ncp9_final

The Magazine of The Centre for Economic Performance Volume 13 Issue 1 Spring 2008

ISSN 1362-3761

C e n t r e Pi e c e

China’s entrepreneursIndia’s foreign investment policy

Management practices in China and India

Unemployment and welfare to workVoting on interest rates

Nurses’ payBritain’s new homes

WILL THE CREDIT CRUNCHLEAD TO RECESSION?

Management gurus and the publishingindustry that sustains them oftencongratulate themselves on their‘thought leadership’, compiling endlesslists of ‘ultimate business thinkers’ and‘most enduring ideas’. All very amusing– indeed, frequently lampooned bycolumnists like Lucy Kellaway in theFinancial Times – but disturbing too.Despite the lack of intellectual rigour in most business bestsellers and an absence of any evidence beyondthe anecdotal, they clearly have a ready market.

Economists and other serious socialscientists tend to be more modest inthe claims they make for their ideas –and they are typically more reluctant topackage their findings in a way thatwill attract an audience beyondacademia. The Centre for EconomicPerformance (CEP) has always sought tobuck this trend: one of its central aimsis for top-quality economic research tohave an impact on society through thelong-term percolation of new ideas

into policy, practice and publicunderstanding.

In this issue of CentrePiece, we takea leaf out of the management crowd’sbook with the launch of a series ofreviews of CEP’s achievements, lookingback at some of the ‘big ideas’ thathave emerged from the research and their influence on both scholarship and public policy. In the first article, John Van Reenen describes how theCentre’s work on unemployment and welfare have not only changed theway economists think about theseproblems, but also led to policies likethe New Deals.

CEP research of a more recentvintage is making significant advancesin the study of management itself, andhere we report findings from oursurveys of management practices inChina and India. Two other articlesaddress key issues for these emerginggiants of the world economy – andmuch more will be discussed at a three-day conference on the topic that

CEP is hosting in early July.Elsewhere, we examine the often

perverse effects of regulation in Britain– the lethal impact of pay regulation inhealthcare; and how planningregulations stop us building houseswhere they’re most needed – and therole of incentives – for the unemployedto get a job; and for novice monetarypolicy-makers to conceal their trueviews on interest rates.

Finally, our cover story asks whetherthe credit crunch will lead to recessionand reaches a worrying conclusion. This too draws on enduring ideas from economic research: the doctoralthesis of Federal Reserve chairman Ben Bernanke. When it comes tomanagement of the world economy,economists and their ideas are,fortunately, more prominent than the business gurus.

Romesh [email protected]

CentrePiece is the magazine of the

Centre for Economic Performance at the

London School of Economics. Articles in this

issue reflect the opinions of the authors, not

of the Centre. Requests for permission to

reproduce the articles should be sent to the

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© Centre for Economic Performance 2008

Volume 13 Issue 1

(ISSN 1362-3761) All rights reserved.

Centre Piece

Editorial

CentrePiece Spring 2008

1

page 2 Big ideas: unemployment and welfare to workJohn Van Reenen presents the first in a series of surveys of significant research findings that have emerged from CEP

page 4The unemployment trapBarbara Petrongolo investigates whether the Job Seeker’s Allowance succeeded in getting people back to work

page 10Can better management sustain growth in China and India?Nick Bloom and Rebecca Homkes evaluate management practices in the two countries’ manufacturing sectors

page 15China’s entrepreneursLinda Yueh explores what we know about the people who have driven China’s remarkable economic growth

page 20Will the credit crunch lead to recession? Nick Bloom suggests that uncertainty will lead to a slowdown much worse than we currently anticipate

page 26Where to build Britain’s new housesTim Leunig argues for an end to the planning laws that constrain housing development in the South East

Contents in brief...

page 7 Understanding trade unionsRichard Freeman has been honoured forhis pioneering research on labour markets

page 8 Can pay regulation kill?John Van Reenen and colleaguesexamine the impact of regulating thelabour market for nurses on hospitalperformance in England

page 19 India’s foreign investmentpolicy: the impact onproductivityArunish Chawla considers what kinds ofliberalisation policies make a difference tofirms’ productivity

page 24 Delayed dovesStephen Hansen and MichaelMcMahon look back at the votingrecords of external members of theMonetary Policy Committee

page 26Where to build Britain’snew houses

page 24Delayed doves


2

What has economicsdone for me lately? I am often askedabout the purpose of the Centre for

Economic Performance (CEP). What impact have we had? How can we justifyour funding?

The CEP makes a difference in a varietyof ways. We evaluate public policies to see ifthey have any benefits and, if so, to whomthose benefits accrue and whether theyoutweigh any costs. The literacy hour inprimary schools, the Job Seeker’s Allowancefor the unemployed, R&D tax credits andmany other policies have been subjected to our rigorous and objective assessment.Our findings can be used by governmentsand others to assess what worked in thepast and what needs to be changed in the future.

Of course, many of these findings gounattributed once they enter the nationalbloodstream. Ideas, once accepted, areoften bastards. How many people knowthat the decline in social mobility betweenthe generations born in 1958 and 1970,mentioned repeatedly by politicians andcommentators, was first discovered by CEP researchers?

CEP researchers do not hide away frompublic debate. In 2007 alone, CEP researchappeared in the print, online or broadcastmedia on more than 380 occasions. It is bytaking public communication seriously that

our research can be disseminated to awider audience.

Our researchers are also formallyinvolved in policy-making in a number ofdifferent areas, serving on bodies such asthe Low Pay Commission, the MonetaryPolicy Committee, the Migration AdvisoryService and pay review bodies, andadvising business and non-governmentalorganisations such as trade unions.

But this perhaps misses out what ismost important: the long-term impact ofthe CEP. Starting in this issue ofCentrePiece, we have decided to give aflavour of how our ideas have influencedthe world. As Keynes said in The GeneralTheory, ‘Madmen in authority, who hearvoices in the air, are distilling their frenzyfrom some academic scribbler of a fewyears back.’ Whatever your opinion of theirmental state, there is no question thatpolicy-makers have been significantlyinfluenced by CEP research.

Obviously our ideas are not developedin a vacuum: we have many interactionswith the wider research and policycommunity, above all with others in theeconomics faculty at the London School ofEconomics (LSE). We are fortunate to bepart of the department that is the highest-ranked in the world outside theUnited States.

We have learned that it takes time foracademic ideas to percolate into publicconsciousness. Our findings and their

policy implications are not acceptedimmediately – or sometimes at all. Manyare disproved by events or furtherinvestigation, but even the ones that proveto be right take time to be supported andput into practice. This means, of course,that many of the new ideas that we havebeen generating in recent years may nothave an effect for many years to come.

Our first ‘big ideas’ overview looks atunemployment and welfare to work.Future commentaries will include thecauses of rising wage inequality andpolicies to combat this inequality such as education, the minimum wage andunions; declining social mobility;productivity and competition; innovationpolicies; economic geography; andhappiness and mental health.

Unemployment and welfare to workUnemployment and welfare to work havebeen one of the most high profile areas inwhich the combination of theory andcareful empirical analysis at CEP led topolicy developments. In turn, therecommendations that were adopted were evaluated and this allowed us to enhance our theoretical understanding ofthese issues.

In the aftermath of the GreatDepression and World War II, theKeynesian consensus was thatunemployment was essentially a problem

To illustrate CEP’s impact on public policy and debate,John Van Reenen introduces and presents the first in aseries of ‘big ideas’, surveying the significant researchfindings that have emerged from the Centre over the pastthree decades.

Big id


3

of demand. Governments needed to getthe level of aggregate demand right tomaintain full employment through amixture of monetary and, above all, fiscalpolicies. LSE economists like John Hicksand Bill Phillips (of the famous Phillipscurve) were at the heart of this consensus.

The appearance of ‘stagflation’ –growing inflation and unemployment – in the 1970s shattered this happy state of affairs. Out of the crisis,Thatcherism drew on Milton Friedman’swork to emphasise the failure of demand management and the need forgovernments to allow the market to letunemployment find its ‘natural’ level (theNAIRU or ‘non-accelerating inflation rate ofunemployment’). Printing money to boostdemand led only to accelerating inflation.

In 1990, as the Thatcher era wasdrawing to a close, CEP was born. A majorstrand of our work (building on the formerCentre for Labour Economics) agreed thatthere was a NAIRU as Friedman argued.But rather than being somethingimmutable and fixed in stone,microeconomic supply-side policies couldbe used to lower the NAIRU and therebyreduce unemployment. Simply cuttingunemployment benefits was not the onlyway of achieving lower unemployment.

The framework for this view waspublished in the classic textbookUnemployment: MacroeconomicPerformance and the Labour Market byRichard Layard (CEP’s founder director),Stephen Nickell and Richard Jackman (first edition 1992). Reviewing the 2005edition in the Journal of EconomicLiterature, MIT’s Olivier Blanchard wrote:

‘The book was and remains animpressive achievement. The wayto read it however is not so

much as a treatise than as amanual of battlefield surgery. Itspurpose is clear: How tounderstand, and then how toreduce, unemployment in Europe,by taking inventory of theknowledge at hand.’

First, there had to be intellectualfoundations. This meant moving awayfrom the textbook model of perfectcompetition in the labour market andconsidering a more subtle and realisticpicture of how people worked. Togetherwith Dale Mortensen, Chris Pissarides(director of CEP’s macroeconomicsprogramme from 1999 to 2007) developed job search theory, now regarded as the foundation for modernunemployment theory.

The basic idea is that it takes time foran employee to find a job and for anemployer to find an employee – so thismeans that there will be an equilibriumlevel of vacancies and unemployed asindividuals get ‘matched’ with jobs. Layard et al showed how many othermodels of imperfect competition(bargaining, efficiency wages, etc.) had some similar implications.

