How to learn from Asia

Industry in recession; undersea cables in peril; upsides of decoupling from China; Korean tech; labour market rights; how to get better MPs; AI opportunities; regulatory reform; how Asia works

We think conservatives need to talk more and get better at sharing ideas. So here we share the best newspaper columns, policy reports and books that will stimulate thinking and promote new ways of doing things.

The Conservative Reader is published every Friday lunchtime, so please do look out for it. And expect plenty of content about the things we think make conservatism such a compelling body of thought: identity and belonging, community and commitment, market economics, national resilience and good government.

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Best wishes, Nick and Gavin

Towering columns

In The Times, David Smith says British manufacturing is in recession - and this is a serious economic problem:

Manufacturing is important, despite its small contribution to GDP, as a driver of productivity, exports and investment. All have disappointed in recent years, for familiar reasons. But the current weakness of UK manufacturing is not, for once, a Brexit story, or not mainly one. In the eurozone, there is a similar large difference between the performance of services and manufacturing. The latest eurozone “flash” PMI shows eurozone services even stronger than those in the UK, with an index reading of 56.6, its highest for 12 months.

In sharp contrast, the reading for manufacturing output, 48.5, was at its lowest for four months, while the overall index for the sector, 45.5, was the lowest for nearly three years. Strikes in France helped drag it down. Is everybody in the same boat? No. A notable exception was America where, according to its “flash” PMI for this month, services and manufacturing rose in step, at a 12-month high and 11-month high respectively. Quietly, the US economy is doing well, with manufacturers reporting increased employment and benefiting from a significant easing in supply chain disruption.

America’s manufacturers are benefiting from the Biden government’s Inflation Reduction Act, which provides big incentives and subsidies for firms to pursue green innovations and technologies, and which some business groups believe should be replicated in this country… The longer the manufacturing malaise goes on, the more the pressure will build for the government to adopt a meaningful industrial strategy.

In the Financial Times Helen Thomas writes that governments ought to worry more about threats to undersea cables:

The news last week that Russia has been making extensive use of spy-ships to map energy and cable infrastructure in the North and Baltic seas wasn’t surprising. The defence community has repeatedly warned that critical subsea assets are at risk, given Russia’s huge increase in submarine activity over recent years. Nato in February created a “co-ordination cell” for the issue. Last autumn’s sabotage of the Nord Stream pipelines has focused attention on other vulnerable deep sea targets.

Yet there remains what that 2010 summit called a “profound lack of awareness” about our dependence on this undersea network, a reliance that has grown with the explosion in global data flows. A report last year for the European parliament said that 400 cables carry about 99 per cent of global digital communications. There are clusters, where cables come ashore and on key routes. About 20 connect western Europe to the US, carrying two-fifths of global internet traffic…

Resilience planning for a concerted attack is sorely lacking. Governments may not really know which cables are used, by whom or for what. International law in this area is woolly: “more suited to the peripheral role cables played in the 70s and 80s, rather than to the indispensable status they hold today,” according to up-and-coming Conservative MP Rishi Sunak in a report for Policy Exchange in 2017. There is also no international mechanism to reprioritise critical traffic if needed, nor to prioritise repairs.

In the Daily Telegraph, Jeremy Warner says decoupling from China may lead to an industrial revival in the West:

There will undoubtedly be inflationary consequences [of decoupling], in that some of the key benefits of unfettered free trade, in terms of specialisation, competition and efficiency, might be lost. Yet once Chinese mercantilism has been curbed, these downsides could be more than made up for by enhanced onshoring of investment and therefore economic growth.

It is striking how much Western growth in output and productivity has slowed since the fall of the Berlin Wall in 1989, marking the start of the era of unrestrained globalisation. This was meant to be the final triumph of democratic capitalism, the end of history and all that. Yet there doesn’t seem to have been much in the way of an economic dividend. The subsequent malaise in many Western democracies cannot of course be wholly attributed to globalisation; there are many factors at work here. But globalisation has played some part in nearly all of them, including the financial crisis, whose origins lie in no small measure in political pressure to compensate for lacklustre income growth with expanded credit.

