluctant to put their money into a country that was one of the most corrupt in the world. In 2015, Transparency International ranked Ukraine 130^th out of 168 countries in its Corruption Perceptions Index.

Figure 2: Balance of payments on current account for Ukraine, 2000-2020

Source: International Monetary Fund (IMF) financial statistics

Figure 3: Value of Ukraine’s currency to the dollar and foreign exchange reserves in months of imports

1 US$ = Ukraine currency (HRY)

Foreign currency reserves: months of imports

Sources: IMF financial statistics

What rescued Ukraine’s economy in the latter part of the period, other than some modest internal improvement in domestic economic conditions, was the flow of incoming remittances from the substantial number of Ukrainians working abroad.

These remittances rose substantially during the period, especially after 2014 given the underlying economic conditions and political dislocation arising at that time (see Figure 4). The share of GDP accounted for by remittances from Ukrainians abroad rose from 1% of GDP in 2000 to around 10% two decades later. The contribution of remittances to real consumption expenditure – and hence, to maintaining living standards – was even greater.

Figure 4: Remittances from Ukrainians abroad, 2000-2020

Source: World Bank

The question of EU accession is not therefore primarily a question of increased trade opportunities. It encompasses, crucially, a change in the investment environment and also the question of labour migration. Of the ‘four freedoms’ of the EU’s internal market (goods, services, capital and people), it is the last two that may prove crucial in negotiations and to the Ukrainian economy.

What would be required for Ukraine to join the EU?

The recent request for a special procedure has come as a result of the war in Ukraine. President Zelensky was mindful that a number of states, most notably Turkey, have been waiting to join the EU for a number of years, with accession agreements stalled.

While the EU has shown an interest in an integrated relationship with Ukraine since independence in 1991, it is only when crises hit the region – for example, the Orange Revolution of 2004-05, the invasion of Georgia in 2008 and the Revolution of Dignity in 2013-14 – that the EU has stepped up its interest in developing a political relationship with Ukraine (Bélanger, 2022).

The Russian invasion has changed the narrative of EU membership beyond issues of economic integration to those of political and social integration and security.

The first dimension of the accession process is political. It requires stable institutions and abiding by the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. A prospective state must also show that it is capable of adopting the body of EU legislation (acquis communautaire) into its national system.

In addition, a state must satisfy economic criteria. The existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the union are the broad requirements that would be assessed by the European Commission.

There was widespread support for accession to the EU within Ukraine and most EU member states responded positively to the idea. But France’s president, Emmanuel Macron, has suggested that Ukraine should continue with the looser association status, likening Ukraine’s future relationship with the EU to that of the UK.

Some political commentators have also argued that Ukraine is not ready to shoulder the responsibility of EU membership, and the EU is not in a position to take on board Ukraine’s internal problems.

On 1 March 2022, the European Parliament recommended that Ukraine be made an official ‘candidate’ for EU membership and ten days later, the Versailles Declaration attempted to bring all EU member states on board to initiate an accession process.

Using data drawn from the AA and the DCTFA as the basis for accession is likely to be the easiest way to begin the process. These existing agreements can also provide the framework for the accession treaty (Van Elsuwege and Van der Loo, 2022).

How might EU membership improve on the AA and the DCFTA?

Unlike the AA and the DCFTA, membership of the EU would give Ukraine presence in the EU institutions – the European Parliament, the European Commission, judges and an advocate general in the European Courts. Ukrainian would also become an official language of the EU.

Ukrainian citizens would benefit from the principle of non-discrimination, enhanced free movement rights and family rights to move to work, study, settle, retire and gain access to social security benefits across the EU.

EU law would take supremacy in Ukrainian courts and would, in some cases, be directly applicable. Where the conditions are met for direct effect, individuals and legal entities (corporations) will be able to assert EU law rights in national courts. Ukrainian courts would be able to ask for preliminary rulings from the Court of Justice of the EU.

The EU budget would also need adjustments. It would be difficult to expect Ukraine to pay into it, but the resources it is likely to need to rebuild after the war would have an impact on EU budgetary priorities. The EU has already created special funds for Ukraine and would be likely to ask for outside contributions from the global community for a special rebuilding fund to offset the burden (EU Law Live, 2022). The issue of reparations and the use of Russian assets currently frozen abroad will no doubt be a live issue.

What might be the economic effects of Ukraine’s accession to the EU?

As suggested above, the existing AA and DCFTA agreements largely allow for tariff-free entry of goods to and from the EU. Further, given that bulk goods, such as agricultural products and raw materials, form the majority of Ukraine’s exports, Russia will continue to be able to disrupt such shipments, especially through Black Sea ports.

Even after the cessation of overt hostilities on land, this is going to limit the scope for rapid expansion of such trade with the EU. Since Ukrainian exports of services are minimal, the main focus of Ukraine post-EU accession would be on capital inflows and labour outflows. As it stands, we could expect further negotiation on investment standards and on Ukraine’s ability to stamp out corruption as part of any accession negotiations. The sources of capital for reconstruction will no doubt extend beyond the remit of the EU, and involve other international organisations and the question of reparations from Russia.

Issues of labour migration have been complicated by the large number of refugees from Ukraine who are currently housed in bordering EU countries and for whom returning to Ukraine may prove to be a drawn out process.

One of the striking aspects of Ukraine’s pattern of migration, even before the invasion, is the shift in destination of Ukrainian emigrants. Prior to 2014, Russia received the largest share of Ukrainian migrants.

But even before the occupation of Crimea and parts of the provinces of eastern Ukraine, the pattern of migration was shifting towards the EU (see Figure 5). In 2012, the primary destinations of Ukrainian migrants were Russia, Poland and Italy (International Labour Organization). By 2017, Poland had overtaken Russia and become the dominant recipient of Ukrainians (Centre for Economic Strategy).

Estimates from surveys of Ukrainian households indicate that migrants to Poland increased from around 200,000 to 900,000 in the period 2012-17, and that up to 2.9 million Ukrainians were working abroad at any one time (typically for relatively short periods). Further, these workers were relatively unskilled and around four million Ukrainians were engaged in this form of ‘circular migration’ (Centre for Economic Strategy, CES).

Figure 5: Destinations of Ukrainian migrants, 2012 and 2017

Destination of Ukraine migrants 2012

Destination of Ukraine migrants 2017

Sources: International Labour Organization, Centre for Economic Strategy

The likelihood that many of these short-term migrants do not hold valid EU residence permits is confirmed by official EU data. According to Eurostat, at the end of 2020, 1.35 million Ukrainians held valid residence permits for the EU: around 500,000 for Poland, 223,000 in Italy, 166,000 in the Czech Republic, 95,000 in Spain and the rest elsewhere, mostly in Germany and Central and Eastern Europe.

Most of these were issued for an initial period of less than 12 months but were often extended. It is clear that, unless the CES survey figures of migrant numbers are overestimated, many Ukrainian migrants, especially in Poland, are ‘under the radar’.

Ukrainian migrants complain that they are used as cheap manual labour in the EU, paid significantly less than EU natives. The CES provides survey data on the wages of Ukrainians in 2017 both in Ukraine and recipient countries. Not surprisingly, Ukrainians abroad earn a premium relative to wages in their own country (especially wages outside Kyiv), but wages are typically below those of local workers abroad, especially in Poland.

Figure 6: Average salary of migrants in dollars, monthly, 2017

Source: Centre for Economic Strategy

The question therefore arises as to whether the EU will want to implement transitional arrangements under which free movement of labour from Ukraine would be restricted for a period subject to national law in EU states. For example, the 2005 Act of Accession for Romania and Bulgaria permitted EU member states temporarily to restrict free access of workers from these countries for a period of up to seven years, although such workers should still be given preferential access over workers who were nationals of non-EU states.

The quid pro quo is, of course, that workers who are given access from accession states should have the same rights in terms of pay and other conditions of employment contract as other EU nationals irrespective of any restrictions on numbers.

The situation is further complicated by the fact that countries such as Poland will continue to host an influx of Ukrainian citizens who are not there as workers but as refugees, including children and the elderly, for a currently unknown period of time. Hence, there will need to be detailed negotiations as to how ‘free movement of labour’ is to be applied in the context of Ukraine.

Conclusion

Membership of the EU would bring economic benefits for Ukraine. These would be felt less in terms of trade in the short term, but regularising migration and migrants’ wages would be important.

Joining the EU would also place an administrative burden on an already stretched Ukrainian government and parliament, including the need to fast-track aspects of the EU acquis communautaire and monitor the observance of EU law and policy, particularly in relation to investment incentives and contracts.

Any accession treaty will be likely to contain transitional periods, especially for full free movement of labour, and opt-out clauses. The symbolism may be that Ukraine will be given the status of ‘membership of the EU’, rather than associated or affiliated status.

But the impact of the Russian invasion of Ukraine and its request for EU membership has altered the perception of the role of the EU in international diplomacy. In particular, the EU has come to realise the need to strengthen its own security and manage its internal problems – ranging from the consequences of Brexit to the handling of alleged breaches of the rule of law by Hungary and Poland.

The war in Ukraine has ignited a catalyst for change across the whole of Europe and this may be reflected in how EU member states and the European Commission handle the question of accession by Ukraine.

Where can I find out more?

• Ukraine: EU trade realtions with Ukraine, European Commission.
• What prospect is there of Ukraine joining the EU? EUROPP.

Who are experts on this question?

• Roman Petrov
• Steve Peers
• Peter Van Elsuwege
• Guillaume Van der Loo

Authors: Richard Disney and Erika Szyszczak

Authors’ note: Erika benefited enormously from discussions from an online seminar held on 5 April 2022 with Ukrainian students, Oksana Holovko-Havrysheva and Kyseniia Smyrnova, sponsored and hosted by EU Jean Monnet projects at the Ivan Franko National University of Lviv and the National University Kyiv-Mohyla Academy.

Photo by artJazz from iStock

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The pandemic has raised questions about how these shocks and the policies to tackle them affect not only the economy, but also our lives in general. For example, some narratives during the pandemic claimed a trade-off between health and lives on the one hand, and the strength of the economy on the other.

But adopting a broader approach to policy will enable us to consider the balance between two interacting systems – the social and the economic – which will involve some trade-offs but also some synergies.

Inflation, unemployment and growth

Conventionally, a number of key economic indicators are used to assess the health of an economy. Growth in real GDP is prominent among them, along with inflation, unemployment and the trade balance.

Although it can be tricky to compare the figures directly because of methodological differences, these metrics are particularly useful for international comparison of economic outcomes. The methodology employed for conventional economic indicators also supports macroeconomic forecasts for the future of the economy, which are needed for setting monetary and fiscal policy.

These traditional indicators of economic health show the shock of the pandemic to the economy in several key spheres. Here, we take a brief look at GDP, unemployment and productivity, before and during the pandemic.

Figure 1: Quarterly GDP growth by country/region

Source: OECD.Stat

Figure 2: Real GDP growth including forecasts, by country/region

Source: OECD.Stat. Note: On 17 March, the OECD published estimates of the economic effects of the Russian invasion of Ukraine. A scenario based on a series of assumptions, including higher commodity prices, resulted in GDP being one percentage point lower in the OECD and globally, compared with previous forecasts (see House of Commons Library, GDP International, 2022).