Second, these theories had to beconfronted with data both to test themodels and to put numbers on the strength of the relationships. Huge effort was invested in building up cross-national macro and micro datasets thatcould be used to perform statisticallyrigorous analysis.

The next step was the implications forpolicy. The basic message was that supply-side policies to improve the matchingprocess between jobless workers andvacancies were crucial. This implied anagenda of ‘welfare to work’, something

that has been taken up by governmentsaround the world, particularly in the UKsince 1997.

An example of this is the New Deal forYoung People, first suggested by RichardLayard and introduced by Gordon Brown in 1998 (and later extended to othergroups on welfare, including singlemothers and disabled people). Thephilosophy of the reform was that long-term unemployment was a huge waste ofresources as the jobless lost skills andmotivation and were no longer effectivelycompeting in the labour market anddampening wage inflation.

To combat this problem, a combinationof ‘carrot’ and ‘stick’ was needed. Thecarrot was to give the unemployed helpwith job search through intensiveinformation and mentoring at job centres.Those who still struggled to find workwould be supported in subsidised workand training programmes. The stick wasthat those who refused work or otheroptions would lose their benefits. Elementsof a sanctions approach had been triedbefore the Labour government but without the support package, they hadonly limited success.

The story does not end there. A vitalpart of policy is rigorous evaluation ofwhether it works or not. I was deeplyinvolved in the first evaluation of the NewDeal, which required us to develop newtechniques and combine new datasets. We found that the programme did appearto have major benefits, raising the jobfinding rate by about 20%, and I arguedthat on the whole these benefitsoutweighed the costs. Subsequent workhas tended to support this conclusion.

The evaluations raised many questions:what should be the balance between thecarrot and the stick? How effective is thetraining option? Why does the New Dealeffect seem stronger when it was firstintroduced than later? Why is theaggregate effect not larger, and is theyouth labour market now running intotrouble? These questions feed back intofurther developments of the theory andother policies.

The overall lesson is that carefuleconomic research has real effects onpolicy and the world.

John Van Reenen is director of CEP.eas


4

The Job Seeker’s Allowance was introduced inlate 1996 to encourage benefit claimants to lookfor work. New research by Barbara Petrongoloinvestigates whether it has succeeded inbreaking the ‘unemployment trap’.

The unemployment trap


5

The Job Seeker’s Allowance(JSA) was introduced in the UKon 7 October 1996. It replacedthe existing system of

unemployment benefits and incomesupport, and is currently the main welfaresupport to the unemployed. It wasintended to break the ‘unemploymenttrap’ in which workers were discouragedfrom finding work because of theavailability of benefits.

The new system placed stringentconditions on claimants – possibly forcingsome to stop claiming without finding anew job first. Individuals who drop out ofthe welfare system may become moredetached from the labour market and putless effort into searching for a new job.This may lower the employment rate inthe future – exactly the opposite effect ofthe one intended.

The JSA has two distinct components:

n The contributory component, which haslimited duration, is not means-testedand is based on previous nationalinsurance contributions. This component replacedunemployment benefit.

n The means-tested component. In principle, this is an open-endedmeasure that replaced income support.

The contributory component of theJSA is more stringent than theunemployment benefit that it replaced. Itis only payable for half a year (rather thana full year), young people aged 16-25receive less and there is no allowance for adependent spouse. In contrast, the means-tested component of the JSA is payable atthe same level as the former measure ofincome support. And as most support isprovided through this component, thetotal effect of the changes was not large.

The most significant break with theprevious system was the substantial

increase in evidence that claimants had toprovide to demonstrate that they werelooking for work. Claimants now have tosign a Jobseeker's Agreement in whichthey agree to look for work actively andcommit to a number of specific ‘searchsteps’. Such steps might include howmany employers they are going to contactevery week or how many times they aregoing to contact a job centre.

Claimants are required to keep adetailed diary of each search step

undertaken, such as each phone callmade to a potential employer. The searchdiary is then checked against the initialagreement at fortnightly interviews withthe Employment Service – or morefrequently if a claimant is suspected offraud. Claimants may be ‘directed’ by the Employment Service staff to takespecific steps.

If claimants are still unemployed after13 weeks, they are required to broadentheir search and may not turn down job

Figure 1:

Flows into and out of the claimant count (seasonally adjusted)

150,000

100,000

50,000

0

200,000

250,000

300,000

350,000

400,000

450,000

Jan 06 Jan 08Jan 04Jan 02Jan 00Jan 98Jan 96Jan 94

October 1996

Jan 92

■ Off-flow■ On-flow

Year

Source: NOMIS.

Figure 2:

The claimant count and the Labour Force Survey stock ofunemployed (seasonally adjusted)

150,000

100,000

50,000

200,000

250,000

300,000

Feb 06Feb 04Feb 02Feb 00Feb 98Feb 96Feb 94

■ Claimant count■ LFS unemployment stock

October 1996

Year

Source: NOMIS and ONS.

The Job Seeker’sAllowanceintroducedconditions toensure claimantswere looking for work


6

offers outside their main occupation(although this is difficult to enforce). A claimant who fails to meet theserequirements is threatened with temporarysanctions or disqualification from the JSA entirely.

Some of the effects of the JSA can beseen by looking at flows of people intoand out of registered unemployment, asFigure 1 shows. Soon after theintroduction of the JSA, there was a largeincrease in the number of people stoppingclaiming the JSA, with no increase in thenumber of new claimants. This translated into a rapid decline in theunemployment rate, which was alreadyfalling in the months before the reformcame into effect.

Official evaluations of the JSA carriedout by the then Department of SocialSecurity (now the Department for Workand Pensions) show that the JSA increasedthe number of people stopping claimingbenefits. This was largely due to a‘weeding out’ effect: those who were notserious about searching for a new jobwere forced off the register.

Their findings also show that theaverage claimant increased his or herefforts to find a new job. Of course, it ispossible that as less serious claimants wereweeded out, only claimants who weretrying to find a job remained. So it couldbe that the remaining claimants were theones who were always more motivated,rather than being motivated by the JSA directly.

Indeed, research by Alan Manning(2005) finds that taking account of the

expenditure on unemployment benefitshas been lower under the JSA, if we takeaccount of the increase in incapacitybenefits, it is not clear whether the totalbenefit expenditure was reduced. So itremains unclear whether the move fromthe unemployment benefit and incomesupport system to the JSA was beneficialeither in terms of reducing benefits or ofhelping more people into work.

Some workers appear to have

moved off the JobSeeker’s Allowanceand onto incapacity

benefit

The Job Seeker’sAllowance reduced thenumber of claimants –but it also reduced thenumber of claimants

finding work

This article summarises ‘What are the

Long-term Effects of UI? Evidence from the

UK JSA Reform’ by Barbara Petrongolo,

CEP Discussion Paper No. 841

(http://cep.lse.ac.uk/pubs/download/

dp0841.pdf).

Barbara Petrongolo is a lecturer in

economics at LSE and an associate in CEP’s

labour markets programme.

Further reading

Stephen Machin and Olivier Marie (2008),

‘Crime and Benefit Sanctions’, Portuguese

Economic Journal (special issue on labour

economics), earlier version available

as CEP Discussion Paper No. 645


dp0645.pdf).

Alan Manning (2005), ‘You Can't

Always Get What You Want: The Impact

of the UK Job Seeker’s Allowance’,



dp0697.pdf).

behaviour of both claimants and non-claimants, their average search effort didnot increase at all after the introduction ofthe JSA.

Further effects of the JSA can beevaluated by comparing two groups of jobseekers: those who became unemployedshortly after the introduction of the JSA;and those who became unemployed sixmonths earlier (and then adjusting forseasonal factors using information on latercohorts of claimants).

Although claimants affected by theJSA system came off benefits more quicklythan claimants did under the old system,they were 4% less likely to be in work ayear after they lost their job. This meantthat they were earning an average of£600 less a year.

What’s more, these effects werestronger for young people (those aged upto the age of 24), who experienced moresevere earnings losses than older workersafter the introduction of the JSA.

As the JSA seems to have movedclaimants off benefits but not into newjobs, it increased the number of non-employed people who were not claimingbenefits. Figure 2 shows that the claimantcount – while being very close to theLabour Force Survey (LFS) measure ofunemployment until 1996 – fell moresharply than LFS unemployment after theintroduction of the JSA in late 1996.

So what happened to these workerswho were neither working nor claimingbenefits? Many may have become part ofthe ‘hidden unemployed’ – but there areother possibilities.

A study by Stephen Machin and OlivierMarie (2008) shows that crime in the UKrose more in areas that were mostaffected by the tougher JSA benefitregime. Could this mean that peoplepushed out of the benefit system by thenew, more stringent standards wereturning to illicit methods of earning?Possibly – but other factors could be atwork as well, so we must be careful inclaiming this.

Another possibility is that peoplesimply moved onto other benefits, notablyincapacity benefits. Indeed, individualscovered by the JSA are 3% more likely totake up incapacity benefits – and thus beinduced into longer-term dependency –than individuals not covered by the JSA.

This has important consequences forgovernment spending on welfare. While


7

Further reading

Alex Bryson and Richard Freeman (2006),

‘What Voice Do British Workers Want?’,


(http://cep.lse.ac.uk/pubs/download/dp0731.pdf).

Richard Freeman (2005), ‘From the Webbs to the

Web: The Contribution of the Internet to Reviving

Union Fortunes’, in Susan Fernie and David

Metcalf (eds), Trade Unions: Resurgence or

Demise?, Routledge (summarised in CentrePiece:

http://cep.lse.ac.uk/pubs/download/CP182.pdf).

Richard Freeman, ‘Are European Labor Markets as

Awful as All That?’, CEP Discussion Paper No. 644


Richard Freeman and Joel Rogers (1999),

What Workers Want, Cornell University Press.

Richard Freeman and James Medoff (1984),

What Do Unions Do?, Basic Books.

