Month: January 2023

No end in sight for the war in Ukraine

Viewsridge, CC BY-SA 4.0 https://creativecommons.org/licenses/by-sa/4.0, via Wikimedia Commons

My reviews of the war in Ukraine are becoming less frequent. Thee war just goes on. At the start I spent quite a bit of energy thinking about how it might end. And yet the prospect of an ending is receding. We must resign ourselves to several more months of death and destruction, and probably many more after that. What will happen in that time?

It is hard enough to tell what is happening now. Both sides are wary of releasing information, and it’s always for a purpose. The Institute for the Study of War (ISW), which is one of my main sources, now has extensive commentary on Russian attempts to manipulate what it calls “the information space”, both internally and in the wider world. Interesting as this may be, it reminds me of the story of the blind man looking for his keys under the street lamp: not because that is where he dropped them, but because that is where the light is. Beyond that there are formulaic reports of clashes along the three or four hotspots, which may be nothing more than aggressive patrolling, along with the endless artillery pounding. The Ukrainians are anxious to put out the story that the Russians are gearing up for a major offensive, using troops mobilised last autumn, along with, perhaps, a fresh mobilisation. The Russians seem to be dropping hints of this too, so it is probably true. Stories that Ukraine is preparing an offensive of its own come and go.

Much of the media kerfuffle in recent days has been over the supply of (relatively) advanced “main battle” tanks to Ukraine by its Western supporters. What to make of this? At the start of the war, Russia suffered desperate casualties amongst its armoured vehicles, and the idea that such things were obsolete in the age of drones and hand-portable antitank missiles Tok hold. After this came a gruelling war of artillery, and the usefulness such vehicles became more apparent. But their use seems to be a world away from the Second World War, which still shapes how many people view warfare. The Ukrainians clearly decided that they needed these tanks. Equally important, I suspect, are lighter “infantry fighting vehicles”, such as the US Bradley, which can transport troops – a cross between an tank and an armoured personnel carrier – a concept first developed by the Russians in the Cold War. These were promised to Ukraine by several countries (not including Britain, whose IFV is a bit of a failure) without much fuss before the tank row blew up. There is a lot more symbolism in the tanks, evidently. The whole episode was portrayed in the media as a show of disunity amongst the Western allies, and dithering by Germany. Well, there was certainly dithering – but such time the taken over important symbolic acts often makes them more solid. It is of the nature of alliances that they have arguments over strategy, as each participant has its own objectives. But often this helps improve the quality of decisions. It is possible to look on Germany as a foot-dragger – but it is the lynch pin of the alliance and has shown astonishing resolution, in spite of having much bigger problems thrown at it than the other allies.

Will these weapons transform Ukraine’s prospects, as the BBC seems to be reporting as fact? That is very hard to tell. A lot depends on logistics and finding the right tactics. The weapons were designed for a different type of war – but they are more capable than anything the Russians have. The Ukrainians have shown facility at both tactics and logistics, so we can expect them to make a difference. Still, transformative sounds too much.

What of the coming Russian offensive? They have refreshed their manpower, and will be able to employ large numbers, by modern standards (but not by mid-20th century standards), at the pressure point. This is likely to be in the Donbas region, where the biggest political imperative lies, as well as the easiest logistics. The Russians have learnt a lot from their earlier mishaps, and have developed much more effective tactics. Still, they face three considerable obstacles. Firstly, the Ukrainian forces are much better prepared than they have been. We’ve heard a lot about how Russia has superior numbers, but this is misleading. Russia has huge manpower potential, but Ukraine can dig deeper on its resources, and has been doing so for the last year, building up and training large forces. Second, the supply of Russian munitions is not as plentiful as it was. The Ukrainians report that Russian artillery fire has slackened recently; doubtless this is because they are conserving stocks for the offensive – but it indicates that there are limits – and artillery is central to current Russian tactics. And third, Russia lacks experienced officers and cadres to lead its freshly mobilised forces. This is usually regarded as central to the effectiveness of any army. Still, the Russians have surely thought all this through, and there may be surprises.

