Issue 18

ISSUE 18 MARCH 2018

The Boost Despite Brexit

INSIDE THIS ISSUE

The Economics of Fashion

The Future of Technology in the Oil & Gas Industry

“The Greatest Turnaround in UK Business History”

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Letters

The Nottingham Economic Review

Dear readers, On behalf of the NER team, it is our pleasure to present the 18th issue of the Nottingham Economic Review.

Now in its 10th year, the NER continues to build on the success of previous issues, offering students from Nottingham and other universities around the world a platform to engage with a range of current economic and political themes.

This issue includes a selection of external submissions and articles written by our editorial team and others from around the world. Economic analysis of current topics such as the demonetisation of the Indian Economy, Universal Income and (obviously) Brexit are but a few of the diverse and gripping pieces that make up this edition. Our interview section is not to be missed, featuring a dynamic discussion with Martin Wolf, the Chief Economics Editor of the Financial Times where we discussed the changing political landscape, Nationalism and Globalisation. We hope you will enjoy reading these and invite you to look at our website and, if interested, our recruitment opportunities for next year.

We would like to extend our gratitude to the many people who make the NER possible through their continued support and dedication. The school of economics, in particular Kevin Lee, Hilary Clayton, Sue Berry, Sue Andrews and, of course, Philip Watson. The NER would not exist without Philip, a University of Nottingham alumnus and we thank him sincerely for the wonderful opportunity he has provided us with.

Furthermore, the NER passes on its congratulations to Gainsborough Prize winner, Fausto Gernone, and runners-up Xinniella Khubchandani and Matthew Hills for their respective articles on the Mafia, children and the gender wage gap, and The University of Nottingham’s £5.30 lunch credit. Thank you too, to all others that submitted!

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The Nottingham Economic Review

Foreword

The NER Team About us: The Nottingham Economic Review is a student run annual journal whose purpose is to showcase undergraduate research and promote ongoing advancements in economic thought. Every semester we gather submissions and publish those that we believe contain the most thought provoking, insightful arguments while simultaneously capturing the interest of our readers. We also publish a section dedicated to features and editorials concerning current affairs alongside interviews and Q&A sessions.

Editors in Chief Fausto Gernone Steven Thavendran Matthew Hills

Finance Director Eneeshya Perera Special thanks to Phillip Watson Hilary Clayton Sue Berry Sue Andrews Louise Hemming Prof. Richard Kneller

Associate Editors Adam Sands Arushi Sharan Prasad Kumar Singh Mattias Nilsson Paige Portal Rosie Mahoney Rushabh Maide Swati Raipancholia Ugam Sheth

Contact: Email: team@neronline.co.uk Website: neronline.co.uk

Magazine Design Jason Sayer Marketing Directors Shamima Manzoor Peter Reddy

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Submit your research and articles to NER £750 Gainsborough Prize for the Best Submission For more info, including our latest issues, visit www.neronline.co.uk or email team@neronline.co.uk

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The NER Team

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Contents 02 03 04

Foreword and Prize Winners The NER Team Contents

Gainsborough Prize 05

[Winner] Italian Mafia as a State: How Mafia Taxes & Protects its Citizens - Gernone

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[Runner-up] The Effects of Having Children on The Gender Wage Gap - Khubchandani

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[Runner-up] £5.30 Nottingham Lunch Credit: A Complex Microeconomic Plan? - Hills

Features 9 Nights-Out, Pensions and Hyperbolic Discounting - Reddy 11 The Economics of Fashion - Mahoney 12 The Case for a Universal Basic Income - Malde 13 Life, Liberty, and the Pursuit of ...Growth? - Hughes 16 The Future of Technology in the Oil & Gas Industry - Manzoor 18 The Importance of Economic Growth: Should Raising it be the Main Focus of policy makers? - Sands 20 An Overview of India’s Demonetisation & Moving Towards a Cashless Future - Sheth 22

[Interview] A Conversation with Martin Wolf - Gernone, Lee-Saunders & Sheth

Cover Story 24 The Boost Despite Brexit - Raipancholia Research 28 Does Natural Resource Dependence Increase Income Inequality? - Cann 31 Filing Classical & Modern Political Budget Cycle theory: Testing Tufte’s Hypotheses in the Recent Literature Setting - Gavassa Pérez Features 34 Blockchain: Exploring the Technology Underpinning Bitcoin & its Applications - Chandrakamal 38 Quantitative Easing: A Prisoner’s Dilemma? - Hegdekatte 39 The Changing Relationship between CAP and the Developing World - Latham 42 Kosovo: Reborn, But Not Yet Grown - Nilsson 44 Change Begins at Home: Studying Energy Efficiency in the Domestic Sector - Bihani 45 The Case Against Economic Sanctions - Buss 47 “The Greatest Turnaround in UK Business History” - Portal 49 Digital Globalisation: Unlocking the Economy’s Potential - Gaglani 50 Women: Why We Must Like Them - Prasad Question Time 32

[Answer Revealed] Drilling a Cube: A cube of 1 unit side is drilled from all three sides with a drill size of 1 unit in diameter. What is the volume of one of the eight corner pieces that remain?

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Gainsboroough Prize Winner

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Italian Mafia as a State: How Mafia Taxes & Protects its Citizens Fausto Gernone Joe Pesci, Robert DeNiro and Ray Liotta all starred in ‘Goodfellas.’ (Courtesy Translate Media)

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.rom Vito Corleone to Tony Soprano, the Italian mafia has been a protagonist of the cinematographic culture since the 1920s.

The new TV series “Gomorrah”, showing the relentless struggle between clans in the suburbs of Naples, is reinvigorating the fame of mafia in the pop culture all over the world.

What is sometimes difficult to grasp from such movie representations, however, is that beyond murders and cocaine, mafia plays the role of alternative state, competing with the other, legitimate state. By using the words of Palermo’s chief prosecutor Giancarlo Caselli, mafia is a state within the state, “with its own territory, population and laws” (The Economist 1993). The purpose of this article is to shed light on the real nature of mafia – or Cosa Nostra - and how it acts as a shadow-state in the territories which are under its control.

The social, economic and political impact of the presence of mafia is undeniably nefarious; however, this kind of analysis is beyond the scope of this article. Here the approach is qualitative – rather than quantitative. In particular, my focus is on Italian mafia, with specific regard to the Sicilian one, which is the subject of most literature available, other than most of the mafia’s movies.

“A state within the state” What is really a state? There is no academic consensus about it, partly because it would involve an ideological conflict. Different definitions lead to different theories of State function, giving legitimacy to different policy decisions (Barrow 1993). Particularly notorious is the definition introduced by Max Weber, according to whom the State is “a community of people in which the administrative apparatus successfully upholds the claim to the monopoly of the legitimate use of physical force within a given territory” (Weber 1965). It follows that the necessary condition for any State to exist is the monopoly on the legitimate use of force.

However, this legitimacy is not objectively defined. Different States and different historical

periods have been characterised by different ideas about the limits on the legitimate use of violence (Alfano 2015); death penalty being the clearest example. The boundary between what is legitimate and illegitimate cannot be established universally. Now, one could still argue that while the use of force by the state is well regulated and ascertainable, the use of force by criminal organizations is more arbitrary and difficult to predict. However, state laws regulating the use of violence have been changing dramatically over time, often in order to adapt to the goals pursued. For example, Nazi Germany – which is considered to have been a state –changed laws in order to give its security forces more freedom of action.

Furthermore, Cosa Nostra has an articulated code guiding its action and making its use of force quite systematic and predictable.

One of the documents seized by the mafia boss Salvatore Lo Piccolo, for example, was named “Rights and duties” and comprised of a list of laws governing mafiosi’s activities (la Repubblica 2007).

Even the former Italian Prime Minister Silvio Berlusconi bought protection both for himself and his family Equally important is the practice of protection racket. Through the credible threat of violence, the mafiosi protect their clients by deterring other criminals from robbing or harming them, by settling disputes and enforcing contracts.

Quite embarrassingly, even the former Italian Prime Minister Silvio Berlusconi bought protection both for himself and his family (ANSA 2014). If their clients are businesses, mafia can also protect cartels and force out potential competitors. This form of protection racket is indistinguishable from extortion racket since some of the crimes that protection promises to avoid are often delivered by Cosa

Nostra itself. In other words, clients often pay mafia just to be protected against mafia itself.

Indeed, this is the case with the aforementioned pizzo.

A key feature of protection racket is that it takes the form of a monopoly. A provider – usually a famiglia – cannot tolerate competition within his sphere of influence (either a geographical territory or a business); because if a dispute arose between two clients protected by competing racketeers, the two racketeers would have to fight in order to determine the outcome of the dispute. This would reduce the reliability of the service, repulsing clients.

Therefore, racketeers negotiate territories in which they can monopolize the use of violence in settling disputes.

Interestingly enough, mafiosi occasionally protect the poor without asking nothing in exchange. As Antonino Cutrera explained, however, these generous actions represent a small long-term investment, since the mafioso “knows that his actions are never fruitless, because other than improving his reputation, he also increases the number of people devoted to him” (Cutrera 1900).

Overall, through its monopoly on violence, mafia controls its own taxation system and offers protection, playing a role which is parallel to that of a state. It often plays that role poorly, sometimes through extortion, but it does play it. There are several reasons why today Italian mafia still exists. The shortcomings or the traditional legal system, red-taped as it is, give citizens incentives to rely on unconventional means of justice. In addition, the political ties enjoyed today by mafia, witnessed by the rise of Mr. Berlusconi, make it harder to tackle.

However, there might be other, more deeplyrooted causes behind the presence of mafia in the south of Italy.

The main reason why people choose mafia over the state to solve their disputes is a general feeling of distrust towards the official

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Gainsboroough Prize Runner-up

institutions. Citizens in the south don’t feel themselves appropriately represented and defended by the state, which is often perceived as a greedy stranger. In a sense, they are alienated from the legal establishment. The scepticism of Italian southerners is hardly a novelty, as it dates back to the nineteenth century, when Italy was unified by the army of Garibaldi. Only recently history is revealing that what went under the name of “unification” was nothing more than an annexation of the south by the north. This annexation was obtained through the tacit cooperation of local criminals,

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who accepted to help Garibaldi in exchange of judicial amnesty. Once the “unification” was achieved, those criminals grew in power and formed a complex crime organisation (Romano 1992), which went under the name of mafia. Other than taking over the wealthy banks of the southern kingdom, northern rulers re-named squares and streets, and dismantled local institutions, fuelling the feeling of frustration towards the newly created state.

This sense of humiliation, indeed, fuelled the rise illegal activities (Forgione 2013).

Now, after more than 150 years from the “unification”, mafia still represents a major illness of the Italian peninsula. Any long-term cure would involve a process of cultural, political and economic integration between South and North, in order to re-establish the level of trust that is needed for any society to thrive.

Indeed, there is much more drama than what movies let you think.

The Effects of Having Children on The Gender Wage Gap Xinniella Khubchandani “Wild About Reading” read-a-thon at Joint Base Anacostia-Bolling (JBAB). (Photo by Robert W. Mitchell/Released)

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f you’re a woman, you will earn less than a man” was one of Theresa May’s first statements as Prime Minister, illustrating that there is still a lot of inequality in the country to be overcome. (1) The gender pay gap, defined as the “relative difference in the average gross hourly earnings of women and men within the economy as a whole” (2) is a topical issue in both the UK and globally.

Since the UK’s introduction of the Equal Pay Act in 1970, which prohibits wage discrimination on the basis of sex, the wage gap between full-time working women and men has been steadily decreasing (see figure 1). Despite this, women still have a lower hourly wage than men; in 2013, the gender pay gap for all employees in the UK was 19.7% by hourly earnings (3).

Contrary to popular belief, explanations attributed to the difference in pay between genders are not solely based on discrimination between men and women.

Women are more likely to work parttime resulting in a lack of work experience

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relative to men and a lower chance of getting promoted, leaving them trapped in low-paying roles.

A recent report (4) found that the gender wage gap is miniscule at entry to the labour market, but widens gradually until people

women take more time out of the labour market to care for children, they have less experience relative to others, and hence less human capital. Additionally, mothers are even more likely than other women to work part-time rather than full-time. Apart from the obvious effect of fewer hours of experience, full-time workers have been found to be more likely to have training that is geared to promotion. (7)

Hence taking career breaks to have children or working flexibly to care for them results in less employment experience relative to other workers, depreciation of skills and a lower chance of being promoted. These consequences of having Figure 1: Average real weekly earnings of men and women over time (4) children lead to lower are in their late 20s, after which widens earnings, and certainly do contribute to the more prominently, suggesting that “the gender wage gap - it has been found that arrival of children may have something to do family care accounts for 15% of the gender with it” (4, p.11) (see figure 2). Most women pay gap (5). are mothers and is it is usually women who There exists a vast literature on the take on childcare responsibilities, and the “motherhood gap”; that is, the difference in gender wage gap is wider for mothers. On wages between mothers and non-mothers. average and compared to men, women The literature generally finds that having have 3.2 years more of family care time. (5) children does not affect men’s earnings negatively; if anything, it leads them to Human capital theory (6) predicts that as increase, highlighting that having children is

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contributing to the gender wage gap.

Gainsboroough Prize Runner-up

mothers, just as there can be racial and gender discrimination, though this hypothesis requires further research (10).

Empirical analysis on British Household Panel Survey (BHPS) data from 1991 to Another possible explanation draws on 2008 (inclusive) on a sample of over 2000 the idea that due to exerting effort on employed women aged 18 to 40 found that after controlling for differences in Component Women’s Average Level % of Gap education level, marital status, Compared with Men’s race and even actual labour Education -0.3 years 6% market experience, there is still a Full-time employment -7.7 years 26% wage gap between mothers and experience non-mothers; being a mother Part-time employment +4.1 years 12% results in a wage penalty of almost experience 10%. Unobserved differences Interruptions due to +3.2 years 15% between mothers and non- family care 34% male vs. 70% 13% mothers, which might contribute Occupational segregation by gender (% to wages as well as the decision male) to have children, for example, Being female 29% those with lower motivation to childrearing, women with children might succeed in the labour market are also the bring less effort to the labour market than ones likely to have children, accounts for those without, to save energy for childcare some of this gap, as does working part time, and household duties (11), assuming that but there is still a decrease in wages of 3% non-mothers spend more of their time that is for mothers in general.

Results on data from other countries yield similar results.

For example, a unique Danish study (8) conducted econometric analysis on a sample of pairs of twins that consisted of one mother and one non-mother in the twin set. The advantage of conducting a twin study is that many environmental factors about the past that might affect wages such as family background, upbringing social class are controlled for. Despite this, and after controlling for work experience in hours, it found that having children in the home decreases hourly wages by 4-5%, and by even more if the youngest child is under two years old.

Mothers tend to favour occupations that pay less as they are awarded non-pecuniary benefits as a tradeoff for pay, including flexible hours, few obligations to travel and work on weekends. However, a US study found that even accounting for this, mothers incur a wage penalty of 5% per child. (9) So what does explain the remaining penalty?

There could be an element of discrimination between mothers and non-mothers operating in the labour market against

responsibilities reduces the motherhood wage gap.

Understanding the effects of children on women’s wages is important for economic policy creation. Child-rearing creates a wide variety of benefits to all of society for which mothers disproportionately bear the cost (9). Good parenting creates a higher probability of children growing up to be wellbehaved productive members of society, which results in lower crime rates and contributes to the economy. Normal interpretation of “work” that produces a product mainly benefits those who pay for the product, and by paying for the product indirectly pays the worker for the benefits they receive.

Caring for children can also be seen as work, and mothers pay the price for childrearing in the form of lowered wages while others who benefit (the economy, fathers, employers) free-ride on their labour.

The UK’s population is ageing (12) as a result of past and continuing improvements in life expectancy and overall past declines in the fertility rate. (13) Although the fertility rate has been increasing since 2001, it is still below the replacement level.

As the significance of traditional gender roles is diminishing and women are continually becoming Figure 2: Gender wage gap by time to/since birth of first child (4) career focused, as evidenced not at by the trend of women having work on leisure. After conducting further children later in life, the costs of having analysis on the BHPS sample mentioned children to women may discourage them above, regression results suggested that if from starting a family at all, leading birth the burden of childcare is shared between rates to decline and fall even further below the replacement level. Ageing populations are problematic, and in order to solve this, it is important to understand all the reasons for the gaps in pay so that these can be overcome.

Hence, further research on the motherhood wage would be important to consider when creating Figure 3: Wage Differences in the UK (5) policy to narrow the wage gap and promote gender equality as well as partners rather than mainly taken on by help with the UK’s ageing population. women, the wage penalty for mothers References decreases. As gender roles are becoming 1. May, T. (2016). Statement less distinct, it would be interesting to from the new Prime Minister Theresa May, see if fathers taking on more childcare

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Gainsboroough Prize Runner-up

transcript, Prime Minister’s Office, 10 Downing Street and the Rt Hon Theresa May, 13 July 2016 2. Ec.europa.eu (2016). The situation in the EU - European Commission. [online] Available at: 3. Equalpayportal.co.uk (2016). Equal Pay Portal | Statistics. [online] 4. Dias, M., Elming, W. and Joyce, R. (2016). The Gender Wage Gap. IFS Briefing Note BN186. [online] The Institute for Fiscal Studies, pp.10-17.

5. Walby, S. and Olsen, W. (2004). Modelling Gender Pay Gaps. EOC WORKING PAPER SERIES. [online] Manchester: Equal Opportunities Commission.

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6.Becker, G. (1985). Human Capital, Effort, and the Sexual Division of Labor. Journal of Labor Economics, 3(1, Part 2), pp.S33-S58.

7. Abhayaratna, J., Andrews, L., Nuch, H. and Podbury, T. (2008). Part Time Employment: The Australian Experience. Staff Working Paper, Productivity Commission, Canberra. SSRN Electronic Journal.

8. Simonsen, M, and Skipper, S. (2012). “he Family Gap In Wages: What Wombmates Reveal. Labour Economics 19.1, 102-112.

9. Budig, M. and England, P. (2001).

The Wage Penalty for Motherhood. American Sociological Review, 66(2), pp.204-225.

10. Waldfogel, J. (1998).

Understanding the ‘Family Gap’ in Pay for Women with Children. Journal of Economic Perspectives, 12(1), pp.137-156.

11. Becker, G. (1991). A Treatise on the Family. Enlarged ed. MA: Harvard University Press.

12. Office for National Statistics (2015). Population Estimates for UK, England and Wales, Scotland and Northern Ireland, Mid-2014 Release. [online] 13. http://webarchive. nationalarchives.gov.uk/20160105160709/http:// www.ons.gov.uk/ons/dcp171776_258607.pdf

£5.30 Nottingham Lunch Credit: A Complex Microeconomic Plan?

Matthew Hills Inside the Coates Café at the University of Nottingham. (Photo by mattbuck)

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.uring my first year at Nottingham ...I.had a number of conversations about the lunch credit we received as part of our catered accommodation. £5.30 credit was automatically loaded onto our student cards, which could be spent in any of the cafés and restaurants on campus.

