A brave new fiscal world

by Brigitte Granville*

Contemporary political economy has been serving up plentiful lessons for one of history’s core questions – about change and, especially, when and how any real change occurs. Or, if not lessons, then at least case histories (the raw material of lessons). The rich world, aka the advanced industrial democracies, lurches from crisis to crisis. There is nothing like the onset of a proper crisis to raise perceptions or expectations that the future must be ordered differently, and long-festering problems addressed. In Russia, this feeling was captured by the use of a stock phrase in the title of an epoch-defining film of the perestroika period – “we can’t go on living like this (tak zhit’ nel’zya)”; and the ensuing collapse of the USSR had as strong a claim as any event to qualify as a real change (if not ‘a change to end all changes’ as implied by Francis Fukuyama’s much travestied “end of history” tag).

However, as we contemplate the possible implications of the coronavirus pandemic and accompanying blows to economic growth and employment, scepticism about change may seem in order. After all, the generation-long experience since the Soviet collapse has been one of chronically recurring crises like violent squalls leaving, beneath the surface debris, all-too-familiar problems unresolved. There would be nothing new about such scepticism. In his L’Ancien Régime et la Révolution (1856), Alexis de Tocqueville argued that the Great Revolution of 1789 had changed little – “plus ça change.” Giuseppe Tomasi di Lampedusa’s historical novel The Leopard (1958) describes how whole states and ruling dynasties disappeared at the time of the unification of Italy in the 1860s. This episode had all the trappings of political upheaval but in many key respects the economic and social order remained unchanged. The maxim of the aristocratic hero of the novel Tancredi Falconeri summed it up: ‘If we want things to stay as they are, things will have to change’.

Nevertheless, some aspects of the economic policy response to the Covid-19 crisis may signify a more substantial shift than was seen after the last big shock – the Global Financial Crisis (GFC) of 2007. To start with what might seem a surface detail: in its 18 March report of a Zoom debate about the Biden Administration’s $1.9 trillion rescue package between two of the best known US macro-economists, Lawrence Summers and Paul Krugman, The New Yorker magazine highlighted Summers’s present position as an “outsider”. What a turnaround for this hitherto consummate insider!

One aspect of the critique of the “American Rescue Plan” as previously set out by Summers in the Washington Post was that this package might reduce the political headroom required for a different sort of fiscal effort that he strongly supports. This is materially larger government investment spending – on infrastructure, and particularly ‘green energy’, projects. As the next chapter in this saga may show, however, the Biden administration could equally well have established the political momentum required to give its mooted “Building Back America” proposals some chance of being enacted.

This, in any case, will be the decisive test of real change. Global output is now entering into its immediate post-pandemic bounce-back phase after last year’s ‘Covid’ recession. The question is what happens to the world economy after that recession-then-bounce-back episode is over and done with. Against the background of a ‘lost decade’ in which hopes of growth being driven by private business investment in response to market signals were disappointed, the only answer is government investment, creating incremental demand by raising employment and labour participation.  This will result in higher wages (because of worker bargaining power) and higher productivity (as firms invest in new equipment to offset rising labour costs).

A useful perspective here is to contrast the potential prospect of a new and more inclusive growth cycle post-Covid with what happened post-GFC. That previous recovery of the 2010s was lacklustre to put it mildly. It left many households with lower real disposable incomes and poorer job quality and security. In the OECD area, real wage growth fell well short of pre-GFC trends: average annual wage growth in real terms declined from 2.4% in Q4 2007 to 1.5% on average in Q4 2019.

The mediocre post-GFC recovery stemmed ironically from the authorities’ very efforts to improve the economy. Fiscal austerity was combined with ultra-loose monetary policy. Historically low interest rates degraded the quality of such growth as was seen in that post-GFC decade. The widening inequalities from asset wealth expanding on the back of QE, with the ‘trickle down’ effect largely limited to the creation of low-paid jobs in the hospitality sector, aggravated the scarring caused over a generation by globalization and technological change – hollowing out mid-skilled/paid jobs in rich countries. A minority in those middle brackets may have been able to up-skill, while the majority slid down the scale in income and status.