Figures 1 and 2 show the effects of Covid-19 on GDP growth in all G7 economies. With differences in intensity, the direction of change experienced by these countries is consistent, with an all-round decline in real GDP growth.

The greatest shock appears to have come at the very beginning of the crisis, during the first and second quarters of 2020, when most countries were under strict lockdown measures.

All G7 economies subsequently recovered as GDP grew in the third and fourth quarters of the same year. Real GDP growth stabilised across G7 economies from the end of 2020 and continued throughout 2021. Figure 2 shows that across all these countries, real GDP growth is forecast to slow down during 2022 and into 2023.

In the fourth quarter of 2021, UK GDP grew by 1% compared with the previous quarter (2021Q3). The United States, Canada and Japan grew faster than the UK compared with the previous quarter, at 1.7%, 1.6% and 1.1%, respectively. France, Italy and the euro area grew at a slower rate at 0.7%, 0.6% and 0.3%, respectively. Germany faced a 0.3% decline in real GDP growth in 2021Q4.

In terms of forecasts, the UK’s GDP is predicted to grow by 4.8% in 2022 and 2.1% in 2023. This is the highest expected growth level in 2022, relative to other G7 countries, but the second lowest predicted growth rate in 2023.

Figure 3: Unemployment rate including forecasts, by country/region

Source: OECD.Stat

The unemployment rate has been steady and relatively low in the UK, at around 4% since 2016. This has fallen from 6.2% in 2014 and reached a low of 3.8% in 2019. In comparison with the remaining G7 economies, only Japan (2.4% in 2019) and Germany (3.2% in 2019) have had consistently lower unemployment rates than the UK since 2016.

An unexpectedly high level of job quits was recorded in the United States at the end of 2021. This raised the questions of whether a ‘great resignation’ was taking place following the pandemic (and its effect of having people re-evaluate their lives) and whether the same might be occurring in the UK. The evidence of the latter is currently inconclusive (Wadsworth, 2022).

The United States is predicted to have lower rates of unemployment than the UK in 2022 (3.9% compared with 4.3%) and in 2023 (3.4% compared with 4.2%), with a falling trend. The unemployment rate soared in Canada (9.6%) and the United States (8.1%) with the outbreak of the pandemic in 2020, but it is predicted to fall to almost pre-pandemic levels in the United States (3.4%) and to just above this point in Canada (5.8%) by 2023.

The rates in Japan and continental European countries have been more stable with a declining trend, although it should be noted that the starting rates in France, Italy and the euro area remain significantly higher than other G7 economies, rising from around 1% in 2014 to predictions of around 8% in 2023.

Figure 4: Annual change in GDP per capita

Source: OECD.Stat

Productivity, measured by GDP per hour worked and GDP per capita, is another telling statistic. The impact of the pandemic on productivity across all of the G7 countries is clear.

All economies experienced a decline in GDP per capita growth from the previous year, ranging from the biggest decline in the UK (-9.8%) to the smallest in the United States (-3.9%). Italy and France saw declines in growth of -8.6% and -8.1%, respectively.

The UK’s productivity decline adds to one of the biggest economic policy questions currently facing the country – that of the ‘productivity puzzle’ (Lucas, 2021). By 2021, G7 countries experienced positive productivity growth compared with the previous year.

Wellbeing

These conventional indicators can be useful for drawing certain conclusions. But there is increasing recognition, especially over the last decade, that they do not tell the whole story. In fact, these indicators miss a substantial part of explaining how well the economy is doing.

There are two main related problems. First, these indicators are somewhat ‘narrow’ in the information that they cover, and they omit things that are of interest to assessments of quality of life. For example, the unemployment rate alone does not tell us about the quality of employment, or precariousness within employment.

Second, these indicators risk being seen as ends of policy-making in themselves, while they may be quite detached from our broader wellbeing. GDP, income and employment can all contribute to our wellbeing, but are not necessarily constitutive of it.

These two issues have contributed to a shift in emphasis in policy and academic circles towards a ‘wellbeing economy’, involving multidimensional measures of economic progress and quality of life. Within these spheres of economic study, the aim of policy-making is to achieve individual and social wellbeing.

One prominent approach involves the economics of happiness. This uses a broader and alternative range of indicators to measure and evaluate the progress of an economy. The field is expanding at great pace: the World Happiness Report notes that the term ‘happiness’ is appearing more in texts, and now more often so than GDP (Helliwell et al, 2022). This indicates a shift in values and economic narrative.

Although the domain of happiness economics offers alternative conceptual approaches for analysing and measuring wellbeing, the most integrated into policy design is the ‘subjective wellbeing’ approach. This includes several metrics but is generally based on positive psychology concepts and uses self-reported measures, such as life satisfaction.

Figure 5: Negative affect balance

Source: OECD.Stat, Gallup World Poll

For example, the negative affect statistic represents the share of respondents that report more negative than positive feelings or states compared with the previous day. Figure 5 shows a mixed picture of individual subjective wellbeing in certain countries.

The most extreme valuations are reported in Italy, while those of Japanese and American individuals are the most steady (although Japanese citizens report overall lower levels of negative affect compared with US citizens).

The UK also appears to present a relatively steady level of individual subjective wellbeing, in terms of changes in negative affect. The balance fell between 2016 and 2018, indicating a rise in subjective wellbeing, but the proportion of negative states has continued to rise since 2018. Canada has followed a somewhat similar trajectory to the UK, but since 2017, it has had higher numbers of respondents with a greater proportion of negative feelings and states.

Figure 6: Life satisfaction

Source: OECD.Stat

What about life satisfaction? The comparable data (gathered on two occasions in recent years – in 2013 and 2018), at the European and international level, reveal a slight upward trend in personal assessments of life satisfaction over the five years in Canada, France, Germany, Italy and the UK. The overall level between countries is similar, with the UK faring second best in terms of life satisfaction in 2018 among the five countries.

The risk in this approach is that policy again becomes focused on a single metric, and one that does not vary substantially over time (Agarwala et al, forthcoming). Although national level policy is bound to need a relatively small number of indicators of success, or otherwise, effective policies for wellbeing will require a broader approach. The 2009 Sen-Stiglitz-Fitoussi Commission recommended a ‘dashboard’ involving some conventional economic indicators, and a broader set of metrics speaking to quality of life.

The interest in economic and individual wellbeing measurement has led to a range of approaches that attempt to bridge both objective and subjective accounts of wellbeing.

To this end, several dashboard indicators have been proposed, such as the OECD ‘How’s Life?’ index or the United Nations’ Sustainable Development Goals (SDGs). These dashboards recognise the importance of self-evaluated ‘happiness’ or life satisfaction, but maintain that this is just one element of overall wellbeing.

They also emphasise the need to complement subjective assessments of wellbeing with objective indicators. The danger inherent in dashboards is that they can proliferate indicators (the SDGs have 231 and provide no framework for evaluating trade-offs between them). Nevertheless, they can be helpful in understanding what contributes to individual wellbeing and quality of life.

Finally, official economic statistics are themselves expanding to cover a wider range of indicators of progress alongside GDP growth. The System of National Accounts, promulgated by the United Nations, has already adopted official methods for measuring natural capital and the use of ecosystem resources. It is currently undergoing a major revision that will see other previously ‘missing’ assets – such as health as part of human capital and some cultural assets – being defined and implemented over time.

The diverse country dynamics described above point to the benefit of a balanced overview of multiple important spheres for a context-specific analysis of economic wellbeing, particularly at a time when successive crises – the global financial crisis, the pandemic, Brexit (for the UK) and war in Ukraine – have led many people to question how we should assess economic progress or its absence.

Where can I find out more?

• World Happiness Report 2022.
• The latest international data releases can be found here: OECD Statistics.
• Latest European country data releases can be found here: Statistics | Eurostat (europa.eu).

Who are experts on this question?

• Paul Allin
• Eric Beinhocker
• Diane Coyle
• Jan-Emmanuel De Neve
• Mark Fabian
• John Helliwell
• Richard Layard
• Mary Morgan
• Joseph Stiglitz

Author: Julia Wdowin

Image: SteveClickyClark on iStock

The post How is the UK economy faring compared with other countries? appeared first on Economics Observatory.

For example, below a picture of Reykjavik’s mountainous skyline, a recent op-ed in the pro-independence newspaper The National declares that ‘it is widely accepted that smaller nations are actually better at creating healthy political and economic systems’.

Unionists are more sceptical. They warn that low populations deprive smaller states’ governments of economies of scale. This makes public sector spending relatively more expensive in smaller states, requiring higher taxes.

Supporters of the Union also point to the experiences of small states like Iceland and Ireland in the wake of the global financial crisis of 2007-09 as a reminder of their vulnerability to fluctuations in the global economy (Harvey, 2017).

Research on small states in Europe and beyond can advance this debate. In this article, we review social science research on small states in domestic and international affairs. Most of this work defines size by population, and categorises small states as those with populations of fewer than 1.5 million residents.

By these measures, Scotland – with a population of close to 5.5 million – is not a small state. Nevertheless, size is relative. Small independent states are a useful lens through which to envision an independent Scotland.

We move beyond adjudicating whether smaller is better for political and economic development by highlighting the challenges and opportunities confronting small states. The prosperity of these states depends on their leaders’ ability to forge collaborative and cooperative relations in domestic and international politics.

Small states and local governance: pitfalls and potentials

Are smaller states better governed than larger ones? Evidence is mixed if ‘good governance’ is defined by the rule of law. Some find that small states, especially islands, are less corrupt than larger ones (Congdon Fors, 2014; Olsson and Hansson, 2011; Xin and Rudel, 2004).

Others argue the opposite: smaller states are more prone to clientelism and less professional bureaucracies (Corbett, 2015; Gerring and Veenendaal, 2020). Sceptics also warn that missing data on smaller states lead to a bias in analyses, showing that small states have better governance (Knack and Azfar, 2003).

This mixed evidence suggests that small size may have competing effects on good governance. On the one hand, smallness may strengthen public sector accountability because citizens can monitor bureaucrats’ behaviour more easily.

At the same time, smallness may blur the lines between state and society, abetting favouritism because ‘everybody knows everybody’ (Corbett, 2015). It is paramount for leaders of small states to capitalise on the accountability benefits of smaller polities while suppressing temptations for favouritism (Mungiu-Pippidi, 2015).

Evidence of smaller being better is also mixed if good governance is defined by bureaucratic capacity. There is a trade-off between size and administrative effectiveness (Jugl, 2019). Bureaucracies in smaller states do not benefit from economies of scale: they can be over-stretched and under-specialised.

Yet bureaucracies in smaller states do profit from easier communication and coordination among state institutions and the public. As a result, the evidence suggests that medium-sized countries can have the most effective bureaucracies, all else being equal, while very small and very large countries perform less well (Jugl, 2019).

