free schools (friskola) in Sweden

August 28th, 2014

Six years ago, while updating an essay on education published in Economic Affairs (December 2004), I reviewed a radical reform begun by Sweden in 1992. Sweden’s embrace of free choice and competition impressed me. Here are highlights from pp. 14 and 15 of the 2008 update.

Prior to 1992, Sweden’s school system allowed for little choice. Government assigned pupils to their closest school, and parents had little to say in the matter, short of moving to a different neighbourhood. Very few private schools existed; most were faith-based and accounted for less than one percent of students in compulsory schooling, which in Sweden is nine years starting at age 7.

In 1992 everything changed. Anyone can now open a school, and municipalities are required to finance it on the same per-pupil terms as a government school. ….

There are no restrictions on ownership of private schools. Schools can be and are run by religious groups (Christian, Jewish, Muslim), teachers’ co-operatives, parents’ co-operatives or for-profit corporations. If a registered school attracts and retains students, it receives funding from the students’ respective municipalities. Sweden has created a market for schooling, but it is a very egalitarian market because there is no price competition and each consumer has the same access to schools. Precisely because Sweden does not allow private schools to charge fees or select students, its system has attracted criticism from libertarian groups …..

By no means all Swedish parents have deserted government schools, but the private share of enrolment has increased, and came to exceed 10 percent in 2008. Surprisingly few of the new private schools are faith-based, but many are run for profit, some as chains of schools. ….

Three econometric studies [2003, 2005, 2007] have examined the effect of introduction of school choice on the quality of education in Sweden …. All three studies exploit the fact that private schooling varies by municipality, and all find that everyone gains from competition—pupils who remain in government schools as well as those who choose a private option. The reason this happens is that government schools, faced with competition from private schools, must improve their performance or lose pupils and funding.

Larry Willmore, “Basic education as a human right redux“, MPRA Paper 40478, 28 July 2008.

The private share of enrolment has reached 20% – double the proportion of students enrolled in 2008. Nonetheless, writes FT journalist Helen Warrell, many Swedes are questioning the merits of their schooling reform.

Two decades on from the audacious experiment in opening up state education to the market, a fifth of pupils, or about 312,000 children, attend [independently run free schools, known as] friskola. Of these, two-thirds go to institutions run by companies rather than co-operatives or charities ….

No other European country has entrusted so much of its children’s education to private companies. ….
Swedish schools
But as friskola have proliferated, Sweden’s confidence in for-profit schools has been shaken. Traditionally top of the class in education, Sweden has tumbled in international test rankings, with the OECD’s most recent Pisa results showing scores falling dramatically in reading, maths and science to a position well below the average for developed nations. …. [Pisa is the Programme for International Student Assessment that the OECD administers to fifteen-year old students every three years.]

One of … [the for-profit schools], Rytmus, specialises in music and has a cult following among Swedish teenagers. Lars Ljungman, its headmaster, spent 20 years teaching in the public sector before taking over the free school two years ago.

“I was curious to find out what it would be like because within the public schools it was always said that [the education companies] were so greedy, that they didn’t give to the students,” says Mr Ljungman. “I was thinking about whether I would have less money to spend on my students but on the whole, I have more to distribute for my pupils and teachers.” ….

However,… one Rytmus teacher is less complimentary. “These companies are like parasites, nothing more nothing less,” the teacher says. The expansion of the highly popular Rytmus model … is financially driven …. “Rytmus is like KFC, it is a brand. Expansion is just a way of making more profit. It is about ‘reaching future customers’.” ….

Mr [Jonas] Sjöstedt [leader of the Left party] says there is no question that profitmaking businesses are at fault for the national crisis now known as the “Pisa shock”.

“They’re not [running schools] because they like kids or because they’re interested in education,” he says. “They are doing this because they’re interested in fast money.”

Mr Sjöstedt … admits [though] that drawing a definite link between the poor Pisa results and the increase in private provision is “more complicated”.

“It’s not always the fact that the private schools get worse results … but they do harm [to the system] because traditional municipality schools have to adapt to a market system and they often lose their best pupils,” says Mr Sjöstedt.

