Hamish McRae: These institutions are the best we've got, so let's not boo and jeer from the sidelines

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The Independent Online

The tension around this week's Hong Kong trade talks - or indeed last week's UN climate talks in Montreal and, in a slightly different way, the EU budget row - illustrates a strange mismatch of our world. On the one hand, the world economy is more global than ever before in human history. On the other, the institutions that helped create this global and very successful economy are weaker than ever before.

The World Trade Organisation, the centre of the Hong Kong talks, was, with the IMF and World Bank, one of the three global institutions created after the Bretton Woods Conference in 1944 to try and prevent the post-war world from plunging back into protectionism. (The WTO lay dormant for many years, with its predecessor, the General Agreement on Tariffs and Trade, acting as the trade-liberalising body.) The UN, meanwhile, was designed to preserve the post-war peace settlement, while the origins of the EU were - less explicitly - to bind the French and German economies together so they would not go to war again.

It is quite hard to appreciate the scale of the achievement. You could look at the increase of world GDP since 1945, but equally impressive is the spread of growth beyond the developed world, particularly to China and India. Between 1913 and 1950, the real GDP per head in China and India actually fell. In economic terms, the two suffered more in this period than developed countries. Since 1950, the GDP per head of China has risen tenfold and that of India nearly fourfold.

You can catch some feeling for this progress in the first two charts. Exports and foreign investment rose as a percentage of GDP in the years before World War I, only to fall back due to the war and the Depression. Now, however, the world has not only recovered the lost ground but progressed vastly beyond the previous peaks.

This recent burst towards a more global world economy has been driven largely by improved telecommunications and other aspects of the technology revolution. This has led to fears in parts of the developed world, particularly Europe, that it will be unable to compete against the "new" giants with their much lower labour costs. The fear is that not just manufacturing jobs will go, but service ones, too.

This issue was tackled in a paper last summer by Professor Nicholas Crafts of the London School of Economics - "The Death of Distance: what does it mean for Economic Development?" - and the graphs are taken from data in this paper.

Professor Crafts' view is that while the communications revolution will permit a large increase in trade in services, competition in services is not determined only by costs. Distance still does matter. He does not conclude, therefore, that the European welfare state is threatened by a "race to the bottom". While there will be more competition within Europe, the sheer size of the EU as a whole will mean it remains a magnet for capital. It can still to some extent justify a cost premium.

You can see the advantages of being physically and institutionally near your markets in the final chart. Distance matters not just for trade but for other economic interactions. Europe benefits by being physically close to world markets, while Africa suffers. Eastern Europe has, so to speak, moved closer to Western Europe since its institutions were aligned. Professor Crafts argues that were Zimbabwe somehow to be relocated to where Hungary is, it would see its income rise by 80 per cent.

If this should be encouraging, at least to Europeans, the fact remains that there is still a "drawbridge Europe" mentality. This reflects that this is an economic community of fairly similar nations, rather than a multilateral entity such as the IMF or WTO.

It is the weakness of those multilateral organisations that concerns Paul Volcker, former chairman of the US Federal Reserve Board, who is currently examining failures in the Iraq oil-for-food programme. He is particularly concerned about the lack of international co-operation over exchange rates. Speaking at St Peter's College, Oxford last week, he said: "As things stand, a likely development is the further regionalisation of currency markets. That works reasonably for countries that indeed have particularly close trading and financial relations with the US or Europe - or, looking ahead, China. It does not, however, solve the problem for many small and developing countries that have well-diversified markets. The danger is regional arrangements will tend to solidify, with political as well as economic implications. I don't think that is a world we want to encourage."

So the problem is not just weak international institutions; it is growing emphasis on a regional approach rather than a multilateral one. What is to be done?

We should be aware of the dangers of undermining the very institutions that have underpinned world prosperity. This is why it is so much in the interest of the world community that the WTO talks should stumble towards some sort of acceptable agreement this week. It is also why people who attack the WTO approach are forgetting their economic history and should be aware that it was the less-developed countries which were most damaged by the 1930s retreat into protectionism.

Then there is the issue of currencies. Sterling has been relatively stable in the past few years, more than the dollar, euro or yen. But even we have seen the pound move up from the $1.50s to nearly $2.00 and then back to the $1.70s in the past four years. Mr Volcker's view is some sort of return to the Louvre Accord, when the central banks had unpublished target zones for major currencies: "It seems to me the case is strong for co-operative arrangements among the major currencies, not to eliminate but to limit the volatility among them. The key problem is the absence of institutional structure to promote and oversee such an arrangement."

The important conclusion is that we have to work with what we have got. The WTO is the best institution to try to hold together the gradual progress towards a more liberal global trade regime. The UN is the best institution to try to choreograph agreement on actions to curb climate change. The EU is the best to bind together an increasingly fractious Europe. All these institutions are sub-optimal, as are the IMF and World Bank. But at least they are there.

Where there is no single institution, such as a World Currency Control Board, then we have to make do with as good a co-operation between the main central banks and finance ministries as we can sustain. That is probably harder than managing with a less-than-perfect institution. Remember that the Louvre Accord broke down, with the result that currency swings have been very evident in recent years, with all the damage that does to companies and countries involved in world trade.

We don't need to despair if any or all of these current talks break down. But we should not cheer or jeer. And we should be aware of the achievements of the past half-century and the role institutions have played in this.

The way we live now: working all hours, just like Trollope

It is that busy time of the year; all those things to be done. But have you noticed that a lot of people seem to be quite proud of being too busy? The better your job, the harder you work. So working hard is associated with high social status - exactly the reverse of the situation a century or more ago when rich Victorians showed their status by spending as much time as possible on leisure pursuits. But why the switch?

This conundrum is the subject of some research by Professor Jonathan Gershuny at Essex University, in a new paper "Business as a Badge of Honour". It is not just a question of changes since Victorian times. He has looked at the way time use has changed since 1961, employing surveys that ask people how they spend their day, both in paid work and in unpaid activities.

Aside from the social-status point, several other things emerge. One is that while time in paid work has declined, there has been a rise in unpaid work for men and a fall in that for women. Another point is that we are working more intensively; we have a lot less non-working time during the day.

But maybe the most important is that people with high human capital (economist-speak for good education, qualifications etc) have increased their paid-work time, vis-à-vis those with lower qualifications. Clearly, the importance of "human capital", as opposed to financial and other forms of capital, has risen and is probably still rising.

But why? The clue seems to be that a lot of the activities the Victorians did as leisure, we do as paid work: sports, politics, academic and arts activities and so on. Some of our best-paid jobs are those that would have been done as an unpaid vocation.

All this gives a fascinating insight into "the way we live now" - to borrow the title of Anthony Trollope's novel. But, come to think of it, was not Trollope, getting up at 5am to write 1,000 worlds before heading off to his job at the Post Office, an example of pretty much the same economic pressures as we see today?

He wrote for money, as had his mother, Fanny, and that eventually gave him more social status than being a senior civil servant. So maybe our society today is more like the early and middle Victorian period, driven by its hard-working professional class, than the softer and more self-satisfied image of the later years.