The fact is that we have nothing to fear from geo-economic fragmentation, provided it is done in a considered way for mutual benefit among friendly nations. Done well, it might even presage an economic rebirth, a new era of Western industrial advancement, after the dispiriting declinism of recent decades.

At Project Syndicate, Keun Lee examines the structure of South Korea’s innovative and successful tech businesses, and says they make for reliable partners for the West:

As the United States works to limit China’s access to advanced technologies like semiconductors, it cannot ignore its own dependence on small Asian economies like South Korea and Taiwan for many of those same technologies. The question the US and its allies must ask, then, is how reliable these economies are as producers. Examining South Korea’s industrial successes can go a long way toward providing an answer. It is by now old news that the Korean giant Samsung Electronics has surpassed Japan’s Toshiba and America’s Intel to become the world’s top chip producer (by revenue). But South Korean industry’s prowess extends well beyond semiconductors…

South Korean firms have thrived by seizing external opportunities as they have arisen. Their agility – and their success more broadly – is rooted partly in their structure: the economy is dominated by diversified family-owned conglomerates known as chaebols. The chaebols’ track record is hardly spotless. They were widely criticized for helping to fuel the Asian Financial Crisis of the 1990s by investing excessively with borrowed money. But while roughly one-third of the top 30 chaebols went bankrupt during the crisis, the rest were reborn as profitable global players…

To be sure, family ownership is also prone to opaque corporate governance and entrenched management. But increased public scrutiny in recent years has led to important progress on these fronts. Many chaebols now employ a two-pronged leadership structure, with the family owners leading alongside hired professional CEOs with strong incentive packages. This has proved to be a winning combination… A corporate structure that plays to the strengths of both family ownership and professional management, together with the vision to seize opportunities as they arise, has enabled firms from a small East Asian country to become major global players. Their agility and capacity for innovation, together with their reliability, is good news for the West.

In the Financial Times Sarah O’Connor argues that before we create new labour market rights, we should enforce the laws we already have:

A study of UK labour market enforcement by the Resolution Foundation think-tank reveals the scale of the problem: almost a third of workers paid at or around the wage floor were underpaid the minimum wage last year; 900,000 workers say they don’t get holiday pay, even though it’s a right from day one; 1.8mn say they don’t get a payslip; and about 600,000 haven’t been enrolled in a pension scheme by their employer when they should have been. Meanwhile, the employment tribunal system is plagued with delays and backlogs. With admirable honesty, the government’s director of labour market enforcement said recently that workers rarely approached her office directly as “they probably haven’t the foggiest who we are”.

What’s going wrong? Unlike in other countries such as Ireland, the Netherlands, Norway and Australia, which have one prominent organisation to enforce most employment rights, in the UK the role is spread across six different bodies managed by six different government departments. This means workers don’t know where to go when they have a problem, and the various regulators don’t share information as well as they could. They are also under-resourced: the UK has just 0.29 labour market inspectors per 10,000 workers, less than a third of the International Labour Organization’s minimum standard benchmark of one per 10,000 workers. On this measure, it ranks 27th out of 33 comparable OECD countries.

The approach the regulators tend to take has also been shaped by successive UK governments’ desire not to hurt employers or economic growth with excessive “red tape”.

In The Times, William Hague says the quality of our government suffers when MPs focus excessively on local issues:

Leading a country, however, is getting harder. We are entering a period of profound economic, scientific, climatic and social change, with the pressures of 24-hour media and now artificial intelligence thrown in. Only highly gifted individuals will be able to get their minds round this and also have the skills to govern a complex country. Effective leaders will need to combine expertise with a deep understanding of global trends. In this respect, parliament is steadily heading in the wrong direction. The demands on MPs, and the basis on which they are chosen, are becoming more local, and this is usually, unquestioningly, thought to be a good thing.