This is the most common complaint about free choice in schooling ….. Critics contend that middle-class parents are likely to be drawn to the newer free schools, leaving poorer children stuck in poorly performing older institutions.

Helen Warrell, “Free schools: Lessons in store“, Financial Times, 28 August 2014.

Ms Warrell’s report, though interesting, omits important information and leaves many questions unanswered. A major omission is the fact that privately-run schools receive the same funding per-pupil as municipal schools, and are not allowed to charge top-up fees. Nor are schools, with rare exceptions, allowed to discriminate among applicants for admission.

There is no economic reason, then, for wealthier parents “to be drawn to the newer free schools, leaving poorer children stuck in poorly performing older institutions.” If the attraction of private schools results from advertising and branding (“like KFC”) why, then, should advertising attract a disproportionate number of children from wealthier households? Why do government schools lose their best students to private schools? Do the best students tend also to have wealthy parents?

The stark division of rich from poor, bright from dull, if true, is an anomaly of the reformed Swedish system.

reflections on contributory and non-contributory pensions

August 27th, 2014

I have prepared, for the record, an annotated version of my June 2000 paper “Three Pillars of Pensions? A Proposal to End Mandatory Contributions”. The prologue that follows explains in some detail what I did, and why. This will not be of general interest, but the writing of this paper marked an important moment in my own life, the beginning of my obsession with reform of old age pensions. (That is not a politically correct statement. I should have written ‘pensions for older persons’. But I have never been known for political correctness!)

Without more ado, here is the prologue that I wrote today. The newly annotated paper can be downloaded at the link above.


This is an old, but important paper, one that defined my future work on pension reform. In April of the year 2000, I was at an OECD conference in Prague, listening to presentations of two World Bank economists (Estelle James and Dimitri Vittas). At that moment, it suddenly dawned on me that an ideal pension system should provide basic pensions for everyone, funded pay-as-you-go from general government revenue, allowing citizens who desire more than basic income in retirement to save in any way they please, without subsidies, tax breaks or coercion from government. This was my ‘Eureka’ moment.

When it was my turn to speak, the very next day, I spoke with excitement and enthusiasm. The conference was on private pensions, so the audience did not react warmly to my talk. Nonetheless, I presented my core ideas orally, and drafted a paper immediately after the conference. I circulated it as a UNDESA discussion paper in June 2000. While writing the paper, I discovered that the ideal system I dreamed of was already in place — in New Zealand. Much later I discovered that Mauritius for decades has operated a similar pension system. The universal pensions of New Zealand and Mauritius began long ago, are very successful, but nonetheless have been ignored by the OECD, the World Bank and other development agencies.

The OECD published a version of my paper “edited for length” in 2001 on pp. 385-397 of its “Private Pensions Conference 2000” proceedings. The editors changed the subtitle from “A proposal to end mandatory contributions” to a blander “Is there a need for mandatory contributions?” In my opinion, the OECD editors removed important points from the paper. For the record, I have highlighted all deletions in yellow, so readers can judge for themselves whether anything of importance was omitted.

What most upsets me is the deletion of all reference to Estelle James. Ms James had an enormous influence on my thinking. More than anyone, she is responsible for my obsession with pensions, which began at a conference in Prague, on April 4th of the year 2000. The obsession continues now, at the end of August, 2014.

Regarding length, numerous papers in the conference proceedings are longer than the 13 pages allotted to me. A paper on Romania’s pension system is longest, with 54 pages. The paper co-authored by World Bank economists Estelle James and Dimitri Vittas is much shorter, but still 32 pages long.

“hawks” vs “doves” in the war on terror

August 26th, 2014

FT columnist Janan Ganesh explains how the so-called “war on terror” differs from the cold war.