Measured on a population basis, an independent Scotland with a population of close to 5.5 million would fall below this ‘golden mean’ of population size, which the study estimates at between 15 and 94 million (Jugl, 2019).

This suggests that, all else remaining equal, an independent Scotland would have to be mindful of administrative effectiveness and take action to avoid efficiency losses, which the evidence suggests have been a feature of some countries of a similar size.

Overcoming these losses would require stronger communication and coordination between agencies and departments, and a greater focus on common goals and ‘big picture’ questions. Some smaller European countries – such as Estonia, Iceland, Latvia and Luxembourg – have mastered this challenge (Sarapuu and Randma-Liiv, 2020; Jugl, 2020). With a committed leadership and civil service, Scotland could do so as well.

Figure 1: Countries according to their size and government effectiveness

Source: Jugl, 2022

Note: hover mouse over each point to see underlying country data

Clean and effective governance would be especially important for a newly independent Scotland because of its resource wealth. Petroleum and related products – but also increasingly renewable energy resources – are a staple of the Scottish economy, and the country’s primary export.

Whether in Scotland or New Caledonia, proponents of independence argue that their territory’s resource abundance can propel their newly independent state’s fledgling economy. But are smaller states better at managing resource wealth?

Scholars have long debated whether, when and under what conditions resource abundance is a blessing or a curse (Ross, 2015). Among smaller states, Norway, with a comparable population to Scotland, is a paragon of sound resource governance. The eponymous ‘Dutch disease’, on the other hand, suggests that smaller economies can be more susceptible to the economic consequences of resource abundance.

Economists blame the discovery of natural gas in the Netherlands for causing the Dutch currency to rise against other currencies. This exchange rate appreciation made imports cheaper and Dutch exports dearer, heightening the decline of Dutch manufacturing. Countries with larger domestic markets, which are less dependent on international trade, are more insulated from these resource-backed currency fluctuations.

The economic success of some resource-abundant small states (and the failures of others like Equatorial Guinea) highlights that natural resources can be a lever or impediment to growth. Checks and balances, clean and effective bureaucracies, savings mechanisms like sovereign wealth funds and partnerships with local and international monitoring groups, like the Extractive Industries Transparency Initiative (EITI), can help newly independent small states to manage their resource wealth effectively and equitably.

Moving beyond resource wealth, and contrary to claims in The National op-ed, researchers disagree whether smaller is better for economic development. Some find a positive relationship (Anckar, 2020) and others no relationship between small size and economic development (Easterly and Kraay, 2000; Gerring and Veenendaal, 2020).

Still others maintain that small size at independence, when economic and political arrangements are first forged, is a powerful predictor of long-term development (Bin Khalid et al, 2022).

A seminal work in this area – The Size of Nations – argues that trade with larger markets erases inherent economic disadvantages of smaller population size. This work on size and development recalls that economies do not exist in a vacuum; policy-makers and policies shape small states’ economic wellbeing (Alesina and Spolaore, 2003).

They need smart, flexible, collective and responsive policy-making, especially when economic integration exposes small states’ economies to the volatilities of globalisation (Baldacchino, 2020).

Another study of small European states examines the domestic politics buttressing small states’ integration into the global economy (Katzenstein, 1985). This analysis of seven small West European states with populations comparable to Scotland – Austria, Belgium, Denmark, the Netherlands, Norway, Sweden and Switzerland – reveals that close, continued cooperation between the state and heads of unions and business associations sustain small states’ economic integration.

This close cooperation engenders generous welfare programmes that compensate those disadvantaged by economic openness. It also breeds a social mindset that ‘all members of society are in the same small boat, that the waves are high, and that everyone must help pull the oars’. Social solidarity in norms and governance are vital for small states’ prosperity in world markets.

Building from this insight, more recent work explores how governments in small West European states, especially Denmark and Switzerland, navigated the global financial crisis of 2007-09 (Campbell and Hall, 2017). The authors introduce a ‘paradox of vulnerability’: it is precisely the repeated experience of economic volatility and shocks – but also other external challenges such as military (see below) or political threats – that force small states to develop resilient state structures.

These well-designed and robust structures, based on values like expertise, accountability and collaboration, help small states and their governments to deal with new crises and challenges like the global financial crisis.

Importantly, the authors use the cases of Greece and Ireland to demonstrate that resilient governance structures do not follow automatically from smallness but from exposure to external threats. Time is needed to build resilient structures and develop national solidarity.

Small states in the international arena: vulnerability and cooperation

Conventional international relations scholars argue that vulnerability anchors small states’ foreign policy. Fears of conquest and bullying by larger neighbours push smaller states into alliances with hegemons like China, Russia and the United States, or into absolute neutrality, as in the case of Switzerland (Archer and Nugent, 2002; Goh, 2007).

Others question smaller states’ inherent acquiescence. Both Iceland and Malta successfully confronted the UK in disputes on fishing rights and developmental assistance in the 1970s (Baldachinno, 2009). More recently, Lithuania’s decision to open a Taiwanese representative office and Baltic states’ military aid to Ukraine illustrate that small states can stand up to larger states.

International organisations can also help small states to solve their security challenges (Bailes and Thorhallson, 2013). They amplify small states’ influence by providing a venue to organise and lobby larger states collectively. For example, the Forum of Small States is an informal group of small state representatives that meets regularly to discuss small state concerns and share best practices.

But small states’ ability to leverage regional and international organisations to advance their interests depends on the quality of their diplomatic corps. Many small states lack the staff and expertise to participate effectively in these multinational forums (Corbett and Connell, 2015).

International organisations can also help small states to solve their economic challenges (Lake and O’Mahoney, 2004). Economic openness and trade dependency are defining features of small state economies (Rigobon and Rodrik, 2005; Alesina and Wacziarg, 1998).

This is because smaller economies lack a large domestic labour force to produce goods, and a large domestic market to consume goods. Imports make up a large share of consumed goods, while exports make up a large share of produced goods. This means that small economies are more dependent on world markets.

Because of their greater trade dependency, protectionist policies are particularly costly for consumers and producers in smaller economies. Therefore, leaders of smaller economies face strong domestic pressures to open domestic and foreign markets. Joining international organisations like the World Trade Organization (WTO) and the European Union (EU), which deepen trade integration, is a boon for small states’ economic development.

In the context of independence referendums, the main lesson from research on small states is for newly independent states to keep good relations with their neighbours. Secessionist states are likely to have deep economic ties with the state they left and neighbouring ones.

Returning to Scotland, four out of the country’s top five international export markets are in the EU. But 60% of Scottish exports go to England, Wales and Northern Ireland.

Because of smaller states’ higher trade dependency, maintaining trade flows with the UK and Europe would be existential for an independent Scotland’s economic wellbeing. This may require an independent Scotland’s admission into the EU, although whether EU member states would accept an independent Scotland into the union is open to debate.

Conclusion

This overview of evidence on the performance of small states should caution any knee-jerk optimism (or pessimism) about Scotland’s political and economic viability as a small independent state.

The blessings and afflictions of small population size are contingent on local and international politics. Reaping the benefits of small size in domestic affairs while mitigating the costs demands deep collaboration and solidarity between state and society.

Thriving in the international arena – one dominated by larger states – requires diplomatic tact and international cooperation. These demands are obtainable, but not inevitable.

Scotland’s success as a small independent state would depend less on its size than on its leaders’ ability to leverage the benefits and lessen the liabilities of small population size.

Where can I find out more?

• Scotland as an independent small state: Where would it seek shelter?
• What Dutch disease is, and why it’s bad.
• Small states and small states revisited.
• Country size and public administration (video abstract).
• Democracy in small states: why everything we think we know about democratisation is (mostly) wrong.

Who are experts on this question?

• Godfrey Baldacchino, University of Malta
• Jack Corbett, University of Southampton
• John Connell, University of Sydney
• John A. Hall, McGill University
• Malcolm Harvey, University of Aberdeen
• Külli Sarapuu, Tallinn University of Technology
• Baldur Thorhallson, University of Iceland
• Tiina Randma-Liiv, Tallinn University of Technology
• Wouter Veenendall, Leiden University

Authors: Marlene Jugl and Steve L. Monroe

Editors' note: This article is part of our series on Scottish independence – read more about the economic issues and the aims of this series here.

Photo by leonardospencer from iStock

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While the MPC has recently started to increase interest rates, they will remain very low by historical standards and substantially below the rate of inflation. This article aims to help us understand what rising inflation will mean in this low interest rate environment.

What are the links between inflation, interest rates and real economy activity?

Economics textbooks usually say that there is a key difference between anticipated inflation (inflation that was expected beforehand) and unanticipated inflation. When inflation is anticipated, transactions can be agreed, with future changes in prices taken into account. In this case, the levels of output, employment and the quantities of goods and services produced remain unaffected by the exact level of inflation.

As inflation rises, so too does the rate of lending/borrowing before considering inflation – what’s known as the ‘nominal interest rate’. This change accommodates the additional growth in prices to maintain the same overall (or real) interest rate. In simple terms, the real rate of interest is simply the nominal rate minus the inflation rate.

With anticipated inflation, if all wages and prices are perfectly flexible (meaning that they can be changed with no additional cost), then they can also be raised together with general inflation. In this case, the relative prices of goods, services and real wages will be unaffected by inflation.

In economics, this idea is known as the ‘classical dichotomy’, and it represents a theoretical benchmark that indicates conditions under which inflation will have no effect on the real economy in terms of things such as output and employment.

If this theory were applicable to the UK economy, we would expect to see the real rate of interest (the nominal rate minus the inflation rate) vary only a little – due to productivity shocks and other factors. In contrast, the nominal interest rate would vary a lot with inflation.

But in fact, at certain times, we observe the exact opposite: the real interest rate varies a lot while the nominal interest rate varies less. This has certainly been the case in the UK since 2009, when the nominal interest rate was first fixed at just above zero (with slight variation) and the real interest rate essentially mirrored this.

In this case, the real interest rate is simply the negative of the inflation rate. For economists, it is this real interest rate that matters for households and firms when they make their savings and investment decisions.

This means that the MPC policy of near zero interest rates will result in notable effects on the real interest rate as inflation varies. Even when fully anticipated, inflation will have real effects on the economy, altering consumption, investment and employment. In the period since 2009, there have been big swings in the real interest rate – from almost -5% in 2011 to just above zero in January 2015-March 2016 (see Figure 1).

Figure 1: Nominal and real interest rates, from 2009 to 2022

Source: Bank of England

This is the longest period of sustained negative real interest rates in UK history, having lasted over a decade. This has had a variety of effects on the economy, but it is the effect on the redistribution of income and wealth that is most important. Since the Second World War, there have only previously been two brief periods of negative real rates: from 1950 to 1953; and from 1974 to 1978.

What role does the central bank play?

The policy rate of interest set by the MPC is essentially a short-run interest rate, captured in the price of short-term government bonds. The other big policy used by central banks since the global financial crisis of 2007-09 has been quantitative easing (QE). This enables the central bank to influence long-term interest rates.

