MARCH 2016
DUBAI COLLEGE
The Brazilian Petrobras Scandal
The Economics of Medicine
Lord Falconer Visit
In the UAE
DC ECONOMICS The Petrobras Scandal It’s no secret that corruption is rampant in Brazil – the people are so accustomed to scandal upon scandal ending with little to no punishment for politicians, that they have coined a phrase for this phenomenon –ending in pizza. This is meant to capture the nature of politics and justice in Brazil – although president Dilma Rousseff has had several impeachment hearings, action is at a deadlock, and under Brazilian law, ministers go to special courts which have historically been very reluctant to prosecute them. Brazilians are very aware that the political elite always get away with illicit activities. However, the recently uncovered political scandal signifies a much needed change. Petrobras, Brazil’s state owned Oil Company is responsible for a whopping 10% of the country’s GDP. The scandal involves a kickback bribery scheme. Petrobras is mostly controlled by the government, and expectedly, spends large sums of money on awarding construction contracts. From around 12 years ago, a few powerful Petrobras employees and the government officials who appointed them colluded with a small cartel of construction firms, awarding contracts to firms that greatly overcharged the government. The excess revenues were pocketed by both the Petrobras employees and politicians. While this type of scam is quite commonplace, the scale of the scandal is unprecedented - around $3 billion was given away in bribes. Around 20% of Brazil’s congress is under investigation, and recently, a previous employee of the oil company said that he had received $100 million through illicit activities. Political instability ensued – many Brazilians took to the streets and called for the impeachment of the president with renewed fervour. Economically, Petrobras’ plunge has massive repercussions for the economy. Previously, under Rousseff’s predecessor Lula da Silva, Brazil enjoyed economic expansion, reaching 7.5% growth in 2010. Brazil was part of the BRICS group of emerging markets and most politicians were very optimistic about the nation’s prospects. Oil revenues drove a lot of Brazil’s growth. However, the economy was extremely sluggish and took a large downturn during the past few years, and most put this down to president Rousseff’s populist policies. The Petrobras plunge only exacerbates this. It is currently valued at $70 bn, less than half of its value in 2010. The oil company remained a large part of the country’s economic identity for a long time and accounts for most of the government’s revenue, so the plunge is expected to worsen its already massive debt, and the Brazilian economy is forecasted to contract by around 1% this year. Low global oil prices have also resulted in the downfall of the Brazilian economy. Most
!1
MARCH 2016
economists say that this is a perfect example of the dangers of oil dependence. has been suffering because it is specialized and exports most of its resources, instead of investing in their own infrastructure and diversifying. Moreover, when oil prices are high, governments have little incentive to foster economic growth as they are flooded with oil revenues; however this is very dangerous as they suffer when oil prices plunge. This is the first time that politicians have been caught and prosecuted to such an extent, and many see the scandal as a harbinger of political and economic reform. Even president Rousseff is cutting unemployment benefits and using tighter fiscal measures. Judge Moro, who is looking over the investigations, is lauded as a hero by many Brazilians. Jetasri Gupta
ECONOMICS IN MEDICINE - What is the price of life?! Arguably, we can say that Economics is the science of scarcity. In Health economics, the ultimate desire is to acquire the maximum value for money by efficiently allocating resources in treating patients and maximising clinical effectiveness. We may not realise it, but we unconsciously use the principles of economics in our circadian lifestyle. For example when buying a car, our desiring mind says, "buy the nicer one" and on the contrary, our resourceful mind says, "buy the cheaper one". Health economics does not vary much from the fundamentals of our daily thoughts. Trade-offs and sacrifices are also to be made in the medical industry, the opportunity cost that is most often experienced is generally measured by the health benefits, these may consist of many factors such as lives saved or improvement in quality of life, against those benefits that could have arisen if the funds were spent in the next best alternative. According to The Economist the medical industry is set to boom with the majority of the populations in developed countries getting older and suffering from chronic illnesses such as arthritis or general degeneration in the musculoskeletal system. Surprisingly, the medical industry is predicted to flourish even more in developing nations as the population is generally becoming wealthier and are able to afford a higher quality of healthcare. However a rather unnerving statistic that has been released by the WHO states that a record "$1 trillion was spent globally in 2014". This is proving that the unsustainable inflation in the prices of life saving medicine is proving to be costly, literally, and soon we will find that even the most wealthy of countries will be crippled by the heightening cost of drugs.