The cold war carried the highest stakes in history – nuclear weapons saw to that – but it was essentially rational. There were spheres of influence, the dark logic of deterrence and even some grown-up bartering over arms and territory. So when David Cameron watches a video of what seems to be a fellow Briton murdering a journalist in the name of a clerical insurgency in the Middle East, the prime minister’s disgust must vie with nostalgia for the great planetary conflict of his youth. Religious extremists are shapeless, being both sub-state and cross-border, and unrestrained in their violence. There is no Andrei Gromyko, the old dealmaking Soviet foreign minister, to haggle with here.

Another advantage enjoyed by national leaders during the cold war was the legitimacy of their intelligence and security agencies. ….

The greatest threat to UK security is the fraying of this consensus. It began with end of the cold war, when an existential menace disappeared, and continued with peace in Northern Ireland, when paramilitarism declined. Suddenly the security state had to account for its existence. Then came an Iraq war founded at least in part on erroneous intelligence and, more recently, the revelations of British and American surveillance by Edward Snowden, the former US National Security Agency contractor. ….

This is why the talk of “hawks” versus “doves” is so misleading. It is perfectly possible to oppose intervention in another continent while favouring a ruthless defensive posture, including the empowerment of intelligence agencies to track threats of unprecedented elusiveness.

Janan Ganesh, “Cynicism is no match for the mortal threat posed by Isis“, Financial Times, 26 August 2014.

Mr Ganesh (born 1982) joined the FT in August 2012. He is author of George Osborne: The Austerity Chancellor (Biteback Publishing, 2012) and was previously a political correspondent at The Economist.

funding universal pensions in Hong Kong

August 25th, 2014

A member of the government’s Commission on Poverty has suggested a goods and services tax could be used to fund a new public pension scheme, instead of a further tax on payrolls.

The controversial idea was floated by University of Hong Kong academic Dr Law Chi-kwong after a government-commissioned study last week suggested granting every Hongkonger aged over 65 a pension of HK$3,000 per month, with no means test. But Law suggested the plan would be more palatable if only those in greater need were entitled to the subsidy.

The study, by Professor Nelson Chow Wing-sun, a colleague of Law’s …, suggested funding the pension by imposing new taxes of between 1 and 2.5 per cent of workers’ salaries on both employees and employers. ….

But Law said linking a goods and services tax to universal pensions would make the latter more palatable to the public, after former financial secretary Henry Tang Ying-yen was forced to withdraw a plan to introduce the indirect tax amid a public outcry in 2006. ….

“The government would run into a budget deficit even if it did not introduce a universal pension.” he said. “The government would have to raise taxes somehow.”

Law said that if Hong Kong did eventually introduce a universal pension, the government could consider excluding high-income earners from receiving it “so that public resources could be more focused to help the needy”.

Timmy Sung, “Sales tax mooted to fund pension for all“, South China Morning Post (Hong Kong), 25 August 2014.

Introducing a goods and service tax (GST) or – even better – a value-added tax (VAT) in Hong Kong is an idea whose time has come. I fully support Dr Law’s proposal. But I disagree with his idea of  excluding high-income residents from the social pension. An income test is equivalent to a tax on the wealthy, but only on those who are 65 years of age or older. Why not collect more taxes from all the wealthy, young or old, with a higher GST or VAT rate for luxuries, for example? Why burden only the elderly with higher taxes?

I have explained numerous times, on this blog and elsewhere (for example here and here), that means tests are taxes. This is not a controversial statement. Economists on the political Left, Centre and Right agree with it. Non-economists, unfortunately, are often attracted to the idea of reducing government expenditure by limiting benefits to those certified as poor.

Means-tests improve the government’s budget, it is true, but in precisely the same way as increased taxes do. Citizens inevitably finance all government services and transfers of income. There is no free lunch. Some pay indirectly when they are denied benefits. Others pay directly through the tax system.

fees for active asset management

August 25th, 2014

Today the Financial Times publishes yet another article exposing the high, hidden fees of actively managed investment funds.

Headline fees charged by asset managers may be as little as a fifth of the total amount siphoned off from investors, according to research by one of the UK’s largest pension funds.

Railpen Investments, which manages £20bn on behalf of 350,000 scheme members, said it typically paid around £70m a year in upfront, disclosed fees to asset managers.