One of the main ways this has affected the economy is via large-scale central bank purchases of longer-term bonds. This has raised the prices of these bonds, which means that the corresponding longer-term interest rates have also fallen.

To illustrate this, Figure 2 compares the yield curves in 2010, 2018 and 2021. The yield curve shows how the interest rate (yield) on government bonds varies with the length of the bond (also called the ‘maturity’). The vertical axis shows the (nominal) return on government bonds and the horizontal axis shows the length of maturity in years.

For all three yield curves, the ‘short end’ at half a year is roughly equal to the policy rate (0.5% in 2010 and 2018, 0.1% in 2021). But the large amounts of QE undertaken between these years has ‘flattened the curve’, bringing down longer-term returns on government bonds. This has led to the real interest rates on longer-term bonds becoming negative as well as at the short end shown in Figure 1.

This means that QE has helped to bring long-term nominal interest rates down closer to zero and below the inflation rate, at least in more recent years. The combination of the MPC interest rate decisions and QE has been to make both short- and long-term real interest rates negative.

Figure 2: UK yield curves in 2010, 2018 and 2021

Source: Bank of England

Note: Since 2010, QE has 'flattened' the yield curve. While the 'short end' is around 0.5 for both 2010 and 2018, the longer end has gone down. 20 years maturity went from 4.5% in 2010 to 2% in 2018, and 1.2% in 2021

One of the major effects of flattening the yield curve has been to boost asset prices, including the stock market and house prices. In general, there is an inverse relationship between the rate of interest and the value of financial assets: lower interest rates mean higher asset prices.

For example, if an asset yields £10 per year, its market value is approximately equal to £10 divided by the interest rate, which gives the amount you would need to invest at that interest rate to give you an income of £10. Using this approximation, if the interest rate was 10%, you would only need to invest £100 to give you an income of £10 per year. If the interest rate is 0.5% – as it has been most of the time – the income of £10 per annum is worth £2,000. Whether the income is from rent, dividends or bonds, the income generated by the asset is worth more when interest rates are lower.

This also has real effects, since the ownership of assets is highly skewed with a small proportion of households owning most of the wealth. Wealth inequality has increased in the UK in recent years.

What are the effects of inflation when there are near zero or fixed interest rates?

So, how does inflation affect the economy in an environment where nominal rates are fixed, as they have been since 2009? There are several effects, even when inflation is anticipated.

First, higher inflation redistributes from lenders to borrowers. With a fixed nominal interest rate, inflation reduces the amount that borrowers have to repay to lenders overall (in real terms). If one person has borrowed £100 from another, and promised to repay £105 in 12 months’ time, the actual value of the eventual £105 will depend on inflation (if prices have gone up, £105 is less valuable).

If inflation over the 12 months is equal to 5%, then the £105 that the borrower has to repay has the same purchasing power as the £100 initially borrowed a year ago. This implies a zero real interest rate. If there had been no inflation, then the real interest rate would have been 5%. If interest rates were operating normally, this effect would be present only if the inflation was not fully anticipated.

Second, the government is the biggest borrower in the UK, with debt equal to almost 100% of GDP. There is therefore a big ‘inflation tax’. The real value of the governments’ liabilities declines, which is in effect a tax levied on the holders of government bonds. If I own bonds that promise to pay me £1,000 next year, the purchasing power of that £1,000 will be less as a result of inflation.

For example, if inflation was 5%, my purchasing power available from the £1,000 will be 5% less (because the items I consume have gone up in price). I will be in exactly the same position as if there had been no inflation and I had been taxed directly on the bond payment.

Due to QE, a large proportion of the UK government debt is held by the Bank of England. But the Bank’s bond purchases are ultimately funded by the creation of reserves at the Bank held by commercial banks. These are liabilities of the public sector to commercial banks, so that inflation erodes their value in the same way as it does bonds held by the private sector and households.

The size of the inflation tax is very large given the high level of debt relative to GDP. The Bank of England expects inflation to reach over 10% in 2022, so the inflation tax will be equivalent to about 10% or more of GDP.

Note that the inflation tax on bonds relies on the fixed interest rate policy. If interest rates were free to adjust, then they would rise with inflation so that the real return on bonds was not affected: the additional interest payments on the bonds would compensate for the extra inflation.

Third, this inflation tax does not fall on financial intermediaries such as banks, because both their assets and liabilities will generally be defined in nominal terms: inflation will reduce the value of their assets (bonds, reserves at the Bank of England) and their liabilities (deposits of firms and households).

Exceptions to this are defined benefit pension schemes, where the liabilities are defined in real inflation-indexed terms and the bonds held are nominal. Any assets or liabilities that are indexed to inflation will not be subject to the inflation tax.

Ultimately, the bulk of the inflation tax is levied on households indirectly, even if they do not directly own government bonds. This is because the broad measure of money (known as M4) takes the form of household deposits at commercial banks. The value of this money held by households is eroded by inflation.

So, in the fixed interest rate environment that has been in place since 2009, inflation has big effects even if fully anticipated. It redistributes purchasing power from savers to borrowers. Savers are hit as the real return on their savings declines and becomes negative. Households with mortgages will benefit as the real cost of their loans falls. But the biggest beneficiary of all is the government, since the value of its debt will decline in real terms and there is in effect an inflation tax.

What are the other effects of inflation?

There are several more standard costs to inflation, even when interest rates are not fixed. The most important ones in the current situation are the following.

Eroding purchasing power

Inflation erodes the real value of wages and benefit payments. If these are set in nominal terms, the process is obvious. Over time, the fixed nominal income is able to buy less if prices are going up. Now, benefits and the minimum wage may be indexed to inflation, in the sense that each year they are updated as a result of last year’s inflation. An increase in inflation will still have an effect: since the indexation is lagged and not instantaneous, real income will be falling until the minimum wage or benefit is updated.

For example, if I have an income of £100 per week, if inflation is 5%, then each month my income will fall by about 0.42% (5% divided by 12 months). But at the end of the year, if it is indexed it will be updated by 5% to take it back to its original level in terms of purchasing power. But in the intervening months, the real value of that income has been declining.

Wages may in principle rise faster than inflation, leading to a rise in real wages. But if inflation is higher than was expected when the wages were agreed, the unexpected inflation will still reduce real wages below the expected value. Where nominal wages are inflexible downwards, inflation might be the natural method of reducing real wages in response to some negative effect.

Informational costs

Inflation reduces the information conveyed by prices in terms of the relative costs of different items, and so may lead to a misallocation of resources. Prices are going up and down all the time. The Consumer Prices Index (CPI) measures the inflation of a basket of over 700 items covering most household expenditures. When inflation is low, most of the changes reflect real changes in relative prices.

But when inflation is higher, the public may confuse nominal price changes and real (relative) changes. People may be put off buying a good or service when its price goes up because they think it has gone up relative to other goods when it has not.

Further, if inflation leads to more uncertainty about relative prices, it will lead households to devote more time to researching prices – sometimes called the ‘shoe leather’ cost of inflation.

Higher costs of holding money

Inflation introduces a cost of holding money (at least for non-interest bearing deposits). This means that it erodes the ability of money to act as a store of value. When inflation is very high, households may be driven to holding other assets that are more volatile, such as gold or Bitcoin, or substituting foreign currency (for example, the US dollar) for the domestic currency. It should be noted that this flight from money usually only happens in a hyper-inflation.

Indeed, in his theory of the optimal quantity of money, Milton Friedman argued that to encourage people to hold money, the inflation rate should be negative (so that there was a real return to holding money). The role of money as a store of value is very important and encourages savings. This role is undermined by inflation.

Great uncertainty

Inflation creates uncertainty, which discourages investment by firms since the returns to investment become less predictable. This uncertainty also makes households worse off. In essence, higher inflation can lead to households and firms putting a higher probability of a bad outcome.

History tells us that when inflation is prolonged, it becomes entrenched and then it is hard and costly to reduce it. If higher inflation becomes part of firms’ and households’ expectations, then inflation can become hard-wired into wage and price decisions.

The costs of curbing these inflationary expectations will come in the form of low growth and unemployment, as illustrated by the big recessions of the 1980s in the UK and the United States when the ‘Great Inflation’ of the 1970s was reversed.

What are the implications for monetary policy?

Prior to 2009, the MPC set interest rates above the rate of inflation nearly all of the time. Inflation almost always remained in the target range of 1-3% from 1993 onwards, with average inflation at exactly 2%.

This was a period of active inflation targeting, where the nominal interest rate was kept above the inflation rate and varied to keep inflation on target. Inflation expectations settled down at 2% from the mid-1990s as the private sector came to trust that the Bank of England was willing and able to keep inflation at this long-run average.

Since 2009, the priorities of the MPC have shifted away from inflation and more towards supporting the recovery. Inflation has swung around more wildly: from 0% to 5%, but still with an average around 2%.

Until 2020, inflation expectations have remained anchored. But now there is something of a moment of truth for the MPC. Inflation looks set to rise to 10% or possibly more in 2022. If the Bank of England keeps interest rates at these very low levels, then the private sector will lose faith in the Bank’s willingness and ability to control inflation and keep it low.

But the Bank may be a prisoner of circumstances. It is ultimately subordinate to the elected government and the chancellor faces a very high level of government debt. If the Bank were to raise interest rates, this would have a negative effect on government finances. Also, low interest rates have led to high asset prices, not just in bond markets but also in the housing and stock markets.

Raising interest rates might well lead to a decline in the values of these assets, which would be very unpopular with the wealthy and homeowners. This means that the Bank may be unwilling and unable to raise interest rates significantly.

Indeed, although current expectations for inflation are close to or above double digits in Europe and North America, markets expect interest rates to stay at levels well below inflation and below their levels before the global financial crisis of 2007-09.

Such a situation is sometimes referred to as ‘Japanification’, in reference to Japan’s experience since 1990. Given the testing fiscal situation of many economies, perhaps inflation will be the inevitable outcome of an inability of central banks to raise interest rates and governments to raise taxes or cut expenditures.

The war in Ukraine and ensuing sanctions imposed by the West have only made matters worse in terms of policy choices of central banks and governments by making the supply side of the economy worse.

Where can I find out more?

• What may happen when central banks wake up to more persistent inflation: Charles Goodhart and Manoj Pradhan.
• NIESR Monthly Inflation Blog by Huw Dixon.

Who are experts on this question?

• Jagjit Chadha
• Huw Dixon
• Michael McMahon
• Richard Davies

Author: Huw Dixon

Picture by Thinglass on iStock

The post How does inflation affect the economy when interest rates are near zero? appeared first on Economics Observatory.

The response has been an outpouring of support from the West. In the UK, 100,000 people signed up to host a Ukrainian refugee family on the first day that the ‘Homes for Ukraine’ scheme opened. An emergency appeal by the Disasters Emergency Committee (DEC) received more than £150 million during the first week, making it DEC’s second largest fundraising appeal in more than 50 years.

Some critics have accused the West of double standards in the response to the Ukrainian crisis – for caring more about a humanitarian disaster unfolding on their doorstep than about similar tragedies further afield.