And the Ukrainian offensive? If the new Western supplied armour is to be part of it, it does not look as if they will be able to pre-empt the Russian one. It will have to come later, assuming that the Ukrainians have the strength left. There is some rather wild talk of seeking to recapture Crimea (for example in The Economist). Militarily this is not quite as absurd as it sounds – if Ukraine can advance south of the Dnipro River, then that would put it in a position to isolate the peninsula. Politically, it sounds like a bad idea, though. Russian claims that Crimea is somehow more historically Russian than Ukrainian is their usual nonsense. But in 2014 it had a substantial population that looked to Russia, and many anti-Russian elements (such as the Tatars) have doubtless largely left. Ukraine would acquire a grumpy province that would be hard to secure, as well as delivering a massive humiliation to Russia.

But that opens up the question of how on earth this war is supposed end. It looks as if Russia will talk about it if the annexation of Ukrainian territory is on the agenda. That would obviously include keeping Crimea, but surely also large parts of the four oblasts that they formally annexed last September and now partially occupy. That is so far inconceivable to Ukraine – the war has cost them so much that they want more to show for it. We might objectively argue that such a deal would not be so bad – Ukraine has consolidated its moral hold on the rest of its territory, and its place in the “West”, including as this expression does such countries as Finland, Poland and Bulgaria – but this is far from the psyche of the men doing the fighting, and the citizens enduring Russian bombardment. What would be decisive is the withdrawal of American support from the country. If that comes it will be seen as a huge betrayal. We will certainly have to see how the bloody events of this spring and summer play out first. I don’t think Joe Biden’s hopes of being re-elected as president in 2024 would survive such a retreat.

Could Russia’s resolve weaken? There have been plenty of examples of despots hanging on for years while their countries go to the dogs (look at Syria or Venezuela). Russia has already endured massive losses. A big test will be if the regime goes for a further wave of mobilisation, of which there is already much talk. Last autumn’s wave was clearly politically costly. Meanwhile the economy weakens, as war priorities take over, and many men are conscripted or have fled the country to avoid that fate. But economic hardship will not weaken its leader, Vladimir Putin, who sees his mission in terms of historic destiny, and who has so much personally tied up in the war. His war has failed its original objectives, but he cannot afford to admit defeat. Perhaps a coup will carry him away. But this would be done by Kremlin insiders, who are also committed to the war – there would be limits as to how much such people could concede. Mass unrest that would cause the collapse of Russia’s internal security apparatus looks vanishingly unlikely – though it is conceivable that another wave of mobilisation could provoke it.

The outlook is very gloomy indeed. The war presents as clearly as ever the main lesson of war: never start one. But there was plenty of evidence for that before this misadventure began.

The Economist advocates turning the clock back on trade

Last week’s Economist led on the dangers of changing political attitudes to world trade. The paper suggested that the rise of “zero-sum thinking” threatens capitalism, liberal democracy and the livelihoods of many. But we live in a world were the conventional wisdom of economists is being challenged – from inflation to interest rates to economic growth. The conventional wisdom on trade needs to be challenged too: not because the economics is wrong, but because the context has changed.

There are two central foundations to economists’ understanding of the benefits of trade. One is the logic of comparative advantage, one of the first insights of modern economics when it got going more than two centuries ago. What matters when resources are constrained (as they almost always are) is opportunity costs, and not absolute costs. It is more efficient for for a less productive supplier to produce goods, if the more efficient one is better able to produce other goods that are in short supply. It is one of the first things economics students are taught, and one of the most important challenges to “zero-sum thinking”, which suggests that imports are bad because they put local people out of work. Those people can be redeployed to make things things more productively in world terms, meaning that everybody can benefit.

The second foundation for the economic benefits of trade is economies of scale and the benefits of specialisation (or economies of scope). Industries may not have critical mass in their own market – but through trade they can access bigger markets, benefiting everybody. This idea can work alongside comparative advantage (the concentration of watchmakers in Switzerland presents economies of scope and scale, which in turn leads to comparative advantage, for example). That makes them easy to muddle. Economies of scale and scope do not necessarily lead to comparative advantage, and you can have comparative advantage in a particular area without economies of scale or scope. This needs to be picked through with care – which alas The Economist seldom does. Now let’s step back and look at how world trade has evolved in the last 40 years or so.