However, Chris Hitchen, chief executive, said Railpen has calculated that the additional underlying fees it is paying are “multiples of that number, 300-400 per cent of that”.

“What we are getting billed is far less than what is being siphoned off underneath,” said Mr Hitchen, a past chairman of the National Association of Pension Funds. “I don’t think many people have done the analysis. I would think that most people in our position would not be aware of what they are paying.”

Steve Johnson, “Investors’ headline fees ‘only a fifth’ of total“, Financial Times, 25 August 2014.

The annual 70 million pounds in ‘headline fees’ that this large UK pension fund pays to asset managers amount to 0.35% of the fund’s value. This is not unreasonable, but hidden fees increase the cost – in this case, to something between 1.4 and 1.75 percent of assets. These high fees do not include fees that the pension fund itself (Railpen Investments) collects from 350,000 members. Actively managed funds perform no better, on average, than passive funds that track a broad index. After fees, their performance is worse. It is impossible to pick a ‘good’ actively managed fund because there is virtually no correlation between a fund’s performance one year and its performance in a subsequent year. This year’s high performing fund might well be next years dog. Savers who pay for active management, avoiding diversified, passive funds, expose themselves to increased risk and a high probability of lower returns on investment.

Hong Kong Report calls for universal pension

August 24th, 2014

More precisely, the long-awaited Report recommends a “universal, uniform amount, non-means-tested pension”, known also as a “demo-grant”. The Report is somewhat vague on this, but there is no apparent provision for the universal pension to retain its purchasing power by automatically tracking increases in consumer prices or wages.

Professor Nelson Chow of the University of Hong Kong headed the research team that produced the report.

Here are highlights from the “conclusions and recommendations” section of the 43-page executive summary. The full report is available in Chinese.

One out of three elderlies is [sic] now living under the Poverty Line ….

Failure for the government to set up the demo-grant would likely perpetuate disputes over retirement protection. ….

[T]he characteristics of demo-grant is [sic] that it is the right of citizens and so should be enjoyed by all citizens who are Hong Kong permanent residents reaching a specified age [65 years]. ….

[T]he research team considers that the amount may be set at $3,000 [a month, roughly US$387], … about the basic rate of existing elderly CSSA [means-tested pensions] … with the purpose of providing the elderly with a stable source of income but not as their sole income for maintaining livelihood. ….

[The recommended universal pension would be financed on a pay-as-you-go basis, from earmarked payroll taxes:]

  • Employers with [monthly] salary below $10,000, employers and employees each to pay tax at 1% … (employees with income below $6,500 only employers would pay and employees are exempted);
  • Employees with salary at $10,000 to below $20,000, employers and employees each to pay tax at 1.5% of the salary;
  • Employees with salary $20,000 and above (maximum limit at $120,000), employers and employees each to pay tax at 2.5% of the salary.
  • [...]
  • As the level of the demo-grant is linked to the source of capital [i.e. tax revenue], should there be any substantial increase in amount, there would not be easy agreement from employers or employees paying the tax. As such there would not be arbitrary increase [sic] in the amount of the demo-grant.
  • The purpose of the different rates in payroll old age tax is to …  indirectly serve the purpose of narrowing existing disparity in income.
  • Levying the payroll old age tax may be done through existing MPF [Mandatory Provident Fund] contribution system thus minimizing administrative fees.

Future Development of Retirement Protection in Hong Kong, Executive Summary, University of Hong Kong, Department of Social Work and Social Administration, 20 August 2014.

To my surprise, the Report does not recommend abolishing the MPF, even partially, despite the fact that almost no-one is happy with the scheme. The Report, on page 7, clearly acknowledges this dissatisfaction:

Most participants [in focus groups] had much reservation about the MPF scheme and severe criticisms were made. They … [suffered] fluctuation in investment market and were dissatisfied with … high management fees.