This loss of status and dignity for this squeezed middle class and the working poor must account – alongside the relentless pressure on material living standards – for the social and political backlashes on both sides of the Atlantic. The importance of social recognition was well brought out by the German philosopher Axel Honneth. The lack of social recognition is reflected in attitudes of detachment and disenchantment towards politics intensifying into a disgust and desire to break the system. This alienated section of society has simply lost all confidence that government can change anything and the result is a political landscape that is increasingly difficult to decipher. ‘Trump & Brexit’ are the most conspicuous symptoms of this problem, but continental Europe has seen its own versions – including the unprecedented ‘yellow vests’ (gilets jaunes) protest movement in France that has been a focus of my own recent work.

If the promise of genuine change in the wake of the pandemic may be taken seriously, it remains all too far from being a foregone conclusion. In Europe, for example, there are announced increased spending plans at both the EU and the national levels. There is so much to be done, from restoring crumbling infrastructure to rebuilding energy systems, installing digital technology backbones everywhere and training the workforce in digital technology. . . But are the bureaucrats capable of spending the money efficiently? Like many other economists who follow closely monetary and fiscal policy developments, I will believe it only when I see it.

As for the US, the country’s deep polarization remains a serious obstacle to the Biden administration’s ambitions. On both sides of the Atlantic, economic uncertainty and declining living standards have created internal tensions and fractures turning a large section of society in on itself – and away from a threatening and alien wider world. Unless trust and dignity are restored, overcoming widespread poverty and despair, these tensions will not go away.

*Brigitte Granville is Professor of International Economics and Economic Policy at the School of Business and Management, Queen Mary, University of London, and the author of What Ails France



Carney, M. 2021. “A new dawn for globalisation”. FTWeekend, 20/21 March 2021.

Di Lampedusa, G. (2007). The Leopard. New York City: Pantheon Books.

Granville, B. 2013. Remembering inflation. Princeton and Oxford: Princeton University Press.

Honneth, A. 2006. La société du mépris. Vers une nouvelle théorie critique. Paris: la Découverte.

Wallace-Wells, B. 2021. “Larry Summers Versus the Stimulus”. The NewYorker, March 18, 2021.

Was Benjamin Disraeli Britain’s first BAME Prime Minister? Or, why it is good that the BAME term has been scrapped.

by Sanghamitra Bandyopadhyay*

Was Benjamin Disraeli Britain’s first BAME (Black, Asian and Minority Ethnic) Prime Minister? Clearly not. British Jews are not understood to be BAMEs, in spite of being ethnic minorities and comprising less than 0.5% of the British population. British Jews are some of the largest individual contributors to UK’s GDP, having become prominent in law, politics, business, entertainment and academe.

This paradox is also evident when one identifies Rishi Sunak, Priti Patel, and Suella Braverman as BAMEs. As British Indians, they too are ethnic minorities, constituting just over 2% of the British population, but they don’t exactly constitute a portrait of economic or social deprivation. Neither do Britons such as Cush Jumbo, Konnie Huq, Kazuo Ishiguro, Vanessa Mae, David Oyelowo, Jasminder Singh or Gok Wan conjure images of disadvantagedness.

Of course, the term BAME is all about describing economic and social disadvantage. We all knew that, but of recent public discourse in Britain has comfortably used this poorly defined classification to identify Britain’s disadvantaged individuals. Yet a cursory look at the current statistics for UK’s income distribution by ethnic group has some interesting findings. By recent statistics, British Chinese have the highest incomes, followed by Indians and whites. By contrast, British Bangladeshis, Pakistanis and Black/Caribbean/African and Black British are least represented in the top earning quintile. The findings are reversed when we examine the bottom two quintiles, where British Bangladeshis, Pakistanis and Black/Caribbean/African and Black British occupy much of the bottom of the UK income distribution. Thus all British ethnic minorities are not disadvantaged as the term BAME would suggest.

Source: UK Parliament document ‘Income inequality by ethnic group’, 2020, Commons Library, https://commonslibrary.parliament.uk/income-inequality-by-ethnic-group/

UK’s wealth inequality has yet another harsh story to tell. While the median white British and Indian household in the last decade was worth £282,000 and £266,000, respectively, the median black Caribbean household was only worth £89,000. Black African and Bangladeshi households had the lowest household net worth of just £24,000 and £22,000, respectively. These wealth inequality statistics are partly explained by age (as the white British and Indian households are older), but they are also indicative of historical deprivation in education and access to good jobs. Lower incomes mean lower saving rates and thus fewer assets.