The massive explosion in global trade in the 1990s and 2000s is mainly explained by comparative advantage. The thing to understand about comparative advantage is that it is driven by differences in economic structure, which create differences in opportunity costs: it is a function of difference. China, the largest driver of this surge in global trade, was a very different place to the developed countries it traded with in 1990. A vast number of people were still employed on the land, in highly inefficient agriculture; in the developed world the agricultural workforce was nearly insignificant, while producing much more food than it could consume. By shifting workers from agriculture to manufacturing in China, a lot more manufacturing goods could be produced, with any shortfalls in agricultural production made up for by developed world production with a negligible increase in workforce. This meant that Chinese manufactured goods were dirt cheap, while its agricultural produce was expensive – a colossal opportunity for world trade, even if Chinese manufacturing productivity was much lower than in the developed world. The process worked something like this: low agricultural productivity ensured low wages; low wages meant cheap manufacturing products, even with low manufacturing productivity. The picture was a lot more complicated than this – it wasn’t actually a case of China importing grain while exporting washing machines (they imported more capital goods than food) – but comparative advantage was the driver.

That is all Economics 101. But while economists understand how comparative advantage works in principle, they are surprisingly ignorant of how it works in practice. It has improved impossible to model the dynamics of comparative advantage in a way that produces the detailed results and predictions that are most economists’ day job. So, after they have completed their undergraduate studies, few economists think much about it. If they did they would me more alive to the issue of convergence. The Chinese economy, like the Japanese and South Korean economies before it, did not stand still. Productivity shot up, especially in agriculture, and the agricultural workforce rapidly diminished, while that of manufacturing and services rose. Convergence with the developed world happened at astonishing speed, and as that happened the differences that drove comparative advantage diminished. Developed countries started to find Chinese products becoming more expensive. The incentives for long range trade between China and the rest of the world diminished. This hurt developed countries much more than it did the Chinese – as the Chinese benefited directly from increased productivity and rising wages. It is, I believe, one of the reasons for sluggish growth in the developed world since the great financial crisis of 2007-09, though it is almost never mentioned as a factor (and certainly not by The Economist), in spite of the great economist Paul Samuelson drawing attention to it.

This is where the second factor can come into play – economies of scale and scope. In Europe, for example, the leading economies converged in the late 19th and early to mid-20th centuries. Comparative advantage diminished. But, after the Second World War, trade within the continent flourished, so clearly something else was behind it. Why, for example, did Germany, France, Britain and Italy all have substantial car industries, all with a lot of cross-border trade? This shouldn’t happen under comparative advantage, unless the cars each country made were somehow very different from each other. In fact the economics of motor manufacture meant consolidation into larger and larger firms was required to be competitive. Cross-border trade gave consumers more choice, and the other benefits of competition, if their own country only had room for one or two car firms. As Europe developed its single market, economic benefits flowed – but on nothing on scale that flows between more diverse economies. There are two sorts of benefit here. The first is that the benefits of economies of scale lifting productivity; this can work in quite a similar way to comparative advantage, with some countries specialising and others happy to have cheaper products (the aero industry is a bit like this). The second derives from good old fashioned competition between businesses in different countries. This is very different, as this only works if multiple countries are making similar products. We must also bear in mind that as the gains or more limited, it requires a level playing field to work; if one country suffers a systemic disadvantage, such as high transport costs because they two oceans away, then the benefits of trade diminish. That is one reason that Europe had to develop detailed rules for free trade, while the Asian economies’ rise was based on much cruder arrangements, such as World Trade Organisation (WTO) rules.

The important thing to realise about economies of scale and scope is that they are dependent on technology and not any iron logic of economics, as is the case for comparative advantage, although you wouldn’t think it from the way many executives from large businesses talk. And technology changes with time. The late 20th Century was particularly good for economies of scale, but that is changing. And that is for two reasons. The first is the rise of technologies that diminish the costs of short production runs and individualisation (indeed the same edition of The Economist featured this in its business section – a new theory of the firm – one of the articles featured on the cover). The second is the diminishing importance of manufactured products in the economy as whole, compared to services, such as healthcare, which are largely untradeable. All this points to reduced benefits from trade, especially between big geographical blocks like America, Europe and East Asia, as opposed to within them.

Where does that leave the current debate on trade? The first point is that I don’t think the benefits of trade are diminishing because of political obstacles; I think those political obstacles are arising because the benefits of trade are diminishing. The second thing is that, for developed economies, there is no great box of goodies that can be unlocked through trade liberalisation to help flagging growth along. Doubtless there are further benefits to be had – and especially with less developed countries if done in the right way, but not on the scale that saw the economic transformation of the 1990s and 2000s.