Some people viewed it as free money and made the point that no other university offered this. Others deemed it as a waste; they didn’t like the lunch available and would have preferred their rent to be reduced by £5.30 a day, which across the year is over £800. Is that the case, though? Does this £5.30 credit actually cost the University of Nottingham £5.30 and, if it does not, could the rents be reduced?

To answer the first part, we should first do some microeconomic analysis of the credit.

The cafés and restaurants on the campus, which I will subsequently refer to as eateries, typically have fixed costs as a large percentage of their total costs. Take the café in the Sir Clive Granger Building: the staff have already been hired; there must always be a staff member there even if they are not busy; the premises have already been rented (in this case they are owned by the University itself); and the machines and refrigerators have already been bought.

From this we can deduce that the marginal cost - that is, the actual cost to the eatery of

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providing an additional lunch - is quite small and not £5.30. Think about it, the wholesale cost of a sandwich, drink and snack to the eatery is more like £2-3. Given that they have already spent on the fixed costs, increasing the demand of the cafes by offering the credit increases revenues, and although the profits made on each of these extra sales may be lower, it will still help towards the fixed costs.

Does this £5.30 credit actually cost the University of Nottingham £5.30?

If not, could the cost of student halls be reduced?

From that analysis - which I’m worried will remind you more of a micro exam than an interesting Review article - we can see that the yearly cost to the University of offering this £5.30 ‘credit’ is probably not £820 (155x£5.30), but closer to £390 (155x£2.50) for example.

Now, obviously, the places you can eat with the credit are quite diverse, but all have the similar characteristic of low marginal cost.

Therefore, since we hypothesised that the cost is probably a lot less than £800, the rents would not be much less if the credit wasn’t

offered, thus answering our first question.

It will be useful now to understand why the University offers this, and how they benefit.

From a brief research into other Universities it is found that not many offer a similar lunch ‘credit’. In many cases this is because they are Inner-City and therefore the University doesn’t own the eateries in the area. Though that begs the question: who owns the eateries on Nottingham’s campuses?

Until now I have been referring to the ‘University’, and indeed it is, but through an organisation they own called ‘Nottingham Catering Services’. Apart from Starbucks and certain places in Portland (such as Man’s), which pay rent to the University, all the eateries are owned indirectly by the University itself. Below, I will offer some speculation as to why the University offers this £5.30 credit.

First, the apparent mandate of Nottingham Catering Services is to provide a reasonable level of hospitality to the campuses on Nottingham. This is not a profit maximising company and therefore this can give us some insight into why they offer this service.

By giving the credit to all catered residence students (which is mostly first year students) they are effectively making the demand for their eateries much larger. Why might they want to do this? Perhaps they have too much capacity; Nottingham Catering Services operate over 30 different cafés, bars and restaurants. And although the eateries in the

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Portland Building can get busy during peak times, other places are relatively quiet.

This might be due to mismanagement and over-investment and therefore, they are desperate to increase demand (even at a discount to the accommodation services) to fill the eateries. However, as mentioned above, Nottingham Catering Services are instructed to provide reasonable hospitality and part of that may be to make sure there are well-stocked cafés in most buildings and to provide a lot of variety for different tastes. In order to do this, they would have had to build many different eateries and thus they need to increase demand to cover their fixed costs.

Another potential reason might be to introduce a form of implicit price discrimination or ‘student subsidy’. Nottingham Catering Services have a dilemma as they don’t want to set prices too high and therefore make their eateries unaffordable for poor students, but equally don’t want to set their prices too low thus making a loss and subsidising relatively affluent staff and visitors. The optimum outcome would be to keep prices high, but reasonable while offering lower prices to students, thus balancing profits and affordability. The student credit could be an example of this.

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Perhaps Nottingham Catering Services charge their accommodation only £2-3 for each credit and thus effectively subsidies £5.30 worth of lunch for students for £2-3 instead while charging the full amount to staff and visitors.

There is some evidence for this if we look at the average price for catered accommodation at other Universities with amends for the difference in term length, etc: the approximate yearly rent is £5,900 (1) which is £200 more than the Nottingham Accommodation which includes lunch whilst the other don’t!

I doubt that Nottingham Catering is charging the Accommodation services £820, which is the total amount of credit given in the year as this would make Nottingham Accommodation £1000 cheaper for the same thing in other universities. Although housing in Nottingham is cheap, it is not that cheap. Therefore, I suspect that Accommodation Services pay much less than £5.30 a day to Nottingham Catering Services and this is a possible hypothesis to support this.

I hope this has been an interesting thoughtful read and made you reconsider not only the lunch card, but the way that pricing works in general. Behind a price, credit or voucher is often a plethora of theories and reasons.

Some might see it as maximising efficiency and making sure that products are allocated by the economic system to those that value them most. Others might see it as companies simply eliminating what little consumer surplus we may receive, making sure we can never get a ‘bargain’. In this case who knows what theory was behind the University’s decision to offer this. Perhaps this is being over-thought and is simply an attractive bonus to entice more students into studying at Nottingham.

1. This approximate £5,900 figure was found by looking at a selected number of accommodations that most closely matched the accommodation of ‘Single Study Plus’ at Nottingham. The universities were Bristol, Durham, Exeter and Manchester.

Author’s note: During the editing process for this article Nottingham Catering Services introduced the ‘DailyBites’ card. This is similar to the credit that is loaded onto Catered Accommodation Students cards and can be bought by anybody. A discount is received on the credit received. This offers further evidence that the cost of the ‘credit’ to the University is not £5.30 and should not repudiate any of the claims or theories in the article.

Nights-Out, Pensions and Hyperbolic Discounting Peter Reddy Haribo gummy bears. (Courtesy Johnny Controletti)

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. t’s a familiar story across university ...campuses up and down the UK “I am .absolutely not coming out this Friday, I need to have a productive weekend to catch up on x,” succeeded by a night much regretted come Saturday morning and subsequently no progress with x. This is not, however, a problem solely affecting students but one which is causing issues in the current economic system. Of course, this is not suggesting that everyone in the UK has a chronic inability to control where they end up on a Friday night, but rather that human beings suffer from an underlying myopia when making decisions.

Myopia, or short-termism, is a behavioural

trait affecting decision-making that leads individuals to place greater value on rewards that occur sooner rather than later.

Are Haribos genuinely “just too good”?

If you were to be offered the choice of a day completely free from work and all other responsibilities later this week, or at a similar point next year, the vast majority would not hesitate in choosing the former. Impatience such as this can be seen in a wide range of psychological experiments; a personal favourite of mine being a 2012 advert by

Haribo, in which young children were offered a sweet they could eat instantly, or two if they could hold off eating it for fifteen minutes. The children shown in the advert all struggled to prevent themselves from eating the single sweet, (and who can blame them - I’m not waiting fifteen minutes to be given a fried egg!) and the advert concludes that this is because Haribo are ‘just too good’. This myopic effect may result in children choosing one sweet instead of two and you putting off that allimportant essay due in next month, but it also has wider implications on everything from pension decisions to the optimal strategy in dealing with long-term issues like climate change.

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The Effect of Immediacy Impatience would lead to very strange conclusions in any utility theory in which it is not accounted for (an individual choosing to consume a single Haribo as opposed to two simply could not occur despite the time delay).

As a result, economists commonly account for this inconsistency in modelling using a discount rate. The use of a discount rate is said to correct this empirical incompatibility by instead assigning an effective utility received by an agent, in terms of how highly valued a future outcome will be relative to the present, known as the net present value.

To see if this correctly assesses our behaviour habits with regard to time discounting, consider the previous example of a night out vs. doing some much needed coursework: You’ve started university this year and you’ve got a close-knit group of friends, work is mounting up and you’re planning to have a productive weekend to get on top of it when a couple of friends demand you join them in town tonight.

You know you can’t say no to that and after some very minor convincing on their part you agree to go, justifying it to yourself by counting the number of weekends you’ve got left till this large deadline, even though the same thing is definitely happening next week.

Compare that to the case in which your friends ask you to come on a similar evening out when you know you’re going to be just as snowed under with work. Instead of this occurring tonight however, they give you the choice to join them or have your productive weekend, in four months time. These are two very different choices and the average student would be much more willing to forgo the night out in four months’ time to catch up with work.

This result is not consistent with standard economic theory which states that at a constant discount rate, if the choice is independent and identical in both periods, the same decision should be reached in each by the student in question. Again this phenomena is not limited to students making decisions about whether to go out on an evening but has been shown to occur in a large number of experiments. These include an experiment undertaken by Ainslie (1983) which stated that participants generally “reported that they would prefer $50 immediately rather than $100 in six months, but would not prefer $50 in 3 months rather than $100 in nine months, even though this was the same choice seen at 3 months’ greater distance.” And also not restricted to students or even real humans,

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this effect has also been shown to hold for rats, pigeons, and monkeys.

Behavioural economics has reconciled these results by hypothesising that people do not have a constant factor by which they discount future rewards, but are instead affected by a bias towards the present. This present bias, formally known as hyperbolic discounting, occurs where individuals greatly discount rewards in the short-run (one Haribo now is worth two in fifteen minutes) and discount long-run rewards to a lesser extent (students being willing to forgo a night out in four months time).

Millions of people are not currently saving enough to meet their expectations for income once they retire Should We Care?

‘Okay, this is mildly interesting,’ you might be thinking (at least I hope so if you’ve gotten this far into the article) ‘but noting this really rather small theoretical distinction isn’t going to mean we have to make radical changes to the way in which we make decisions - if this is just human nature then we’ve been doing just fine for thousands of years.’ You wouldn’t be wrong either, you could even argue making last minute decisions about where to end up in an evening and a further barrier to retirees writing their memoirs is on balance a good thing. The UK, alongside the rest of the developed world, is however in the process of a substantial and notably underreported structural change to the way in which pensions are allocated, which adds a great deal of significance to this small theoretical distinction.

Thirty years ago the vast majority of pension plans were those of a defined benefit nature, whereby upon retirement individuals receive a fixed amount annually. This usually took the form of a percentage of their final salary, after making lifelong contributions into a pension fund, organised by the company they worked for. As economic conditions have changed and more and more pension funds reach insolvency, these companies have become increasingly keen to reduce this risk associated with meeting these pension payments, and have turned towards defined contribution schemes. In a defined contribution plan workers contribute into pension funds, which then invest this money and upon retirement

return the proceeds of the investments to retirees, whatever value they may take. The scale and speed of this shift is unprecedented, prior to the 1980s <1% of pensions took the form of a defined contribution type, whereas in 2011 that number had risen to 85%. Why then would this change cause problems when combined with the tendency for people to employ hyperbolic discounting?

Not only does swapping to defined contribution schemes transfer the investment risk from the pension funds to individuals, it also gives workers a choice as to their desired contribution level. Again, standard economic theory assumes this choice to be beneficial as individuals can select the rate of contribution to their pension at each point in time they most prefer. This should allow agents to pick the optimal plan for them, smoothing their consumption through their life in the particular manner they desire.

Unlike defined benefit schemes which forced workers to invest a stable amount into their pension, the new defined contribution pensions allow individuals to succumb to their tendency to employ hyperbolic discounting and continually delay putting money aside.

Current pensions data shows just how much less funding these newer schemes receive with average contribution rates of 21.2% for defined benefit pensions and only 4% for those of a defined contribution nature.

The difference between investing 21% of income and 4% adds up very quickly, and over the course of a 50 year working life equates to pension savings 80% lower. This is a huge figure and means that in a world in which virtually no newly adopted pensions are purely of a defined benefit nature, people will on average face one fifth of the pension pot they otherwise could have done upon retirement. With an expected change in pension pot this large, many more households in future years will be unable to live off their pension savings alone.

How Should We Go About Caring?

Fortunately, the UK government are aware of this forthcoming problem, with a significant report into the pension system concluding that “Millions of people are not currently saving enough to meet their expectations for income once they retire.” And although being aware of a problem is the first step towards dealing with it, what then should this awareness of the effects of hyperbolic discounting imply for policy?

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Firstly, it leaves scope for the government to intervene in the market for pensions, and other markets also affected by this issue, to correct the associated market failure derived from a time inconsistent discount rate. This failure this leaves people with lower than optimal private investment in areas that return longrun payoffs, such as pensions and renewable energy schemes. Richard Thaler then helpfully breaks down potential government interventions where hyperbolic discounting is present into two areas - disseminating information, and using incentives, to redress the balance between immediate reward and long-term payoff.

Improving information involved in decisionmaking is not only important in this context to ensure individuals make fully informed decisions, but can also act as a reminder and discourage the immediate consumption bias. Think about the success of food labels reminding us that although we may think we need those cookies now, they have a grotesquely unhealthy amount of sugar, or the energy efficiency rating given to many household appliances encouraging people to think about the long-term savings. These techniques could also be applied to pensions, with some commentators suggesting an annual pension statement employed not only to inform individuals about the value of their savings, but also to subtly remind them to think about pensions at least once a year.

There is also a need to provide incentives to make alternatives with long-term payoffs more desirable compared to immediate payoffs. The bias towards the present should be accounted for when determining public policy decisions, and can also be used advantageously to influence public behaviour. Government grants for residential solar panels have caused a great increase in their demand, for example, by mitigating the immediate loss associated with their purchase. These principles should be used not only in the market for pensions, but anywhere in which decisions are affected by this bias, in order to correct for it and encourage people to place greater value on long-term solutions. (I’m not quite sure there is the political appetite just yet for grants given to students for not going out on an evening and instead doing work however…)

So do not worry, you are not alone in succumbing to your present bias in wanting to enjoy tonight and not care about the consequences tomorrow, and continually put off doing any form of work/revision until you absolutely have no choice but to do it.

The moral of this story is not however stop drinking, cancel everything but the work you’re doing, and immediately invest in a secure pension - but be aware you’re a human being and therefore affected by biases like this one. Either that or get yourself out to that trashy club tonight and instead resort to reciting behavioural economics to justify it!

References

Ainslie, George and Haendel, Victor. “The motives of the will”, in: E. Gottheil; K. Druley; T. Skodola; H. Waxman (eds), Etiology Aspects of Alcohol and Drug Abuse. Springfield, Ill. 1983.

119-140.

Alexander, William and Brown, Joshua.

“Medial prefrontal cortex as an action-outcome predictor”, in: Nature Neuroscience. 2011.

1338–1344.

Department for Work and Pensions. “Security in retirement: towards a new pensions system”, Department for Work and Pensions. Pensions White Paper. 2006.

Jones, Ioan. “Why my habit of getting drunk every weekend really isn’t my fault “, Ecnmy.

2016.

Kotlikoff, Laurence, Johnson, Steven, and Samuelson, William. “Can People Compute? An Empirical Test of the Life Cycle Model”, National Bureau of Economic Research. Cambridge, MA Working Paper No. 2183, 1987.

Office for National Statistics, “Occupational Pension Schemes Survey, UK : 2015”, Office for National Statistics. 2015.

Pensions Policy Institute, “The changing landscape of pension schemes in the private sector in the UK”, Pensions Policy Institute. 2012.

Richard Thaler, “Psychology and Savings Policies”, The American Economic Review 84(2): 1994. 186-192.

The Economics of Fashion Rosie Mahoney

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. othing quite beats the satisfaction of ..finding an amazing bargain, whether it be the perfect party dress or those trainers you’ve been after for months, but have you ever stopped to think about why retailers can charge such low prices?

It is estimated that the value-clothes market in the UK is worth £7.8bn, yet according to a 2011 report by O’Rourke Group Partners a t-shirt retailing for around £10 on the highstreet only costs approximately £4 to make (O’Rourke Group Partners, 2011). So why are many retailers able to charge such high price mark-ups on their products to yield huge profits and what does this entail for

Catwalk models on the runway. (Courtesy PxHere)

manufacturers?

Profit depends on companies maximising the difference between sale price and production costs (Jarvis, 1997). In order to remain competitive within the industry it is not difficult to understand why retailers would try to minimise their manufacturing costs as much as possible despite the knock-on effects of doing so.

In 2013 an effect of minimising manufacturing cost was brought to light on a global scale when an eight-story building in Dhaka, Bangladesh collapsed. The building was home to several garment factories as well as shops.

The day before the collapse growing cracks were discovered in the walls and the shops were immediately closed. However, garment factory workers were ordered to continue and to return the next day, this was when the building collapsed killing 1,129 and injuring 2,500 (Bunting, 2011). One of the main causes for the collapse was due to 4 extra floors being built above the original permit, this as well as the decision by managers to send workers back into the factories, was due to the pressure to complete orders for buyers on time in order to receive full payment.

International Textile Garment and Leather Workers’ Federation (ITGLWF) conducted

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a report into high-street retailers use of sweatshops and the types of incidents that occur daily. The report found that in Indonesia factory workers surveyed were working between 10 and 40 hours of unpaid overtime a week. Additionally mental and physical abuse was common when workers failed to reach production targets (despite the setting of these targets being illegal). In one factory, 40 workers were locked in an unventilated room without access to toilet facilities, water or food for over three hours as punishment.

This report highlighted how common these practices were as part of the manufacturing process for many retailers. A re-occurring theme seems to be that meeting the fastpaced order demands of retailers is prioritised over the fair treatment of workers completing these orders. The list of brands ultimately sourcing from the 83 factories surveyed in the report is so comprehensive that it is difficult to find a well-known high-street brand that does not make use of this shocking system (ITGLWF, 2011).

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The effect of retailers taking advantage of the limited amount of regulation and government intervention in these countries is astronomical.

The low pay and long working hours mean workers are trapped in a cycle of poverty from which they are unable to escape. The large size of the labour force means factory workers have little bargaining power as they can easily be replaced by people who will not kick-up a fuss over wages or poor working conditions.

This cycle of exploitation is passed from generation to generation. Education remains just out of the workers grasp due to its high cost. Ultimately these countries are not meeting their potential for economic growth whilst development remains low (Madeley, 2008).

Does paying more for your clothes mean you are not contributing to this issue? The answer is, for most retailers, no. High-end retailers and the luxury sector can appear to exist outside of this exploitative system. They hide behind claims of artistry and design. Yet

despite the large price tags the manufacturing process is usually no different (Bunting, 2011).

In many cases high-end retailers use the same factories and the same working conditions as those found on the high-street. So is it possible that even when you splash out on a high-end item you are still contributing to the social and economic issues of developing countries?

So what can you do to help? Buying from high-street stores that do not use sweatshops would be a start, however information as to which retailers ethically manufacture their clothes is murky at best. In the past few years, ethical clothing brands such as PeopleTree have been set up to give shoppers the option of supporting manufacturers in less developed countries (Ethical Consumer, 2017). It is also possible to do some research and become aware of the worst high-street offenders whilst supporting campaigns to increase regulations in manufacturing sectors in less economically developed countries.