A senior CBS News correspondent has been particularly berated for his comments that: ‘This isn’t a place, with all due respect, like Iraq or Afghanistan that has seen conflict raging for decades. This is a relatively civilised, relatively European – I have to choose those words carefully, too – city where you wouldn’t expect that, or hope that it’s going to happen.’

A contrast has also been noted with a DEC emergency appeal launched for Afghanistan in December 2021, which collected £30 million, less than a quarter of the amount given to the Ukrainian appeal.

But do people really care more about crises closer to home?

Analysing the responses to more than five decades of DEC appeals, there is in fact, little evidence that UK donors are more generous when it comes to close European neighbours. Across the whole period, there have been 73 DEC appeals, of which six (including Ukraine) have been in response to disasters in European countries – the previous ones being floods in Romania (1970), earthquakes in Turkey (1990) and the former Yugoslavia (1969), and conflict in the former Yugoslavia (1994) and Kosovo (1999).

Looking at average total donations by geographical area (see Figure 1), the amounts donated were, if anything, lower for European appeals compared with those in Asia, Africa and Central America.

This mirrors findings from economic experiments that explore the role of race in generosity in the context of Hurricane Katrina in 2005. In these experiments, donors were primed with information about the race of victims, but this information did not affect how much they gave.

In other words, on average, white donors gave as much to black people as to other white people. But people did give less when they were primed to think that the victims were from a less economically disadvantaged area. This may explain the higher amounts given to Africa and Asia in DEC appeals.

Although there was no variation by victims’ race on average, there was variation according to the participants’ subjective identification with racial groups. This was measured by the question ‘How close do you feel to your ethnic or racial group?’

Where white donors identified more with their racial group, they gave less to black victims, while white donors who did not identify with their racial group gave more to black victims. (Similarly, black donors who identified more with their racial group gave less to white victims.) The role of group identity in pro-social behaviour is more complex than a simple ‘them and us’.

Figure 1: Analysis of donations to 72 DEC appeals, 1968 to 2021

Source: Disasters Emergency Committee
Note: Real donations in 2021 prices (GDP deflator)

What explains responses to disaster appeals?

There is a perception that people give more in response to natural disasters than to man-made disasters. This is not the case for DEC appeals. Since 1968, roughly two-thirds of the appeals have been in response to natural disasters.

The average amounts given are not significantly different between man-made disasters and natural disasters – £26.8 million for man-made emergencies (such as war and violent conflict) and £39.2 million for natural disasters (£28.6 million excluding the 2004 tsunami in the Indian Ocean). The current response to the invasion of Ukraine also confirms that people give generously when it comes to man-made disasters.

The amount of money donated is closely related to the scale of the disaster, as measured by the number of people who are killed and the number affected in other ways. Standardised information on the scale of natural disasters is available from the Emergency Disaster Database (EM-DAT) provided by the Centre for Research on the Epidemiology of Disasters (CRED).

Controlling for natural disaster type (floods, earthquakes, storms, etc.) and geographical area, a 10% increase in the number of people killed and in the number of people affected both increase the amount donated by 3-4%.

Another key factor driving donation responses is media coverage. While this is closely correlated with the scale of disasters, research has isolated the effect of media coverage by exploiting the presence of competing news events, particularly sporting events. The results show that television coverage of natural disasters has an effect on the provision of aid.

The exact mechanism is not clear, but media coverage is likely to provide information on the scale of the need, to make the need more salient in people’s minds, to create identifiable victims by showing images of real people who are suffering, and to reduce the social distance between donor and potential recipients.

Media coverage is an important factor in explaining the very large response to the DEC appeal in the aftermath of the 2004 tsunami. The response to that natural disaster remains the biggest fundraising appeal, with more than £500 million donated (in real terms). Dramatic pictures of devastation were broadcast around the world during the Christmas holidays, a time when people typically watch a lot of television and when there may be few competing news stories.

Similarly, the almost constant coverage of the war in Ukraine is likely to be an important factor driving the large donation response.

Lift or shift?

When large amounts of money are donated in response to a single fundraising appeal, there is a concern that this will reduce donations to other causes. But there is no evidence that this is the case.

Focusing on responses to six DEC appeals between 2009 and 2015, analysis of detailed donation data from the Charities Aid Foundation (CAF) accounts found that donations to other charities increased during the time of an appeal. Although these other donations subsequently reduce, there is overall zero effect on other donations.

The contemporaneous increase may be the result of transaction costs – ‘if I am giving to one charity, I might as well make my other regular donations at the same time’. But this may also be a salience effect: the DEC appeal makes people more aware of the need to give to those in need.

Taken together with the positive response to the DEC appeal itself, the most important takeaway for the charity sector is that the response to the current humanitarian crisis in Ukraine is likely to generate new giving rather than taking donations away from other charities.

Where can I find out more?

• Disaster Emergency Committee (DEC).
• Charities Aid Foundation (CAF).
• Emergency Disaster Database (EM-DAT) at the Centre for Research on the Epidemiology of Disasters.

Who are experts on this question?

• Sarah Smith
• Kim Scharf
• Susan Pinkney, CAF

Author: Sarah Smith

Photo by Radek Procyk from iStock

The post Charitable donations: do we care more about our close neighbours? appeared first on Economics Observatory.

Carbon emissions from our flights, farms and factories affect the air we breathe. The forests we raze for fuel, agriculture and to build homes, offices and schools leave the earth’s atmosphere starved of oxygen. And as more and more fish are hauled from our seas, the water in which they once swam is becoming less hospitable to life.

Figure 1: Forest area by country (% change in square km, base year = 1990)

Source: World Bank

According to data from the World Bank, many countries have depleted a vast share of their forests since 1990. Figure 1 highlights how Brazil has cut down around 15% of its trees, Indonesia 24% and Paraguay over a third.

Similarly, data from the International Union for Conservation of Nature (IUCN) show that there are almost 3,000 species of fish now classified as critically endangered. Nearly 2,500 amphibians are also on the red list, facing extinction, as are around 2,000 insects (see Figure 2).

Figure 2: Endangered species (number of species on red list)

Source: IUCN Summary Statistics

But how did we get here? How has the economic development of the last century come at so great a cost? These questions, as well as how best to react to the emergency at hand, were the subject of a discussion between Diane Coyle (University of Cambridge and one of the Observatory’s lead editors) and Partha Dasgupta (University of Cambridge and author of the Dasgupta Review, an independent report commissioned by the UK Treasury).

The conversation, held on the first day of this year’s Royal Economic Society (RES) annual conference, centred on both why and how we must embed our reliance on nature into economics. Diane and Partha also explored how traditional economic measures (such as GDP growth) are insufficient to capture this relationship, and discussed what needs to change about economics as a discipline to address these collective problems.

What are the main messages of the Dasgupta Review?

At the core of the review is the idea of ‘embeddedness’. For Partha, it is no longer sufficient for economists to view nature as something separate from human activity. To understand and model our use of natural resources with precision, it is vital that economists see human beings – as well as our accumulation of physical and human capital – as contained within nature.

Measurement is also an important issue. Until economists and policy-makers are able to find accurate ways to track the effects of economic activity on the natural world, it will be very difficult to price anything accurately. How will we ever know the true costs or benefits of a given investment without having a clear picture of the way that such an investment alters or shapes the natural environment around it?

For example, if developers in Sri Lanka want to build a shrimp farm on the coast, any economic benefits in terms of jobs, trade and profits must be weighed against the destruction of the immediate area around the farm. To build the facility, mangroves will need to be removed and an area of open water contained. Not only will this take away a natural filter for the region’s seawater, but it will also reduce the availability of nursery space for native fish, birds and insects to breed and lay their eggs.

As a result, to gain a complete picture of the economic costs and benefits of such a project, it is important to understand the complex network of relationships between the sea, wildlife and plants. Analysing projects simply by looking at human factors, such as income and profit, overlooks numerous other issues, giving a murky and incomplete picture of potential economic or social gains.

How should economists change the way they think?

For both Diane and Partha, embedding nature into economics is not about tearing up the rulebook. Correctly accounting for the value of the natural world does not mean doing away with economic orthodoxy.

As Partha put it during the conversation, as economists ‘we have inherited a language created by some of the most extraordinary minds of the past century… but we are misusing it.’ Embedding nature into economics is about a methodological re-orientation, not a revolution.

In fact, traditional economic thinking can help to clarify our understanding of the climate and ecological crises, if well deployed. Using a framework of scarcity of resources, for example, shows that as natural capital is depleted, its relative price increases. This means that the true cost of any activities that further reduce the stock of natural capital is set to grow continually. According to the same analysis, this implies a ‘negative discount rate’ – our forests, seas and marshlands become more and more valuable to future generations.

So, rather than viewing economics as a discipline at odds with protecting the environment, its tools should be turned to new tasks. The valuable lessons of asset management, discounting and resource optimisation – when combined with granular data informed by ecology and biology – can allow policy-makers to take a holistic view that captures the economic, social and environmental costs and benefits of different interventions. To view these decisions with maximum clarity requires using the methods already at our disposal, not rejecting the knowledge accrued over the last few decades entirely.

What next?

Towards the end of the discussion, Diane questioned the level at which governments will need to intervene to embed nature into economics. How much should be left to firms and households? Can individuals be trusted to do the right thing and protect the natural world? In a situation with missing markets and externalities (such as pollution), normally it is thought to be the role of the state to ‘correct’ the problem with policy.

To this, Partha concluded by claiming there is no ‘one-size-fits-all’ framework to follow. Different groups have different ways of managing their local environments, and we cannot assume that the ecological and climate crises will play out in a uniform manner.

Where appropriate, decision-making should be ceded to local communities who understand the challenges they face. Community is as important as technology, governance and monetary incentives when it comes to creating sustainable systems that cause minimum harm.

Social capital, therefore, is the final piece of the puzzle. Networks of people – from the local level all the way up to multinational organisations – are vital if nature is to be embedded successfully into economics.

These community bonds stretch to future generations too. As Partha reflects in the review, ‘if we care about our common future and the common future of our descendants, we should all in part be naturalists’. To care for each other, therefore, is to care for the natural world – there can be no economy without it.

Where can I find out more?

• The Economics of Biodiversity: The Dasgupta Review: The full report for HM Treasury is available online, together with an abridged version and a summary of headline messages.
• This article on the University of Cambridge website summarises and reflects on some of the review’s main findings.
• This interview with Leslie Hook for the Financial Times provides more of Partha Dasgupta’s reflections on the review.
• The second edition of our printed magazine – ECO – focuses on the economics of the climate crisis and is available to read online.

Who are experts on this question?

• Matthew Agarwala
• Diane Coyle
• Partha Dasgupta
• Cameron Hepburn
• Cristina Peñasco
• Dimitri Zenghelis

Author: Charlie Meyrick

Picture by Damocean on iStock

The post #RES2022: Why should economists care about biodiversity? appeared first on Economics Observatory.

That is because institutions – whether they are regulatory regimes, legal frameworks, fiscal policies, or trade agreements – set the ‘rules of the game’ for business. Firms configure themselves to optimise performance within them. But unlike a single fiscal, legal or regulatory change, a referendum on independence brings the uncertainty of possible wholesale change.