Understanding trade unions and the labour market

The prize, awarded by the Institute for the Study of Labor(IZA) in Bonn, honours the pioneering work ofexceptionally creative scholars who have revolutionisedtheoretical and empirical research on labour markets. Theprize committee includes Nobel Laureates George Akerlofand Joseph Stiglitz, and the previous winners are JacobMincer, Orley Ashenfelter, Ed Lazear, Dale Mortensen,David Card, Alan Krueger and CEP’s Chris Pissarides.

The award team said: ‘By drawing attention to importantsocial problems and trends, Richard Freeman has greatlyextended the range of issues addressed in modern laboureconomics. His analyses of inequality and discrimination,the role of unions and the welfare state are extremelyvaluable for the understanding of effective labour market policy.’

’In various studies, Freeman has proven that unionsperform multiple economically valuable functions whichreach far beyond their role in wage bargaining. Thesecontributions, which are among Freeman's mostinfluential research, have revolutionised the perception oftrade unionism in modern labour economics.’

’In light of globalised markets and internationalcompetition, the trade unions' strategies should not beconfined to achieving higher wages. According toFreeman, modern unions must also provide a directchannel of communication between workers andmanagement and act as an intermediary to protectemployment and foster the creation of new jobs.’

’By serving as an institution of collective voice, unionscontribute to a higher level of job satisfaction and improveworkers' loyalty to the firm. Freeman has demonstratedthat union influence not only reduces absenteeism butalso promotes long-term employment relationships bylowering the number of quits. This reduction in labourturnover lowers hiring and training costs. Moreimportantly, it increases productivity by creating incentivesto invest in workers' education and skill enhancement.’

‘In this respect, trade unions who act constructively are ofvital importance to overall economic performance.Freeman's research shows that non-dogmatic unions canplay a significant role in today's labour markets. It should

encourage union leaders to be more aware of their keyresponsibility for the economy as a whole.’

’For more than three decades, Richard Freeman has beenamong the internationally most active and influentiallabour economists. His research, which has greatlyenriched the scientific debate, has also had a strongimpact on policy debates around the globe. Among theinstitutions he has advised on economic policy issues arethe World Bank, the International Labour Organizationand the European Union. In addition, Freeman directs theProgram on Labor Studies at the National Bureau ofEconomic Research.’

One of the results of the IZA prize will be a book basedon Richard Freeman’s articles published by OxfordUniversity Press. This will be about his research on labourmarkets in the UK and continental Europe, work doneprimarily at CEP.

Richard Freeman, professor of economics at HarvardUniversity, visiting professor at LSE and seniorresearch fellow in CEP’s research programmes onlabour markets and wellbeing, has been awarded theIZA Prize in Labor Economics 2007.

in brief...


Can pay regulation kill?

Nurses’ pay in England is set centrally with little localvariation. This means that hospitals in high cost areas likeLondon and the South East struggle to recruit and retainstaff. As a consequence, our research finds that they treatfewer patients and have lower quality outcomes – forexample, much higher fatality rates among patientsadmitted with emergency heart attacks.

These effects are not trivial: the results suggest that a10% increase in the gap between the wages paid to NHSnurses and those paid to women working in the privatesector locally raises the fatality rate among peopleadmitted with a heart attack by about 5%.

Centralised pay setting happens in many public sectorlabour markets like health, teaching and the police.People often worry about the minimum wage pricingpeople out of jobs. But when pay in a sector is set to bealmost the same across the country, it effectively imposesa maximum wage on people living in parts of the South

East where wages outside the public sector are pushedup by the tightness of the labour market.

Nowhere is centralised pay setting more important thanin the NHS. More than a quarter of a million nurses inEngland have their pay set by a single pay review body.The process allows some local flexibility, but in practicethe gap between the wages paid to a nurse in Newcastleand one in London is small compared with the pay gapbetween women in those areas who are not nurses.

The research looks at how centralised pay setting fornurses in the NHS affects hospital performance bytracking changes in the outside wage and changes inperformance in over 100 English hospital trusts over a six-year period.

Common sense would suggest that hospitals located inplaces where outside opportunities are better are goingto struggle to recruit, retain and motivate staff. This is

John Van Reenen and colleagues present evidence onthe impact of regulating the labour market for nurseson the performance of hospitals in England.

Centralisedpay setting fornurses meansthat hospitals

in high costareas struggleto recruit and

retain staff

in brief...

8


exactly what the study finds: in areas like London wherethe outside labour market is strong – where the wages ofnurses are lowest compared with their non-nursecounterparts – nurse vacancy rates are higher and fewerqualified nurses work in the NHS.

But these recruitment difficulties are not confined to thehuman resources department. More worryingly, they feedinto a lower quality of service provision and pooreroutcomes for patients. Hospitals in areas where theoutside labour market is strong have lower volumes ofactivity relative to their staffing levels. They also havehigher fatality rates among patients who are admittedwith emergency heart attacks. A 10% increase in theoutside wage means a 5% increase in death rates fromheart attacks.

None of these effects are present in firms operating inthe private sector. Nor do they seem to arise becausehospitals in high cost areas face greater financialproblems or have patients who are sicker – in fact,patients in many high external wage areas generally havebetter health than those in low external wage areas.

One key problem is that hospitals that find it difficult torecruit permanent staff rely more on temporary agencystaff. These nurses can be paid at a higher rate to getaround the pay regulation. But they often tend to haveless experience and training, and will not know thehospital as well as someone on a permanent contract.

The maps in Figure 1 show the link between outsidewages and use of temporary agency nurses who are less

experienced in working in the hospital. In the first map,the areas with the highest outside wages are marked inred and those with the lowest outside wages are markedin blue: it is clear that the large cities and the South Easthave higher outside wages. The second map shows theintensity of use of agency nurses, and the spatialdistribution is very similar to that of the first map: whereoutside wages are high, use of agency nurses is high.

The study uses data from 1995 to 2002 and there havebeen some relaxations in the rules since then with morerecruitment bonuses and cost of living allowances. But itis still the case that public sector workers are taking amuch bigger effective pay cut compared with similarlyskilled workers in lower cost areas.

The lessons can be used throughout the public sector.Instead of across the board pay increases, the right thingto do is to allow wages in the high cost areas of theSouth to increase at a much faster rate than the low costareas of the North. This should be done in schools andpolice departments as well as hospitals. Only then will thedeath premium of London be properly tackled.

This article summarises ‘Can Pay Regulation Kill? Panel Data Evidence

on the Effect of Labour Markets on Hospital Performance’ by Emma

Hall, Carol Propper and John Van Reenen, CEP Discussion Paper No.

843 (http://cep.lse.ac.uk/pubs/download/dp0843.pdf).

Emma Hall is at the Centre for Market and Public Organisation

(CMPO) at the University of Bristol. Carol Propper is at CMPO and

Imperial College, London. John Van Reenen is director of CEP.

Figure 1:

Outside wages and the use of agency nurses

9

Highest outside wage

Lowest outside wage

Highest intensity of agency nurses

Lowest intensity of agency nurses

Hospitals in highcost areas havehigher fatality

rates amongpatients admitted

with emergencyheart attacks

The phenomenal growth ofChina’s manufacturing sectorover the last decade hasbeen fuelled in large part bya seemingly inexhaustible

supply of cheap labour. The opening of theChinese economy has enabled a countrywith one fifth of the world’s population tomake more use of that resource. Labourshortages in urban areas are supported bymass migration from the countryside.

But even in China, the supply of workersis not infinite and economic growth isleading to wage growth. With rapidlyincreasing wage rates and an ageingpopulation (due in large part to the one-child policy instituted in 1978), Chinese manufacturing is set to change.

Can China’s manufacturing sectorcontinue to grow even with rapidly risingbills? And what about the other Asian giant: can Indian manufacturing start tocatch up with China by raising its annualgrowth rate to the 10%-plus levels thatChina has enjoyed?

One key factor is the quality ofmanagement in these countries. If management practices are poor incomparison with those in Europe, Japan andthe United States, Chinese and Indian firmswill be less able to compete as their costsincrease. But if Chinese and Indian firms are

able to adopt world-class managementpractices, then the phenomenal growthrates of these industries may continue formany years.

CEP’s research programme withMcKinsey & Company and StanfordUniversity makes it possible to comparemanagement quality in China and India

The economies of China and India have beenbooming – but do they have the quality ofcorporate management to sustain growth overthe longer term? Using CEP’s global survey ofover 4,000 firms, Nick Bloom and RebeccaHomkes evaluate management practices in thetwo countries’ manufacturing sectors.

Can better managementsustain growth in China and India?


10

(Bloom, Dorgan et al, 2007). During thesummer of 2006, our team contacted over4,000 medium-sized manufacturing firmsacross Europe, India, Japan and the UnitedStates, and spoke directly with plantmanagers about their firms’ managementpractices. In the summer of 2007, weextended this survey to China.

Measuring management in a systematic way requirescodifying the concept of good and bad management into ameasure applicable to different firms. We used an interview-based management practice evaluation tool that defines andscores from 1 (worst practice) to 5 (best practice) across 18of the key management practices that appear to matter toindustrial firms, based on McKinsey’s expertise in workingwith thousands of companies across several decades. For fulldetails of the survey methodology, including all thequestions, see Bloom and Van Reenen (2007).

The 18 practices fall into four broad areas:n Shopfloor operations: have companies adopted both the

letter and the spirit of lean manufacturing?n Performance monitoring: how well do companies track

what goes on inside their firms?n Target setting: do companies set the right targets, track the

right outcomes and take appropriate action if the twodon’t tally?

n Incentive setting: are companies hiring, developing andkeeping the right people and providing them withincentives to succeed?

