The outlook for the Doha round may not be as bad as it looks; why a dreary North sea gas pipeline is at the centre of things; and Gordon's productivity problemby P L / May 20, 2006 / Leave a comment
It’s up to Lamy
Prospects for the Doha round look grim. Over five years in, and the World Trade Organisation’s 149 members still seem as far apart as they were during the 2003 Cancún debacle. Only the massaging down of expectations by WTO boss Pascal Lamy ahead of the Hong Kong summit last December rescued it from disaster. Now another deadline looms: 30th April, by when an outline deal must be reached if a final agreement is to be struck by the end of the year, ahead of the expiry of Bush’s fast-track authority in 2007.
But while progress has been painfully slow, all hope is not lost. Negotiators have a much clearer idea of each other’s true bottom lines. So if the political will is there on all sides, a framework deal could rapidly fall into place. The grand bargain involves the EU and the US opening their agriculture markets—the EU cutting its farm tariffs, the US its subsidies—in return for greater access to industrial and services markets in developing countries, notably India and Brazil. The poorest countries also need to be bought off with duty-free access to EU and US markets; in particular, the US has to hack down its cotton subsidies, while the EU has to compensate its ex-colonies for eroding the margin of their preferential access to EU markets.
The key to success does not lie solely in Brussels and Washington. New Delhi and Brasilia must also step up to the mark. They showed in Cancún that they were a force to be reckoned with; now they need to use their power responsibly by making the concessions that will unlock further moves from the EU and the US. India and Brazil have a new-found confidence; if they can overcome their lingering doubts about liberalisation, they have much to gain from a successful Doha round. Lamy too is vital—not just as an honest broker, but also as a deal-maker. If the talks remain logjammed, he should break the deadlock by publishing his own draft agreement. That will take guts, for sure, but Lamy has plenty of those—and the alternative is failure.
Gas connections The unglamorous gas pipeline known as the “interconnector,” which runs between Bacton in Norfolk and Zeebrugge in Belgium, has suddenly become the centre of political attention. Britain has little spare gas capacity, especially since a fire damaged the country’s main gas storage facility, and imports from continental Europe should have flowed down the interconnector in the recent cold snap when British demand surged. But this did not happen because Europe’s monopolistic energy producers had little incentive to compete for British business since their protected home markets are so profitable. The result was that prices soared and Britain paid perhaps £1bn more for gas than it might have done.
Higher gas prices are not just painful for consumers. They push up inflation, dampening consumers’ spending power and delaying a potential cut in interest rates. And they are also prompting power companies to switch back to dirtier coal—one reason, according to the government, why it will miss its climate-change target of cutting carbon-dioxide emissions by a fifth by 2010. A reminder that competition matters—and that EU governments’ energy protectionism cannot be ignored.
Britain’s productivity puzzle Despite Gordon Brown’s budget boasts about Britain’s economic performance under his watch, productivity growth has ground to a halt. It was a mere 0.6 per cent in 2005, according to new ONS figures. That did not stop Brown asserting in his budget speech that matters had improved—a statistical sleight of hand achieved by ignoring events since 2001. “After decades behind, Britain has caught up with Germany in productivity… and has halved the gap with France,” the chancellor said. In fact, whereas Britain narrowed the gap with the other G7 rich economies from 19 per cent in 1992 to 6 per cent in 2002, the gap rose to 8 per cent in 2004. The gap with the US and Germany, although lower than in 1992, is 16 per cent, and that with France a whopping 29 per cent. And whereas productivity growth averaged 2.5 per cent a year in the first four years of Brown’s stewardship, it has slumped to just 1.6 per cent a year since then.
One reason for the recent fall in productivity growth is cyclical: the economy has slowed since the dotcom bubble burst in 2001. But another is the huge expansion of the public sector. It is harder to boost productivity in labour-intensive services like health and education than in manufacturing—and harder still to measure it: does reducing class sizes cut productivity (because more teachers are needed to educate a given number of pupils) or potentially raise it (because skills are increasingly valuable and children learn much more with more personal attention)? The ONS recently had a stab at estimating productivity growth in the NHS since 1999—and came up with six answers ranging from a fall of 1.5 per cent a year to a rise of 1.6 per cent a year.
The failure to reform sufficiently in the public services has not helped: the NHS has improved, but not as much as the extra money warranted. Ironically, this may now be changing. All the noise about job cuts caused by local NHS deficits is politically awkward, but if the government does not bail out underperforming NHS trusts, the cuts will boost productivity since most trusts plan to provide the same service with lower spending.