The Case For a Universal Basic Income Rushabh Malde (Courtesy Fortune.com)

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.s of January 2017, Finland became ..the first country to provide each ...citizen with a universal basic income, under a two-year pilot scheme. It has replaced all benefits workers receive, however, it is only given to those between the ages of 25 and 28 and is also a guaranteed sum of £475 a month, regardless of whether the citizen is employed or not.

It has proven a popular idea around the world given the rise of robots and automation, shown by a 2016 survey of 28 EU states in which 68% people would support or vote for some form of unconditional basic income (1).

Why has such a scheme generated such support from both the left and the right and what are the economic arguments for it?

The idea of a universal basic income was first given prominence by Milton Friedman. He argued, correctly, that most welfare schemes have significant disincentives to work. Some welfare schemes designed in the past were

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such that once the person started to work, the government clawed back 10%, to 20% of marginal earnings. For people on low incomes, these have significant negative substitution effects that encourage people not to work.

It can also encourage risky yet entrepreneurial businesses given everyone has an income to fall back on if the business fails Why does a UBI system avoid such pitfalls? It’s because it is unconditional - given regardless of whether one works or not. Furthermore, some economists argue it can have positive effects on labour supply since most will need to work to ‘top up’ their income, given such an income isn’t sustainable enough to live off. It can also encourage risky yet entrepreneurial businesses given everyone has an income to fall back on if the business fails, for example (2,4).

Another reason why some economists are in favour of such an idea is due to high government administration costs. The current system of welfare payments has been rebranded as Universal Credit. This system, which started under the former Work and Pensions minister, Ian Duncan Smith, aimed to be completed by 2015. It is a single monthly payment for people in or out of work; it was designed to replace all benefits into one. Its administration and IT costs have exponentially risen to almost £16bn, and is only now being slowly being rolled in some towns in London.

A UBI system is less bureaucratic. It could replace all welfare payments, and working tax credits and be easy to manage since it’s an income provided to all. (3) Another reason why economists on the left like such a scheme is its anti-poverty effects.

UBI may be seen as a negative income tax.

Currently, the UK system of a working tax credit means the government tops up the wages of low-income working families. However, many have viewed such a scheme as a ‘subsidy’

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for companies to pay low wages. With a UBI, however, all this is removed. Citizens receive the same amount from the government and companies are more accountable for the wages they set. The rising minimum wage to over £9 in London is looking to have some modest negative effects on employment. Those who broadcast the dangers of raising the minimum wage argue too, that these employment dangers in raising the minimum wage make it not as effective an anti-poverty tool as UBI since these problems are eliminated.

If there is so much support, on both sides of the spectrum, why has the uptake been so small? One reason is the level of automation.

Currently, robots and automation have not been a revolutionary part of the production process. Fears that such automation will eliminate low skill labour encourage the idea a UBI (3). Such widespread automation, however, has not taken place. Thus, UBI may be a solution to a more distant problem.

Second, the government costs are huge.

Providing such a scheme would depend on

the level each citizen would receive. Given the government currently spends £251bn on welfare, it could be estimated such a scheme could cost roughly double the current welfare payments expenditure bill to be of a worthy amount. It would indeed, too, need give money to citizens of all backgrounds – including the rich. Given the size of the deficit and futuristic concerns, this therefore seems an unlikely policy for the near term. (5,6)

Life, Liberty, and the Pursuit of… Growth?

Samuel Hughes

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. ertainly the advent of modern economic growth ranks amongst the most revolutionary events in human history, an entirely new thing under the sun.

Since the prehistoric dawn of agriculture, we remained mired in the Malthusian trap. Any hard-won advance in technology would not act to raise living standards, but dissipate into higher population growth; and absent any technological progress, population would eventually run up against the carrying capacity of the land, cut back by famine, war, and pestilence. Rather than living in harmony with nature, the balance struck was more one of dying in harmony with it.

Yet the trap was escaped. And not just with another “efflorescence” – what Jack Goldstone names the periodic Golden Ages of Ancient Greece and China, the Italian city-states, and the Dutch – but a sustained, albeit uneven, two centuries of strong growth.

This can be seen crudely from the Maddison Project’s estimates of historical GDP per capita in the famous hockey-stick graph: after centuries - nay, millennia - of stagnation, it suddenly shoots up. As Marx noted, “what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?”

The magnitude of this growth can’t be accounted for by simply working harder. The increase in working hours during what Jan de Vries has coined the “Industrious Revolution” got the Netherlands and England to scarcely a fraction of the income level they would subsequently achieve with the Industrial Revolution. The innovation and adoption

(Courtesy Pexels)

of new ideas was central. Inspiration, not perspiration. And this didn’t just act to increase productivity, but to improve quality, and expand the variety of goods it was even possible to produce. Think of all the innovations in health, household utilities, transport, communication, entertainment, and access to information that weren’t available at any price in 1800.

The growth of income per capita has no effect on the average level of happiness Yet revolutions do not always end happily.

And Richard Easterlin’s empirical conclusions on the effect of economic growth on happiness are gloomy. Formally put, the Easterlin Paradox finds that for a given country, in the cross-section – that is, for individuals at a point in time – self-reported happiness does indeed rise with income; but with time-series data for the nation as a whole, the growth of income per capita has no effect on the average level of happiness.

The standard explanations for this are that expectations quickly adapt to new benchmarks, making happiness only fleeting; or that happiness mostly depends on your income relative to others, and not on its absolute level. Hence happiness can never be fully or universally achieved. Material progress has been nothing more than chasing the rainbow.

However, the measures of “happiness” used for these findings form a shaky foundation from which to draw any conclusions. The surveys usually ask for a person to rate their subjective well-being on, at best, a 10 point scale; but they often have only three options (“not very”, “quite”, and “very” happy).

Both scales are truncated – they have an upper limit, reducing the scope for possible improvement. If lots of people start out happy, the scales don’t allow them to say they’ve got any happier, by nature of their construction.

Therefore any increase in these measures can’t possibly keep up with the growth of GDP over time, which has no inbuilt limit. Discrete options also mean only large changes in happiness are recorded: there’s no middle ground response for those experiencing an increase in happiness less than the difference between “quite” and “very”.

The ten point scale suffers from this marginally less so, but without the verbal hints attached to the three point scales (ten adverbs would be a bit much), the meaning of each point becomes less clear to respondents. Is 10 supposed to be orgasmic bliss and 0 the worst torture imaginable? Or do they refer to more realistic everyday levels? Is 5 the halfway point between the two extremes, or the point of emotional indifference? Or is it the average level of happiness, and if so, the average with reference to which group? Your acquaintances? Your country? The world?

The Gallup World Poll sets the extremes of the scale as the best and worst “possible life for you”; but responses to this depend so much on individual perception and context

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that translating them into a standardised scale for comparisons between people is very problematic. We also answer these questions ordinally, qualitative rankings of more or less happiness where the quantitative intervals between options mean nothing. Just because one represents “not very happy”, two “quite happy”, and three “very happy”, it does not follow that the difference between the first two is equal to the difference between the latter two. Hence even simple averages of responses are dubious.

Aggregating the responses between people isn’t only troublesome because of how they each individually interpret the scales, but also due to each having their own definition of happiness. Happiness can be thought of as feelings of pleasure, contentment, or purpose, but often not all at once.

Many people would reject the pleasure of Aldous Huxley’s soma or Robert Nozick’s experience machine in favour of a more meaningful life.

Contentment and purpose can also be at odds; as Oscar Wilde put it, “There are only two tragedies in life: one is not getting what one wants, and the other is getting it”. The evidence that children make people less happy is little discouragement to many, they pursue objectives they see as worthwhile and fulfilling, even at the expense of contentment or pleasure. And when the World Values Survey asks about “life satisfaction”, what of the people who would echo Mill that it is “better to be Socrates dissatisfied than a fool satisfied”?

Furthermore, we simply struggle to meaningfully answer such a monumental question. Rather than arriving at an accurate judgment of life satisfaction as a whole, at any particular moment we over- and underemphasise aspects arbitrarily more salient in our minds. That is, we suffer from availability bias. Norbert Schwarz found that even something as trivial as leaving a dime on a photocopier for office workers to find leads them to report being more satisfied with their life as a whole. Often answers reflect more the effects of looking on the bright side, a

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state of denial, or even the stoic triumph of the human spirit over circumstance, than an overall evaluation of life satisfaction.

Amartya Sen also sees it as deeply mistaken to discount the suffering of the deprived simply because they adapt to their deprivation,

should also be cross-examined. The media relentlessly highlights attention-grabbing bad news stories, giving the perception of degeneration even as most objective indicators have improved. As Wilfred Beckerman quips, “Catastrophe is always good news.”

So we should be highly sceptical of these subjective well-being measures; even more so for international comparisons of happiness, which are problematic since even when a direct synonym analogous to “happy” can be found for translation, there are cultural differences in its use. Nevertheless, if we do believe the measures, Angus Deaton has made use of the recent availability of reliable data from the Google image search results for “happiness”. (Courtesy Google) Gallup World Poll covering far adjusting their expectations to what seems more countries and a greater range of income like the inevitable and taking pleasure in small levels than Easterlin. mercies as a coping mechanism.

He finds that in the cross-section of countries, Easterlin’s finding of flatling national happiness a fourfold increase of income is consistently also coincides with major social changes in the associated with a linear increase of one (out last half century other than economic growth. of ten) on scores of life satisfaction. Although Therefore no relationship can be found either there is indeed diminishing marginal utility, with rising public expenditure, leisure, local the function also appears strictly monotonic – environmental quality, life expectancy, or thus far. Even so, the explanations advanced women joining the labour force. It’s then to account for the Easterlin Paradox have a perhaps more plausible that the measures lot of intuitive merit, and are worth discussing of happiness are insensitive to changes in in themselves. actual happiness, rather than happiness being insensitive to economic growth.

First, there is the power of adaptation. The story goes that we grow accustomed to our new material circumstances. Like Sisyphus, condemned to toil for the impossible, our aspirations tend to race ahead of us, moving on to loftier goals just as we realise our last ambitions. Boredom and dissatisfaction with what we have creates an insatiable urge for novelty. Advertising only inflames this desire, speeding up our gallop to nowhere on the hedonic treadmill, and thus we find the truth in Veblen’s reversal: “Invention is the mother of necessity.”

“There are only two tragedies in life: one is not getting what one wants, and the other is getting it” - Oscar Wild

It shouldn’t be forgotten either that inequality has also risen for many countries, with median income actually stagnating, which isn’t reflected in GDP figures – if incomes haven’t actually risen, how do we know the relationship between it and happiness?

Alternatively, perhaps another likely culprit

Alternatively, perhaps what’s happening is we revise our conception of how far the happiness scale goes up: we could be happier than our parents, but also more aware of what sort of happiness is possible and reasonable to expect, adjusting our responses accordingly.

Of course, desires are not exogenous, and the

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ascetic Epicurean response of limiting wants may be more successful than the economist’s strategy of satisfying them.

Yet is it true that well-being is purely a negative phenomenon, deriving only from narrowing the gap between desires and their fulfilment? This view echoes Dryden’s lines: “For all the happiness mankind can gain/ Is not in pleasure but in rest from pain.” Yet following such a strategy would strip life of its fullness and richness. Anthony Kenny presented the trade-off well: “To increase a person’s chances of happiness, in the sense of fullness of life, is eo ipso to decrease his chance of happiness, in the sense of satisfaction of desire.”

Secondly, there is the power of comparison.

“I would rather be first in a small village in Gaul than second in command in Rome”, spoke Caesar. When wealth and consumption are sought, not as ends in themselves, but as signals of status – an inherently relative phenomenon – the inevitable result is positional competition: a zero-sum game where one person’s gain only comes at the expense of another. This often plays out as the conspicuous consumption of Veblen goods.

Desired for their exclusivity and as a marker of rank, these are expensive, and more importantly, known to be so.

This arms race is compounded by the intrinsic scarcity of certain prized goods. Beautiful old houses, front row seats, great works of art, unspoilt holiday resorts, prestigious schools, leadership positions, servants – all of these are either physically fixed in supply, or their nature would be destroyed by democratic wealth (crowds appearing; servants having other options etc.).

Hence the only way to afford them is to be wealthier than everyone else; it is the relative, not absolute, amount which matters.

Furthermore the competition for these goods – Roy Harrod termed them “oligarchic” – only intensifies with growth, as a larger proportion of income is freed up for positional spending.

But the logic of fixed supply means that at the end of the day the same amount of people are enjoying the oligarchic goods, yet there’s perhaps the added cost of the unpleasantness of positional competition. Yet not all that

first appears to be emulation for the sake of keeping up with the Joneses is so. Humans are social animals who can appreciate doing the same thing as others for its own sake, to share the experience and be part of something. Or emulation might be because of genuine learning from others, rather than a desperate attempt to maintain one’s position in the rat race.

The evidence that children make people less happy is little discouragement to many The majority of Harvard students asked by Sara Solnick and David Hemenway to choose between a world in which they earned $50,000 compared to an average of $25,000, or one where they earned $100,000 compared to a $200,000 average, preferred the former option. However, this is Harvard. These respondents may be more competitive than

as supporting it. Perceptions might be relative, but comparing yourself to others isn’t the only benchmark: there’s also your own prior experience. And the two benchmarks are substitutes. When times are good, favourably comparing our current selves to how we were doing in the recent past lessens the need to get ahead of others. Your own rising standard of living consoles and distracts you from nasty comparisons to others. Envy and resentment give way to greater tolerance and trust.

In a zero-sum stagnant economy, where one person’s gain necessarily comes at another’s expense, people will oppose greater economic mobility and the openness of opportunity, as this imposes a cost on themselves. As Prospect Theory has shown, the fear of loss is a powerful motivator. Hence growth needs to be high enough to ensure the pie is larger, so that even accepting a smaller slice leaves people with more.

Thus Friedman finds that times of economic growth usually coincide with progress in the moral character of society: the openness of opportunity, commitment to fairness and tolerance of diversity. The converse is that no matter how high the level of wealth in a society, stagnation of its growth rate will usually imply moral retrogression.

Friedman’s argument is a restatement of Edward Gibbon: “All that is human must retrograde if it does not advance.” Society is a bicycle, stable so long as it has forward momentum.

Whatever the answer to such questions on the purpose of economic growth, it’s important An advert from the 1930s advertising American suburban living ”. (Courtesy Pixabay) to keep asking them. most. Only a third of the staff chose likewise.

It’s important to occasionally leave behind And if what we crave is relative rather than technocratic concerns over the means of absolute wealth, what are we to make of achieving this or that, and delve into the the immigration flows from poorer to richer territory of ends and values. After all, it’s countries? They join the bottom economic worth recalling the full title of Smith’s magnum rung of their chosen new society, and with all opus: An Inquiry into the Nature and Causes the social stigma of an outsider to boot. of the Wealth of Nations. The central object of our studies is not only the causes of economic In his book, The Moral Consequences of growth, but its effect, attributes, and qualities; Economic Growth, Benjamin Friedman its “nature”. accepts that our desires are inherently relative; yet, by his account, rather than highlighting the futility of growth, he sees this

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The Future of Technology in the Oil & Gas Industry Shamima Manzoor An oil well in Azerbaijan (Courtesy Pexels)

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..ata in the oil and gas industry ...has never been organised in ..the way that a company like Google or Amazon would do it”, according to Ashok Belani, Executive Vice President of Technology at Schlumberger1. Only 3-5% of all oil and gas assets are connected digitally, and only around 1-3% of all data collected in the industry is used (1). However, it seems now that the oil and gas industry is finally ready to embrace the benefits of technology, as it emerges from an environment of low oil prices. $115 per barrel of crude oil - this post-recession high2 achieved in 2011 now seems impossible.

Oil prices started falling in June 2014 due to a toxic mix of growing supply and slowing demand, with prices hitting $27 per barrel in January 2016. Excess supply was primarily due to increased investment in and availability of both renewable and non-renewable energy sources, including the effects of the rise of fracking in the US. On the other hand, slowing demand stemmed from China’s policies to target growth from services and consumption, rather than from heavy investment.

Preceding the downturn were years of strong development in the industry. Soaring prices were predominantly a result of China’s industrialisation and its copious demand for energy. Oil and gas companies endeavoured to capitalise on high prices and find as much resource as possible, whatever the expense.

As companies were blinded by increasing profits, underlying problems like declining productivity and rising costs were ignored.

Once prices started falling, these problems were exposed. Afren, an African-focused explorer listed in London, was one of many small oil and gas companies that failed as a result. Between 2014 and 2016, capital expenditures fell by around 40%2 as $620bn of major projects through to 2020 were cancelled or deferred (2).

Oil prices are however beginning to recover, having recently been holding around $50

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a barrel7. The oil producing cartel, the Organization of the Petroleum Exporting Countries, agreed last November to limit output, with other countries also committing themselves to supply reductions. According to Citi’s bullish prediction, prices are expected to reach $70 per barrel by the end of 2017 (3).

The scope for technology Despite the price rebound the uncertain environment has meant companies are optimistic but still cautious, for instance they are tending to prefer shorter-cycle projects.

Their priority now is to address their costs, by becoming more efficient and by increasing productivity. This is where technology can have significant effects - capital expenditures could be reduced by up to 20%; operating costs in the upstream side by 3-5%; and operating costs by around 50% in the downstream side (4).

50% of oil and gas companies plan to increase spending on digital technologies over the next three to five years Many of the world’s key industries, including manufacturing and commerce, have embraced and exploited the technological progress of the 20th and 21st century. In contrast, the oil and gas sector, although having adopted some technology in the past to aid exploration and the discovery of new reserves - for instance geophysical imaging and 3D seismic visualisation – has generally been reluctant to innovate.

This is partly due to cultural resistance to change in this well-established industry, and partly due to asymmetric risks caused by the high potential for technological failure in an industry where losses are usually large.

Furthermore, high oil prices and the high

profits that followed provided little incentive or concern to look at increasing efficiency.

However, in today’s post oil-price-crash environment, we are likely to see wide stream adoption of technology into the industry as firms now have a need to improve productivity and cut costs. 50% of oil and gas companies surveyed by Accenture PLC said they plan to increase spending on digital technologies over the next three to five years (1).

There is high potential for technology adoption particularly in the upside stream of the industry.

Technologies like data collection and analytics, automation, and sensors, can improve not only productivity and efficiency, but also safety, by removing the need for dangerous procedures carried out by on-site workers.

Robots can be deployed to work underwater to repair pipelines, and drones can be utilised to carry out maintenance. Extraction techniques can be improved by using sensors at the tips of automated drill bits. Drilling is usually carried out miles below the surface, and when a drill pit or a pipeline is broken then this halts production. These automated drill bits can adjust the bit according to the grade of the ore in order to prevent damage, sparing firms time and money.

Some projects have already been successfully implemented. For instance, a well has been drilled in Vaca Muerta, Argentina – despite Royal Dutch Shell’s employees being far away in Calgary, Canada – and at a fraction of the cost5. This has been possible due to ‘virtual drilling’: real-time data from the rig in Vaca Muerta was sent to Calgary for the design and control of the drilling. “The aim is to bring the data to the expert, not the expert to the data,”(5) according to Peter Zornio of Emerson, an automation firm.