Measuringmanagementpractices

CHINACHINACHINACHINACHINACHINACINDIAINDIAINDIAINDIANDIAINDIAINACHINACHINACHINACHINACHINACHINACINACHINACHINACHINACHINAC

AINDIAINDIAINDIANDIAINDIAIAINDIAINDIAINDIANDIAINDIAIINACHINACHINACHINACHINACNACHINACHINACHINACHINACINACHINACHINACHINACHINACNACHINACHINACHINACHINAC

CHINAINDIACHINDIACHINDIACHINACHINACHINACHINAINDIAINDIACCCC

The average Chinese and Indian firm is poorlymanagedThe research finds that comparing acrossall the countries in the sample, theaverage management scores for Chineseand Indian firms are the lowest (see Figure1). Despite recent media attention for theimpact of principles of lean manufacturingin China and India, both countries still lagbehind in terms of modern manufacturingtechniques and practices. Their firms alsounderperform in terms of incentivestructures and people management.

By comparison, firms from more

developed countries – Germany, Japan,Sweden and the United States – are wellmanaged. France, Italy, Poland and the UKare all solidly mid-table, while worryinglyfor Portugal and Greece, theirmanagement practices appear to be onlyslightly better than those in China andIndia. This suggests that the OECDcountries’ advantages in managementshould not be overstated and that Chinaand India may be catching up.

What’s more, although the averageChinese and Indian firm performs badly,this disguises tremendous variation inmanagement practices within eachcountry. The best Chinese and Indian firmsare as well managed as those in the UKand the United States (see Figure 2).

Indeed, rather alarmingly for theBritish and Americans, many of their firms– about a quarter of UK firms and 15% ofUS firms – are actually worse managedthan the average Chinese and Indianfirms. And while roughly one third of wellmanaged Chinese and Indian firms areforeign multinationals, two thirds areexcellently run domestic firms.

Another notable result illustrated inFigure 2 is the marked variation inmanagement practices in India, especiallyin comparison with China. While India hasa large upper and lower tail of over- andunderperforming firms, Chinese firms aresolidly clustered slightly below average.

The domestic Indian firms with poormanagement practices are typicallygovernment owned or family firms thatpractice primogeniture (handing down theCEO position to the eldest son). They stand

11

Figure 1:

Chinese and Indian firms are the worst managed on average

2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5

India

China

Greece

Portugal

Poland

Italy

France

UK

Japan

Sweden

Germany

United States

The bars indicate for each country the average score on the 18 managementquestions (1=worst practice, 5=best practice).

For each company in the study, researchers interviewed oneor two senior plant-level managers, who knew only that theywere taking part in a ‘research’ project. These managerswere selected because they were senior enough to have areasonable perspective on what happens in a company butnot so senior that they might be out of touch with theshopfloor. The interviews relied on open questions and theinterviewers were trained to probe for details of practices onthe ground.

The interviews were run by an international team of 47postgraduate students (mainly MBAs), who worked from CEPin a specially created survey centre during the summer of2006. This was a 24-hour operation since the Chinese daystarts at midnight in London, just before managers on theWest Coast of the United States pack up to go home.

CHINACHINACHINACHINACHINACHINACHINACHINDIAINDIAINDIAINDIAINDIAINDIANDIAINDIAICHINACHINACHINACHINACHINACHINACHINACHCHINACHINACHINACHINACHINACHINACHINACHINDIAINDIAINDIAINDIAINDIAINDIANDIAINDIAIINDIAINDIAINDIAINDIAINDIAINDIANDIAINDIAICHINACHINACHINACHINACHINACHINACHINACHCHINACHINACHINACHINACHINACHINACHINACHCHINACHINACHINACHINACHINACHINACHINACHCHINACHINACHINACHINACHINACHINACHINACH


The averageChinese andIndian firm isbetter managedthan a quarter of UK firms

in sharp contrast to some of India’s well-known industrial giants, which operateusing world-class management practices.

India also displays a substantially largerspread of productivity acrossmanufacturing plants than China. Thissuggests that there is something in theIndian business environment that isconducive to much more variation inmanagement practices and productivitythan in China, a phenomenon we arecurrently researching.

Which firms are getting it right?To understand why China and India havethese underperforming firms with poormanagement practices, we segmented thefirms by broad ownership category. Wefind that multinational firms are wellmanaged everywhere. These firms aretypically the Chinese and Indianmanufacturing operations of successfulEuropean, Japanese and US firms, whichhave transferred their world-classmanagement practices abroad.

In stark contrast, foreign joint ventures– in which foreign and domestic firmsshare ownership – tend to struggle. Mostof these ventures are located in China.They date from regulations introduced in1979, which required foreign investors toset up joint ventures with local firms inorder to gain entry to the market. (It wasnot until 1986 that the first wholly-ownedforeign enterprise was established.)

Given the complex managementstructures that shared ownership entails(multiple layers of domestic and foreignmanagement and shareholder boards),managerial clashes seem to have plaguedthe organisation of operations andincentives. Combined with the inherentcultural and language clashes, theseforeign joint ventures adopted substantiallyworse management practices than evenmany domestic firms.

Other firms that are poorly managedare those owned and run by families. Suchfirms are particularly common in India butrare in China (there has been a morerecent drive towards private familyownership in China, but this was difficultprior to 1979). Given the difficulties ofseparating ownership from control in India(arising from problems in the legal system),family firms rarely bring in externalmanagement.

Government firms are also extremely


12

Figure 2:

Chinese and Indian firms are better managed than about 25% of UK firms and 15% of US firms

1 3 52 4

United States

UK

India

China

1 3 52 4

1 3 52 4

1 3 52 4

Average management scorein China and India



Government firms and firmsowned and run by families arevery poorly managed

The charts show the distribution of firms across management scores

(1=worst practice, 5=best practice) within each country.


13

badly run in both countries (and indeedacross all the countries in the sample),with particularly weak management ofworkers and a lack of modernmanufacturing techniques.

In recent years, there has been astrong push in former Chinese state-owned firms towards dispersing ownershipamong their workers. With reforms toIndia’s legal system, government andfamily-run firms may diminish inimportance there as well. This may pavethe way to a brighter future for the twocountries’ manufacturing sectors if firmscan adapt their practices to match thoseof their competitors.

Managerial over-optimism isnot equated with strongmanagement practices Since good management is strongly linkedwith good performance, why is it that notall firms make a priority of improving theirpractices? To examine the possible causesof this disconnect, we asked managers asa final question in the interview to assessthe overall management performance oftheir firm. To avoid false modesty, theywere asked to exclude their personalperformance from the calculation.

The answers indicate that Chinese andIndian managers are particularly over-optimistic about their managementpractices. The average Chinese and Indianfirm’s self-assessment is that itsmanagement is better than the averageFrench, Italian, Japanese, Polish, Swedish,UK and US firm.

This is particularly striking given howpoorly managed the average Chinese andIndian firms are in comparison with theirEuropean, Japanese and US counterparts.In fact, the only country with distinctlymore optimistic managers is Greece, whichhas the third-worst managed firms in thesample.

Chinese and Indian firmstend to be highly centralisedMore than management practices, thedegree of management autonomy withina firm can affect its productivity, especiallyin terms of its ability to implementprocesses and make timely decisions. Wefind huge variations in the extent to whichpower is centralised within firms’corporate headquarters rather thandelegated to individual plant managers.

The corporate headquarters of some

Figure 3:

Foreign multinationals are well managed in China and India, but foreign joint ventures are not

2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2

Government

Family owned, family CEO

Foreign joint venture (China only)

Domestic firm, non-family owned

Family owned but external CEO

Foreign multinational

Figure 4:

Chinese and Indian managers are more over-confident than European, US and Japanese managers

2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8

India

China

Greece

Portugal

Poland

Italy

France

UK

Japan

Sweden

Germany

United States

■ Self-assessed management■ Our management score

The bars indicate for each country the average score on the 18 management questions and the

average score on the self-assessed management question: ‘Excluding yourself, how well

managed is your firm on a scale of 1 to 10, where 1 is worst practice, 10 is best practice and 5 is

average’. The scores are divided by 2 to put them on the same scale as our management scores.

The bars indicate the average score on the 18 management questions (1=worst practice,

5=best practice) for each type of firm ownership in China and India.

Average self-assessed management score in China and India


firms treat their production plants almostas independent entities, letting plantmanagers make decisions on hiring,investment, sales and productdevelopment. But others directly controlalmost every aspect of their plants’activities, leaving little decision-makingpower to plant managers.

To investigate this variation indecentralisation, we asked plant managersabout the degree of autonomy they had infour activities: hiring new full-time workers;making capital investments; controllingtheir sales and marketing; and introducingnew products. We combined these fourindicators into one overall measure of plantmanagers’ autonomy, where high valuesindicate that decisions are decentralised toplant managers and low values indicatethat they are taken at corporateheadquarters.

Figure 5 plots this measure ofautonomy across countries. The substantialvariation is evident as firms in NorthernEurope and the United States are typicallydecentralised compared with the veryhierarchical ones in Asia and SouthernEurope.

In related work (Bloom, Sadun and VanReenen, 2007), we find that this degree ofdecentralisation is positively related to theproductivity of information technology (IT).Firms in which managers and workers aremore autonomous appear to make muchbetter use of IT, presumably because theirgreater operating freedom enables them toexperiment and adapt the IT to their localenvironment.

This highlights a potential futureproblem for Chinese and Indian firms.Their highly centralised managementstructures are likely to be less effective asproduction technologies becomeincreasingly computer-intensive.

The future of Chinese andIndian manufacturingWhile the results of our survey highlightthe fact that Chinese and India firms havebelow average management practices, thisis mainly due to a long tail of poorly rungovernment and traditional family firms. Asthe two countries develop, both in termsof local markets and ownership structures,the proportion of these firms shouldcontinue to shrink rapidly.