Now let’s look at biggest specific issue bothering The Economist – the problem of US government subsidies for green industries. Europeans are worried that this will make their own industries uncompetitive. That is a legitimate worry, but if Europeans match those subsidies with their own, the damage will be limited – and, indeed, it might hasten the transition to clean technology, with the benefits that will flow from that. The Economist worries that it will lead to inefficiency and, horror, duplication. And yet duplication is a prerequisite of competition.

Still, trade remains integral to the modern way of life and deserves continued political attention. For some things, the importance of both comparative advantage and economies of scale and scope remain undiminished. Only a few countries have direct access to metals such as cobalt and lithium, which play a critical role modern industries. And serious economies of scale or scope remain in others, such as the mining of iron ore (Australia has unmatched scale economies), or the manufacture of advanced microchips (Taiwan leads in scope economies). But the key the issue is not just economic costs, it is the potential for serious dislocation if supplies are interrupted. The modern economy contains many bottlenecks. We have to balance the benefits of short term cost savings with the risks of natural disaster and conflict. Alas the solutions are likely to make manufactured products yet more expensive.

The reason for the rise of “zero-sum thinking” is that the economics of trade is moving in that direction too, though the benefits of free trade remain substantial. It is not surprising that other issues loom larger than trade freedom, such as security of supply and the need to accelerate the transition to clean energy. It is easy to understand why The Economist wants to turn the clock back to the days of easy trade gains and steady economic growth – but it does not help prepare its readers for the hard choices ahead.

Sir Keir Starmer: the tortoise of British politics

Picture: Randy Browning, US Fish & Wildlife Service

Uncharismatic politicians are gaining the ascendency. In America Joe Biden bumbles away in public and looks his age, and yet his record of achievement in difficult political conditions is remarkable. In Germany, Chancellor Olaf Sholz is hardly more impressive in public, and yet his awkward three-way coalition government looks solid and is managing stresses that could hardly have been imagined when it was formed. Meanwhile in France the charismatic Emmanuel Macron is not out, but he is down. In Britain the Leader of the Opposition, the dull Sir Keir Starmer, is looking getting stronger by the day.

Sir Keir has caused a lot of frustration among Labour supporters, along with anybody that wants to see the back of the Conservative government. He seems unable to spell out a compelling vision of what Labour stands for; as a speaker he is uninspiring. But Labour’s poll ratings are sky-high, and his own public approval ratings are higher than they have ever been. These ratings may not be decisively better than those for the prime minister, Rishi Sunak, (though one recent put them on that path) but the steady upward trend is what is remarkable. Usually politicians start by sparking high hopes, and then gradually disappointing. Sir Keir is achieving the opposite.

Partly this reflects the chaos stalking the Conservative party, to which Sir Keir’s colourless Labour party presents and appealing contrast. Boris Johnson had bags of charisma, but no grip. Liz Truss lacked charisma but did communicate a clear vision effectively – but people found it detached from reality, and she could not control her parliamentary party. Mr Sunak presents a favourable contrast to these two, but he struggles to reassure voters about the state of his party, and doubts grow.

But Sir Keir’s performance has been more assured of late too. He remains extremely cautious about putting clear policy proposals out into the public domain. Instead he and his team have put out two much vaguer themes in early 2023. These build on the theme developed in 2022 of placing a high priority on environmental sustainability, and the goal of “green growth”. The first of these was developed by Sir Keir himself: when he made an attempt to hijack the Brexit slogan of “Take Back Control” to promote the idea of greater devolution to the nations and regions of the UK. This is cheeky, not least because Britain has little tradition of devolved power, so the slogan is suggesting people take back what they never had in the first place. That is forgivable because the idea is the right one: decisions need to be taken closer to the people affected by them, and people need to have a greater sense of involvement in them. Whether Labour proposals will actually deliver much that is worthwhile is open to doubt. The party has a tradition of being highly centralised, and Sir Keir has batted away more radical ideas like electoral reform. It is hard to think that he will go down the road of a local income tax, for example. I’m unconvinced that anybody in the Westminster ecosystem really “gets” what would be involved in the sort of reform that would make more than a minor difference. Still, the verbiage is better than nothing. It is more worrying, if unsurprising, that Labour spokespeople have not tried developing the theme since Sir Keir flew the kite in the New Year.