Mandatory saving in privately managed retirement accounts has been in place since December 2000. With limited exceptions, employers and employees are required to deposit each month at least 5% of salary income. Total mandated savings thus amount to 10% of salaries, up to a maximum mandated saving of HK$2,000 a month from both sides. I haven’t run the numbers, but I am quite confident that current MPF saving would be more than adequate to finance universal pensions of $3,000 a month.

MPF accounts are poor savings instruments, and do not provide old age pensions. Employees withdraw their savings as a lump sum when they reach the age of 65. No tears would be shed (except by MPF managers) if government were to abolish the MPF, replacing forced savings with payroll taxes that are a smaller fraction of salaries, and using the tax revenue to finance a universal pension.

Chinese gastronomy

August 23rd, 2014

Despite a rich gastronomic tradition dating back more than two millennia and a remarkable history of culinary innovation, Chinese food is almost invisible at the highest international levels. The Michelin Guides do not venture into China beyond Hong Kong and Macau; the only place on Chinese territory to make the 2014 S.Pellegrino and Acqua Panna World’s 50 Best list was a French restaurant in Hong Kong, Amber. Even this year’s Asia’s 50 Best Restaurants list included a mere six Chinese restaurants in the whole of mainland China. According to the outside gastronomic world, Chinese cuisine seems to be largely terra incognita.

This neglect may be partly due to a simple culture clash. Michelin inspectors, for example, traditionally visit restaurants alone, and it’s impossible for a lone diner to experience the variety of dishes that make up a meal in most Chinese restaurants, where eating “family style” is the norm. …. (The first Chinese restaurant in the world to receive three Michelin stars was, unsurprisingly, an international hotel restaurant in Hong Kong offering a tasting menu of Chinese dishes served in small, individual portions.) ….

Chefs and restaurateurs across China complain it’s increasingly hard to find suitable staff. To cap it all, President Xi Jinping launched a campaign in 2013 against official wining and dining that has been devastating for more expensive restaurants. Chinese people, moreover, traditionally look down on chefs, and China has yet to see a new generation of young people who think cooking is hip.

Fuchsia Dunlop, “Chengdu chef Lan Guijun: the new emperor of Chinese gastronomy“, Financial Times Magazine, 23 August 2014.

Lan Guijun (born 1965) is not an ignored Chinese chef. He owns and runs Yu Zhi Lan, an 18-seater restaurant in Chengdu, the capital of Sichuan province in southwestern China. “The restaurant opened quietly in August 2011″, writes English writer/chef Fuchsia Dunlop, “and its fame has spread among food-lovers in China, Hong Kong and Japan”. This small Sichuan restaurant, with its talented chef, shows how the culinary landscape of China can be transformed.

Ms Dunlop is fluent in Mandarin and author of four books, including the autobiographical Shark’s Fin and Sichuan Pepper: a sweet-sour memoir of eating in China (Norton, 2009).

racial violence in the USA

August 21st, 2014

British historian Tim Stanley does not expect President Obama to address in any meaningful way the problem of racial violence in the USA. He believes that change will come from Republicans and, especially, from the black community, not from the current occupant of the White House.

Obama is a president who is black, [but] he has never sold himself as an expressly black president – that is, he tries to operate outside of the racial narrative rather than play a leadership role within it. He is evidence to the young black child that, yes, anyone can make it in America.

But what he was never going to be was someone who would confront racism head on or seek a substantial redistribution of power and money of the variety that many civil rights leaders feel is necessary to help the poor. …..

Obama has commented on Ferguson but mostly to appeal for calm and ask for a proper investigation of what happened.

If there is hope for real change, some of it might come from the Right. In general, they have been horrified by events in Ferguson – not so much by the looting (condemned by almost everyone) but by the obvious inequities in the law-and-order system. Jonah Goldberg, a highly respected Right-wing columnist, argued that “the idea that police forces shouldn’t take into account the racial or ethnic make-up of their communities when it comes to hiring [is] bizarre.”

Senator Rand Paul, a libertarian Republican who would like to be president, has condemned both the militarisation of the police and the country’s drug laws. Meanwhile, many Republicans are embracing prison reform.