We may consequently see a change in the occupation mix in the industry. Within 10 years, oil and gas companies could employ more data scientists and statisticians than engineers, geologists and roustabouts (6).

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The oil and gas industry may also be affected from technological developments in other linked industries, mainly electric vehicles, energy-saving devices, and renewable energy.

Electric vehicles and ride sharing City councils’ efforts to reduce pollution and congestion, state efforts to reduce carbon emissions, and growing consumer awareness of carbon footprints, means electric cars could account for a greater percentage of new car sales. Furthermore, consumer behaviour is changing with more people considering ride sharing. Investment in electric vehicles is bringing down their cost, and together with ride sharing, this could reduce oil demand.

Additionally, improvements in engine performance and fuel efficiency may mean less oil is needed in standard cars.

Energy-saving devices Consumer attitudes to energy saving are also being extended to homes with the adoption of energy-efficient technologies.

Smart technology can reduce consumers’ energy bills. People are incorporating energysaving devices into their lifestyle, such as smart thermostats.

Electrical sensors can set optimal levels of heat and light using usage, weather and occupancy information.

Renewable energy Renewable energy, which is the fastest growing energy source, is also being transformed by technological advancements, and this will affect the oil and gas sector.

Growing environmental concerns are supporting the rise of renewables, as the oil industry is the largest industrial source of volatile organic compound emissions.

Annually since 2001, global solar power generation has increased by 50% and wind power generation has increased by 24% (6).

Technological progress is bringing down the cost of producing and storing renewable energy. Therefore, it is becoming not only cheaper but also more widely available.

Technology can help to eliminate the major issues facing the renewable energy sector such

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as integration, scaling, and storage. Coupled with the rise of new energy sources like fuel cells, nuclear fusion and tar sands, this could pose a threat to the oil and gas industry’s share of global energy supply.

Instead of building 85 coal plants, China will invest $350 billion into renewable energy In the short term, there could be an increase in demand for gas as countries seek lower carbon energy sources to meet emissions regulations – but in the long term, countries may adopt renewable energies instead. This trend is already manifesting itself at a larger scale.

China announced in early 2017 that instead of building 85 coal plants, it will invest $350 billion into renewable energy (6). Meanwhile, 40% of India’s power could come from non-fossil fuel sources by 2030 (6).

and gas industry.

We could see the next decade or so bringing about a revolution whereby the oil and gas industries become digitalised, thus bringing it in line with the modern age and better able to compete with other energy sources that are already becoming more digitalised.

References 1: Wethe, David. “Big Oil’s Rejection of Silicon Valley Is Finally Coming to End.” April 18, 2017. Accessed April 23, 2017. http://www.rigzone.com/news/article. asp?hpf=1&a_id=149758.

2: Biscardini, Giorgio, Reid Morrison, David Branson, and Adrian Del Maestro. “2017 Oil and Gas Trends.”

PwC. 2017. Accessed April 22, 2017. https://www. strategyand.pwc.com/trend/2017-oil-and-gas-trends.

3: Kollmeyer, Barbara. “Citi sees Brent oil at $70 a barrel by end of 2017.” MarketWatch. February 22, 2017. Accessed April 10, 2017. http://www. marketwatch.com/story/citi-sees-brent-oil-at-70-abarrel-by-end-2017-2017-02-21.

4: Choudhry, Harsh, Azam Mohammad, Khoon Tee Tan, and Richard Ward. “The next frontier for digital technologies in oil and gas.” McKinsey & Company. August 2016.

Accessed April 10, 2017. http:// www.mckinsey.com/industries/ oil-and-gas/our-insights/ the-next-frontier-for-digitaltechnologies-in-oil-and-gas.

5: “Oil struggles to enter the digital age.” The Economist.

April 06, 2017. Accessed April 25, 2017. http://www.economist. com/news/business/21720338talk-digital-oil-rig-may-be-bitpremature-oil-struggles-enterdigital-age.

6: Bughin, Jacques, James Manyika, and Jonathan Woetzel. Beyond the The Three Gorges hydroelectric gravity dam on the Yangtze River, China. (Courtesy Le Grand Portage) supercycle: how technology is reshaping resources. Report.

Concluding remarks February 2017. Accessed April 10, 2017. http:// In an industry where changes have historically www.mckinsey.com.br/business-functions/ been a result of regulations and policies, oil and sustainability-and-resource-productivity/our-insights/ how-technology-is-reshaping-supply-and-demandgas companies are beginning to actively look at for-natural-resources/en. how technology can revolutionise operations,

create additional profits, and increase capacity.

The adaptation of technology in the oil and gas industry will not only affect the industry itself, but also other countries and global industries which heavily depend on these key resources.

Technology use in other industries such as electric vehicles and the renewable energies industry is also having direct effects on the oil

7: Thomas, Natalie. “Small-cap focus: UK oil and gas.” Financial Times. April 7, 2017. Accessed April 11, 2017. https://www.ft.com/content/effe58b0-1aa011e7-bcac-6d03d067f81f.

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The Importance of Economic Growth: Should Raising it be the Main Focus of policy makers?

Adam Sands U.S. twenty Dollar bills (Courtesy Unsplash)

he ultimate aim of policy makers ...around the globe is to improve the lives of the people they represent. In the UK, we often see a lot of focus on growth figures, but how far these growth figures go towards improving the lives of the people, for many, remains unclear. Of course, economic growth is generally considered a good thing, but on it’s own, it is not sufficient to improve the general lives of the majority of people.

I will put forward the view that the decision by policy makers to focus resources onto stimulating economic growth is largely dependent upon the respective country’s stage within economic development, or its position within its economic cycle. However, to first understand what following a policy of rising GDP achieves, it is important to look at the devastating effects that negative economic growth can have on an economy.

Recently, negative economic growth has hit Greece hard. It’s now nearly 10 years since the global financial crisis, and Greece are still feeling the repercussions severely. As recently as the fourth quarter of 2016, unemployment in Greece was recorded as 23.6% (Philip Chrysopoulos 2017). This high unemployment rate which Greece has endured for many years has occurred as a result of almost consistent negative economic growth. As early as 2012 it was predicted that the Greek economy would collapse by over a quarter, plunging Greece into a “1930s-style Great Depression” (Phillip Inman and Helena Smith 2012).

These predictions turned out to come true. This immediately provides us quite an obvious link between economic growth and unemployment.

For a country in recession such as Greece, targeting an increase in GDP can lead to the creation of wealth that is desperately needed to boost the economy. However, Greece have not been able to target these issues as they have had to commit to austerity over the past decade due to the regulations behind

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their IMF loans. All of this has made that comparison between Greece today and the Great Depression a very accurate one indeed.

To deal with the devastating effects of the Great Depression in the 1930’s, John Maynard Keynes suggested prioritising fiscal stimulus for an increase in GDP. President Franklin D Roosevelt tried this in the form of his, New Deal, and this significantly reduced unemployment by 1937.

As recently as the fourth quarter of 2016, unemployment in Greece was recorded as 23.6% However, the Roosevelt Recession of 1937-38, was a result of his pursuit of a balanced budget, leading to an increase in unemployment to 19% (Maurice W Lee 1955). By putting other objectives ahead of GDP, in this case a balanced budget, it put GDP and therefore the economy at risk. This is the situation that can be seen in Greece today. The focus in recent years has been mainly on reducing the budget deficit and the national debt, rather than growing the economy. This suggests that, when in recession, if GDP is not the number one goal of economy policy, problems can occur.

It is essential for an economy in recession to prioritise economic growth and investment to get the economy moving again, however this was not done in Greece, and only halfheartedly done in the UK. The Conservative-Liberal Democrat coalition committed to austerity, rather than investing.

This was an attempt to reduce the current account deficit, much like Greece. Not only have the UK government failed to deliver a current account surplus as planned, these policies helped lead to the “longest double-dip recession for more than 50 years” (Andrew Grice 2012). By putting a balanced budget ahead of growth, the economy stumbled out of recession. If the UK government had

committed to investing in higher paid jobs and the public sector rather than austerity, then the recession may have ended sooner and benefits would have been felt on a wider scale.

When countries do target a rise in GDP there are several ways in which they can go about doing this. One of these is by cutting taxation and government regulation, allowing the trickledown effect to come into play. This is seemingly what the UK have done. The top rate of income tax came down from 50% to 45% in 2013, the largest tax cut worldwide in 2013 (Andrew Oxlade 2013).

The corporation tax rate has also been reduced in the UK, from 28% to 20% in the last parliament (Jon Stone 2015), and down to 17% by 2020. This may be a successful way of creating economic growth, which it eventually has done in the UK, but this type of growth may not have positive impacts country wide.

This type of growth quite often raises income inequality. The current UK economic policy of austerity policies such as cutting corporation tax, may be gradually raising GDP, but it simply isn’t benefiting the masses. The Managing Director of the IMF, Christine Lagarde, discussed this issue, whilst making a speech about how rises in GDP since the Financial Crisis weren’t beneficial to the masses. Whilst making a speech on the Greek debt crisis, she referred to John F Kennedy’s metaphor “In too many countries, economic growth has failed to lift these small boats, while the gorgeous yachts have been riding the waves and enjoying wind in their sails” (Christine Lagarde 2015).

We live in a world where the richest 300 have more than the poorest 3 billion (Mark Karlin 2013), thus explaining why Lagarde suggests that whilst GDP is rising, lives may not necessarily be improving. To put it simply, there is no use in promoting economic growth if it is beneficial for the few but not the many.

This implies that perhaps there is a greater role

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for the redistribution of wealth than there is for just creating growth.

The most obvious way to redistribute wealth is of course, to tax the rich more, and for the government to spend this money on improving the lives of the poor. However, taxes can only be raised so much before they decrease the incentives to create wealth; and in order to redistribute wealth it needs to first be created.

The idea put forward by Friedman of a negative income tax (Robert H Frank 2006), to help reduce inequality for me is by no means, however it does have its advantages. Crucially, it allows for the redistribution of wealth to the poorest in society, without distorting the incentives to work hard. So, although many agree that the redistribution of wealth is important, it is equally as critical to ensure redistribution is done fairly.

For a developing economy, it is a totally different situation. In many cases, we cannot redistribute wealth as there is little wealth in the first place, and so economic policy must be designed with this in mind. Looking at the Chinese economy, at the time of 1949 it was one of the least developed economies, with masses of its population in poverty. Both urban and rural citizens saw virtually no increase in living standards from 1950 and were just as poor in the 1970s as during the Great Depression. 1978 saw the beginning of the Chinese economic reform.

From 1978 to 2011, China’s average growth was the fastest of any economy worldwide, achieving double digit growth in many years.

This push for economic growth via government investment in capital and exporting industries saw a huge rise in living standards. Food prices dropped while agriculture incomes rose, life expectancy has increased and the country is now full of world leaders in all kinds of departments. It is clear to see that this growth has transformed Chinese society for the better.

Countries such as Dubai and the BRICS are now following a similar model, and are seeing similar results. Now that China has caught up and is forecasted by many to overtake the USA to become the number one economic powerhouse (Kenneth Rapoza 2011), it must now consider whether this policy of rapid economic growth is both sustainable, good for the people, and how much this growth is damaging the environment.

These huge economic growth rates that China has experienced over the past few decades has propelled them to become the world’s second

largest economy. This has brought with it an increased quality of life for the masses, almost wiping out urban poverty all together, (Elizabeth Stuart 2015). Now that the economy has become much larger it must look to make sure that everyone is benefitting from this growth.

Despite the great poverty reductions recently, there is huge income inequality in China. Still, “the poorest 24% of Chinese households own just 1% of the country’s wealth” (Gabriel Wildau and Tom Mitchell 2016). This demonstrates that improved economic growth cannot solve all problems for a country, as issues such as income inequality can still persist.

In my view, I believe that for a developing economy, policy makers should first and foremost focus policies around generating economic growth. This is because it is a great way to create jobs, wealth and get the capital investment needed to put the economy on the ladder. China is proof of this. This is also the case for a country in recession, both deficit spending and tax reductions can help propel the economy into recovery and lead to growth, creating needed jobs. Perhaps if the UK had employed this strategy rather than impose austerity, productivity would have improved and helped achieve Osborne’s original goal of export-led growth. But I respect that this aim was also made difficult because of the Eurozone crisis.

However, I think that what every country should be doing is parking the industrial growth to one side, making way for the new, huge and prosperous green market that is just around the corner. By focusing our attentions on the Green market, we can make green energy cheaper and available to the many, as well as profiting from it ourselves.

This is the next challenge for countries such as the UK and China. By making “Green Growth” our number one economic goal we can not only achieve a cheaper, greener energy system, but we can achieve great economic growth; and if we make the minimum wage a living wage, control inflation, and close tax loopholes at the top, this growth can be shared across the whole of society.

So raising GDP brings many benefits, especially for development and recession recovery. It helps to create the jobs and gain the capital investment needed for a country to progress. This leads to my conclusion that yes, economic growth is important, and yes it should be a central goal of all policy makers regardless of the economic development of

the economy that they are creating policies for.

However, economic growth is not sufficient in the long run.

As we see today there are new challenges on the horizon, and for economies such as the US, ourselves in the UK, and now even countries such as China we need to focus our attentions on going green for the good of the planet and finding a way to crack the code of how to distribute wealth successfully.

References

Andrew Grice. 2012. Independent. 7 24. Accessed 4 2, 2017. http://www.independent.co.uk/news/uk/ politics/britain-stuck-in-longest-recession-for-50years-7973434.html.

Andrew Oxlade. 2013. Telegraph. 10 9. Accessed 4 4, 2017. http://www.telegraph.co.uk/finance/ personalfinance/tax/10366122/UK-top-rate-tax-cutwas-worlds-largest-in-2013.html.

Christine Lagarde. 2015. IMF. 6 17. Accessed 4 4, 2017. http://www.imf.org/external/np/speeches/2015/061715. htm.

Elizabeth Stuart. 2015. The Guardian. 8 19. Accessed 4 15, 2017. https://www.theguardian.com/business/ economics-blog/2015/aug/19/china-poverty-inequalitydevelopment-goals.

Gabriel Wildau, and Tom Mitchell. 2016. Financial Times. 1 14. Accessed 4 15, 2017. https://www.ft.com/ content/3c521faa-baa6-11e5-a7cc-280dfe875e28.

Jon Stone. 2015. Independent. 7 8. Accessed 4 5, 2017. http://www.independent.co.uk/news/uk/politics/budget2015-corporation-tax-just-got-cut-again-even-thoughthe-uk-already-has-the-lowest-rate-in-the-10375238. html.

Kenneth Rapoza. 2011. Forbes. 5 26. Accessed 4 5, 2017. https://www.forbes.com/sites/ kenrapoza/2011/05/26/by-2020-china-no-1-us-no2/#6ef523914aef.

Mark Karlin. 2013. Buzzflash. 7 18. Accessed 4 3, 2017. http://www.truth-out.org/buzzflash/commentary/ item/18094-richest-300-persons-on-earth-have-moremoney-than-poorest-3-billion.

Maurice W Lee. 1955. In Economic Fluctuations, 236.

Homewood, Illinois: R. D. Irwin Inc. Philip Chrysopoulos. 2017. Greek Reporter. 3 16.

Accessed 4 11, 2017. http://greece.greekreporter. com/2017/03/16/unemployment-in-greece-rises-23-6in-fourth-quarter/.

Phillip Inman, and Helena Smith. 2012. The Guardian. 9 18. Accessed 3 24, 2017. https://www.theguardian.com/ business/2012/sep/18/greek-economy-shrink-greatdepression.

Robert H Frank. 2006. New York Times. 11 23. Accessed 2 19, 2017. http://www.nytimes. com/2006/11/23/business/23scene.html.

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An Overview of India’s Demonetisation & Moving Towards a Cashless Future Ugam Sheth The flag of India (Courtesy Yann Forget)

O

.n November 8, 2016, the Indian ..government announced an immediate ban on two largedenomination bills. Prime Minister Narendra Modi banned the Rs. 500 (approximately £5.98) and Rs. 1000 (approximately £11.97) bills. These account for 86% of currency in circulation within the Indian economy where 78% of financial transactions are done in cash (Kazmin 2016). Holders of these notes would need to visit banks to deposit them or convert them into new notes by December 30, 2016.

India has a large problem with ‘black money’ - cash, or other wealth, that has evaded taxation. A 2010 World Bank estimate showed that the shadow economy (composed of black money) makes up at least one-tenth of India’s GDP (Basu 2016). Black money is any sort of income that an individual has not disclosed to the government for the sake of tax avoidance. Black money interferes with wealth redistribution mechanisms and exacerbates inequality - most of the tax evasion occurs in the top income levels, depriving the government of valuable funding that would be used to better the lives of the less fortunate through infrastructure and public services spending. Moreover, black money keeps money out of banks where it could be lent to others to help drive investment and economic growth.

A clear example of this is the real estate market. A third of business in India is done with black money. Moreover, bribes are common to gain licenses and other approvals.

These bribes are then invested in real estate, which deals largely in cash, and the buyers understate how much they paid for property (Ministry of Finance 2012). This benefits both parties: the buyers have an outlet for their black money and sellers pay less tax due to the understated value of the property. In fact, this led to the real estate bubble within India, which many analysts are now fearing will burst due to fewer buyers with enough legal money to purchase property. Shares in Indianlisted real estate developers fell sharply the

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day after Mr Modi’s announcement — several by nearly 20 per cent — as investors worried about the consequences of a dramatic fall in cash transactions (Mundy 2016).

Demonetisation of the two major bills is a laudable move - these bills are preferred for black money because they are easier to store and transfer due to their high denomination.

The idea of this move is to expose and penalise the people hoarding huge amounts of unaccounted cash. After this move, anyone who deposits more than Rs. 250,000 has to explain the source of the cash. If unexplained, they will have to answer to the tax authorities.

Black money keeps money out of banks where it could be lent to others to help drive investment and economic growth The initiative was met with success in the beginning. Banks, both private and public, were seeing great business. Old bills worth 13 trillion rupees (£155 billion) had been deposited by December 10, 2016, with many more expected by the deadline (Choudhury 2016). This should improve bank liquidity and consequently encourage more lending to boost economic growth.

Demonetisation has pushed India towards adopting cashless payments. Cashless payments entail using bank facilities (ensuring disclosure of all income) which provides banks with more reserves to extend loans and leads to increased tax revenue for the governments.

This cashless boost has brought benefits to various start-ups. One start-up in particular, a mobile payments platform called Paytm, saw a 14 times increase in daily average sign ups after the currency decision. Since the demonetisation, daily transactions on Paytm have increased to nearly six million - a 300% increase (Punit 2016). Paytm’s success also motivated India’s biggest banks to implement

an ‘immediate payments system’, known as IMPS, which does not need an electronic wallet (like Paytm); instead money can be transferred between people with just a mobile number, a payment code and a personal PIN. The Indian asset management industry could also benefit from this. Demonetisation could induce a shift in savings patterns away from physical assets (such as gold and real estate) and towards formal financial products. Physical assets are a convenient means of storing black money. With less black money in the economy and more in bank accounts, asset managers should see their business increase in a postdemonetisation India.