The second idea to be developed this year comes from the party’s health spokesman, Wes Streeting. The NHS needs radical reform, he says, not “sticking plaster solutions”. Unlike the “take back control” idea, this one has been regularly repeated by Labour since. The idea seems to be that a reformed NHS can deliver better results without requiring an “open cheque book”, as sir Keir put it. At one level this looks like muddle and nonsense. Currently the NHS is suffering an emergency as it fails to cope with demand, following a decade of under-investment; this demands urgent solutions and not reforms that will take much longer to deliver benefits. The NHS badly needs sticking plaster right now, and lots of it. And radical reform has been tried before, and the results have almost always disappointed – most recently with the coalition government’s attempt in the early 2010s. To make a real difference, some kind of open chequebook will be needed, alongside sensible reforms – including to social care. Meanwhile Mr Streeting is vague about what reforms he has in mind – beyond tearing up the contract for general practitioners (GPs) – which came as a surprise to GPs. Still, politically these words make more sense. Labour does need say something about the NHS, and not just throwing money at it. Perhaps it is the inverse to 2010. Then the Conservatives promised that there would be no radical (“top-down”) reforms to the NHS, and then promptly broke their promise by embarking on a huge reform programme. Labour are probably promising radical reform but planning to deliver sticking plaster with spin.

Tactically this is all very shrewd. My feeling is that Labour will manage to consolidate their advantage over the Conservatives, which still has a certain fragility – polls show few people making a switch between the parties, and many more former Conservatives abstaining or supporting the Reform party of radical Brexiteers. It is the race of the tortoise and the hare. The hare lacks the attention span to win.

But there is a dark side to Sir Keir’s progress. In his campaign to party members to win the leadership, he promised to stay true to the party’s broad policy agenda, developed under his predecessor, Jeremy Corbyn. He has broken this promise. according to Stephen Bush, of the Financial Times and formerly of the New Statesman, this isn’t because he was deliberately misleading. He just didn’t understand the implications of his words, and found that when the time came he was unable to keep his promise. What he said was driven by the political exigencies of the time, without having been properly thought through. This is surely true of his emerging policy agenda now. Britain’s many problems can’t be fixed except with additional public spending, and this must be done when adverse demographics, among other things, mean that there will be little economic growth. Meanwhile Britain runs a substantial current account deficit. To my rather conventional mind, this means that there will have to be higher taxes, and the sort of taxes that will crimp domestic demand – income tax, VAT and National Insurance. Whether or not this is so in theory, Ms Truss has surely shown that it is true in practice – the government needs a degree of confidence from financial markets, which like to see a degree of prudence in public finance. Sir Keir will not say this, but once in power he will surely be faced with the need to raise taxes.

Two other areas worry people about Sir Keir’s caution. One is relations with the European Union. He avoids talking about Brexit, and has set his face against rejoining the Single Market or customs union. With the electorate slowly but surely coming to view Brexit was a serious mistake, surely he has the opportunity to be bolder, while forcing the Tories to defend a sticky wicket? Actually in this case I think Sir Keir’s judgement is sound. Re-integration with the EU brings with it awkward choices, surrendering sovereignty while acquiring little influence. Besides, the EU itself will be sceptical. And though the public may be regretting Brexit, they show little appetite to reopen the debate.

The second issue is electoral reform. Labour members support this, but Sir Keir is ducking and weaving, and is committing to nothing. This is disappointing because it is hard to see the British political system changing for the better without it. British politics has got itself stuck in an awkward groove, which in effect disenfranchises most voters, contributing to a huge sense of frustration. Of course countries with other electoral systems suffer problems too – but Britain’s are deep. Sir Keir’s caution is understandable though. I suspect many Tories think that Labour adopting electoral reform would be a gift to them. It gives them a chance to change the subject from their own record, and to awake the innate conservatism of the British electorate, with all sorts of lurid stories as to what the implications of reform are. Still, I don’t think it would work for them. Maybe Labour can promise electoral reform at a local level, as part of their “take back control” agenda. That would be a worthwhile step.

None of which takes away from Sir Keir Starmer’s relentless rise. It is a striking political achievement that deserves wider recognition.