DUBAI COLLEGE
Recent News Headlines That Have Caught Our Eye… ‣ The US economy expanded an annualized 1.4% on quarter in Q4 2015, higher than a second estimate of 1% according to final figures released by the Bureau of Economic Analysis. ‣ In Japan, consumer inflation at 1.1 per cent in the year to February, unchanged from January. ‣ The production value of Taiwan's manufacturing sector fell by more than 10 percent. ‣ In the UK, there is record employment, modestly rising wages and nearzero inflation. The Bank of England says household consumption will grow faster than the overall economy this year. ‣ In the UK, there will be a tax cut for businesses from 20% to 17% by 2020
Undoubtedly, we are unambiguously quick to assume that there are many positive externalities arising from drugs and medicine such as good health or a life saved. This assumption is correct however the pricing of medicines does prove to be multifarious. One model for the pricing of medicines is the price discrimination method- this involved
!2
MARCH 2016
DUBAI COLLEGE
charging poorer and developing countries with lower costs for medicine and healthcare whilst charging higher prices in developed countries. Though this may seem socially fair, this mechanism tends to be flawed as the criteria for distinguishing low economically developed countries (LEDC) and high economically developed countries (HEDC) conflicts with regions of middle economically developed countries (MEDC) causing low priced medicine to be stockpiled in LEDC's and sold in HEDC’s. The Medical and Healthcare Industry consists of many large and highly profitable companies such as Pfizer, Roche, and Novartis- each of these profit with billions of dollars on a yearly basis. This industry can be classified as an oligopolistic industry as there are multiple large and highly profit motivated companies in the market. The concerning detail that arises with this highly privatised industry is that if these huge companies are fiercely motivated by maximising profit, how far will they go to achieve this core objective and does this affect us? The trivial "excuse" for these pharmaceutical firms achieving masses of supernormal profit is that they fund "Research and Development" however many have their concerns. To conclude, the polemical yet imperative question in the healthcare industry is "what is the right price for medicine?". My answer to this perplexing and rather paradoxical question is that there is no answer....at the end of the day we are debating on what is the price of life? Omar Malik
Lord Falconer Visit Lord Falconer, Ex Lord Chancellor, former government minister under Tony Blair, Queen’s Counselor (QC) and eminent barrister spoke to DC staff and students this week during a visit to the Dubai offices of Gibson, Dunn & Crutcher, where he is a partner. This is also a week when David Cameron has begun his campaign to ensure his legacy is not to be forever remembered as a PM who took Britain out the European Union, and where Boris Johnson, Cameron’s arch nemesis has stepped out and become the figurehead of the “Leave” campaign. Lord Falconer is very much a Europhile and it was great for our students to quiz him on the benefits of EU membership. Questions from our students ranged from what his thoughts were on Jeremy Corbyn (voters are fed up with political class and so this time have chosen something different - this also explains Trump’s current success) to how important is keeping Scotland part of the Union. It was hugely informative to have a member of the House of Lords explain to us how this unelected chamber functions in a modern democracy and also listen to how his influence !3
MARCH 2016
DUBAI COLLEGE
led to significant and long lasting changes to UK law. These experiences are like gold dust to our students and without question, we are fortunate to have had the opportunity to take part. -Mr.Christopher
IN THE UAE: In February this year, Christine Lagarde – the head of the IMF – proposed a plan to the UAE to start introducing taxes into the region at the Arab Fiscal Forum. Calling taxes “the lifeblood of modern states”, Lagarde suggests the Gulf states to focus on implementing corporation tax, property tax, and excise duty with plans to increase VAT already under way. VAT will be introduced into the region at a rate of 5% by the end of 2018. “Higher government revenue would create much- needed fiscal room for manoeuvre, and allow for more spending on … infrastructure, health care and education,” she said. Gulf budgets have been hit as oil prices declined from above US$110 per barrel in June 2014 to less than $30 per barrel in January this year. The question, however, is whether implementing such taxes, especially corporation tax, will deter companies from establishing themselves in the UAE and whether it will give rise to tax evading activities. In addition, critics of the implementation of taxes say that would discourage firms from investing and creating jobs. In discussion of this issue Lagarde said, “The localisation and development of investment by companies … is not predominately driven by a tax rate” As of now, the UAE is set to remain a tax-free region however over the coming years, it will be interesting to see the effect that these taxes will have as well as the rules and regulations that are imposed along with these taxes. Ashna Gupta
!4