The incidence of Britain’s socially disadvantaged also varies greatly by region. The majority of ethnic minority poverty in the UK is concentrated in inner city London. Three-fifths of black Britons live in London.  Outside London, the distribution of the ethnically disadvantaged is similar to that of disadvantaged whites across the UK. Ethnic variation in poverty is remarkably less pronounced outside London.

All said, Britain’s disadvantaged ethnic groups deserve outstanding attention due to these stark disadvantages. But how should we identify these groups of individuals?

There are tried and tested means of identifying people who are disadvantaged and poor. Indeed, Frederick Engels in his 1845 treatise, the Conditions of the Working Class in England in 1844 succinctly sums up what it means to be economically vulnerable: ‘He knows that, though he may have the means of living to-day, it is very uncertain whether he shall to-morrow.’ Economic and social disadvantage has no regard for ethnic or national borders if the preconditions for precariousness are met – namely, low levels of education, poor access to jobs and regional poverty.

When media commentators, organisations and policy makers wish to identify groups of Britons who are subject to economic and social deprivation, they can turn to a rich body of economic literature which describes how to count the disadvantaged, identifies specific groups by demographic characteristics and explains mechanisms that allow for the persistence of poverty amongst these identified groups. The recent Deaton Review (2020) measuring the unequal impact of Covid-19 on ethnic minorities in the UK sets a fine example of how policy makers can identify specific ethnic minority groups disadvantaged by economic downturns, and thus can devise policies that mitigate the effects of the shock.

There is thus no a priori reason for a poorly conceived definition of disadvantagedness such as BAME. It neither serves the purpose for accurately counting the disadvantaged, nor is it able to correctly identify ethnic groups who are truly disadvantaged, and it certainly serves no purpose to devise policies that support these individuals. A further downside of using broad acronyms such as BAME is that Britain’s disadvantaged ethnic groups are likely to change over time. Afro-Caribbean/African, Pakistani and Bangladeshi communities may cease to be economically disadvantaged in the near future, and others may take their place.

The ill-defined categorisation of disadvantaged Britons as BAMEs has unfortunately imposed an unwanted, meaningless and incorrect identity on a large group of very different people. It has wedged a divide between whites and non-whites, and the haves and have-nots. It is sufficient to identify economically and socially disadvantaged Britons as ‘vulnerable’ or ‘disadvantaged’ or just ‘the poor’, as is usual practice in other countries.  For these reasons, it is good that the Commission on Race and Ethnic Disparities yesterday has announced the scrapping of the BAME term from public discourse in the UK.

*Sanghamitra Bandyopadhyay is Deputy Director of the Centre for Globalisation Research and Reader in Economics. She is also the lead for the UK-wide research group, Research Circle for the Study of Inequality and Poverty.

Measuring the representativeness of social partners in Europe

By Marta Martínez and Pedro Martins

Are workers and firms well represented in social dialogue? In many countries, affiliation rates to social partners (employer associations and trade unions) have been decreasing for decades. However, social dialogue still regulates labour conditions of a significant part of firms and workers through collective agreements and, in some cases, their extensions. The result of this social dialogue generally includes conditions over wages, working time, training, and many other issues, with important effects on the labour market and the economy.

Creator: Hilch Credit: Getty Images/iStockphoto

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What drives social returns to education?

By Ying Cui and Pedro Martins

Schooling typically delivers significant private returns, with better educated individuals generally receiving higher earnings. However, the schooling of one person has also the potential to generate significant positive effects on other individuals, through formal and informal social interactions between them. Economists refer to these spillovers as ‘externalities’. These third-party effects also explain the wedge between private and social returns to education: while the former are typically estimated at 5% to 10%, the latter can be as high as 10% to 20%.

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Corporate social responsibility and cross-border M&A by Chinese firms

By Xianmin Liu
What is CGR PhD's research about? 
Introducing research projects of CGR PhD members

My research aims to explore the relationship between corporate social responsibility (CSR) and the success of cross-border M&As by Chinese A-share listed firms to extend our understanding of why and how Chinese firms pay more attention to CSR performance in initiating cross-border M&A and going global.