The newly organised and changingfirms that adopt competitive best practicesshould push average standards of

management practices towards those inEurope and United States. Thus, even asChinese and Indian wage rates and rawmaterials costs start to rise, the negativeeffects could be offset by an improvementin management practices.

But a possible cloud on the horizon forthese countries is the hierarchicalorganisation of their firms, which, as ourresearch shows, impedes the effectiveadoption of IT. Whether Chinese andIndian firms can also modernise theorganisation of their firms alongside theirmanagement practices is a key question,and one that CEP researchers will continueto investigate.

This research was jointly funded by the

Anglo-German Foundation and the Economic

and Social Research Council.

Nick Bloom is an assistant professor of

economics at Stanford University and a

research associate in CEP’s productivity and

innovation programme.

Rebecca Homkes is management research

project manager in CEP’s productivity and

innovation programme, and has been

overseeing the Chinese survey.

Further reading

Nick Bloom, Stephen Dorgan, John Dowdy,

Christos Genakos, Raffaella Sadun and John

Van Reenen (2007), ’Management Practices

and Productivity: Why They Matter’

(http://cep.lse.ac.uk/management/

Management_Practice_and_Productivity.pdf).

Nick Bloom and John Van Reenen (2007),

‘Measuring and Explaining Management

Practices across Firms and Nations’,

Quarterly Journal of Economics 122(4):

1351-408 (earlier version available as CEP

Discussion Paper No. 716:

http://cep.lse.ac.uk/pubs/download/

dp0716.pdf).

Nick Bloom, Raffaella Sadun and

John Van Reenen (2007), ‘Measuring and

Explaining Decentralisation across Firms and

Countries’, LSE/Stanford mimeo

(http://www.stanford.edu/~nbloom/

decent.pdf).


14

Figure 5:

Asian firms are much more centralised (hierarchical) thanNorthern European and US firms

-0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4

Greece

Japan

India

China

Poland

Portugal

France

Italy

Germany

UK

United States

Sweden

More centralised production(plant managers have

little autonomy)

More decentralised production(plant managers have

lots of autonomy)

Average degree of plant manager autonomy over hiring,investment, sales and new products, by country



Chinese and Indianfirms are much morecentralised thanNorthern European and US firms

The central feature ofChina’s transition from acentrally planned economyis the development of thenon-state sector – private

firms led by an emerging class ofentrepreneurs. In 1978, the first year ofreform in China, the state sectoraccounted for over 90% of the country’sGDP; by 2005, this had fallen to less thanhalf (see Figure 1).

Not all of China’s growthachievements can be attributed toentrepreneurs. Rural industries – thetownship and village enterprises –contributed a growing proportion fromthe early 1980s onwards and accountedfor nearly a third of GDP in the mid-1990s. And foreign investors also played arole from around that time.

But since the late 1990s, China’sentrepreneurs have been the key driver ofgrowth. They are the creators of the de novo firms that are forming a dynamicand innovative private sector – an essential force in any developing country(see, for example, Wu, 2002, and Zhang et al, 2006).

What do we know about the people

who have had the wherewithal to start abusiness or work for themselves? Whatkinds of personal traits differentiate themfrom people who choose not to embraceentrepreneurship? The findings from anational household survey conducted in

China’s remarkable economic growthhas been achieved through the rapidemergence of a dynamic private sector.Linda Yueh explores what we knowabout the generation of self-employedentrepreneurs who have driven thistransformation.


15

Figure 1:

State-owned enterprises’ share of GDP, 1978-2005

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

1978

1980

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Year

Source: China’s National Bureau of Statistics

CHINAINDIACHINDIACHINDIACHINACHINACHINACHINAINDIAINDIACCCC


China’s entrepreneurs

China’s economy isincreasingly driven

by competition,innovation and

productivity

urban China in 2000 shed some light onthese questions.

The rise of China’sentrepreneurial classThe dramatic growth in the share of self-employed entrepreneurs in the Chineseworkforce is evident from the mid-1990s(see Figure 2). It is most apparent in therural areas where there were no recordedprivate enterprises until 1994.

The upward trend continues in urbanareas as in the country as a whole. But inrural areas, self-employment now seemsto be falling. Given the massive migrationfrom rural to urban areas, this may wellreflect the limited opportunities for ruralindustries to develop when competingagainst the advantages of urbancompanies and markets.

Overall, the increase inentrepreneurship in China bodes well forsustained economic growth. But theemergence of China’s entrepreneurs hasnot been without obstacles. Byguaranteeing employment and providingsocial security in the absence of a nationalsafety net, the lifetime employmentsystem in the state-owned enterprises(known as the ‘iron rice bowl’) stronglydiscouraged urban workers frombecoming self-employed.

Not until the dismantling of theemployment system and the massivelayoffs accompanying the restructuring ofstate-owned enterprises in the mid-1990sdid private Chinese firms begin to flourish (Knight and Yueh, 2004). And byproviding an alternative source ofemployment and revenue, the emergingnon-state sector has given the government leeway in its efforts todownsize and reform state-ownedenterprises (Fan, 1994).

Another institutional challenge facedby entrepreneurs has been limited accessto credit. A recent estimate by the firstChinese chief economist of the WorldBank suggests that out of 40 million smalland medium-sized enterprises in China in2006, less than half of 1% could obtainloans from banks (Lin, 2007).

Aspiring entrepreneurs have also faceda shortage of key assets such as land or property (the property market did not develop until the late 1990s) andinsecure property rights in a system thatdid not protect private ownership officiallyuntil 2004. Having property in Chinasuggests being fairly well connected asurban (and, for the most part, rural) landis state-owned and privatisation of landand buildings has only begun recently.

When the survey asked entrepreneurs

why they started their own business, 37%said that it was because they had therequisite skills and experience, 17%started a business by joining in withrelatives, 11% had property and 7% had funds.

Comparing entrepreneursand non-entrepreneursSo which characteristics distinguishentrepreneurs from non-entrepreneurs inChina? Comparing people who havestarted their own business as their primaryor secondary job with people who remainin paid employment, the first notabledifference is in annual incomes. As Figure 3 shows, between 1995 and 1999,the average entrepreneur earned over35% more than the average person inpaid employment.

As Table 1 shows, there are a large number of similarities betweenentrepreneurs and non-entrepreneurs. The average age of both groups is 35,both have identical years of education andnearly 85% of both groups are married.

There are, though, a number of


16

Figure 2:

Entrepreneurs as a percentage of total employment in China: national, urban and rural areas

0%

2%

4%

6%

8%

10%

12%

200520042003200220012000199919981997199619951994199319921991

■ Urban■ National■ Rural

■ Entrepreneurs

Year

Source: China’s National Bureau of Statistics

Communist Partymembership makes anindividual less likely to

be an entrepreneur



China’sentrepreneurs

are more likelyto have

experiencedunemployment

than people in paid

employment

significant differences. The first is thatnearly 18% of non-entrepreneurs aremembers of the Chinese Communist Partycompared with just 6% of entrepreneurs.It may be that Party membership protectsagainst retrenchment and thus reduces thelikelihood of someone stepping out intothe private sector.

Second, nearly a third of entrepreneurshave experienced unemploymentcompared with less than a fifth of non-entrepreneurs. This makes the differencein incomes all that more remarkable, asindividuals who have experiencedunemployment tend to suffer from‘scarring’, which results in a lower wagewhen they are in work again. But havingexperienced unemployment during thelarge-scale layoffs of the mid- to late1990s seems to be a significant factor inbecoming an entrepreneur.

Third, entrepreneurs have larger socialnetworks. In the context of a weak legalsystem and opaque regulatory structure,perhaps it is not surprising that startingone’s own business requires contacts tosecure supplies and distribution as well asoperating licences.

The personal traits ofChinese entrepreneursConsidering all of the relevant personal,socio-economic and attitudinal traits,estimates of the probability ofentrepreneurship find that women andpeople who have been in employment fora number of years are less likely to beentrepreneurs. Some features of anindividual’s socio-economic backgroundalso affect his or her potential forentrepreneurship.

Having a more educated mother orone who is in a non-manual orprofessional job increases the likelihood ofentrepreneurship, while having a fatherwho is a Communist Party memberdecreases the likelihood. Mothers who aremore accomplished seem to encouragetheir children to start their ownbusinesses, while fathers with connectionsto the Party seem to reduce the jobinsecurity of their children.

Having a larger social network and awillingness to embrace risk alsosignificantly increases the likelihood ofbecoming an entrepreneur.

A number of questions about attitudesasked of a sample that had experiencedunemployment are also revealing. When


17

Figure 3:

Annual incomes of Chinese entrepreneurs and non-entrepreneurs in renminbi (RMB)

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Non-entrepreneurs

Entrepreneurs

19991998199719961995

■ Entrepreneurs■ Non-entrepreneurs

RM

B

Year

Source: Chinese Household Income Project survey, 2000

Table 1:

Differences between Chinese entrepreneurs and non-entrepreneurs

Personal characteristics Entrepreneurs Non-entrepreneurs

Age 35.6 35.8

Years of employment experience 12.3 22.8

Have experienced layoff 27.8% 19.2%

Years of education 9.4 9.4

Gender 55.7% male 49.7% male

44.3% female 51.3% female

Marital status 83.4% married 84.2% married

Communist Party member 6.2% 17.7%

Social network (size) 8.2 6.4

Socio-economic background

Father’s education (years) 5.4 5.2

Mother’s education (years) 6.0 5.9

Father is/was Communist Party member 26.5% 34.2%

Mother is/was Communist Party member 8.7% 10.8%

Father is/was self-employed 3.9% 2.8%

Mother is/was self-employed 1.7% 1.8%

Father is/was non-manual worker 22.3% 28.4%

Mother is/was non-manual worker 8.1% 13.7%

Income

Annual income (RMB) 8475 5986

Average annual income (RMB), 1995-98 5751 4312

Source: Chinese Household Income Project survey, 2000



18

considering an opportunity for work, bothentrepreneurs and non-entrepreneursvalue wages, social security provision,good working conditions and the ability tolearn skills on the job.

