Economics newsletter edition #1

OCTOBER 23, 2014

DUBAI COLLEGE

EBOLANOMICS

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THE ECONOMICS BEHIND EBOLA EU-US TRADE DEAL

DC ECONOMICS EBOLANOMICS The recent outbreak of Ebola in the countries of West Africa has had a huge impact on the health safety of the affected countries however, the outbreak has also had a significant impact on the global economy, especially those of the countries affected by the virus. If the epidemic continues to spread to neighbouring countries, the potential economic drain could be as much as $32.6bn by the end of 2015, according to the World Bank. The affected countries are being isolated from the rest of the world through the cancellation of flights to West Africa and reduction in trade. In the affected countries themselves, sectors such as agriculture and services are already suffering due to a dwindling workforce as more people are affected by ebola and as more people leave the country to unaffected areas.

Prices are rising, real household income is decreasing and there is greater poverty as a result of the forgone productivity. The outbreak of the disease has a also sent cocoa bean prices to the highest in 2011 due to uncertainty regarding shipments from West Africa. Additionally, China Union, which began shipping iron ore out of Liberia earlier this year, is scaling down its activities and has threatened to shut operations temporarily if the outbreak is not contained. So why is there no real medication to stop it? Pharmaceutical companies will direct investment into medication that will generate income for them which is why they aim to target higher income groups that have the purchasing power to buy the medication. This leads to a significant underinvestment in drugs for diseases as companies do not see the developing world as a potential market for their products as they look like bad investments. One way to get the required drugs would be for the government to make a payment (grants, subsidies) to companies in order to develop the drugs and in exchange, the company would give up the right to sell the product allowing public health officials to control its supply and use. Hopefully a drug will be developed soon that can hinder the growth and negative impact of the deadly virus.

EU-US TRADE DEAL Negotiations between the US and the EU on the Transatlantic Trade and Investment Partnership (TTIP) started in July 2013. The recent end of the 7th round of discussions (week beginning 5th Oct) has sparked major protests and demonstrations across the EU as people speak out against the trade deal. The TTIP aims at removing trade barriers between the US and EU resulting in ASHNA GUPTA

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OCTOBER 23, 2014

significant economic growth for both economies. A study published a year sago estimated that the TTIP could boost the size of the EU economy by 120bn euros and the US economy by 95bn euros.

Boosting trade by eliminating barriers could help to increase demand and supply, which should have knock on effects on job creation and economic advancement in both economies, without having to increase public spending or borrowing. If the trade deal is bringing so advantageous to the EU, why are there so many concerns surrounding the deal? In order to create a trade free zone, all regulatory barriers must be removed which opponents of the deal say would put too much power in the hands of global corporations favouring the rights of corporations over the rights of the people. In the UK, the main concern of the deal is the impact that it will have on the NHS - if the government ever wants to reverse any contracting of health services done by a previous administration, it could become extremely expensive as any American company that loses business as a result could sue. Elsewhere across the EU, many fear the lower standards of protection for workers, consumers and the environment that the agreement could potentially bring as well as food safety. It will be interesting to see wether this deal is agreed upon, and if it is, if it will boost economic growth and employment as it is said to.

FALLING OIL PRICES: GOOD OR BAD FOR THE ECONOMY? Usually, falling oil prices would boost global growth however this time, it seems that falling prices are reflecting weak economic growth in the world’s major economies. If it is weak demand causing falling prices, it suggests weakening growth. The global economy is certainly weak. Japan’s GDP fell in the second quarter, as did Germany’s. Weaker growth translates into lower energy demand although demand for oil has been weak for a while, the recent slowdown (especially in Germany) took markets by surprise, causing the sharp fall in prices. Weakening demand is not the only reason.

There has also been a big supply shock as the world’s total output of oil has been rising strongly. Most of the growth in supply has come from America in particular due to the increases in shale-oil output.

With weak demand, much of the extra output has gone into rebuilding oil stocks in rich countries however, as hoarding slows, prices are likely to weaken again unless world demand picks up or oil production is cut - which seems unlikely at the moment as major oil produces such as Saudi Arabia are unwilling to do so. Russia obtains more than half its budget revenue from oils and gas exports, making its economy highly sensitive to oil price changes. The falling prices have dragged down Russia’s currency - reaching 41 roubles to the dollar. Countries such as Iran are also feeling the same effects. With the unexpected and sharp decline in the oil prices, which commodity will be next?

ASHNA GUPTA

DUBAI COLLEGE

Recent News Headlines That Have Caught Our Eye… ‣ French economist Jean Tirole has won the Nobel Prize in economics for his work on market power and regulation. ‣ Euro Area inflation has plummeted, hitting just 0.3% in September.

Fears that the region could drop into deflation have risen and European Central Bank policy looks behind the curve.

The IMF now sees a 40% chance of the euro area falling back into recession. Weakness has spread from the periphery to the core, with the IMF scaling back German and French growth forecasts. ‣ Stock markets are continuing to fall heavily due to fears over Chinese economic growth and fresh concerns about the eurozone. ‣ China has overtaken the USA and has been ranked as the world’s largest economy in terms of purchasing power parity by the International Monetary Fund.

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