In the last three decades, both the value and number of cross-border mergers and acquisitions (M&A) have soared in waves (Xu, 2017). As a majority of foreign direct investment (FDI) (Albuquerque et al., 2019), cross-border M&As have become more prevalent to gain such as strategic assets, natural resources, market power and synergistic effect. Accordingly, the extant researches in cross-border M&A are also rapidly increasing, especially in emerging market countries like China (Karolyi and Liao, 2017; Li, Li and Wang, 2019; Schweizer, Walker and Zhang, 2019), which is the biggest developing country and overtook Japan as the second-largest economy in the world since 2010. In addition, China is still a transitional nation and has a transformational and proactive government, promoting studies in cross-border M&A under the institutional environment with Chinese characteristics as well.

Source: Thomson Reuters Eikon M&A database, compiled by the author.
Note: Completion rate of cross-border M&A is the ratio of the number of completed cross-border M&A deals recorded by Eikon to the total number of announced cross-border M&A deals. Dotted line of China2 excluded the targets in Hong Kong, Macau and Taiwan, because they are special administrative region (SAR) of China.Read More »

Coronavirus recovery – lessons from the eurozone crisis

By Stella Ladi, Angie Gago, Catherine Moury and Daniel Cardoso

As governments around the world grapple with the public health and economic effects of the COVID-19 pandemic, there are striking similarities with the eurozone crisis that followed the 2008 financial crisis. Having researched this crisis, it is clear to us that there are some important lessons to apply to today’s recovery. The early signs indicate that the EU is responding much more effectively to this crisis than it did in 2008.

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CGR Working Paper | COVID-19 response needs to broaden financial inclusion to curb the rise in poverty

By Mostak Ahamed and Roxana Gutiérrez-Romero
CGR Working Paper 105

The ongoing COVID-19 pandemic risks wiping out years of progress made in reducing global poverty. In this paper, we explore to what extent financial inclusion could help mitigate the increase in poverty using cross-country data across 78 lowand lower-middle-income countries. Unlike other recent cross-country studies, we show that financial inclusion is a key driver of poverty reduction in these countries.

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How Germany flattened the curve

By Georg von Graevenitz

CORE links modern economic methods to pressing policy challenges: mounting inequalities, climate change, concerns about power in the workplace, and financial instability. COVID-19 has highlighted inequalities in new ways, demonstrated the risks of ignoring pollution linked to climate change and underscored the role of governments in stabilising economies, coordinating responses and preparing for adversity. The pandemic also highlighted the role of science and trust in protecting society against adversity. Differences in preparedness, often the result of many years of incremental policy developments, have been particularly significant in this fast moving crisis. This post describes how scientists, preparedness and luck combined to simplify crisis management in Germany. But neglect of the exploitation of workers in the meat-processing industry has created unexpected external effects as new lockdowns are now being declared.

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Making the case for LMIC to be partners in the global solution for COVID-19

By Kaouthar Lbiati

The growing success of efforts to contain the spread of Covid-19, the disease caused by the virus, may present yet another hurdle – How to end lockdown without causing a second wave? There is no modern analog for the shutdown of economic activity. Ending the lockdown needs unparalleled capabilities in testing, tracing and most importantly it needs researchers to deliver a new vaccine!

Source: https://wendyedavis.files.wordpress.com/2020/04/lockdown.jpg

This paper makes the case for low and middle-income countries (LMIC) to be part of the clinical evaluation of the efficacy and safety of the COVID-19 future vaccine, the ramping up of regional manufacturing capabilities for local immunization and underscores the critical importance of reaching an advanced purchase agreement with manufacturers and suppliers as well as building up multilateral financial partnerships with key institutions before even a vaccine is made available in either North America, Asia and/or Europe.

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A study of Indian Born Global Firms

By Amrita Manohar
What is CGR PhD's research about? 
Introducing research projects of CGR PhD members

The survival and success of a company internationally is dependent on a multitude of factors, such as their financial resources, past experience, and familiarity with their own domestic market in order to achieve this international presence. However, certain firms called ‘born global’ firms have been able to establish international operations despite not possessing the resources or experience. According to Knight and Cavusgil (2004), Born global firms (BGs) are companies that begin international operations either at or soon after their establishment, with a notable part of their revenue generated from their activities in foreign markets.

Apart from early internationalization, BGs are characterized by their small size, limited resources, lack of prior experience in the domestic and international markets, and limited knowledge. These characteristics serve to differentiate them from large multinational enterprises, domestic firms, and small and medium-sized enterprises that follow a more gradual internationalization path.

Source: Shutterstock

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