Lastly, it is possible that certain people would rather just let their black money go to waste rather than face government enquiries about the origins of their wealth. However, the government can profit from bills that are not deposited. Theoretically, money is a debt of the central bank. In most modern economies this debt is offset, on the asset side, by holdings of securities like government bonds.

Therefore, the unreturned notes would create a huge positive asset position for the central bank. The Reserve Bank of India could, if it chooses, create new currency liabilities (i.e. print money) and transfer that money to the government to spend in the form of a fiscal stimulus, which might help soothe some of the pain caused by demonetisation. Of the 15.44 trillion rupees (£181bn) nullified by the demonetisation, around 14.97 trillion has already been deposited (The Times of India 2017). So, around 0.5 trillion rupees could be a potential government windfall.

Depositing more money in bank accounts will result in a multiplier effect. Greater deposits mean that banks can provide more loans to businesses and individuals. More loans mean that banks have a lower cost of capital achieved through economies of scale: the cost of lending is spread out over more loans.

Lower cost of capital means that the banks can provide a lower interest rate to individuals and

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businesses. This will increase consumption within the economy, which is important because a major component of the Indian economy’s growth is consumption (Ministry of Finance 2017). Until now, a lot of this money was hoarded away but now it will be inserted in the active economic system to provide the economy a further boost.

replacement notes created a cash shortage that strangled large sectors of the economy.

Since domestic commerce drives a large part of Indian economic activity, economists warn that India’s growth of 7.3 percent in the most recent quarter, among the fastest of any large economy, could take a hit if the cash shortage continues (Anand and Kumar 2016).

There has been much criticism over the implementation of demonetisation. The secret and surprising decision to cancel and replace most of India’s currency is an economic experiment with little precedent. Historically, large-scale overnight demonetisation has only occurred in countries in danger of government or economic collapse — such as Germany after WW2, the former Soviet Union, or Zimbabwe facing the hardships of hyperinflation.

There has been much discussion in the field of economics regarding the phasing out of high denomination bills to combat illegal activity.

However, this discussion is based around economies with a significantly larger cashless transaction base than India. Approximately, only 20% of transactions are cashless in India.

Even though Paytm has seen great growth, there are still problems regarding a cashless society - there is a lack of infrastructure in India.

Firstly, the timing of the announcement (November) was criticised. In India, end of year is considered wedding season where families undertake massive expenses - in fact, soon after the announcement, the central government introduced specific directives for families with weddings so that they could withdraw a larger amount from their banks.

Moreover, political opponents have accused the Prime Minister of abusing his power for political gain. The first few months of 2017 saw pivotal elections in Uttar Pradesh, India’s largest state. While reinforcing Modi’s image as decisive leader, demonetisation also serves to reduce the coffers of his political opponents.

PM Modi’s party won control of the state and this is a crucial win for national re-election in 2019. How much the demonetisation influenced this win is still up for debate.

To be effective, demonetisation has to be a secret until the last minute, to prevent those holding black money from unloading it before the ban goes into effect

To be effective, demonetisation has to be a secret until the last minute, to prevent those holding black money from unloading it before the ban goes into effect. To maintain the secrecy, the government did not print the replacement Rs. 500 and Rs. 2000 notes in advance. Demand for new notes vastly exceeded supply and ATMs often ran dry. This resulted in long lines at the few ATMs that were operating and infuriated those that had wasted time standing in line for hours when ATMs ran out of new notes.

Demonetisation’s disruptive nature led to the population lacking cash to pay for basic necessities such as food and fuel. Many everyday retail expenses suddenly became ‘luxuries’ because consumers sought to save their cash for necessities. This lack of

Since the demonetisation, demand for card readers has vastly exceeded supply. Banks are struggling to meet demand from retailers who need the card readers to be able to accept payments from customers who cannot pay with cash. In the long term, this can be resolved - however, currently it is exacerbating the problem of reduced consumption in the economy.

To substantially limit black money, India must move toward becoming a greater cashless society. Only around 53% of adult Indians have a bank account (The Hindu 2015). However, more than one billion people in India have a cellphone. The aforementioned IMPS system can take advantage of this to encourage more active banking, in the form of mobile banking.

As evidenced by Paytm’s growth, Indians are switching to electronic payments more rapidly than many experts had predicted, and in various speeches, PM Modi has begun emphasising the benefits of a cashless economy over the anti-corruption fight.

Tackling black money requires a change in culture and mind-sets. This is a difficult task for India as, in many places, corruption has

become the way of doing business. Even with demonetisation, people came up with ways around it. Investigators found massive stashes of the new currency bills stolen away by corrupt bank managers to launder their special customers’ untaxed savings. Combatting this goes beyond currency or cash because most of the black money in India isn’t actually money: it’s parked in gold, real estate and foreign bank accounts. Moreover, even if demonetisation can flush out the black money that is held in cash, with no strong punitive consequences for tax evaders, people with black money will simply hoard in the new currency bills.

References

Anand, Geeti, and Hari Kumar. 2016. “India Hobbles Through A Cash Crisis, And Electronic Payments Boom”. The New York Times. https://www.nytimes. com/2016/12/13/world/asia/india-cash-electronicpayments.html.

Basu, Kaushik. 2016. “In India, Black Money Makes For Bad Policy”. The New York Times. https://www. nytimes.com/2016/11/27/opinion/in-india-black-moneymakes-for-bad-policy.html.

Choudhury, Suvashree. 2016. “Banks Take Back $184 Billion Of Old Notes, RBI Says”. Reuters India. http:// in.reuters.com/article/india-modi-corruption-rbiidINKBN14213G. Kazmin, Amy. 2016. “Narendra Modi: Indian Premier Who Has Bet Big With Currency Move”. Financial Times. https://www.ft.com/content/7f622798-be3a11e6-8b45-b8b81dd5d080.

Ministry of Finance. 2012. White Paper On Black Money. New Delhi: Government of India, Department of Revenue.

Ministry of Finance. 2017. Economic Survey 2016-17.

New Delhi: Government of India, Department of Economic Affairs.

Mundy, Simon. 2016. “Death Of India’S Big Bank Notes Spells Pain For Gold And Real Estate”. Financial Times. https://www.ft.com/content/b6e4e7a6-a804-11e6-8b6902899e8bd9d1.

Punit, Itika. 2016. “”A 7,000% Increase” And Other WTF Numbers Thrown Up By Digital Payment Firms Post-Demonetisation”. Quartz. https://qz.com/844564/ from-paytm-to-mobikwik-a-7000-increase-and-otherwtf-numbers-thrown-up-by-indias-digital-paymentfirms-post-demonetisation/.

The Hindu. 2015. “175 Million New Bank A/C In India In Three Years: World Bank”. http://www.thehindu.com/ business/Industry/175-million-new-bank-ac-in-india-inthree-years-world-bank/article7109166.ece.

The Times of India. 2017. “97% Of Scrapped Notes Deposited With Banks As On Dec 30: Report”. http:// timesofindia.indiatimes.com/toi-features/business/97of-scrapped-notes-deposited-with-banks-as-on-dec30-report/articleshow/56344692.cms.[Accessed 16 May 2017].

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A Conversation with Martin Wolf cbe Chief economics commentator at the Financial Times Interviewed by Fausto Gernone, Francis Lee-Saunders, and Ugam Sheth

M

..artin Wolf, chief economics .commentator at the Financial Times and an honorary professor at the University of Nottingham, visited the university this year and Fausto Gernone, Francis Lee-Saunders, and Ugam Sheth caught up with him to talk about what has been a tumultuous political year.

This historical period is characterised by major changes in the global political scenario. The election of Donald Trump, the vote for Brexit and the rise of Marine LePen, for example, indicate that people’s confidence in globalisation has been eroded. Do you think that the current rise of nationalism represents a failure of globalisation? Is this a proof that “a rising tide does not lift all boats”?

We are living through a complex transitional period and where we will end up is not clear.

As I wrote in an article at the beginning the year, there is no doubt that we are at the end of two periods within the post-war period. The first [period] is the Western-led globalisation, which has clearly come to an end. In the 80s and 90s Western countries largely led the globalisation process, but that’s over.

Secondly, we are at the end of the US role as a willing and rather enthusiastic global henchman. That period is at the end too.

What we don’t know, I think, is whether the entire post-war era of peace and economic integration in the West is also coming to an end.

The question then is why has this happened and what role has globalisation per se played in that. The answer is not simple. I think it’s reasonably clear that economic factors have played a role. I would stress in particular one economic process and one event which clearly played the big role. The process is the general – though not completely universal – rise in inequality. The event is the financial crisis, which was an immense shock and not only destabilized economies and led to a long period of economic stagnation in living standards, weak productivity growth and so forth, but also led to a sense that the political,

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economic and financial elites don’t know what they are doing. So [the current transitional period] has clear economic roots. Of course, there are other things going on which are not insignificant, but maybe not deterministic. For example, there have also been some very profound social changes and people are also rebelling against those. The most obvious of them is large scale migration - which is both a social change and economic change - and particularly migration from cultures which are somewhat different from the cultures of the receiving countries.

“Obviously, it’s far easier for politicians and for people who don’t fully understand what is going on to blame foreigners” Until roughly the 1970s most of the European countries were net emigration countries; clearly [turning into immigration countries] was a profound socioeconomic and cultural transformation. Another cultural change of very profound significance is the transforming role of women, with clear economic consequences too.

The question is: “Okay, we’ve identified these economic changes; what role did globalisation play in it?” It seems clear to me that if you define globalisation as international economic integration across frontiers, including migration for economic reasons, but mainly trade and capital flaws, then globalisation played a role in these developments. It clearly was one of the reasons for rising inequality, and I think that the global financial crisis as it happened wouldn’t have happened without it.

But it’s also quite clear to my mind that globalisation was not the dominant cause of rising inequalities per se. In particular, I don’t think that trade globalisation and migration were dominant causes. I think that financial liberalisation and technological changes were more profound causes.

Financial liberalisation is obviously related to globalisation, but it’s not quite the same thing.

We’ve had a pretty wacky financial crisis, but [it would] not [have been] necessarily quite the same if finance was less integrated: the US could have had a huge crisis on its own.

So, while I accept that economic changes were very important in bringing this about and I accept that globalisation played a part in it, I wouldn’t myself consider it as the dominant the factor.

The final point is that even if globalisation wasn’t the main cause of the problems, it’s a very good scapegoat. Obviously, it’s far easier for politicians and for people who don’t fully understand what is going on to blame foreigners. These are very complex processes, on which economists disagree. So [politicians] would say that the rising inequality in the US is due to the imports from China, or Mexico, or [in the case of UK] because of unskilled workers from Poland, and so forth.

I think the evidence for those propositions is weak, but it makes very good politics.

We’re clearly at a turning point. We don’t know how serious it is. It clearly has economic roots; they are very important and huge economic challenges. Globalisation is an element in it: it may not be the dominant one, but it’s a very good scapegoat.future, because if you build a coal-fired power station it will last for 30 years. If you build a city plan around motorways you will have traffic for 30 years.

If you build a bus rapid transit system you will have much lower emissions for 30 years.

There’s no question that those decisions are not happening quickly enough. They’re beginning to, they’re quicker than they were, but they’re not happening quickly enough.

The hope is that the Paris agreement will

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get every country committed to cutting their emissions and this will start to change these investment decisions, but it’s the translation from the commitments that countries make in an agreement about what they will be doing in 2025 or 2030 to the decisions they literally make now that is crucial. If countries delay making those decisions then we will fall further behind. We’re already way behind where we need to be, but we will fall further behind.

With this recent rise in nationalism, it seems the world is ignoring the lessons learned from 1914 to 1945. What do you think will be the main economic consequences of this?

I already started looking at these issues when I was at Oxford in the late 60s and then [when] I worked in the World Bank mostly on trade in the 70s. At that stage developed countries were mostly quite favourable towards trade globalisation, whereas the developing countries were against it. Now, of course, we have the inverse situation, which is quite interesting to me. The developed countries today are still more liberal in terms of levels than most emerging and developing countries, but the direction is clearly the opposite, thus at some point they will cross over. So, the question is: “How bad could it get?” Well, again that is one of the questions for the future.

So far, what do we know? The growth of trade worldwide has slowed very significantly since the crisis, there is no doubt. It has slowed in absolute terms and it has slowed relative to global GDP: that’s clear. An interesting question is what role did protectionism play in this. My own view, which is partly based on reading the evidence and analyses and partly on my hunch, is that there are three reasons why this has happened. I’m focusing mainly on trade and FDI, as their growth has stopped rising.

The first explanation is that during the era of high globalisation from the late 1970s to 2007, an enormous amount of opportunities for trade were exploited. There was a huge amount of integration across borders.

Particularly, the division of labour between emerging countries and developed countries

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progressed dramatically. Supply chains were disintegrated across frontiers and multinational companies emerged to exploit these opportunities.

Obviously, that’s a one-off. Those opportunities existed and they were extraordinary. They had been suppressed for 50 years: from 1930 to 1980 developing countries were very closed, with very few exceptions like Hong Kong, Singapore or South Korea. So,

a lot and that’s stopped. So that’s a second explanation for why this has happened.

The third explanation is protectionism. I think all three are relevant but at the moment I would say that protectionism has certainly increased. It hasn’t begun to increase enough to explain the slowdown and is still relatively under control. Of course, circumstances could change and protectionism comes into play again and become worse and worse.

For example, with Donald Trump.

Brexit is not itself a protectionist event on a huge scale - clearly barriers will go up, but Britain doesn’t seem to want to go into protectionist direction. However, if Marine Le Pen gets elected and the EU disintegrates, then we could suddenly see in the next years an enormous increase in protectionism and I think that would probably go global. At the moment, I regard protectionism as a sleeping menace but it could become a real menace very quickly.

You mentioned that globalisation makes a good scapegoat for people. With that in mind, do you see any way that the political consensus over globalization, which used to exist, could be rebuilt?

This will be my optimistic story. I’m not saying it will happen - I think it’s very unlikely - but there are two points in favour of accepting globalisation. Firstly, a lot of the shock and the hostility has been there to some extent for 20 years, Martin Wolf in 2015 (Courtesy The Carbon Brief via YouTube) but it really got going only recently.

The funny thing is that in 2000 it there was this one-off opportunity. When was mostly left-wing students who were antithe opportunity to exploit it appears in large globalisation, not the working people. This is measures, you would expect trade ratios to new, it’s not been there all the time. I think a stabilize and not continue to go up forever. lot of it was due to the financial crisis and the We’ve seen that in a lot of countries; in fact, subsequent collapse in real income growth they’ve shrunk in China and India - trade is a and the looking for scapegoats. smaller share of GDP. That’s the first reason: natural exhaustion of opportunities.

However, the financial crisis happened eight years ago. Let’s suppose in the next ten A second explanation, which the IMF has years there’s a reasonable recovery that is stressed, is that demand has been very steady and progressive, with employment weak; particularly investment demand. ratios rising and real incomes rising. There Investment is trade-intensive because any are big headwinds, particularly demographic major investment program tends to involve headwinds, in the developed countries. Ten importing a lot of expensive machinery and years from now, the financial crisis will be 20 things associated with it which aren’t made in years in the past. While it will be presently in that many countries. So you end up importing people’s minds, it will fade inevitably. People

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Interview

don’t remember shocks like this for so long.

So that’s the first reason why things might get better.

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irrelevant. In any case, anybody who thinks about it will realise that if we did put the production back in our countries, it’s all going to be done by robots anyway.

people in IT-type activities are going to be replaced, but they’re going to be replaced by computers, not by cheaper labour. 15 years ago there was a lot of discussion about how Indian outsourcing would essentially demolish Silicon Valley, and that hasn’t happened. So, I’m reasonably optimistic that, if we’re calm, lucky and sensible, we can get through this. But we have to get through it without blowing ourselves up and the world

The second reason relates to what I said about trade. Most of the adjustment to globalization I think the optimistic view would be that we has happened. If you take trading goods, the will get over this through steady and stable obvious impact, which was very unpopular, was on the production of trading goods, in which emerging and developing countries were competitors.

There’s no doubt As discussed before, that countries that the balance between then developed very the developing and large trade deficits in developed world has manufacturing, like radically changed the US and UK saw a over the years. Since shrinkage of industrial the Asian tigers employment and that started experiencing was very unpopular. astonishing There’s also been a growth rates, some progressive decline people proposed in manufacturing that societies employment for which accepted completely different authoritarian Anti-G8 demonstration in Le Havre, France, the week-end before the 2011 G8 summit in Deauville. (Courtesy Guillaume Paumier) reasons, which have governments and been the extremely were willing to limit rapid productivity growth in manufacturing growth, as well as a recognition that the individual freedoms in the interest of and the relatively low income elasticity of adjustment has essentially already happened. the common good would eventually demand for manufacturing.

All the labour-intensive sorts of manufacturing outperform the West. Do you believe that emerging countries could do has now these sorts of Confucian societies can be This has consequences: if you look at the US gone. All of it. Moreover, wages with China an alternative to the liberal, free-market or UK, employment in manufacturing is now are converging quite rapidly. There is not system? about 8% of the total: it used to be 30%-40%. going to be another China. India is not going When I was roughly your age we still thought In other words, the employment is gone! This to be China. It’s not practically set up to be it. the authoritarian regimes we had to worry is already happened: there’s not much left There’s no other country of China’s scale. So, about were communist ones. It was thought to lose. You could halve it and it is still only in my view, basically the entire globalization their authoritarianism was the big advantage.

4% of the labour force. It’s not very much. In challenge is over.

In the mid-60s [their authoritarianism] addition, as we’ve already pointed out, trade was beginning to fail, but there was a very penetration is slowing. So we are basically strong idea that the communists had a huge complaining about something that’s historic. advantage over the west because they were I am not blaming people, as I understand their so authoritarian. perspective, but people get used to what’s happened in the past. I make this point very Then we had, as you rightly point out, the often. Back in 1800s, 70% of the population in Tigers. The relevant ones were South Korea this country worked in farming. and Taiwan (I think Hong Kong and Singapore are sui generis). They were a very strange Currently, it’s less than 1%. No one thinks mixture: they had authoritarian governments, about that because that’s a life that’s long they were highly market-oriented, they since vanished. Nobody wants to go back to had governments which were strongly prothe old farming world of 1800s. Well, similarly, In finance, the developed countries have huge development and they clearly exploited trade 10-20 years from now, people just won’t institutional and legal advantages. Finance is to an enormous degree. If you looked at them remember all those factories. They’re gone: not a cheap wage activity. Professionals in carefully, you started to realise actually they they’re museums or have been knocked finance in Beijing or Mumbai are almost as were like Japan. down. And the factory jobs were jobs that expensive as they are in the West. They’re their grandparents did. Over time, [the decline highly skilled people so that’s not a low wage Now, Japan is a socially hierarchal society, in manufacturing employment] becomes competition in any way. It’s true that a lot of but it wasn’t a dictatorship in the post war

“I’m reasonably optimistic that, if we’re calm, lucky and sensible, we can get through this”

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period. It was unbelievably fast-growing. We think of it now as a slow-growing country, but in the 50’s and 60’s it was the fastest growing country there had ever been. So, I think it was very difficult to argue that the central ingredient of the Koreans and the Taiwanese was the political system. The central ingredient was the economic system they adopted. And they adopted it - consciously, by the way - from Japan, with a lot of American help and advice.