Ultimately, the decisions that business leaders make at an individual firm level – whether to invest, divest, consolidate, grow, and whether to enter or exit a business, market, sector or industry – cumulate and amplify to have a profound impact on local, regional and national economic performance.

How business leaders make sense of such uncertainties, identify the risks and opportunities that they present, and ultimately act at a micro level has implications for short- to medium-term prosperity at a macro level. Establishing how they make decisions under conditions of constitutional uncertainty is therefore critical to understanding wider economic performance and prospects.

How do business leaders make decisions under conditions of uncertainty?

Decision-making under conditions of uncertainty generally, and political uncertainty specifically, has been an area of economic inquiry for many years. Research has often focused on pro-active versus uncertainty avoidance strategies when there is policy or regulatory uncertainty. Depending on whether such decisions are viewed as an opportunity or risk, investments might be delayed or pre-empted (Bernanke, 1983; Bloom et al, 2007).

Evidence from studies of responses to regulatory uncertainty and changes of policy have been mixed (Doh and Pearce, 2004; Dutt and Joseph, 2019). When facing a significant policy or regulatory change, many businesses adopt a ‘wait-and-see’ position (Holburn and Zelner, 2010; López-Gamero et al, 2011; Marcus and Kaufman, 1986; Yang et al, 2004).

But other research indicates that this is not always the case, particularly where decision-makers identify a ‘first-mover-advantage’ – whereby a firm can benefit by acting before its competitors (Aragón-Correa and Sharma, 2003; Carrera et al, 2003; Hoffmann et al, 2009; Marcus et al, 2011). Some businesses may also come under pressure from external parties – such as investors and financial analysts – who pressure decision-makers into addressing uncertainties that may affect future performance (Wiersema and Zhang, 2011).

Some research also shows that strategies to deal with uncertainty will vary depending on whether the uncertainty is likely to yield slow continuous change, rapid high velocity change or uneven, discontinuous change (Doh and Pearce, 2004).

Constitutional uncertainty falls into the last category as it brings the prospect of disruption to multiple institutions simultaneously and change to the rules of the game for business (good or bad).

Suffice to say, there is relatively limited research on the impact of independence movements on business behaviour. Seminal studies of the economics of secession have focused on such issues as the economic determinants of secessionism, the political economy of secessionism and regional economic inequalities (for example, Collier and Hoeffler, 2006; Griffiths, 2014; Horowitz, 1985; Sambanis and Milanovic, 2001; Sorens, 2005).

Studies of business more specifically have tended to focus on voting preferences. They note that large businesses tend to oppose significant constitutional change, while smaller businesses are more inclined to support it (Dion, 1995; Gagnon and Lachapelle, 1996; Lange, 1998; Lynch, 1998; Medina and Molins, 2014).

Yet others have argued that the size of a business is ‘merely a surrogate for several things poorly understood’ (Darnall and Edwards, 2006). For example, research shows that other characteristics, such as ownership structure, may have greater explanatory power of why certain strategies are adopted over others in specific circumstances (Darnall and Edwards, 2006; Mascarenhas, 1989).

The Scottish independence referendum and business

The 2014 referendum on Scottish independence provided an opportunity to investigate how business leaders make sense of the uncertainties created by such votes.

One study – based on interviews with 75 leaders of businesses with a significant economic footprint in Scotland – found that around 90% reported uncertainty associated with the independence debate (MacKay, 2013).

The interviewees represented sectors such as business services, electronics and technology, energy, engineering and manufacturing, financial services, food and drink, and life sciences. They were asked whether they faced any uncertainties related to the constitutional questions, if they perceived the independence referendum to be an opportunity or a threat, and, as a proxy for decision-making, whether they were making contingency plans for different outcomes.

In addition to the reports of overall uncertainty, in 2014, these business leaders were more readily able to identify risks than opportunities. The risks were most pronounced in large, publicly traded companies with head offices in Scotland, and for which trade with the rest of the UK was important.

For these companies, the prospect of being regulated in a jurisdiction outside where most of their business took place, the question of what currency would be used, complexities around tax, employment and access to the European Union (EU) market were most commonly cited.

It was these businesses, often prompted by pressure from shareholders or customers, that were most likely to be putting in place contingency plans (for example, moving their ‘brass plate’ elsewhere or setting up alternative supply chains).

Participants from large and medium-sized companies that were privately owned were also likely to emphasise the risks of independence over opportunities. But without the pressure of being publicly traded, they did express a greater willingness to absorb any short- to medium-term downside risks. Partnerships, given their management structures and diversity of views, were less likely to express strong views either way.

Participants from large subsidiaries of global companies were most likely to emphasise their experience of working across multiple jurisdictions. Such companies were more likely to rely on business continuity plans already in place than to initiate contingency planning specifically related to the independence debate.

For these participants, decisions about whether to invest, divest, consolidate or grow, and whether to enter or exit a business, sector or industry in Scotland were closely connected with the reasons that they were invested in the first place. For these participants, the overall business and trading environment that emerged following a referendum vote was also an important consideration.

Participants from businesses whose customers, labour and supply chains were primarily in Scotland or global were more sanguine about the prospects of independence than those that had significant trade with the rest of the UK.

Even within industries such as financial services, variations in participants’ responses were divided along such lines. For example, a hedge fund headquartered in Scotland but with a global customer base and investment profile may have been less concerned about the risks posed by the prospect of independence than a retail bank or insurer whose customers were primarily in England.

Half of the participants who took part in the study were unable to identify additional opportunities that independence might bring beyond those already available.

Of those participants that did identify opportunities arising from the constitutional debate, only 10% emphasised opportunities over risks. These participants tended to be from medium-sized businesses with a significant proportion of their trade being either in Scotland or global.

Opportunities tended to be more specific to their business, such as the prospect of dispensing with an adverse licensing fee controlled by the UK government or the possibility of greater research and development support from an independent Scottish government, rather than more general opportunities that might arise from an independent Scotland. In these instances, the opportunity to be able to influence government in a smaller country was frequently cited.

The interviews conducted for this study add granularity to survey findings conducted at the same time. Other surveys in 2013 and 2014 – conducted in partnership with the Scottish Chamber of Commerce – found that the main uncertainties listed by the 759 respondents included business and personal taxation, regulation, currency and Scotland’s relationship with the EU (Bell and McGoldrick, 2014).

Half of the participants in the study were able to identify some associated opportunity with independence, including policies more appropriate for Scotland, improved business support from government and close identification with the Scottish brand.

But strikingly, only 4% of respondents identified business growth as an opportunity, and 47% couldn’t identify any opportunities at all. Of the 24% of business that have a risk register, only about half listed the constitutional question, and these businesses tended to have their trade in the rest of the UK or EU.

Indeed, along similar lines, analysis of a longitudinal panel of business investment in 3,589 Scottish firms in the lead-up to the 2014 referendum found that listed firms, firms on the border with England, firms that are financially constrained or whose investments are likely to be irreversible had greater sensitivity to the political and policy uncertainty generated by the independence debate (Azqueta-Gvaldon, 2020).

Echoes of the Scottish independence referendum in the Brexit debate

Findings from the study of business attitudes and perceptions during the Scottish referendum shed light on the responses to industry-led surveys ahead of the referendum on the UK’s membership of the EU in 2016 (see Figure 1).

Surveys of industry bodies with membership drawn from predominantly larger businesses (such as the Confederation of British Industry) tended to find more negative attitudes to leaving the EU than those with membership drawn from smaller firms.

Figure 1: Business attitudes towards the EU referendum, 2016

Source: Surveys conducted by the Confederation of British Industry (March 2016); British Chambers of Commerce (May 2016); Institute of Directors (May 2016); Federation of Small Businesses (September 2015); British American Business (March 2016).

Digging into a survey of 2,231 firms conducted by the British Chambers of Commerce in May 2016 helps to explain why.

Businesses exporting to the EU were much more likely to be in favour of remaining part of it (62.1%), while that figure dropped to 46.7% for those that only export to the rest of the world. Only 30.7% of firms that sell to the EU were biased towards leaving, while that figure increased to 50.1% for those that only export to the rest of the world.

Of non-exporters, 42.8% were inclined to vote to remain in the EU, while a slightly higher 46.4% expressed support for leaving. It was also non-exporters who were most inclined to respond that they didn’t know whether to opt for remain or leave, at 10.2%.

Evidence from the Brexit debate supports the findings reported here: that it is not so much the size of the business that is important, but how they are structured and where they have significant business activity.

What can we learn from Brexit for any future debate on Scottish independence?

In January 2021, the UK exited its transitional membership of the EU’s customs union and single market. While the effects of the Covid-19 pandemic have complicated assessing the impact of Brexit on UK economic growth, exports and imports between the EU and UK fell sharply in 2020: by 14% and 19% respectively. This was even more pronounced between the fourth quarter of 2020 and the first quarter of 2021, with exports falling by 18% and imports by 25% (Ward, 2021).

Evidence from the Bank of England and the National Bureau of Economic Research suggests that the Brexit process, and uncertainty about future outcomes, have also depressed business investment and productivity. This has resulted from, amongst other factors, the culmination of a multitude of firm-level decisions.

The reasons for this drop will become clearer over time, but even with the UK-EU Trade and Cooperation Agreement (TCA) between the EU and UK covering goods (but not services), it has created border frictions.

Indeed, according to analysis by the Office for Budget Responsibility (OBR), in the longer term, both imports and exports will be around 15% lower than had the UK remained an EU member. Similarly, productivity will be about 4% lower due to non-tariff barriers compared with if the UK had remained an EU member.

Given that many new trade agreements between the UK and countries outside the EU largely replicate the agreements that the UK had as an EU member, forecasts suggest that, as with the UK-Japan Comprehensive Economic Partnership, these will be largely immaterial for GDP growth (OBR, 2021). Businesses’ perceptions about the impact of leaving the EU on market access have therefore largely been borne out in practice.

Wider economic performance is based, in part, on business leaders’ perceptions and the decisions that stem from them. The survey findings reported here are largely consistent with research showing that uncertainty can influence business decision-making, as investments are deferred until future outcomes become clearer.

It’s not necessarily all bad news either. Government provision of tax incentives and the need to upgrade assets neglected due to the uncertainty created by the Brexit process has led economists to forecast a strong domestic recovery for business investment following the transition period to a new UK-EU trading relationship (Romei, 2021). This suggests that the deferral of business investment due to political uncertainty can rebound once such uncertainty is resolved.

Yet Brexit also shows that the realities of increased complexity of exporting to European countries, even with goods covered by the TCA – the non-tariff barriers – are likely to dampen exports. This is because the costs for businesses begin to limit the benefits and opportunities of trading in some areas.

With the end of the Brexit transition period, compliance with relevant ‘rules of origin’, EU standards, regulatory checks and differing authorisations between EU countries (which ‘passporting rules’ once circumvented) all add costs to businesses.