In my time as an MP, I was assiduous about advice surgeries and attending to local issues. But I spent most of my time on national or international affairs. Today, according to surveys of MPs, fully half of their time is spent on constituency casework or meetings. They are more accessible because of social media, and under pressure to differentiate themselves locally because faith in national political parties has declined. In turn, this incentivises the parties to choose local candidates, which narrows the pool from which they draw.

Do not mistake me here: I think we need more vibrant local politics in Britain and improved local accountability. But that is best provided by strengthening mayors and local devolution, so that MPs focus more on the national picture and are chosen with that in mind. In the classic definition of Edmund Burke in 1774: “Parliament is not a congress of ambassadors . . . parliament is a deliberative assembly of one nation, with one interest, that of the whole . . . You choose a member indeed; but when you have chosen him, he is not a member of Bristol, but he is a member of parliament.”

Wonky thinking

For the National Bureau of Economic Research, Erik Brynjolfsson, Danielle Li and Lindsey R. Raymond argue that AI disseminates the tacit knowledge of more able workers and helps newer workers, while improving customer sentiment, reducing requests for managerial intervention, and improving employee retention:

First, AI assistance increases worker productivity, resulting in a 13.8 percent increase in the number of chats that an agent is able to successfully resolve per hour. This increase reflects shifts in three components of productivity: a decline in the time it takes to an agent to handle an individual chat, an increase in the number of chats that an agent is able to handle per hour (agents may handle multiple calls at once), and a small increase in the share of chats that are successfully resolved.

Second, AI assistance disproportionately increases the performance less skilled and less experienced workers across all productivity measures we consider. In addition, we find that the AI tool helps newer agents move more quickly down the experience curve: treated agents with two months of tenure perform just as well as untreated agents with over six months of tenure. These results contrast, in spirit, with studies that find evidence of skill-biased technical change for earlier waves of computer technology.

Our third set of results investigates the mechanism underlying our findings so far. We posit that high-skill workers may have less to gain from AI assistance precisely because AI recommendations capture the potentially tacit knowledge embodied in their own behaviors. Rather, low-skill workers are more likely to improve by incorporating these behaviors by adhering to AI suggestions. Consistent with this, we find few positive effects of AI access for the highest-skilled or most-experienced workers. Instead, using textual analysis, we find suggestive evidence that AI assistance leads lower-skill agents to communicate more like high-skill agents.

Finally, we show that the introduction of AI systems can impact the experience and organization of work. We show that AI assistance markedly improves how customers treat agents, as measured by the sentiments of their chat messages. This change may be associated with other organizational changes: turnover decreases, particularly for newer workers, and customers are less likely to escalate a call by asking to speak to an agent’s supervisor.

In Re-Engineering Regulation: An A-Z of Reform, published by Policy Exchange, James Vitali identifies 26 examples of regulations that might be changed, and says the task before ministers is not ideological deregulation, but intelligent regulatory reform:

Much of this comes down to our societal approach to risk. Regulators are seen by some as responsible for eliminating risk from our lives. But should we try to eliminate all risk from our existence? The pursuit of a regime in which there is zero risk and uncertainty in our lives would lead to an intolerable level of control on individuals and businesses, and it would not only reduce freedom of action, industry and innovation, but create new risks and hazards as well.

Unfortunately, too, debate on regulatory reform often goes down an unproductive cul-de-sac which identifies all attempts at regulatory reform as an attempt at wholesale, dogmatic deregulation. Nevertheless, what is a legitimate and increasingly urgent subject of debate is whether or not we are weighing other societal objectives and values sufficiently when it comes to the regulatory regime in many sectors.

As Policy Exchange’s Re-Engineering Regulations: A Blueprint for Reform made clear last summer, what the UK needs is not wholesale deregulation, but better, smarter regulation. It is the character and quality of rules and regulations that matters, not the quantity. Improvements need to be driven by the centre and coordinated across Whitehall. In many cases, this will mean peeling back a layer of bureaucracy that is strangling the potential of British enterprise, but in others, it means reforming and optimising the rulebook to align incentives in a way that is conducive to the national interest. Ultimately, though, the entire system must be re-aligned so that it is incentivised to regulate more effectively.