However, they did need clearly political stability. I think it’s easy to argue that, since they were so very poor and undeveloped in the 50’s and 60’s, a full democracy wouldn’t really have worked: they didn’t have an educated electorate and so forth. They made a transition to democracy in the 80’s and they’ve been under democracy of some kind ever since. It’s very messy, but democracy tends to be [so], and they tended to grow very fast and they’re very rich countries.

Interview

elements, Korea and Taiwan are Confucian societies: some of them are democracies and some of them aren’t. That’s about social structure. It’s clear that Confucian societies

Perón, it’s a catastrophe and you can’t stop it without a revolution. And if you look at the whole experience of politics since the Second World War, there have been vast numbers of authoritarian regimes and most of them have been catastrophes. \ I would guess 90% have been catastrophes, while 10% or maybe rather fewer worked reasonably well. Why? Because they had a good population and relatively sensible autocrats, with relatively sensible advisors. The trouble is that you can’t rely on [sensible autocrats with sensible advisors] because they might go crazy or be corrupted. The Suharto regime started in a bloodbath, then it had 20 years of relatively good growth and then it became completely corrupt under his children.

My view is that democracy is probably not going to be quite as effective as authoritarianism if you got an unbelievably intelligent, successful, intellectually coherent, and welladvised autocrat - but that’s a very, very rare event. Even in the case of Well, they have their Korea and Taiwan, a lot of problems, but I would say the reason why they did the Korean story indicates Poster distributed between 1942 and1945 in the USA by the Office for Emergency Management, Office of War Information, Domestic so well is that they just had you can develop under Operations Branch, and the Bureau of Special Services. (Courtesy U.S. National Archives and Records Administration) so much help from America. authoritarianism, but at some point you’re going to have to move out have some benefits for growth and the most So, my view is that there’s very little reason of it, probably when your GDP per head is obvious one is that they place a long, heavy to believe that in the long run, authoritarian about half [that of] the western world. They emphasis on education. These are madly progovernments are likely to do better than continue to grow pretty fast under democracy. education societies and that’s a big plus in democracies. They might do better for a short Of course they grow [relatively] slower, but development. period but I wouldn’t attribute the success of that’s because they largely caught up. China Korea or Taiwan to their political systems. I is clearly trying to maintain its authoritarian I think that’s more important to my mind would attribute it to their policy regimes, the regime after a point where most people than the political system. These are the most nature of their populations and the economic would’ve expected them to democratise. I highly educated people in the world: Korea’s opportunities they were able to exploit. think we should take an open mind on whether probably the most highly educated country in that would work or not. the world if you look at the numbers of PhDs The NER would like to thank Mr. Wolf for and so forth. his time and cooperation.

I also would like to point out that being Finally, authoritarianism by its nature is a highConfucian is not the same thing as being variance system because it has no checks and authoritarian. Confucian societies are not balances. If the authoritarian is Lee Kuan Yew, necessarily authoritarian societies. Japan is who [was] a very sensible one, it [goes] very a Confucian society, China still has Confucian well. If the authoritarian is Hugo Chavez, or

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Cover Story

The Boost Despite Brexit Swati Raipancholia

In the official Brexit White Paper plan, it was stated that workers would be entitled to five weeks of annual leave, one more than required by EU law

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..fter Brexit, the UK lost £5.7bn from .its stock ..market as financiers withdrew.their investments. ...The people of the UK lost confidence in the economy as a result of the unexpected decision to leave the European Union. However, in late 2016, there was a robust rise in economic growth, confidence and investment in the UK. How did the UK suddenly manage this? The answer lies in a mix of nudge theory, currency weakening and possibly innovative measures that have been in place for years.

Nudging the Economy Towards Growth Nudge Theory is a concept rooted in behavioural economics.

It examines psychological factors behind economic occurrences and explains how indirect ‘nudges’ and positive reinforcement can push an economy to grow. An example of how Nudge Theory can be applied to the UK’s economic boost is the newfound certainty amongst the population.

Although Brexit led, and will continue to lead to several political and economic issues, the result of the referendum, be it favourable or not, created confidence as a result of certainty amongst British people. According to Deloitte’s Consumer Tracker, confidence amongst UK consumers recovered to a rating of -5% in September from -8% in June, which was just after the referendum, as a result of low inflation and low unemployment, which allowed them to momentarily put aside fear of Brexit.

The certainty of inflation and unemployment rates after the referendum acted as indirect nudges, increasing consumer confidence, and allowing British consumers to boost their spending on discretionary items, perhaps to take advantage of existing economic conditions before the formal Brexit process was to begin in 2017. Theresa May’s recent chaotic Snap Election creating a Conservative-DUP government also

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led to uncertainty, especially amongst young people.

Another example of Nudge Theory in practice in the UK is the workplace pensions scheme. This scheme automatically enrols UK workers into a pension scheme, from which they have the option to opt out.

This is considered to be a ‘nudge’ as the effort required to opt in would be significantly more than that required to opt out. This nudge allows workers to plan for their future without personal strain, and also helps the UK deal with its ageing population issue (whereby the average age for the population grows increasingly old, which can lead to an economic slowdown despite strong growth fuelled by the youth).

Currently in the formal process of exiting the EU, the UK has the opportunity to reacquire their pre-EU employment law to ‘nudge’ workers to work more and/or spend more. In the official Brexit White Paper plan, it was stated that workers would be entitled to five weeks of annual leave, one more than required by EU law. This could act as a nudge, albeit a small one, to boost spending during these vacations, and also act as an incentive for workers to be more productive, boosting the UK economy in the long term.

Does a Weak Pound Necessitate a Consumption Boost in the Long-Term?

Currency fluctuations act as one of the most fundamental reasons for changes in spending patterns. After British Prime Minister Theresa May’s speech in October 2016 declaring Article 50 (an article which gives any EU member the right to exit and outlines the procedure for doing so) would be triggered in March 2017, the pound nearly fell to a 31-yearlow to $1.2764. In elementary economic terms, a weak pound leads to expensive imports and cheap exports.

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A prime example of an industry benefiting from this currency weakening is Britain’s car-manufacturing industry. Average monthly export revenues increased by £0.5bn in the six months to April 2017 to £3.4bn, according to the Office for National Statistics (ONS). It can be seen that the weak pound does create an increase in export revenue, however the future may not be so bright for these industries. As import prices are high, it is likely that an increase in raw material prices could offset the benefit from depreciation of the pound, and create a reduction in production. Although it can be said that the benefits of a weak pound are primarily short term, tourism acts as an export. The weak pound can increase tourism to the UK, and boost aggregate demand as it becomes cheaper for foreign consumers to have holidays in the UK. This could be a longer-term source of income for the UK, as tourists are unlikely to be largely affected by Brexit and the changes that come with it.

However, the boost in consumer spending as a result of a weak currency was not immediate. The UK suffered through a period of low confidence, low economic growth and low levels of consumption when the referendum results were first announced. The average price of production rose by 10% (in a year-on-year measure) due to the high cost of imported raw materials for manufacturers. These initial impacts were then counteracted by a boost in confidence which made consumers take advantage of a weak currency; though this was not immediately the case.

An important response to consider is the monetary policy response to Brexit, led by the Bank of England (BoE). The BoE’s response to avoid a Brexit-triggered recession consisted of three main actions: 1. Reducing interest rates; a standard measure to boost spending as borrowing to spend becomes cheaper and saving is less worthwhile and therefore reduced. Interest rates were cut to a record-low of 0.25% in August 2016, following the referendum results.

2. Increased Quantitative Easing (QE). However, this measure was unsuccessful, as the central bank was short of £52m of the £1bn needed to buy up government debt.

3. Term Lending Scheme. This measure tackles the collateral damage of low interest rates; banks finding it harder to make money as their margins between borrowing and lending interest rates is squeezed. This scheme consists of £100bn to encourage banks to lend cheaply to consumers, to boost confidence and consumption.

has invested in for years, it is possible that the rewards from this investment are just starting to be reaped. For example; the Microsoft app ‘SwiftKey’ which predicts one’s next typed word on a smartphone based on previous typing patterns, was created in University College London and taken over by Microsoft for £177m.

Similarly, in 2014, Google bought a UK start-up called DeepMind, a London-based AI firm that aims to develop computers that think like humans, for £400m. This was the largest EU purchase ever made by Google. Industries such as AI aren’t as affected by Brexit, as the individuals with the skills and knowledge of technology needed to run these innovative industries are based in the UK, and are not as affected by currency fluctuations or economic changes as these skills can be shared and transferred digitally.

AI represents one of many examples of innovative technology in the UK, making daily tasks easier and allowing external companies to purchase domestically-created products, to boost the economy. Alongside AI a constant digitisation has occurred across UK firms, which aids longterm growth prospects. An example of this is the UK law firm Allen & Overy launching ‘Margin Matrix’, a digital derivatives compliance system to help major banks adhere to new regulatory requirements concerning large transactions.

Despite the uncertainty created by Brexit, constant monetary and time investment into long-term projects such as AI and general technological innovation encourage spending and boost growth in the background, regardless of the changing economic environment.

Conclusion At the end of 2016 the UK was back on track with its economic growth, with growth of 0.5% in the final quarter, as a result of the population ignoring the economic calamities that would soon arise as a result of Brexit. Chris Hare, economist at bank Investec, explained how the UK would now begin to face the consequences of Brexit, as the weakening of the pound will raise import prices, raising inflation to over 3%, reducing purchasing power.

The BoE predicts an annual growth rate in 2017 of 1.4%, compared to 2.2% in 2016. Regardless of the high consumer confidence towards the end of 2016, it is likely to have been temporary. With an economic shock as large as Brexit, it’s impossible to assume the UK economy will continue soaring against all odds, as it has done in the months following the referendum.

Intelligent Innovation Artificial Intelligence (AI) could be a more abstract and extreme cause of the UK’s sudden growth. AI refers to computers and technology doing human tasks that involve human emotion, for example. As it is a venture that the UK

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Research

The Nottingham Economic Review

Does Natural Resource Dependence Increase Income Inequality?

Julian Cann Steel plant chimneys spout pollution in Kazakhstan (Courtesy LeRoy Woodson)

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..atural resources have long been a key and recurring theme in the study of economic development, having been central to the economic success of North America, Scandinavia and Australia, but failing to spur development in much of Sub-Saharan Africa and Latin America.

primary education enrolment from UNESCO (2016) are also considered.

A negative but weak correlation between the Gini coefficient and measures of natural resource dependence is evident in the sample

Although a large literature examines the relationship between natural resources and macroeconomic indicators, identifying an apparent “resource curse” (Auty and Warhurst, 1993) of slower economic growth in natural resource dependent countries, comparatively little research has considered the influence natural resources have on the income distribution.

This is despite the long-standing debate on the relationship between income inequality and development, starting with Kuznets (1955). This study addresses this shortcoming by answering the question: does natural resource dependence increase income inequality?

To address this question, I assembled an unbalanced panel dataset containing 196 observations from 87 geographically and economically diverse countries at fiveyear intervals from 1995-2010, with the recentness of the sample separating it from previous literature. Income inequality is measured using unaltered Gini coefficients from the All the Ginis database (Milanovic, 2014). Natural resource dependence is given by primary exports (WTO, 2015) as a percentage of GNI (World Bank, 2016), and decomposed into agricultural and non-agricultural exports. As additional control variables, institutional indicators (the strength of property rights and trade freedom on a 0-10 scale) from the Fraser Institute’s Economic Freedom Index (Gwartney et al, 2015), Alesina et al’s (2003) ethnic fractionalisation index, GDP per capita (PPP, current $) lagged one year previous from World Bank (2016), and gross

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dependence is associated with increased inequality. This motivates the use of an interaction term, similarly to Boschini et al (2007).

To analyse this relationship econometrically, two specifications are estimated. Using pooled OLS with heteroscedasticity-consistent standard errors, income inequality (Gini) is first regressed on natural resource dependence (RDep), property rights (PR), an interaction between the two given the non-linearity seen in Figure 2, plus a vector (X) of control variables (trade freedom, ethnic fractionalisation, lagged GDP per capita and its square, primary education enrolment and a constant): (1) Giniit = β1RDepit + β2PRit + β3(RDepit × PRit) + β4Xit + εit for country i in year t.

Omitted variable bias is likely to be problematic using pooled OLS estimation, because there may be unobserved factors varying across countries that influence both the income distribution and explanatory variables (for example, geographical features can affect income inequality and the propensity for resource dependence). Assuming these are time-invariant, countryspecific fixed effects (α) can be added to account for these factors, in effect as dummy variables for each country. The fixed effects specification is therefore:

Figure 1. Scatterplots of natural resource measures against the Gini coefficient

(see Figure 1). Splitting the sample by belowand above-median property rights, in Figure 2, income inequality appears to be non-linear in property rights: in countries with stronger property right protection, natural resource dependence leads to lower income inequality.

Where property rights are weaker, resource

(2) Giniit = β1Xit + β2RDepit + β3PRit + β4(RDepit × PRit) + αi + uit (2)

using clustered robust standard errors at the country-level.

Table 1 shows the main regression results from pooled OLS and fixed effects regres-

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sions, organised by estimation method and natural resource measure. Several control variables display consistent behaviour across natural resource measures and estimation methods. No Kuznets curve relation is identified in the sample – estimated via pooled OLS, there may be a very modest negative association between GDP per capita and income inequality, but this is not robust to the use of fixed effects. Moreover, primary education enrolment and ethnic fractionalisation (as a cross-sectional variable) have no statistically significant impact on the income distribution.

With regard to the casual variables of interest, under pooled OLS (columns 1, 3 and 5), the difference in significance between natural resource measures is striking. Primary resource dependence has a positive but only weakly significant coefficient that suggests a one percentage-point rise in the share of primary exports in GNI leads to a onepoint increase in the Gini coefficient.

The coefficient for agricultural resources is more than three times greater and significant at the 1% level, whereas non-agricultural resources have no statistically significant impact. Property rights have a significant moderating effect on the income distribution, with a one-point increase in the index implying around a 2-point decline in the Gini coefficient (though this constitutes a 2.5-times standard deviation shift within a country). However, these are not interpretable as causal effects without considering the interaction term.

The interactions between measures of resource dependence and property rights are negative, tracking the relative magnitude and significance of the resource measure they comprise. For a one percentage-point increase in agricultural dependence, a country’s Gini coefficient will rise if the property rights score is below 7.8 – virtually all but the most developed countries in the sample, given the 0-10 scale (see table 2). A similar threshold can be derived for primary resources, but at a lower level of statistical significance. Finally, the index for trade freedom is positively and significantly associated with income inequality.

Surprisingly, many of these coefficients are reversed in the fixed effects model (columns

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2, 4 and 6). All measures of natural resource dependence and their interactions are significant at the 1% level, but their sign is reversed, whilst property rights retain their significant negative coefficient (at a lower magnitude) and trade freedom loses its significance, now captured by the country-specific effects.

As such, a one percentage-point increase in primary resource dependence will decrease income inequality if the property rights index is below 7.7, whilst the corresponding

Pooled OLS regressions therefore appear to corroborate the picture from Figures 1 and 2: economic dependence on natural (agricultural) resources raises income inequality – but if property rights are sufficiently strong, natural resource dependence can decrease income inequality. Yet introducing country-specific fixed effects to account for time invariant unobserved factors, it appears that both economic dependence on natural resources and strong property rights reduce income inequality by themselves, but if property rights are sufficiently strong, natural resource dependence increases income inequality.

This disparity matters enormously for policy implications – under the pooled OLS model, strengthening property right protection emerges as a key channel through which natural resource rents in developing economies can be equitably distributed; under the fixed effects model, there is much less support for this. Given the probable extent of omitted time invariant factors under pooled OLS, the fixed effects model is preferred.

Omitted variable bias under pooled OLS appears to massively overestimate the effect of natural resources on income inequality by as much as five points, and underestimate the interaction between resources and institutions.

What time invariant factors do fixed effects account for that could explain this difference?

Geographical factors are an obvious candidate, as fundamental determinants of economic activity and the income distribution. Engerman and Sokoloff (2002) advance persuasive arguments for the importance of geography and resource endowments for the initial income distribution, whilst Collier and Gunning (1999) argue societies with Figure 2. Scatterplots of natural resource measures against the Gini coefficient, by strength of property rights an inherently high level of risk (for examthreshold for agricultural dependence is 8.2, ple, due to climate) may be predisposed toand for non-agricultural dependence is 8.1. wards income-sharing over generation. The Now, greater resource dependence is asapparent “curse of the tropics” (Sachs and sociated with lower income inequality in all Warner, 1997) is not captured by the pooled but the most economically developed samOLS model, and such factors could be key in ple countries. Notably, the “appropriability” explaining the divide between developed and of different types of natural resources found developing economies in the sample. to matter for economic growth by Boschini et al (2012) is less important for the income An alternative explanation is taken from Lane distribution. and Tornell (1996). In a neoclassical growth model with multiple groups rather than a

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single representative agent, windfall natural resource income (or an increase in the rate of return) can trigger a “voracity effect”, where, given weak political institutions, groups respond by obtaining more than proportional income redistribution. This again suggests a divide between developed and developing economies, with underlying differences in political systems the key omitted variable.

but it is reasonable to assume that with an ideal sample natural resource dependence might be less benign for the income distribution. Nonetheless, this study represents the best effort so far to model the interrelation of natural resources and the income distribution with unaltered Gini coefficients.

In sum, this study is the first to use a panel dataset of unaltered Gini coefficients to ex-

Two distinctions are important to remember.

Improved property right protection in itself does not imply increased inequality (this only occurs if resource dependence is well above the sample mean), whereas greater resource dependence might. It should also be noted that whilst the internal property rights index is associated with lower inequality, the same cannot be said of trade freedom and external institutions.

Although these findings are robust to the use of alternate institutional and fractionalisation indicators, their limitations should be understood.

In particular, sample selection issues are problematic for the representativeness of this study. A number of key non-OECD oil exporters, including Saudi Arabia, Venezuela, the United Arab Emirates and Iraq are absent from the sample, as are several Sub-Saharan African mineral exporters.

This poses a sampling bias on two fronts: some of the economies most adversely affected by commodity wealth (such as Sierra Leone and DR Congo), and those in which a minority elite exclusively gains from resource rents (some Middle Eastern oil exporters) are systematically less likely to report data on income inequality and other indicators, for administrative and political reasons. The direction of bias cannot be known ex ante,

30

overturned by the existence of strong property rights. This is upended in the preferred fixed effects model: natural resource dependence of any kind decreases income inequality, but strong property rights can mitigate and reverse this.