As the implementation of the TCA comes into force in 2022, with full border checks in the UK, and businesses have had time to adjust with reconfiguring supply chains and labour, the full impact of the Brexit will become clearer. Some initial surveys of business leaders suggest that in the short term, a third of businesses that trade with the EU have experienced declines in trade (Institute of Directors, 2021).

Indeed, recent data published by the world trade monitor appear to show British exports underperforming the rest of the world (CPB, 2022). This has led the OBR to remark in their economic and fiscal outlook that trade flows of exports and imports were ‘lagging behind the domestic economic recovery’, and they suggest that ‘Brexit may have been a factor’ (OBR, 2022, p. 62).

The experience of Brexit gives an indication of some of the challenges and opportunities that might arise for business and the economy in the event of a Scottish vote for independence from the UK. While the UK is and will continue to be Scotland’s largest trading partner irrespective of independence, the prospect of rejoining the EU presents another complex dimension to the debate.

Conclusion: the past as prologue?

Research looking at business perceptions and decision-making in the lead-up to the referendum on Scottish independence in 2014 shows that factors such as ownership structures, location of key markets, as well as those of labour and supply chains were key determinants in how participants made sense of the uncertainties presented by the constitutional debate (MacKay, 2013). These also contributed to whether they perceived there to be opportunities or risks associated with independence.

With a Scottish population of around 5.5 million people, and a population of approximately 61.5 million in the rest of the UK, large businesses in Scotland were likely to have 80% or more of their UK business outside Scotland. Government data also routinely suggest that 60% or more of Scottish exports at present go to the rest of the UK, largely reflecting the difference in the size of the respective markets.

The factors shaping perceptions of uncertainty, and whether uncertainty presents opportunities or risks are unlikely to be significantly different in a second referendum. Business behaviour and decisions around whether to invest, divest, consolidate or grow, and whether to enter or exit a business, market, sector or industry are clearly more nuanced than simply attributing such outcomes to the size of a business.

Some circumstances in Scotland have clearly changed since 2014, particularly with Brexit, but also in terms of the sectors attracting investment. Given these changed circumstances, how factors shaping perceptions of uncertainty interact might conceivably lead to different perceptions of opportunity and risk in a second referendum.

It is likely that the rest of the UK will continue to be Scotland’s most important trading partner for the foreseeable future. The UK economy, it is important to emphasise, is highly integrated. The impact that Brexit may have on business attitudes towards the opportunities and risks posed by the prospects of a second referendum remains to be seen. It is likely that patterns would not be significantly different.

In the short term, listed firms and firms with significant trade in the rest of the UK will be most anxious and prone to defer investment or move part or all of their operations in the event of a ‘yes’ vote. Subsidiaries of multinational companies, privately held firms with the majority of their trade in Scotland, firms with global markets or those that see growth opportunities in Europe might be comparatively more relaxed.

The lessons from the Brexit negotiations and the challenges and opportunities we have experienced throughout the process will also undoubtedly play an important role in shaping the views of business.

Where can I find out more?

• Centre on Constitutional Change.
• Brexit analysis: Office for Budget Responsibility.
• Brexit uncertainty is taking a toll on the British economy: National Bureau of Economic Research.

Who are experts on this question?

• John Vickers, University of Oxford 
• Nicholas Bloom, Stanford University
• John Van Reenen, London School of Economics
• Ronald MacDonald, University of Glasgow

Author: Brad MacKay

Editors' note: This article is part of our series on Scottish independence - read more about the economic issues and the aims of this series here.

Photo by Travelling Light on iStock

The post Scottish independence: how do business leaders view risk and opportunity? appeared first on Economics Observatory.

How do these developments influence the way a central bank might operate in an independent Scotland? How would they affect an independent Scotland’s choice of currency?

What is the traditional role of the central bank?

A central bank has broad areas of responsibility. It has several day-to-day routine functions that it undertakes, including providing liquidity for the banking system, currency issue and management, and banking services to the government.

In addition, central banks typically have two main policy responsibilities:

• Monetary policy: typically involving the setting of short-term interest rates, but in recent years moving beyond this, with a view to achieving an inflation target.
• Financial stability: most importantly as the ‘lender of last resort’ for the liquidity needs of solvent commercial banks that find themselves short of liquidity. This can also include responsibility for financial supervision to the extent that this is not covered by a separate agency.

What are the central bank options for an independent Scotland?

An independent Scotland would face an important choice about its currency arrangements (MacDonald, 2022). The choice of currency would then have implications for how the country’s central bank should be designed and the functions it could undertake.

Under the option of a formal currency union – whether with the rest of the UK or with the European Union (EU) – an independent Scotland would share a central bank with the other member(s) of that union.

The shared central bank – the Bank of England or the European Central Bank (ECB) – would have responsibility for inflation and for lender of last resort activities across the currency area (including Scotland). In the case of the euro area, this would also involve potentially working with local national subsidiaries. Members are represented in the decision-making of the central bank, as on the ECB’s Governing Council.

In the 2014 independence referendum, the Yes campaign’s proposed policy was for a formal currency union with the UK. No agreement was reached, but the Scottish government envisaged having Scottish representation in the governance of the Bank of England, which would have responsibility for central bank policy in Scotland as well as for the rest of the UK.

A second option – an informal currency union using sterling – was proposed by the Scottish National Party’s Sustainable Growth Commission. In this case, there would be no separate Scottish monetary policy, but a Scottish central bank might still be required to undertake a number of functions related to managing the government’s accounts and currency reserves. It would also be at the centre of the Scottish payment system.

The Bank of England’s role in this case would be less clear-cut; indeed, it may assume no role. Most importantly, the Bank of England’s responsibilities towards Scotland in such a scenario would be decided entirely by the authorities in the rest of the UK. In normal economic conditions, it would be unlikely to pay specific attention to Scotland in deciding policy. An example of this can be seen in the United States where the Federal Reserve has no responsibility for economic conditions in Ecuador or Panama – two countries that have informally adopted the US dollar.

To the extent that Scotland’s economy is close in nature to the rest of the UK (it is part of what economists call an optimal currency area or OCA), this may not matter for some aspects of central bank policy. In such a situation, for example, and at least in the short term, UK interest rates would be appropriate to Scotland. If the UK is not an OCA, then a central bank setting interest rates only for rest of the UK would not be appropriate for Scotland.

In an informal union with the rest of the UK, a Scottish central bank would not have the capacity to fulfil all of the responsibilities of a central bank to any meaningful extent (Armstrong and McCarthy, 2014). In particular, there would be reduced capacity to act as lender of last resort to the banking system or undertake ‘unconventional monetary policy’ involving the purchase of financial assets (see below). This is because, while it might be able to build up some reserves to help with this over the long term, ultimately this capacity depends on the ability of a central bank to create (or ‘print’) the domestic currency. A Scottish central bank could not do this in an informal currency union.

The Bank of England may choose, with the support of UK elected policy-makers, to have some responsibilities – perhaps indirectly – towards an independent Scotland’s economy or banking system. An informal currency union does not preclude agreement between two countries about central banking, and the lack of agreement does not prevent any subsequent support.

Central banks often reach agreements between themselves. The UK government participated in the bailout of Ireland in 2010, despite not being a member of the euro area. What these agreements might look like, and the circumstances under which they might be implemented, are uncertain, as is any agreement.

Under the third option – a separate Scottish currency – an independent Scotland would have its own central bank with the full capacity to perform all the functions discussed above. This central bank would be expected to be accountable to the Scottish government and to the Scottish parliament, including with regard to the issues discussed below.

With this option, monetary policy would be set for the needs of Scotland alone, although decisions would have to take account of international influences. Crucially, in contrast to other options, this policy would allow an independent Scotland to create or print its own currency. This enhances the lender of last resort liquidity support available to Scottish banks and the ability to perform unconventional monetary policy, in particular the quantitative easing (QE) that has become increasingly common since the global financial crisis of 2007-09.

How have recent developments affected the potential role of a Scottish central bank?

Even before the Covid-19 crisis, central banking was entering a period of change (Goodhart, 2010). The response to the pandemic and parallel debates around the role of central banks have increased their economic and political importance. This has the potential to increase the range of central bank capacities available were Scotland to have its own currency.

The most important change has been the increased influence of central banks on government borrowing through the buying of government bonds as a part of unconventional monetary policy. Central banks are responsible for monetary policy; governments are responsible for fiscal policy. The separation of responsibility for monetary and fiscal policy is fundamental to present-day central banking. But this separation is never absolute.

Monetary policy, through the setting of short-term interest rates, has always had an influence on governments’ borrowing costs. When short-term interest rates are low, these are usually low. When rates are high, this will generally increase the interest rate on government bonds (Baker et al, 2016). Similarly, the economic impact of fiscal policy will influence a central bank’s monetary policy decisions. The buying and selling of short-term government bonds has also long been a normal part of monetary policy.

Unconventional monetary policy, most commonly QE, involves central banks seeking to support increased economic activity by buying financial assets, including government bonds. With QE, the lines between monetary and fiscal policy have begun to blur significantly, but in the UK stopped short of ‘monetary financing’ (McMahon and Macchiarelli, 2020).

Monetary financing is when a central bank directly finances the government’s fiscal deficit – the gap between public spending and income from tax and other revenues. Permanent monetary financing is expected to cause inflation. It is, for example, banned under the treaty that established the ECB.

But recent research from the International Monetary Fund (IMF) argues that modest monetary financing in countries with a track record of responsible economic policies does not raise inflation expectations (Agur et al, 2022).

During the Covid-19 crisis, central bank support for government borrowing increased markedly, even when compared with previous episodes of QE. In the UK, for example, government borrowing was at its highest since the Second World War.

Some economists argue that QE during this time made the Bank of England effectively the ‘buyer-of-last-resort’ (albeit by matching government issuance with buying in the secondary market rather than directly financing the government).

Investors in the market for UK government bonds (gilts) have doubted the government’s ability to borrow to finance its needs in this period without the Bank of England buying gilts (Financial Times, 2021). From March 2020 until November 2021, the Bank of England purchased over £400 billion of gilts, almost exactly matching the UK government’s net cash requirement – a measure of its borrowing requirement – month by month.

The Bank of England’s actions are a temporary response to an unprecedented health and economic emergency. Additional gilt purchases can stop as monetary policy dictates, and the Bank of England retains the option to sell the gilts it holds over time, or not to buy any more as those they hold are repaid.

This partly underpins the argument that this is not monetary financing, as it is not permanent. But, 13 years on from the start of QE, the Bank of England has remained a significant holder of gilts and QE will continue to be part of central banks’ policy tool kit.

In a formal currency union, QE can work across member countries. During the pandemic, the ECB has created euros to purchase members’ government debt, keeping borrowing costs unusually low. An informal currency union would not have any such arrangement, and a Scottish central bank would have no capacity to create sterling to support Scottish government borrowing (and therefore expenditure).

This is not to say that an independence Scotland would be unable to borrow at all, but we cannot be confident as to how much it would be able to borrow in an informal currency union.

A new Scottish currency would mean that Scotland would have a central bank able to create money to purchase government debt, as many governments have done during the pandemic.