The UK’s departure from the European Union does present an enormous opportunity for the Government to improve its regulatory regime. But it is an opportunity, not a handout. Many of the benefits of Brexit are already apparent, but the Government must think hard about how to capitalise on the repatriation of regulatory authority for the benefit of the British public. The UK needs to establish how it can continue to be an attractive place to transact business in an increasingly competitive international environment.

Book of the Week

Our recommended book this week is How Asia Works: Success and Failure from the World’s Most Dynamic Region, in which Joe Studwell argues that the successful Asian economies had governments that reformed agriculture, promoted manufacturing, and controlled financial interests tightly in the pursuit of those priorities:

The policy prescription for rapid economic development was confused for a time in east Asia by the presence of other fast growing economies that did not conform to the pattern of Japan, Korea, Taiwan and China. In the 1980s and early 1990s, the World Bank seized on the performance of the offshore financial centres of Hong Kong and Singapore, and the suddenly faster-growing south-east Asian economies of Indonesia, Malaysia and Thailand, to argue that economic development was in fact fostered by laissez-faire policies, with a minimal role for government. Despite the fact that the offshore centres, with their tiny, dense populations and absence of agricultural sectors to drag on productivity, are not really comparable to regular countries, the World Bank used Hong Kong and Singapore as two of its three “proving” case studies in a highly controversial 1987 report…

This was the ideologically charged era of the so-called Washington Consensus, when the World Bank, the International Monetary Fund and the US Treasury were united in their determination that the free market policies coming into vogue in the US and Britain were appropriate to all economies, no matter what their level of development. The vitriol of the debate was such that academic rigour was frequently a victim, as with the World Bank reports...

Beginning in 1997, with seven economies that have expanded at least 7 per cent a year for a quarter century - Japan, Korea, Taiwan, China, Malaysia, Indonesia and Thailand - east Asia entered a period of reckoning of its own, as the Asian financial crisis took hold. By this point Japan had long since become a mature economy that faced a new set of post-developmental structural problems, ones it showed much less capacity to address than the original challenge of becoming rich. Korea, Taiwan and China, however, were still in the developmental catch-up phase. These states were either unaffected by the Asian crisis or recovered quickly from it, and returned to brisk growth and technological progress. But Malaysia, Indonesia and Thailand were knocked completely off course. They suffered currency depreciation, inflation and much reduced growth. It is indicative that today Indonesia and Thailand report GDP per capita of only USD3,000 and USD5,000 respectively, and feature significant levels of poverty, where Korea and Taiwan report GDP per capita around USD20,000. At the end of the Second World War, all these countries were similarly poor.

What the Asian crisis clarified was that a consistent set of government policy interventions had indeed made the difference between long-run success and failure in economic development in east Asia. In Japan, Korea, Taiwan and China, governments radically restructured agriculture after the Second World War, focused their modernisation efforts on manufacturing, and made their financial systems slaves to these two objectives. They thereby changed the structures of their economies in a manner that made it all but impossible to return to an earlier stage of development.

Quick links

England and Wales have more police officers than ever before.

Summer-born children are being wrongly diagnosed with special needs.

Britain’s semiconductor strategy may fall short.

The Foreign Secretary struck a conciliatory tone towards China.

The modal Chinese person is fifty; the modal Indian is twenty.

Australia published its strategic defence review.

WhatsApp has threatened to quit Britain over the Online Safety Bill.

Rishi Sunak and other European leaders have called for the North Sea to become the world’s biggest power plant.

Rory Geoghegan, a former police officer and No. 10 staffer, has set up the Public Safety Foundation.

Richard Sharp has resigned as Chairman of the BBC.

Britain is one of the least racist countries in the world.