Of course, it will be the black community that will lead the fight for change. …. Sadly, what they have discovered since the days of the civil rights movement is that government isn’t always their best friend and the promises of the Left can be empty.

Tim Stanley, “A black president couldn’t stop the Ferguson race riots“, The Telegraph news blog, 17 August 2014.

On his home page, Dr Stanley writes “I am very, very Catholic and my politics are right-of-centre.”

HT Kierran Petersen at BBC Echo Chambers.


the legacy of slavery in the USA

August 21st, 2014

Jefferson saw slavery as a state of war between master and slave. It was a legal institution that categorised blacks as property and gave all whites authority over every black person. Even after it was destroyed, the law and the officers who enforced it remained a useful way of keeping blacks in an inferior position – in particular, of policing the movement and behaviour of black men.

This was not war as Jefferson envisaged it, but the post-slavery experiences of black people were consonant with his predictions. Black people, he said, would never forget the wrongs done to them in slavery and the white majority would never overcome its “deep rooted prejudices” against black people. And this, he feared, would undercut America’s republican experiment – for it would discredit a republic founded on the egalitarian principles eloquently set forth in the American Declaration of Independence.

That document, which insists that all men are equal and entitled to life, liberty and the pursuit of happiness, would lose much of its power if the society formed in its image contained a permanent group of second-class citizens. And so Jefferson offered separation as the most viable solution. Blacks would have to leave the US to find true citizenship in a country of their own. ….

Perhaps nothing Jefferson ever wrote has caused more outrage and, in some quarters, ridicule among present-day Americans who have come to take a diverse America and black American citizenship for granted. …. [In the ensuing] two centuries …, the doubts Jefferson expressed about the true quality of black American citizenship have hardly been eliminated.

This is not to suggest that … law enforcement is anything other than an essential cornerstone of any society based on law. It is to say that the “deep rooted prejudices” that Jefferson spoke of have warped this vital social function – and made black people, particularly young black men, presumptive felons outside the boundaries of full citizenship.

Annette Gordon-Reed, “US has yet to overcome its tortured racial past“, Financial Times, 18 August 2014.

Ms Gordon-Reed is a professor at Harvard Law School and winner of the 2009 Pulitzer Prize in History. Her full column can be downloaded at the link above (metered paywall, free registration required).

balanced-budget fundamentalism

August 20th, 2014

Oxford University economist Simon Wren-Lewis writes on his blog that balanced-budget fundamentalism – the belief that government budgets must be balanced, regardless of the state of the economy – is stronger in Europe than it is in the United States. This should worry Europeans because “fundamentalism … that denies the principles of macroeconomics … is doing people immediate harm”.

Europeans, and particularly the European elite, find popular attitudes to science among many across the Atlantic both amusing and distressing. In Europe we do not have regular attempts to replace evolution with ‘intelligent design’ on school curriculums. Climate change denial is not mainstream politics in Europe as it is in the US (with the possible exception of the UK). Yet Europe, and particularly its governing elite, seems gripped by a belief that is as unscientific and more immediately dangerous. It is a belief that fiscal policy should be tightened in a liquidity trap. ….

There is now almost universal agreement among economists that tightening fiscal policy tends to significantly reduce output and increase unemployment when interest rates are at their lower bound: the debate is by how much. ….

They still teach Keynesian economics in Europe, so it is not as if the science is not taught. …..

So why does ‘balanced-budget fundamentalism’ appear to be more dominant in Europe than the US. …. I suspect a big factor is just recent experience.

The US never had a debt funding crisis. The ‘bond vigilantes’ never turned up. In the Eurozone they did, and that had a scarring effect on European policymakers that large sections of the policy advice community can play to, and which leaves those who might oppose austerity powerless. That is not meant to excuse the motives of those that foster a belief in balanced budget fundamentalism …. The difference between fundamentalism that denies the concept of evolution and fundamentalism that denies the principles of macroeconomics is that the latter is doing people immediate harm.

Simon Wren-Lewis, “Balanced-budget fundamentalism“, Mainly Macro, 18 August 2014.

HT Mark Thoma.