But they differ in that entrepreneursdo not worry as much about job stabilityor job dignity, and curiously, despite theirhigher earnings, they are less inclined thannon-entrepreneurs to hope that theirchildren will become entrepreneurs. Andas is found among entrepreneurs acrossthe world, the drive to earn money is asignificant determinant ofentrepreneurship.

ConclusionThe remarkable growth of China has beendriven by various engines. The mostnotable is the development of the non-state sector, fuelled by the desire ofmillions of Chinese people to seek a betterlife. The easing of the state’s control overthe economy allowed the emergence of ageneration of entrepreneurs, who havetransformed the economy into oneincreasingly driven by competition,innovation and productivity.

The personal traits of China’sentrepreneurs have much in common withthose who remained in paid employment.But there are also notable differences:being female, older or a member of theCommunist Party all significantly reducethe probability of becoming anentrepreneur.

These traits are not dissimilar toentrepreneurs elsewhere (see, for example,Djankov et al, 2005). Being female andolder tend to discourage people fromstarting their own business in manycountries. And as in the West, socialnetworks, a healthy attitude to risk and aninclination to work hard are all traitsassociated with entrepreneurs in China.

Until recently, not much was knownabout these entrepreneurs, but theemerging picture is one of a group ofindividuals who are able to navigateChina’s uncertain institutional terrain andfind opportunities in the world’spotentially most significant market. Theirforay into overseas markets is as inevitableas the rise of China.

This article summarises ‘China’s

Entrepreneurs’ by Linda Yueh,

University of Oxford, Department of

Economics, Discussion Paper No. 324

(http://www.economics.ox.ac.uk/Research/wp/

pdf/paper324.pdf) and forthcoming in

World Development.

Linda Yueh is fellow in economics at St

Edmund Hall, University of Oxford, and an

associate in CEP’s globalisation programme.

Further reading

Simeon Djankov, Edward Miguel, Yingyi Qian,

Gerard Roland and Ekaterina Zhuravskaya

(2005), ‘Who are Russia’s Entrepreneurs?’,

Journal of the European Economic

Association 3(2-3): 587-97.

Gang Fan (1994), ‘Incremental Change and

Dual-track Transition: Understanding the

Case of China’, Economic Policy 19(supp):

99-122.

John Knight and Linda Yueh (2004), ‘Job

Mobility of Residents and Migrants in Urban

China’, Journal of Comparative Economics

32(4): 637-60.

Justin Yifu Lin (2007), ‘Developing Small and

Medium Bank to Improve Financial

Structure’, China Center for Economic

Research, Peking University, Working Paper

(in Chinese).

Xiaogang Wu (2002), ’Embracing the Market:

Entry into Self-employment in Transitional

China, 1978-1996’, William Davidson Institute

Working Paper No. 512.

Jian Zhang, Linxiu Zhang, Scott Rozelle and

Steve Boucher (2006),’ Self-employment with

Chinese Characteristics: The Forgotten

Engine of Rural China’s Growth’,

Contemporary Economic Policy 24(3): 446-58.

Forays byChinese

entrepreneursinto overseas

markets are asinevitable as the

rise of China




19

India’s foreign investment policy:the impact on productivity

A particularly striking feature of India’s foreign investment regime since the 1990s has been that itencourages the adoption of foreign technology bydomestic firms while at the same time opening up theseindustry sectors to foreign investors. So liberalisationconsists of two distinct components:

n Foreign direct investment (FDI), defined by theInternational Monetary Fund as a foreign firm taking atleast a 10% stake in a domestic firm.

n Foreign technology agreements (FTA), more ‘arm’s-length’ transactions in which a foreign firm enters intopartnership with a domestic firm.

The relative importance of the two components can begauged by the fact that in the post-reform period(between August 1991 and January 2005 in this study),the number of FDI projects approved by the Indiangovernment was nearly 19,000 and the number of FTAsapproved was just over 7,600.

Unlike in many East Asian countries, Indian policy-makershave resisted the temptation to offer subsidies to foreign investors (at least until very recently). Instead, they have pursued a two-pronged strategy of inviting FDI from foreign firms as well as encouraging FTAs bydomestic firms.

Previous research has shown that increasing FDI leads togreater competition in industries where firms competewith each other at a single stage of the productionprocess. The effect of increased competitive pressure is tolower the mark-ups that domestic firms are able tocharge, thereby reducing their measured productivity.

This is typically not outweighed by any productivitybenefits to domestic firms from observing and copying thetechniques used by foreign firms – what are known as‘technology spillovers’. For firms in these industries to gain

significantly from technology spillovers, they need to be technologically advanced or close to the ‘technologyfrontier’.

But in vertically integrated industries (where firms operateat more than one stage of the production process),previous research suggests that the effect of FDI onproductivity is positive. This implies that both domesticand foreign firms benefit from technology spillovers.

Chawla’s research finds that liberalisation of the foreigninvestment regime in India has significantly improved theperformance of manufacturing firms. This is surprising asthe sample mainly consists of firms that compete at asingle stage of production. What seems to have happenedis that the policy of encouraging FTAs has had an effectequivalent to technology spillovers, moving domestic firmscloser to the technology frontier, albeit through differentmeans.

Since the industries studied were simultaneously subjected to both FDI and FTA liberalisation, it is not easyto distinguish between the effects of two policies. To do this, the research looks in detail at the motor vehicleindustry. It finds that in this sector at least, the twoelements of the foreign investment regime have beencomplementary in their positive impact on firms’productivity.

India’s experiences are often compared with China’s, andwhile the latter has attracted greater FDI inflows than theformer since the early 1990s, India has attracted greaterportfolio investment and the ratio of market capitalisationof its listed firms to GDP has been higher. What’s more,Indian firms now invest so much abroad that FDI outflowsalmost match FDI inflows.

The fact that India’s foreign investment liberalisation treatsforeign technology and direct investment as inseparable isimportant here. Such a policy is bound to have effectsbeyond the simple enumeration of FDI inflow figures. Atleast one important implication of this policy is its positiveeffect on the productivity of manufacturing firms.

Arunish Chawla is an occasional research

assistant in CEP’s globalisation programme.

India’s liberalisation has been successfulby its openness to both foreigninvestment and foreign technology

in brief...

What kind of liberalisation policies can make a difference tofirms’ productivity? Research by Arunish Chawla exploresthis question in the context of India’s economicliberalisation of the 1990s. He analyses the impact of foreigninvestment policy on the performance of Indianmanufacturing firms over a 15-year period.



20

Recent research by Nick Bloom – as well asresearch of an earlier vintage by Fedchairman Ben Bernanke – suggests that theimpact of the credit crunch on uncertaintywill lead to an economic slowdown muchworse than we currently anticipate.

Will the credit crunch lead to recession?


21

One of the most strikingeffects of the recentcredit crunch is a hugesurge in stock marketvolatility. The uncertainty

over the extent of financial damage, theidentity of the next banking casualty andthe unpredictability of the policy responseof central banks and governments haveall led to tremendous instability.

A standard measure of uncertainty –the ‘implied volatility’ of the S&P100 ofthe US stock market, commonly knownas the index of ‘financial fear’ – hasmore than doubled since the subprimecrisis first emerged in August 2007. Thisjump in uncertainty is of similarmagnitude to those that followed theCuban missile crisis, the assassination ofPresident Kennedy, the Gulf War and theterrorist attacks of 9/11 (see Figure 1).

But after these earlier ‘shocks’,volatility spiked and then quickly fellback. For example, after 9/11, impliedvolatility dropped back to baseline levelswithin two months. In contrast, thecurrent levels of implied volatility haveremained stubbornly high for the lastseven months, rising rather than abatingas the crisis continues.

My research shows that even the

temporary surges in uncertainty thatfollowed previous shocks had verydestructive effects. The average impact of the 16 shocks plotted in Figure 1 (before the credit crunch) wasto cut US GDP by 2% over the next sixmonths (Bloom, 2007).

So the omens for the impact of the current credit crunch are worrying. If these earlier temporary spikes inuncertainty had such a significant effecton economic activity, the impact of thecurrent persistent spike in uncertainty islikely to be far worse. On these numbers,a recession is almost inevitable.

For a broader historical comparisonto the credit crunch, we can also goback 70 years to the Great Depression.

Figure 1:

Monthly US stock market volatility 1962-2008

Note: The vertical axis shows a percentage measure of volatility known as ‘annualised standard

deviation’. Prior to 1986, this is calculated as the percentage actual volatility of monthly returns

on the S&P500 index of the US stock market. After 1986, it is calculated using the percentage

‘implied volatility’ from an option on the S&P100 index.

0%

10%

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The large andpersistent rise in uncertaintysince last Augustis likely to bevery damaging to the economy

unpredictable, the best course of action isoften to wait.

If every firm in the economy waits,then economic activity slows down. This directly cuts back on investment and employment, two of the main driversof economic growth. But it also hasknock-on effects in depressingproductivity growth.

Most productivity growth comes from ‘creative destruction’ – productivefirms expanding and unproductive firms shrinking. But if every firm in the economy pauses, then creativedestruction temporarily freezes –productive firms do not grow andunproductive firms do not contract. Thisleads to a stalling of productivity growth.

Similarly damaging effects alsohappen on the consumers’ side: whenuncertainty is high, people avoid buyingconsumer durables like cars, fridges andTVs. The housing market is also hit hard:uncertainty makes people cautious aboutupscaling their house.

One reassuring fact is that global

This was the last time that volatility waspersistently high (see Figure 2).

Much like the credit crunch today, theGreat Depression began with a stockmarket crash and a meltdown of thefinancial system. Banks withdrew creditlines and the interbank lending marketfroze up. The US central bank – theFederal Reserve – desperately scrambledto restore calm but without success.