Developing economies are therefore likely to experience tempered inequality from natural resource dependence, whereas developed economies are likely to see inequality rise with dependence. There are several plausible explanations for these surprising results, ranging from an array of idiosyncratic geographical factors to a political “voracity effect”. Further research, when unaltered data on income inequality is more widely available, is required to unravel which are at work. What is clear, however, is that policymakers need to ensure internal institutional arrangements prevent resource appropriation References Alesina, A., Devleeschauwer, A., Easterly, W., Kurlat, S. and Wacziarg, R., 2003.

Fractionalization. Journal of Economic Growth, 8(2), pp.155-194.

Auty, R. and Warhurst, A., 1993. Sustainable development in mineral exporting economies.

Resources Policy, 19(1), pp.14-29.

Boschini, A., Pettersson, J. and Roine, J., 2007. Resource Curse or Not: A Question of Appropriability. Scandinavian Journal of Economics, 109(3), pp.593-617.

amine the relationship between natural resource dependence and income inequality.

The effect natural resources have on the income distribution is found to be contingent on institutions, namely property rights. Pooled OLS estimates suggest that economic dependence on natural resources, particularly agricultural resources, increases income inequality, and that this effect is offset and even

Boschini, A., Pettersson, J. and Roine, J., 2012. The Resource Curse and its Potential Reversal. World Development, 43, pp.19-41.

Collier, P. and Gunning, J. W., 1999. Why Has Africa Grown Slowly? The Journal of Economic Perspectives, 13(3), pp.3-32.

Engerman, S. L. and Sokoloff, K. L., 2002. Factor Endowments, Inequality, and Paths of Development

The Nottingham Economic Review

Features

Among New World Economies. NBER Working Paper No. 9259. Available online at: <http://www.nber.org/papers/w9259.pdf> [Accessed 9 June 2016].

Economies, 6(3), pp.335-376.

UNESCO Institute of Statistics, 2016.

Education: Gross enrolment ratio by level of education. UNESCO. Available online at: <http://data.uis.unesco.org/?queryid=142> [Accessed 26 March 2016].

Gwartney, J., Lawson, R., and Hall, J., 2015.

2015 Economic Freedom Dataset. Fraser Institute. Available online at: <http://efwdata. com/grid/WxRvYnU#/Grid> [Accessed 9 June 2016].

World Bank, 2016. GDP per capita, PPP (current international $). The World Bank, International Comparison Program database.

Available online at: <http://data.worldbank. org/indicator/NY.GDP.PCAP.PP.CD> [Accessed 26 March 2016].

Kuznets, S., 1955. Economic growth and income inequality. The American Economic Review, 45(1), pp.1-28.

Lane, P. R., and Tornell, A., 1996, Power, growth, and the voracity effect. Journal of Economic Growth, 1(2), pp.213-241.

WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,, contentMDK:22301380~pagePK:64214825~piPK:6 4214943~theSitePK:469382,00.html> [Accessed 9 June 2016].

Milanovic, B., 2014. All the Ginis. The World Bank.

Available online at: <http://econ.worldbank.org/

Sachs, J. and Warner, A., 1997. Sources of Slow Growth in African Economies. Journal of African

WTO, 2015. Time Series on International Trade. World Trade Organization Statistics Database. Available online at: <http://stat.wto.org/ StatisticalProgram/WSDBStatProgramHome. aspx?Language=E> [Accessed 9 June 2016].

Reconciling Classical & Modern Political Budget Cycle Theory: Testing Tufte’s Hypotheses in the Recent Literature Setting Ernesto Gavassa Pérez Edward Tufte giving a class and holding a scanned copy of a first edition book by Galileo. (Courtesy Aaron Fulkerson)

T

. he literature on political business cycles and political budget cycles are overlapping. This can generate confusion between the exact meaning of each term. Thus, an accurate definition of them will help to provide an adequate setup for the paper. Political business cycles are referred to in the literature as the synchronised fluctuations of the macroeconomic outcomes and the political agenda. Political Budget Cycles are defined as the variations of policy instruments induced by the political cycle.

Political budget cycles have been widely addressed. The piece of research that started the literature was (Tufte, 1978). Tufte states earlier in the book that changes in government spending or tax cuts are policy instruments that can be easily implemented and have a quick effect in the economy (pp.29-33). This assumption leads to the main hypothesis in the literature: presidents manipulate the short run of the economy to improve their position for upcoming elections. The objective of this paper is twofold. Firstly, we want to test

some hypotheses made by Tufte which, to the best of our knowledge, have been tested very little. Shortly, these theses imply that the magnitude of the electoral stakes greatly influences the level of the cycle (pp.23-27), that political factors determine the cycle and that politicians will only induce a cycle if there are no big problems in the economy. Further theses made in the book are not relevant for a detailed discussion now.

Presidents manipulate the short run of the economy to improve their position for upcoming elections Secondly, we want to test whether political budget cycles occur in government spending with this new setting. Previously, the literature has reported no relationship.

Following, we make a review of the papers that examine the political budget cycle and classify them into different dimensions. The

first division that we can make in the literature is between theoretical and empirical papers.

Theoretical ones, such as (Rogoff, 1990), model the political budget cycle as a result of a signalling game. Several papers extend this first model.

Regarding empirical literature, we can split the papers according to several dimensions.

One of them is the relevant country’s characteristics. (Brender and Drazen, 2005) state that only new democracies have political budget cycles. (Shi and Svensson, 2002a, 2002b, 2003 and 2006) argue that it is the level of development of the country which makes election a statistically significant estimator. They also state that the potential rents to be extracted and the share of informed voters are important to measure the cycle of government spending. (González, 1999) states that the level of democracy is an important variable to measure the change in public spending. Finally, (Persson and Tabellini, 2003b) say that the electoral system also has an effect on government spending.

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Features

KEY VARIABLES

CONTROLS2

FD are presented using both a dynamic and a that includes all the key variables along The endogeneity of elections deserves its linear panel data setting. with the interactions between crisisunemp own dimension. (Tufte, 1978) states that some and crisisinfl with the election variables. industrialised countries changed their electoral Model Specification Subscript i refers to the countries used for the calendar to fit the American one (pp.67).

We provide a table with a formal definition work and subscript t refers to each year used The first empirical papers carried out in this of each variable used. Key variables are the in the analysis. research avenue Theoretical Table 1 - Description of the variables used considered elections Framework NAME DEFINITION as exogenous.

The data used in DEPENDENT cgexp Central government expenditures as a percentage of GDP However, more this paper consists VARIABLE recently papers have of a panel of 34 lagcgexp One period lag of central government expenditures started studying countries and a rgdph Real GDP per head election timing as period of 11 years. endogenous. Lastly, trade Trade share with respect to GDP More specifically, frequency of data is we cover the years pop1564 Proportion of population between 15 and 64 yearsâ&#x20AC;&#x2122; old an important factor between 1980 and pop65 Proportion of population with more than 65 yearsâ&#x20AC;&#x2122; old to take into account.

1990. We have used ygap3 Difference between GDP and its trend eight different data polity Index that measures the level of democracy. In our sample, it ranges from 6 to The main motivation sources in order to 10, being 10 the highest level of democracy. underlying this compile the whole informed4 Proxy for share of informed voters. Created by multiplying the radios per capita paper is the same dataset. in a country by the level of freedom of broadcasting. The level of freedom of of (Tufte, 1978). Not broadcasting is measured as 1 if there is freedom and 0 otherwise only is it important Only democracies govfrac5 Probability that two randomly chosen members of the government are from to contribute to have been different parties. This variable measures the level of coalition in a government economics as considered for the Authority = 1 if the government has authority over taxes, expenditure or legislation and = a science but paper. A discussion 0 otherwise to investigate on why this is the elecusa = 1 if there was an election in the Unites States of America, = 0 otherwise whether the case can be found policy instruments left = 1 if political party in power is liberal, = 0 if political party in power is at (Brender and available to us are Drazen, 2005). conservative used to pursue the However, a slightly elecrep = 1 if the previous incumbent is candidate for re-election, = 0 otherwise social optimum. different approach elecnorep = 1 if the previous incumbent is not candidate for re-election, = 0 otherwise has been used this crisisunemp = 1 if unemployment rate is higher than 1.5 times the average unemployment The structure of time.

Whereas rate for the period, = 0 otherwise the paper is as they consider all crisisinfl6 = 1 if inflation is higher than 19.16%, = 0 otherwise follows. This first the countries with section makes an a value higher Source: Authorâ&#x20AC;&#x2122;s own elaboration from the analysed dataset introduction along than zero in the with a literature polity indicator, we review. The second includes the theoretical ones used to test the hypotheses stated in the restrict our sample to countries with a polity framework for the paper. The third presents introduction. index higher than 58. Also, there are some the data. The fourth includes the results. The countries that transform their political system fifth outlines the conclusions.

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In our data, Where Xit is a matrix that includes all the hypotheses in the modern methodological we expect some correlation between the fixed aforementioned controls (apart from the lag setup, the following table we present aims to effects and the regressors. Thus, both FE and of the dependent variable) and Zit is a matrix modify Tufteâ&#x20AC;&#x2122;s table 1.1 in (Tufte, 1978). This

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modification has been made to adapt Tufte’s analysis to the modern approach the literature has taken.

The last column (in Table 2) reports the difference in mean government spending between election and non-election years. In half of the countries the difference is positive and, in the other half, negative.

Thus, the descriptive analysis does not provide evidence of Political Budget Cycles. These agrees with the current literature findings. This is confirmed with the Figure 1 that follows.

However, this result is driven by the fact that we give the same importance to all election years. This is the approach that the modern literature takes.

But what will happen when we differentiate, as Tufte suggests, between election years in which the incumbent seeks reelection and election years in which he does not?

Figure 2 tries to answer this question.

Features

Table 2 - Mean government spending for each country over the 1980 - 1990 period in election and non-election years10

Australia Austria Belgium Bolivia Botswana Canada Colombia Costa Rica Denmark El Salvador Finland France Germany Guatemala India Ireland Israel Italy Japan Luxembourg Mauritius Mexico Netherlands New Zealand Nicaragua Norway Paraguay Portugal Spain Sweden Switzerland Trinidad and Tobago United Kingdom United States

As we can see, Tufte’s hypothesis is also happening in the data: electoral stakes greatly influence government spending patterns. This gives a great motivation to make a further analysis in the next section.

Regarding the other hypotheses, excessively high inflation seems to alter government expenditure, liberal parties seem to spend more (1st, 25th and 99th percentiles of government spending are higher when leading party is liberal) and no relationship between spending and elections in the US is found.

ELECTIONS Average years spending 24.85601997 5 38.76401774 3 53.61777623 3 31.73302937 2 34.74662399 2 23.55522664 3 13.73122692 3 23.47533671 3 39.63779221 5 12.94014025 2 31.30258942 2 42.95897293 3 30.43230724 4 11.13953972 3 14.28585688 3 46.67756557 4 0 47.80813026 2 17.38011503 4 39.7623291 2 24.8060894 2 25.79977036 2 55.06014824 4 42.46201801 4 49.34887505 2 36.12360891 3 9.505591075 3 37.05710793 4 21.91136297 3 42.60610326 3 19.80533981 1

NO ELECTIONS Average years spending 24.69430161 6 38.59951639 8 51.96180773 8 20.81533803 9 36.94740295 9 23.94500852 8 14.18511248 8 24.00523114 8 40.18448766 6 14.70446989 9 29.78283543 9 43.07595396 8 30.82390131 7 13.05625561 7 14.89014637 8 47.43496432 7 0 45.34183884 9 17.35785893 7 42.48875724 9 25.02601899 9 22.08281983 9 55.25971658 7 40.77329 6 46.86903636 9 36.74433994 8 9.79543674 8 36.96193096 7 21.12214518 8 41.83628798 8 19.24184513 4

0 38.62895012

0

2

38.27446577

9

22.74940364 3 23.56960011 8 Source: Author’s own elaboration from the analysed dataset

Figure 1

Theoretical Framework The following results show the estimates of our structural model in four different setups, all of them calculated with robust standard errors. Although most of the Political Budget Cycle’s literature just reports dynamic panel equations, we provide both linear and dynamic panel data estimates. This is done following the recommendations of (Achen, 2000) regarding the inclusion of lagged dependent variables in research dealing with government budget. We compare both dynamic and linear equations and see if the estimates

Difference 0.161718369 0.164501349 1.655968507 10.91769134 -2.200778961 -0.389781872 -0.453885555 -0.529894431 -0.546695455 -1.764329645 1.519753986 -0.11698103 -0.391594069 -1.916715894 -0.604289492 -0.757398742 2.466291428 0.022256102 -2.726428138 -0.219929589 3.716950523 -0.19956834 1.688728015 2.479838689 -0.620731036 -0.289845665 0.095176969 0.78921779 0.769815286 0.563494682

differ substantively. In addition, we report both the equations in levels (FE) and in differences (FD) following the suggestions of (Granger and Newbold, 1974). As they recommend, we interpret the combined results of the regressions in tables 4 and 5.

Both political ideology and high unemployment influence government spending in both equations.

Moreover, they have a positive sign.

Thus, when the leading party is liberal or there is high unemployment, government spending increases. A guide on how to interpret the results is provided in the appendix.

As well, the seeking reelection characteristic is statistically significant at the 95% confidence level 0.354484346 in the dynamic setup but -0.82019647 vanishes in importance in the linear one. If we are to believe that the dynamic setup is a more appropriate one, as the literature does, three out of four Tu f t e ’ s hypotheses be Figure 2 would relevant to explain the Political Budget Cycle.

More interestingly, elections would be an important factor to explain the fluctuations in government spending. The fact that all election years don’t have the same importance can potentially uncover a relationship that has been denied by the modern literature, at least, with the government spending dependent variable.

However, we should take into account that (Achen, 2000) states that including lagged dependent variables when autocorrelation

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occurs, which The omission Table 3 - Fixed effects estimates Table 5 - First differences estimates is our case11, of these two biases the Cgexp cgexp cgexp cgexp r e l e va n t First First Fixed Effects Fixed Effects estimates variables, Differences Differences Dynamic Linear of our thus, could Dynamic Linear lagcgexp 0.6290*** D.rgdph -0.0021** -0.0023*** regressions.

(5.73) create a bias (-2.79) (-3.55) informed -0.4168 -2.1244* If we select in the modern D.authority 0.6679** 0.5309* (-0.54) (-1.84) the linear over literature (2.71) (2.03) crisisunemp 1.7581*** 3.3496*** D.crisisunemp 0.8947** 1.0502** (3.02) (2.97) the dynamic papers.

(2.54) (2.62) crisisinfl -0.5366 -0.9732* setting, the D.left 1.4253** 1.1226** (-0.95) (-1.94) elections (2.63) (2.20) Conclusions left 0.9881* 1.5627*** (1.91) (3.41) in the US Sources for both tables: Author’s own elaboration from the As a conclusion elecusa -0.4628 -0.5279* and years analysed dataset. t statistics in parentheses. Significance we can state (-1.45) (-2.13) levels follow the accepted star coding: * p<0.10 ** p<0.05 that with high high elecrep 0.5088** 0.2620 *** p<0.01. All insignificant variables, including the (2.26) (0.91) inflation are unemployment constant, have been dropped from the table statistically and political significant at the 90% confidence level to ideology seem to be relevant to explain the spending. Again, this relationship holds explain changes in government spending. fluctuations in government spending during in both the dynamic and the linear setup.

However, the reported value of elecusa is the 80’s. This relationship holds with different However, all the remaining relationships negative, opposite to Tufte’s hypothesis. settings and econometric techniques. in our key variables disappear. Therefore, Regarding the role of elections in Political we don’t have concluding evidence to state Table five shows that, even in the Budget Cycles, the relationship between them that elections actually influence government first differences estimator, both high and government spending is inconclusive. If spending. What we can conclude, though, unemployment and political ideology are still any, it would be due to the different incentives is that high unemployment and political statistically significant at the 95% confidence provided by different degrees of electoral ideology influence the Political Budget Cycle. level to explain changes in government stakes.

Blockchain: Exploring the Technology Underpinning Bitcoin & its Applications Kumar Chandrakamal U.K anti-terrorism police in North London, June 2015 (Courtesy Wikipedia)

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. he sudden, dramatic explosion in the price of Bitcoin in November 2013 amassed it the much-needed attention from economists and bankers. While the idea of digital cash is not a novelty, having been conceptualised as the cryptocurrency B-money in 1998, Bitcoin’s uniqueness lies in the non-requirement of trust amongst its users.

It is an alternative currency or monetary system of peer to peer payments, combining the core principles of BitTorrent and cryptography, allowing for a model which eliminates the need for a trusted third party like a bank to mediate the transactions. The exclusion of trust is a result of the “self-policing” nature of the technology underpinning Bitcoin; an algorithm which inherently forbids fraudulent activities like double spending and tampering values in “accounts” of individuals.

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In a precise and technical definition, Bitcoin is digital cash that is transacted via the Internet in a decentralized trust less system using a public ledger called the blockchain.

It is unlikely that Bitcoin will, at least in its current state, convince people to forsake cash and cards The bubble that Bitcoin prices experienced in 2013 has long since burst and the prices have fairly stabilised around $250. Its widespread acceptance has been restricted to a relatively small group of online retailers due to the unstable nature of its value. It is unlikely that Bitcoin will, at least in its current state, convince people to forsake cash and cards (though it has proven wildly

successful amongst drug dealers due to the pseudonymous nature of its “wallets”, ergo its role in the Silk road scandal) It may be argued that the volatility has been a result of the spike in speculative trading ever since the initial bubble formed, reducing Bitcoin to a mere short term profit making asset.

Unlike traditional currencies, Bitcoin does not have a tangible backing like a government or central bank hence, it often varies heavily in value over time as may be usually expected from stocks rather than currencies (which fluctuate around a stable value due to government intervention). Consequently, Bitcoin has been far from successful in fulfilling its potential liquidity.

However, it has also introduced to the world, the blockchain; a publicly distributed ledger which leads to the possibility of a completely

decentralised method of asset exchanges and payments, smart contract issuance and execution amongst other more fantastic sounding applications in disciplines like genome sequencing and health services.

The blockchain technology may possibly be Bitcoin’s most critical contribution to the world, beyond its own function as the propeller of a payment systems revolution. We may think about the blockchain as another class of thing like the Internet—a comprehensive information technology with tiered technical levels and multiple classes of applications.

Going beyond the abovementioned applications, the blockchain may well prove to be a new organizing paradigm for the discovery, valuation, and transfer of all quanta (discrete units) of anything, and potentially for the coordination of all human activity at a much larger scale than has been possible before.

While it is possible to create entirely new blockchains, most of the current applications are based on the Bitcoin blockchain specifically, hence it has become common practice to use the terms Bitcoin and blockchain interchangeably.

However, in order to understand the concept of blockchains, we must first understand Bitcoin and then explore further applications and implications of this technology which transverse personal, political and economic aspects of society and may have disruptive effects on either if not all of them in the future.