Policy would still have to focus on inflation, and the value of the currency and would depend on the new central bank establishing a reputation for policies perceived as responsible (Besley and Dann, 2022). Once this is achieved, a Scottish currency is likely to allow the greatest crisis-related government expenditure.

How else are central banks politically important?

Are there other policy options for an independent Scotland’s central bank? Recent developments suggest that central banks are increasingly considering policy areas that would be important for an independent Scotland: inequality, house prices and climate change.

There remains a debate among central bankers themselves as to the extent to which they should be involved in such issues (Tucker, 2018). The concern here is not that debate, but the implications for Scotland’s currency options.

With its own currency, Scotland would decide whether (and, if so, how) these issues should be part of its central bank’s concerns. In a formal currency union, these debates would be part of a discussion across all countries. In an informal union, the Bank of England and the Westminster government would decide.

Inequality

There has been a debate almost since QE was introduced as to its distributional consequences. QE pushes asset prices higher, as is in part its intention, and this price appreciation favours the holders of these assets.

But financial assets are held disproportionately by the wealthy and, as a result, QE risks increased wealth inequality. Against this, by supporting economic activity, the incomes of the poorest, who are most vulnerable to recession, are supported, with positive implications for income inequality (Bunn et al, 2018).

Inequality has implications for the performance of an economy, justifying central bank attention, but the nature and extent of central bank actions on inequality are also a political issue.

Housing

In February 2021, the New Zealand government required its central bank to consider house prices in its decisions (Powell and Wessel, 2021). This was prompted by widespread concern about rapidly rising property prices.

The debate around this move is linked to a broader debate about whether central banks should act to address asset price inflation more generally, including seeking to address bubbles in the equity market, for example. The Bank of England already considers house prices in the context of banking regulation and financial stability, and the Reserve Bank of New Zealand may do similarly. But going further, a policy focused on the rest of the UK would have important consequences in Scotland.

Climate change

ECB president Christine Lagarde has been particularly vocal about the need for central bank policy to consider climate change. Arguments for doing so include risks to financial stability from the damage caused by rising temperatures. Central banks have powerful tools in this regard. For example, climate-related risks to banks and insurance companies can be regulated more aggressively.

In addition, as part of QE, many central banks buy bonds issued by companies, supporting their prices. Excluding fossil fuel companies from such programmes could have a significant impact on their borrowing costs.

No action would also be an influential decision. If central banks buy an equal share of the corporate bonds in the market, heavy emitters of greenhouse gases benefit most, as they issue higher volumes of bonds.

Conclusions

A Scottish central bank would not only be key to monetary policy but could also be involved in some of the most important political issues that an independent Scotland would face. Whether Scotland decides on these issues, or if decisions are taken elsewhere, is closely tied to its currency choice.

An independent Scotland would need an independent central bank, regardless of the functions that the choice of currency allows. This would be a requirement for market participants to have confidence in policy, especially if Scotland has its own currency.

Yet, central bank independence is never absolute. Decisions by – and about the institutional design of – central banks are inherently political, rather than simply technical, because they have distributional consequences. The decision on what powers the central bank should have, and therefore the currency choice, is as much political as economic.

Where can I find out more?

• Unelected power: The quest for legitimacy in central banking and the regulatory state: Book by Paul Tucker on the role of central banks and independent regulators,
• Currency options for an independent Scotland: Paper by John Kay for a Financial Times panel.
• Monetary finance: Do not touch, or handle with care? IMF paper.

Who are experts on this question?

• Paul Tucker
• Ronald MacDonald
• John Kay

Author: Iain Hardie

Editors' note: This article is part of our series on Scottish independence - read more about the economic issues and the aims of this series here.

Image credit: K Neville on iStock

The post Currency choice of an independent Scotland: what role for the central bank? appeared first on Economics Observatory.

Despite public concerns about the environment reaching record highs (YouGov, 2021), these claims should be taken seriously. Those supporting the pursuit of net zero need to present it as key to bringing down energy bills, creating new jobs and improving livelihoods across the country, alongside the goal of reducing our reliance on fossil fuels.

What does the evidence tell us about net zero in a cost of living crisis?

Households in the UK are currently facing the biggest decline in real incomes since the mid-1970s (Corlett and Try, 2022). Inflation had reached its highest rate in decades even before the Russian invasion of Ukraine. Wages are stagnating and tax contributions are increasing.

Rising gas prices also caused 25 energy companies to go bust between September and December 2021 alone. Ofgem – the UK’s regulator for electricity and gas markets – has removed the energy price cap, meaning that bills are likely to increase by 54% from April.

This has become an era of rising food prices, panic-buying petrol and prohibitive energy bills. Worryingly, this is likely to get worse in the autumn – with Russian aggression in Ukraine dramatically changing who supplies gas and how much is paid for it.

A new energy strategy is needed. The UK government argues that decarbonisation is a key policy and an important part of its post-Covid-19 economic strategy. But recent months have seen increasing dissent about these policies. In parliament, an informal Net Zero Scrutiny Group has been formed by some Conservative MPs.

Prominent members include Craig Mackinlay MP (a former deputy leader of the UK Independence Party, UKIP) and Steve Baker MP (who chaired both the European Research Group and the Covid Recovery Group). There is a possibility that net zero will be dragged into a new culture war that may derail decarbonisation (Taylor and Horton, 2022). This is an emergent narrative, but three claims are currently evident:

• Net-zero policies are too expensive, particularly in a cost of living crisis: Rising energy prices are blamed on net-zero policies; the scale of decarbonisation is questioned; and energy efficiency measures are presented as disproportionately affecting poorer households.
• Net-zero policies are undemocratic: Former UKIP leader Nigel Farage has launched a campaign called ‘Power not Poverty’, calling for a referendum on net zero.
• The UK should start extracting its own fossil fuels: Many have called for a resurrection of fracking of shale gas in the UK. Others have called for the expansion of drilling for oil and gas in the North Sea. Boris Johnson has hinted at the possibility of the latter.

Such claims are questionable for several reasons. First, high energy bills today are mostly the result of higher prices – caused by cold winters, increased demand and ever higher wholesale prices. In fact, these prices are likely to have increased further as a result of previous governments’ slowing decarbonisation and scrapping climate policies. These policies are estimated to have increased total energy bills by £2.5 billion since 2013 (Evans, 2022).

Second, the Conservative Party’ 2019 election manifesto pledged net zero by 2050. It was elected with 43.6% of the vote (and over 13.9 million votes). In that election, Channel 4 hosted the first climate change election debate – attended by the leaders of Labour, the Scottish National Party, the Liberal Democrats, the Green Party and Plaid Cymru. Neither Nigel Farage nor Boris Johnson took part.

Support for decarbonisation is not limited to certain political constituencies either – over two-thirds (69%) of those living in ‘red wall’ seats, which supported Brexit in 2016 and voted Conservative in 2019, support net-zero policies (Conservative Environment Network, CEN, 2021).

Third, the fracking industry is likely to provide only a quick fix, rather than growing large enough to have a meaningful impact on energy bills (Bradshaw et al, 2014). The installation of new oil rigs in the North Sea is the opposite: it can take years from lease to production.

What does this mean?

Popular support for net zero remains high – with 53% of those polled wanting the government to do more to tackle climate change (CEN, 2021). Yet as decarbonisation accelerates, new fault lines appear.

The phasing-out of petrol and diesel cars from 2030 onwards has been labelled as ‘Stalinist’, and there was noisy opposition to low-traffic neighbourhood schemes in cities last summer. Rural communities, which are reliant on cars to get around, will be hard hit by petrol prices going up. Indeed, the gilet jaunes movement in France that began in 2018 stems from just such a challenge (Mehleb et al, 2021).

Decarbonisation is a complex case to make to citizens – asking for dramatic change today for outcomes that many of us may not see. In a cost of living crisis, it pits two key priorities against one another. The economy and the environment are two of the top three policy priorities for the UK public, along with health (YouGov, 2021). Rising prices and energy insecurity will increase the tension between the two.

Popular support for net zero could be shored up. Net zero is not Brexit. In the 2016 referendum on the UK’s membership of the European Union, over-65s were twice as likely to vote ‘Leave’ than those under 25 (Moore, 2016). Today, while climate guilt and anxiety are emotions primarily felt by younger generations (Swim et al, 2022), belief in climate change is rising at similar rates across all age groups (Milfont et al, 2021). Nor is net zero a partisan issue: 77% of Conservative voters voice concerns about climate change (CEN, 2021).

The government needs to invest in energy efficiency measures rapidly and dramatically. Addressing the current crisis should not just be about expanding energy production, but also about addressing energy demand – and in particularly leaky, energy-inefficient homes. The UK has some of the least energy-efficient housing stock in Europe.

Rising energy bills will hit those on the lowest incomes the hardest: they spend up to three times as much of their earnings on energy bills as the richest households in the UK (Resolution Foundation, 2021). Fuel poverty has a particular geography, with many of the homes affected found in the Midlands and the North of England (Energy and Climate Intelligence Unit (ICIU), 2022).

Politically, these households are significant: many of the areas that will suffer most from this gas crisis – due to energy-inefficient homes – were marginal seats in the 2019 election (Grenville, 2022).

Investing in energy efficiency makes people’s lives better and warmer. They will be able to have the heating on for longer at lower cost. Households may see savings of up to £500 from better insulation (Energy Efficiency Infrastructure Group, EEIG, 2022).

Other benefits include improved air quality, reduced respiratory and heart illnesses, improvements to mental health and a reduced number of winter deaths (International Energy Agency, IEA, 2022).

This will also transform local economies. For the energy efficiency industry to change this may come to support over 140,000 jobs in England alone by 2030 (Local Government Association, LGA, 2020). These jobs will be highly important in regions where jobs are at risk from decarbonisation – such as in the Yorkshire and Humber region where up to 360,000 jobs are currently based in carbon-heavy industries (Diski, 2021).

The UK government has dedicated some funds to energy efficiency – including the green homes grant (which was scrapped after six months) and funds for improving energy efficiency in public buildings and social housing. This is merely the start.

Urgent climate action is still required for the UK to meet its net-zero target (Authority of the House of Lords, 2022). While some would have us believe that net zero is the cause of our problems and has no place in a cost of living crisis, the opposite is true. Far from abandoning net zero, it should be expanded and accelerated to allow for warmer homes and new jobs, and to end our dependence on fossil fuels.

Where can I find out more?

• Carbon Brief has analysed how the slowing of decarbonisation policies has added £2.5 billion to energy bills in the UK.
• The Energy and Climate Intelligence Unit has published a report showing how households facing energy poverty – and the impacts of the energy price crisis – are disproportionately found in the North of England.
• The International Energy Agency has detailed the multiple benefits of energy efficiency programmes.
• Recent reporting by Helen Horton and Matthew Taylor in The Guardian provides important details on the politicians currently opposing net-zero policies.

Who are experts on this question?

• Ed Atkins
• Caitlin Robinson
• Kirsten Jenkins
• Neil Simcock
• Stefan Bouzarovski

Author: Ed Atkins

Image by WSS from iStock

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