What followed were massive levels ofstock market volatility and a recession ofunprecedented proportions. From 1929 to1933, US GDP fell by 50%, a bigger dropthan in every recession since World War IIcombined. On these numbers, a recessionnot only looks almost inevitable, but itslonger-run effects start to becomealarming.

So why is this rise in uncertainty likelyto be so damaging for the economy? Thereason is that firms typically postponemaking investment and hiring decisionswhen business conditions are uncertain. Itis expensive to make a hiring orinvestment mistake – so if conditions are


22

Figure 2:

The Great Depression was notable for very high volatility

Note: The vertical axis shows a measure of volatility derived from Schwert (1990), which contains daily stock returns to the Dow Jones

composite portfolio from 1885 to 1927, and to the Standard and Poor’s composite portfolio from 1928 to 1962. The figure plots the

volatility of monthly returns following exactly the same procedure as for the actual volatility data from 1962 to 1985 in Figure 1.

1960195519501945194019351930192519201915191019051900198518801875

Ban

kin

g p

anic

The

Gre

at D

epre

ssio

n

Rec

essi

on

of

1937

Oil

and

co

al s

trik

e

0%

30%

60%

90%

9/11 level of volatility

Year

Much like thecredit crunchtoday, the GreatDepressionbegan with astock marketcrash and ameltdown of thefinancial system


23

policy-making is in safe hands. Thedamaging effect of uncertainty shocks iswell known to Fed chairman BenBernanke. His doctoral thesis of morethan 25 years ago explored the negativeeffects of uncertainty shocks.

The main paper from that thesis waspioneering in the way it formalised thenegative effects of uncertainty in causingrecessions, noting that: ‘events whoselong-run implications are uncertain cancreate an investment cycle by temporarilyincreasing the returns to waiting forinformation’ (Bernanke, 1983).

So what is stopping Bernanke actingto counteract this rise in uncertainty andforestall the recession? Well, as Bernankealso knows, the same forces ofuncertainty that lead to a recession alsorender policy-makers relatively powerlessto prevent it.

When uncertainty is high, firmsbecome cautious, so they react much lessreadily to monetary and fiscal policyshocks. According to research on UKfirms, which I conducted with two

colleagues, uncertainty shocks typicallyreduce the responsiveness of firms bymore than half, leaving monetary andfiscal policy-makers relatively powerless(Bloom et al, 2007).

So the current situation is a perfectstorm – a huge surge in uncertainty thatis not only generating a rapid slowdownin activity but also limiting theeffectiveness of standard monetary andfiscal policy to prevent this.

Policy-makers are doing the best theycan – making huge cuts in interest rates,dishing out tax rebates and aggressivelypouring liquidity into the financialmarkets. But will this be enough? Historysuggests not. A recession looks likely.

Further reading

Ben Bernanke (1983), ‘Irreversibility,

Uncertainty and Cyclical Investment’,

Quarterly Journal of Economics 98(1):

85-106.

Nick Bloom (2007), ‘The Impact of

Uncertainty Shocks’, National Bureau of

Economic Research Working Paper No.

W13385, also available as CEP Discussion

Paper No. 718 (http://cep.lse.ac.uk/pubs/

download/dp0718.pdf).

Nick Bloom, Stephen Bond and John Van

Reenen (2007), ‘Uncertainty and Investment

Dynamics’, Review of Economic Studies 74:

391-415.

William Schwert (1990), ‘Indexes of U.S. Stock

Prices from 1802 to 1987’, Journal of Business

63(3): 399-426.

The forces ofuncertainty thatlead to arecession alsorender policy-makers relativelypowerless toprevent it

Nick Bloom is an assistant professor of

economics at Stanford University and a

research associate in CEP’s productivity and

innovation programme.


24

Do newly appointed external members of the Bank ofEngland’s Monetary Policy Committee (MPC) hide their trueviews on the right level for interest rates? Stephen Hansenand Michael McMahon look back at their voting recordsover the 10 years since the MPC was first given control ofUK monetary policy-making.

On coming into office in May 1997, Gordon Brown, thenew Chancellor of the Exchequer relinquished his powerto set UK interest rates and passed responsibility to anindependent body to be known as the Monetary PolicyCommittee (MPC). The central idea behind this decisionwas that with trained experts rather than politicianssetting interest rates, there would be less scope forpolitical manipulation and monetary policy-making wouldtherefore have greater credibility.

Such an institutional arrangement is increasingly commonaround the world. What is slightly unusual in the UK caseis that the Bank of England Act 1998, which establishedthe MPC, requires the chancellor to appoint four of thenine committee members from outside the Bank. Theseexternal members join five internal members – thegovernor, two deputy governors, the chief economist andthe executive director for market operations – to make upthe MPC.

Other countries also appoint experts from outside their central bank, but the experts typically then take up a senior position within the bank. At times, suchappointments happen in the UK: for example, some ofthe internal MPC members were appointed from outsidethe Bank but joined the in-house staff on theirappointment.

Every month, since the first meeting on 6 June 1997, theMPC has met to decide interest rates by majority vote.With the entire UK economy affected, the MPC makes itsdecision on the basis of the one thing that economistsagree monetary policy can control: prices. The MPC remit,as defined in the 1998 Act, is to ‘maintain price stability,and subject to that, to support the economic policy ofHer Majesty's government, including its objectives forgrowth and employment.’

In practice, the committee seeks to achieve a targetinflation rate of 2%, based on the consumer price index. Ifinflation is greater than 3% or less than 1%, the governormust write an open letter to the chancellor explainingwhat has happened. In fact, the MPC has been verysuccessful and the last 10 years have been a period ofunprecedented stability for the UK both in terms ofinflation keeping within target and GDP growth.

Despite the collective success of the committee, the votingdifferences of internal and external members (which arerevealed in the publicly available minutes of MPC meetings)have been heavily scrutinised in the financial press. Thosevoting for higher interest rates are labelled inflation‘hawks’; those voting for lower rates are ‘doves’.

Using these voting records, our research examines thebehaviour of the external members. According to theBank, ‘the appointment of external members is designedto ensure that the MPC benefits from thinking andexpertise in addition to that gained inside the Bank ofEngland.’

We start from the premise that when MPC members(internal and external) vote on interest rates, they try toensure that the inflation target is achieved. Furthermore,during the monthly meeting, members will communicatetheir views to the other MPC members. By taking account of every other member's view of the world,individual members can formulate their best – and possibly different – guess of what interest rates should be. Thus, the differences in voting behaviour betweenmembers, which are apparent in the voting records, are of themselves unsurprising.

But if the members are behaving according to this ideal,they will learn about the true state of the economy, and

Delayed doves

After a year on the MPC, externalmembers begin voting forsubstantially lower interest rates

in brief...


25

begin to figure out how to interpret the views of theirfellow members. If another member usually suggestsinterest rates that are high, then you will still listen to theirviews but interpret them in such a way as to factor in thatmember's tendency to vote for higher rates.

As all members are doing this, over time the votingbehaviour of members should become more similar aseveryone learns what interpretations different memberswill give to the same data. Therefore any differences invoting behaviour that exist initially should disappear asmembers adjust their views on monetary policy.Furthermore, members who begin voting for similarinterest rates (and so must have the same interpretationsof the data) should not diverge from each other in the future.

But our analysis of the voting records in fact shows theopposite pattern. External members initially vote in linewith internal members, but after about a year on the MPC,these external appointments begin voting for substantiallylower interest rates. This delayed ‘dovishness’ is present

even when we take account of differences in members’backgrounds, age and education, as well as the currentmacroeconomic environment.

These results are especially striking considering that manyof the internal and external members have very similareducation and career experiences on appointment to theMPC, and many of the internal members have had no priorcentral bank experience until they joined the MPC and theBank staff.

Our research explores why external members may behavein this way. We examine differences in the term lengthsthat they will serve, the likelihood that they will bereappointed and the possibility that external members tryto differentiate themselves so as to get publicity and boosttheir career options on leaving the MPC. We cannotconclude that any of these factors are important.

One possible explanation that remains is that externalmembers, on first joining the committee, do not fullyexpress their view about the correct interest rate. It is onlylater, once they have gained experience, that they begin toarticulate their differing views.

These results leave open a number of future researchquestions. For example, why would external members,appointed as experts, hide their views when they first jointhe MPC? And are some of the internal memberscontinuing to hide their true views, keeping interest rateshigher than necessary so as to be seen as more hawkish?

It may well be that the current structure of the MPC meritsreassessment in the light of this evidence of the changingbehaviour of external members.

This article summarises ‘Delayed Doves: MPC Voting

Behaviour of Externals’ by Stephen Hansen and

Michael McMahon, CEP Discussion Paper No. 862


Stephen Hansen is a doctoral student at LSE.

Michael McMahon is an occasional research assistant in

CEP’s macroeconomics programme.

External membersmay not fully

express their viewson interest rates

when they first jointhe committee


26

Nineteenth-century Britainresembled a textbookmarket economy in manyways. Taxes and regulations

were low, and firms were able to respondto the opportunities and threats that theyfaced with very little ‘red tape’. Oneaspect of that economic liberalism wasthat if you owned land, you were able to build houses or factories pretty muchat will. Concepts such as the ‘green belt’ and planning permission had not yetbeen invented.

The result was a massive movementof population over the course of thenineteenth century, out of the countrysideand into the towns. This reflected the‘agglomeration economies’ that citiesoffered to manufacturing firms. Putsimply, productivity was higher in citiesthan in the countryside, and thereforefirms chose to locate in cities. Thatproductivity in turn fed through to higher

wages, and while the streetsof London, Liverpool,Manchester and so on werenot paved with gold, theydid offer more opportunitiesthan were available in smallertowns and villages.

At the start of the nineteenthcentury, Liverpool and Manchester eachhad a population of around 100,000. Atthe century’s end, they each had around600,000. Towns such as Preston grewtenfold, and Crewe, which was a hamletof 46 houses in 1800, was home to42,000 people in 1900. And London grewby a truly phenomenal five million peopleover the century.

Not that all cities grew dramatically:some, such as Bristol or Gloucester,important places in 1800, were nottransformed by 1900: their share of theBritish population did not grow.

The nineteenth century shows us that

The fast-growing cities of the Victorian agemade Britain the workshop of the world.Tim Leunig argues that there are importantlessons for how we manage today’s economy,notably the need to end the highly restrictiveplanning laws that constrain housingdevelopment in the South East and in citiesassociated with our top universities.

Where to build Britain’snew houses

Today’s British economy cannot respondto newopportunities in the way that it did in thenineteenthcentury


27

location, as well as size, matters.Lancashire was the home of the cottontextile industry for good reasons: thedamp climate was well suited to cottonspinning and weaving, and the rawcotton was imported from America via Liverpool.

Once established there, agglomerationeconomies meant that productivity washigher not only because of the climate,but because of the levels of localknowledge. It would have been possible

to open a cotton mill in Suffolk, but thecosts of getting the raw material toSuffolk, combined with lower productivityaway from the agglomeration economies,meant that such a firm would have to payvery low wages indeed to compete withLancashire mills. People in Suffolkpreferred to move to Lancashire and bepaid well, than to stay in Suffolk, do thesame job and be much less well paid.

By 1945, for perfectly understandablereasons, Britain’s faith in the marketeconomy was shaken. We had just wonthe war with a state-planned and directedeconomy. Furthermore, the free marketperiod between the two wars was seen asa failure. Policy-makers looked to our ownwartime experience, which, combinedwith the apparent success of Soviet Russiaand, to an extent, Germany prior to 1939 gave them great confidence in theability of state planning to deliver asuccessful economy.

The belief that ‘the man in Whitehallreally does know best’ took many forms.One aspect was the rise of the planningsystem, originating in the 1947 Town andCountry Planning Act. Today, green belts,‘areas of outstanding natural beauty’,‘sites of special scientific interest’ and soon dramatically constrain the placeswhere development can take place.

Furthermore, even within land markedfor development, planning laws heavilyconstrain what can be built. For example,land zoned for industrial use cannot beused for housing, and vice versa. Theeconomy cannot respond to newopportunities in the way that it did in thenineteenth century: the location ofBritain’s population has been ossified, andin 2008 it bears a far greater similarity to1945 than, say, the location of populationof 1908 did to that of 1845.

This would not matter if economicopportunities could flow easily to theareas in which people lived half a century or more ago. Sadly, the evidenceshows that this is not the case. Just as itwould not have been possible to moveparts of the Lancashire cotton industryout of Lancashire a century ago, so it is not feasible to move finance toLancashire today.

Agglomeration economies aregrowing. Information technology allowsskilled white-collar ‘HQ’ service jobs to bedetached from their associatedmanufacturing operations and located

near to other skilled HQ jobs, allowinghigher productivity driven by high skillservice sector ‘knowledge spillovers’. Therise of dual career households means thatmore couples want to work in places thatare large enough to offer two careersrather than one career and one job.

Today, the South East is the bestlocation for business. It is obviously closerto European markets, but better air linksmake it closer to all parts of the worldthan the North of England, Wales orScotland. And London has simply beenlucky: finance has prospered in the lastcentury; textiles have not.

The outcome is that wages in theSouth East, and particularly in London, arehigher than those anywhere else inBritain, reflecting higher levels ofproductivity. In contrast, towns outsidethe South East have lower wages andhigher unemployment.

So we would expect to see the

The planningsystem prevents

Oxford andCambridge

becoming thetwenty-first

centuryequivalents ofLiverpool andManchester inthe nineteenth

century


28

population of the South Eastboom as the population ofthe North West boomed acentury ago. But this hasnot happened.

Two obvious places thatshould generate massiveknowledge spillovers – Oxford andCambridge – have seen population growat just 0.5% per year. The planning systemprevents them from becoming theLiverpool and Manchester of the twenty-first century, cities that grow beyondrecognition within a generation, creatingwell paid, interesting jobs in abundance.

There is no doubt that Britain pays ahigh price for these restrictions. Had theybeen in place in 1850, Britain would nothave become the workshop of the worldand would have been markedly poorer.The same is true today.

The people who lose out are notprimarily the well educated since they canafford to migrate and frequently do soafter graduation. The people who lose outare those who cannot move to the SouthEast because of housing costs: they end upin less well paid jobs and are more likely tobe unemployed.

The planners were well meaning, andtheir confidence in planning over themarket economy is easy to understandgiven the experience of 1939-45. They arestill well meaning, but it is harder tounderstand ignoring market signals in2008.

The market is very clear: land for

housing and all other forms ofdevelopment is worth far more in theSouth East than anywhere else in Britain.Land for flats or maisonettes is worth fourtimes as much in Southwark as in Leeds,four times as much in Camden as inManchester, and four times as much inHackney as in Birmingham.

Indeed, housing land in the lowestcost part of London – Redbridge – isworth more than equivalent land inManchester, which is the highest costplace outside the South East. Only Oxford,Cambridge and London’s commutertowns come close to London’s values.

Land is worth more in London and theSouth East because when people move tothese places, they get better jobs and canafford to pay more for houses. Or to putit another way, if we build more houses inthe South East, the jobs that emerge totake advantage of these new workers arebetter paid jobs than if we build themanywhere else in Britain.

For that reason, the governmentshould make clear that all significantlevels of new building will take place in

housing hotspots: London and itscommuter satellites as well as in highvalue-added cities, which are generallyassociated with top-notch universities.Land prices tell us where to allowdevelopment. If we follow those marketsignals, not only will the individualworkers be better off but we will all bebetter off since tax revenues will behigher and benefit payments lower.

Of course, some land is worthpreserving for its amenity value. Butstudies show that people place little valueon relatively unattractive, industrialisedagriculture that makes up so much of thegreen belt today. We have gone too farand it is those who are trapped in areasthat are in decline, and will remain indecline, who are paying the price. It is ahigh price, and one that will increase, andnot decrease, over time.

Tim Leunig is a lecturer in economic

history at LSE and an associate in CEP’s

globalisation programme.

The governmentshould makeclear that allsignificant levelsof new buildingtake place inhousing hotspots

Venue:CEP, LSE,

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http://cep.lse.ac.uk

CEP Discussion Papers are now available as electronic copiesfree to download from the Centre’s website:

http://cep.lse.ac.uk/pubs/dp.asp?prog=CEPDP

MULTINATIONAL FIRMS, MONOPOLISTICCOMPETITION AND FOREIGN INVESTMENTUNCERTAINTYArunish ChawlaCEP Discussion Paper No. 866April 2008

LABOR MARKET REFORMS, JOBINSTABILITY, AND THE FLEXIBILITY OF THEEMPLOYMENT RELATIONSHIPNiko Matouschek, Paolo Ramezzanaand Frédéric Robert-NicoudCEP Discussion Paper No. 865April 2008

UNION DECLINE IN BRITAINDavid Blanchflower and Alex BrysonCEP Discussion Paper No. 864April 2008

POLICY UNCERTAINTY ANDPRECAUTIONARY SAVINGSFrancesco Giavazzi and MichaelMcMahonCEP Discussion Paper No. 863April 2008

DELAYED DOVES: MPC VOTINGBEHAVIOUR OF EXTERNALSStephen Hansen and MichaelMcMahonCEP Discussion Paper No. 862April 2008

PRIVATE SECTOR EMPLOYMENT GROWTH,1998-2004: A PANEL ANALYSIS OFBRITISH WORKPLACESAlex Bryson and Satu NurmiCEP Discussion Paper No. 861April 2008

TAX CUTS IN OPEN ECONOMIESAlejandro Cuñat, Szabolcs Deak andMarco MaffezzoliCEP Discussion Paper No. 860March 2008

UNION DENSITY AND VARIETIES OFCOVERAGE: THE ANATOMY OF UNIONWAGE EFFECTS IN GERMANYBernd Fitzenberger, Karsten Kohnand Alexander LembckeCEP Discussion Paper No. 859March 2008

INTERNATIONAL TRADE, MINIMUMQUALITY STANDARDS AND THEPRISONERS’ DILEMMADimitra PetropoulouCEP Discussion Paper No. 858February 2008

EFFICIENCY WAGES AND THE ECONOMICEFFECTS OF THE MINIMUM WAGE:EVIDENCE FROM A LOW-WAGE LABOURMARKETAndreas GeorgiadisCEP Discussion Paper No. 857February 2008

EMPLOYMENT OUTCOMES IN THEWELFARE STATERachel Ngai and ChristopherPissaridesCEP Discussion Paper No. 856February 2008

CEP conferenceThe Emergence of China and India in the Global EconomyThe causes and consequences of the acceleration of economic development in China and India in recent decades, and the implications for other developing anddeveloped countries around the world.

Organisers: Stephen Redding and John Van Reenen

Keynote speakers:Professor Chang-Tai HsiehDepartment of Economics, BerkeleyProfessor Peter SchottDepartment of Economics, Yale School of Management

The conference is sponsored by CEP, the Centre for InternationalGovernance Innovation, the India Observatory at LSE and the Institutefor Economic Research at the University of Munich.

Further details available on the CEP website at: http://cep.lse.ac.uk/_new/events/event.asp?id=50

Or please contact Jo Cantlay [email protected] tel: +44 (0)20 7955 7285

CentrePiece is the magazine of the Centre for

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© Centre for Economic Performance 2008

Volume 13 Issue 1

(ISSN 1362-3761) All rights reserved.

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