The potential applications on the blockchain are separated into three categories: Blockchain 1.0 (Cryptocurrencies and cash related applications like digital remittances, transfers and exchanges), Blockchain 2.0 (Issuance and execution of ‘smart contracts’) and Blockchain 3.0 (Applications beyond finance and markets like healthcare, government, art etc.)

Bitcoin Bitcoin is a form of electronic cash. It is the latest example of a cryptocurrency i.e. an electronic cash or currency which utilises cryptography as a means to control the quantity issued of the currency and to enforce security in transactions. Bitcoin was introduced to the world by an anonymous

programmer under the pseudonym of Satoshi Nakamoto.

The primary attraction of this innovation was to provide a purely peer-to-peer version of electronic cash which would allow online payments to be sent directly from one party to another without going through a financial institution. Bitcoin provides an electronic cash system which is devoid of a central agent authorising the transactions taking place through it. That task is instead relegated to the network of “nodes” or computers containing the Bitcoin blockchain collectively.

Digital “coins”, called Bitcoins are used for transactions using a private/public key cryptography system.

When Alice wants to send Bitcoins to Bob, Alice attaches Bob’s public key to the coin by scanning a QR code from her phone or entering her public key from an email received from her. The keys are made up of seemingly random alphabets and numbers. “Miners” use their computing power to verify that the transaction is real by solving a computational problem, also called finding the “hash” of a “nonce”. In exchange for finding a solution to the problem, the miner is rewarded with Bitcoins which he/she can spend. The solution is then verified by the network, though is a much simpler process than actually finding the solution. Upon verification by the network, Bob becomes the owner of the Bitcoin.

A public list of all the transactions of Bitcoins that have ever taken place are recorded in what is called an “open ledger” or the blockchain.

This is used by the network of miners to check that the Bitcoin has not been spent previously before completing a transaction, preventing one user from repeatedly spending the same coin. The algorithm of the program selfadjusts the difficulty of the computational problems upwards as more and more

Bitcoins are produced making the supply of Bitcoins inelastic in the short and long run as the number of Bitcoins that can be mined is capped at 21 million units, estimated to be achieved by 2140.

The Blockchain A magic computer that anyone can upload programs to and leave the programs to selfexecute, where the current and all previous states of every program are always publicly visible, and which carries a very strong crypto economically secured guarantee that programs running on the chain will continue to execute in exactly the way that the blockchain protocol specifies.

The blockchain is the public ledger of every Bitcoin transaction ever executed (post verification by the network of miners) The blockchain contains complete information about transactions i.e. the public addresses involved and the time stamps when the transactions took place, from the very first block of transactions (called the genesis block) to the very latest block of transactions.

It is ever expanding with the increasing number of transactions being chronologically recorded into the ledger in “blocks” and the blockchain getting updated with new blocks every 10 minutes. Every node (computers containing the software to verify transactions) is required to download a copy of the latest version of the blockchain (at the time of installation) before it can begin “mining”.

The open or public nature of the blockchain upon which systems like the Bitcoin are built means that individual blocks in the chain can be checked via websites like https:// blockchain.info/ to search for all public key specific transactions that have ever taken place. Hence, it is possible to track all the transactions and exchanges of an individual given their public key is known. It must be noted however, that the blockchain technology can also be utilised as a “private ledger” system whereby the access to manipulating and perusing is restricted to specified individuals, although the permission to read the blockchain can be made public.

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The main difference being the two types of blockchains is the level of centralisation and/ or ensure anonymity in the transactions. The primary advantages of a private blockchain is that it allows faster processing of transactions and there is higher trust inherently due to the restricted writer access i.e. people who can add new transactions to the blockchain.

The transaction completion advantage of private blockchains is evident from the fact that an average Bitcoin transaction takes up to an hour to gather confirmation from the network whereas thousands of transactions are cleared per hour via the VISA network which owns its own verification nodes which gives it a centralised nature but also makes verification quicker at the cost of little (or no) anonymity of the parties involved.

As discussed previously, the main attraction of the innovation in the form of blockchain is based upon its non-requirement of trust or the elimination of the need for trust. This is because in the traditional way of doing things, the trust inevitably leads to the involvement of third parties like banks or governments which encumbers the process with additional layers of bureaucracy resulting in higher costs and time to clear i.e. an overall loss of efficiency in the system. The trust is relegated to the ledger itself, which is stored on thousands of nodes and since only the blockchain with the longest sequence of blocks is accepted as the “correct” one, it is arguably impossible to tamper with the transaction records preventing problems like double spending and tax avoidance via unofficial off-the-records cash transactions. This allows all transactions on the blockchain to be decentralized and trust-free for all the users across the globe.

A blockchain is quite literally like a giant spreadsheet for registering all assets, and an accounting system for transacting them on a global scale that can include all forms of assets held by all parties worldwide. Thus, the blockchain can be used for any form of asset registry, inventory, and exchange, including every area of finance, economics, and money; hard assets (physical property); and intangible assets (votes, ideas, reputation, intention, health data, etc.).

The technical intricacies employed to create the blockchain system and the technical expertise that is required for utilising applications based on it may be seen as a detriment to its wide spread adoption amongst the masses. However, it is easy to draw parallels with the introduction of the internet which was the previous paradigm

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in global computing and also involved a steep learning for users, especially the early adopters.

However, today almost 50% of the global population access the internet since it is not important for the casual users to know the what, how and why of the complex programming that is deployed in the background. The same may apply to blockchain technology in the future, when it possibly becomes more integrated into the technologies surrounding the general masses where using it may even become second nature to them. The major impediment to this may be the fact that people may not be willing to remember 32 character alphanumeric keys. These are already in the process of simplification thanks to innovations in frontend applications which are making navigating this system easier for users in order to encourage wider adoption.

Cryptocurrency crowd funding platforms are revolutionising the crowd funding market by removing the need for centralised platforms like KickStarter.

Blockchain 1.0 is representative of the cryptocurrency and electronic money application of the system. The principal example of this is Bitcoin, discussed above.

Blockchain 2.0 and 3.0 represent wider, possible developments based on the technology. Unlike 1.0 the applications and possibilities here are larger because they have not yet been precisely defined so the applications are not as distinct as Bitcoin, although a rough outline can be defined to encompass them.

In 2010, a communication from Satoshi Nakamoto detailed that “the design supports a tremendous variety of possible transaction types that I designed years ago. Escrow transactions, bonded contracts, third-party arbitration, multiparty signature, etc. If Bitcoin catches on in a big way, these are things we’ll want to explore in the future, but they all had to be designed at the beginning to make sure they would be possible later.” The blockchain 2.0 refers to the applications such as Bitcoin 2.0, smart contracts and smart property amongst others. Unlike 1.0, the idea here is to take the concept of decentralisation beyond currencies, into other forms of assets. Such

applications either use the Bitcoin blockchain or create new blockchains to base their applications on, however they still utilise the same decentralised protocol of recording and verifying the “transactions” taking place via the system. The blockchain can be used to register and verify various kinds of contracts and property exchanges. For example; public records like lands, vehicle, marriage registrations etc. may be transferred onto a new blockchain (where the current records will be written onto the genesis blocks).

Ripple Labs, a venture capital backed business is attempting to reinvent the interface of banking services by replacing traditional methods by shifting them onto a cryptocurrency system. A system like this would allow banks to transfer funds more efficiently amongst each other without the need to employ a third-party intermediary as is currently required. Meanwhile cryptocurrency crowdfunding platforms are revolutionising the crowdfunding market by removing the need for centralised platforms like Kickstarter. This allows new businesses to create their own digital currencies like the Bitcoin and to sell shares to early backers.

Swarm is an example of such an application which raised $1 million by selling its custom currency which gives rights to the backers to earn dividends from the profits generated by the activities of the company.

In 2009, there was an incident wherein the Honduran police evicted a house owner of 30 years from her house due to her records showing the land belonged to someone else.

By the time the legal confusion was cleared, the house had been demolished leaving the owner homeless. Such incidents are not uncommon in places where land registries are mismanaged and cannot be guaranteed to have accurate, updated information. Using the blockchain may have the potential to resolve this problem. The concept of smart property implies the notion of transacting all forms of property (whether they be hard assets like homes and computers or soft assets like shares, copyrights) on a blockchain model. An example of this is Swancoin, which allows the buying and selling of art via the Bitcoin blockchain. Assets are registered onto the blockchain and they retain the private key which proves their ownership. The property can then be sold by transferring the private key. Since all property ownerships are verified and attached to specific private keys, the problems regarding ownership of property as mentioned above can be reduced.

A contract is an agreement between two or more parties to do or not do something in exchange for a similar promise. Smart contracts can be defined as a method of using Bitcoins to form agreements via the blockchain, very like generic contracts with the additional feature of not requiring trust amongst the parties since it is automatically enforced by the algorithm. Vending machines are commonly used to demonstrate the concept of smart contracts.

When you deposit money, and make a selection, the item is released. There is no possibility of the machine not feeling like complying with the contract today, or only partially complying (if it is not broken). Similarly, a smart contract cannot “resist” complete execution.

Smart contracts can also be used to deploy crowdfunding activities or fund raising activities which need to reach a threshold before being triggered. Pledges may be fixed on a blockchain but the funds are only removed from individual accounts, if the goal is reached. Since the public address of the receiver is known, the spending rate can also be monitored.

The blockchain technology is a new paradigm in the methods of organising and recording activities with greater efficiency and on a large scale. The decentralised nature of this system has potential to work since it is based on the large underlying network of the internet which is already widely by individuals. The organisational model provided by blockchain is one that requires consensus makes it essentially a symbol of democratic internet application. The third-tier applications of blockchain i.e. Blockchain 3.0 aim to employ blockchain beyond the fields of economics and finance.

This is based on the consideration that all interactions between humans, can, to some extent be said to be have a basic economic structure i.e. to have a transactional nature or forms of exchange. In this scenario, theoretically it could be possible to have a blockchain tracking all the activities of individuals which can be later studied to quantify their contributions to various aspects

of society, if it is required. The morality of this is questionable however, and would need to be further discussed to decide whether such an intrinsic level of personal tracking is desirable.

recorded on the blockchain since this will probably be a waste of time, resources and computing power (for the miners).

Another reason that the blockchain is not for every situation is because we do not want to “economify” everything. It is perhaps not desirable to reduce all our life to a purely economic dilemma.

Also, despite decentralisation being one of the main features of the blockchain, there are pressures towards certain forms of centralisation. The first being the fact that most new applications seem to want to build on the existing Bitcoin blockchain instead of creating new blockchains.

There is also centralising pressures on the mining activity since the raw Bitcoin started in January 2009. (Courtesy Pexels) computing power needed to verify transactions is increasing and might need to be concentrated into a few, large The blockchain may be employed to scale mining groups. This could potentially create censorship resistant transnational create large, “concentrated” pools of miners businesses due to its global reach and if it comes to the situation that a few of them trustless decentralised system. This would are registering around 51% of all new blocks, allow people in restrictive regimes to have they could group up resulting in a “mining the freedom of economic transactions due takeover”. the pseudonymous nature of blockchain transactions.

This means they would have the power to alter the blockchains since they themselves An example of how this could be useful are verifying the transactions which would can be observed in the Edward Snowden give them total control over the economic case of 2010 where the government forced environment using that blockchain. It remains payment networks like PayPal and credit card to be seen what kind of equilibrium these companies from accepting any contributions forces reach in the future depending upon made towards WikiLeaks. This would not how the blockchain technology evolves and happen if Bitcoins had been widely used since adapts to peoples’ needs considering its the contributions could be made directly to current flaws of a low transaction clearance the public key of the organisation rather than rate, long time to confirm transaction, large having to go through the private channels file size of the blockchain itself. There are also which can be influenced by government security concerns like hard forks and “mining agendas. takeovers”, not to mention the potentially massive environmental impacts of the mining There are also more fantastic applications process which wastes energy amounting to of the blockchain being developed. about $15 million. However, the contribution Supercomputing, Artificial Intelligence, of the blockchain to the progression of consumer genomics, personal health record organisational models for information storage are a few such examples amongst is undeniable and that it has deservedly thousands more currently being worked upon. earned the following praise: “Internet is to However, it is important to recognise that it is information, what Blockchain is to value” not the holy grail for every situation simply because not all systems need a peer-to-peer system or a decentralised model. It might also not be efficient to have every minute detail

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Quantitative easing: A Prisoner’s Dilemma?

Manu Hegdekatte

‘To Let’ signs line many streets in London (Courtesy iStock)

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.ince the onset of the global financial crisis, the whole world has been greatly interested in an unconventional form of monetary policy known as Quantitative Easing. When short-term interest rates cannot be reduced further, the central bank buys long-term financial assets such as government bonds and this is known as Quantitative Easing (QE). This affects the economy through two main channels, increasing private bank lending as they have higher central bank reserves, and increasing spending and investment stemming from higher asset prices (and lower long term yields).

Quantitative Easing was first seen in Japan in 2001 to fight deflation, long before the financial crisis. The policy then began to be adopted

by United States, United Kingdom and the Eurozone (amongst others) after the 07-08 Global Financial Crisis.

It is estimated that the Federal Reserve accumulated $4.5 trillion in assets, the Bank of England bought £375 billion worth of assets and the ECB has purchased assets worth €1.1 trillion as a part of their on-going asset purchase programme. This worldwide scale of accommodative monetary policy is unprecedented. The graph below accurately highlights the incredible increase in Central Bank balance sheets that we’re witnessing. ed in rented housing will continue to suffer.

This article aims to explore an aspect of worldwide quantitative easing that is rarely mentioned – the problems that occur when a large number of countries undertake this policy. First, let us introduce the Prisoner’s dilemma, a classic game analysed in game theory. The game is classically characterised

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by two members of a criminal gang who are arrested. Each prisoner is in solitary confinement with no means of communicating with the other. The prosecutors give both prisoners the choice to either ‘remain silent’ or ‘betray’ the other prisoner with the following payoffs:

- Both Prisoners get a 1 year sentence if they both choose to ‘remain silent’.

- If Prisoner 1 chooses to ‘betray’ and the other chooses to ‘remain silent’, Prisoner 1 is set free and Prisoner 2 gets a 3 year sentence. (and vice-versa)

- If both choose to ‘betray’ then both receive a 2 year sentence.

The conclusion of the game is that a rational, self-interested prisoner would always choose to ‘betray’ in order to maximise his payoff (also known as a dominant strategy). The interesting insight of the game is that both prisoner’s would choose to ‘betray’ even though this leads to a situation where both are worse off than when both choose to ‘remain silent’. A unique Nash equilibrium where a Pareto improvement can be made is a key feature of this classic game. We can apply

this game to the current situation that central banks are facing.

Quantitative Easing also effects the economy through the exchange rate channel. By reducing long-term yields, domestic assets become less attractive in the longer run.

This leads to capital outflows, which in turn depreciates the domestic exchange rate. This exchange rate depreciation stemming from Quantitative Easing could boost the economy.

The problem occurs when many countries try to exploit this channel. One clear issue is that the net effect is limited when several countries do this as the effect on the exchange rate is limited.

The other important issue is that a country that chooses not to use this accommodative monetary policy, would actually suffer from the resulting appreciation which would make their exports less competitive.

In the same way, it gets harder to get out of the quantitative easing policies once you start using them. This leads to more countries getting into it and everyone staying in it for longer.

This second issue is the Prisoner’s Dilemma that central banks face.

Let us rework the game for this situation.

Instead of 2 Prisoners we use 2 countries.

Let us assume the following possible payoff’s (which could be thought of as economic growth) depending on the choice of two countries:

- Both countries get a payoff of 2 if they both choose ‘No Quantitative Easing’.

- If Country 1 chooses ‘Quantitative Easing’ but Country 2 chooses ‘No Quantitative Easing’, then Country 1 gets payoff of 3 and Country 2 gets payoff 0 (and vice-versa)

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- If both choose ‘Quantitative Easing’ then both Countries get payoff of 1.

We can use a payoff matrix to analyse this game (see Figure 1).

longer than necessary leading to less optimal outcome.

We haven’t yet addressed why countries staying in it for longer than needed is worse.

Ultra-accommodative monetary policy in the past has led to credit booms and real-estate booms, which would clearly create problems

The dominant strategy for every country would be to choose ‘Quantitative easing’ in order to maximise their payoff (economic growth). So, the Nash equilibrium for both countries is to use Quantitative Easing which leads to a lower payoff for both. This outcome is Paretoinefficient i.e both countries can be made better off without lower the payoff of the other.

Similarly for the choice of whether to stay in it or not (see Figure 2).

Dominant strategy for both countries is to ‘Stay in QE’. Both countries would benefit if both of them left (a Pareto improvement), but we end up with a situation where both stay in that situation

down the line (Maddaloni (2010) is a good overview for this). In fact, a credit and real estate boom was a key factor in the Global Financial Crisis that we’re still recovering

from. The fear is that this would apply to the current world-wide Quantitative Easing programmes. Similarly, Quantitative Easing also has the danger of creating asset bubbles which would harm the economy when those bubbles burst. It would not be wise for a solution to a crisis to lead to another crisis of its own, which is why we need to be wary of certain issues with QE. In summary, it’s clear how the current situation that Central Banks face in regards to QE is similar to a Prisoner’s Dilemma situation. Is there a solution to this problem?

One key assumption in a Figure 1 Prisoner’s Dilemma is that the prisoners cannot cooperate.

However, this constraint does not completely apply to Central banks around the world. It would be a tough challenge, but it’s certainly Figure 2 possible for Central banks to cooperate on some level. It would be definitely be in the interest of the global economy if they could.

The Changing Relationship Between CAP and the Developing World Matthew Latham

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stablished in 1961, the Common .Agricultural Policy (CAP) is a set of policies enacted by the EU in hopes of protecting its agricultural industry and natural environment. While the sheer size of the CAP budget is probably its most controversial aspect, the interaction between CAP and agri-food industries in the developing world has also come under significant historical criticism.

The EU has, under its ‘Policy Coherence for Development’ guidelines, committed to taking into account the impacts of its policies on the

(Courtesy Borisshin)

developing world. But, given that agriculture tends to make up such a large proportion of output in LDCs, it has often been suggested that the protections afforded under CAP are squarely at odds with this commitment. While a static analysis of the external impacts of CAP would shed some light on the policy’s current interaction with the developing world, CAP is far from being static itself.

Since 1961 it has undergone numerous reforms and reinventions. As such, a discussion of the changing state of CAP’s external impacts will be perhaps more

generally applicable, as well as giving some hint as to how the makeup of these policy externalities will develop in the future.

CAP’s policy set is split into two pillars. Pillar one contains most of the direct income support for farmers in addition to more general market interventions, while the policies contained in the second are more concerned with funding the provision of environmental public goods in addition to investment in farm modernisation and regional development.

The vast majority of CAP’s impacts on the

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developing world stem from the first pillar.

Consequently, this is where most of this piece will focus.

The first pillar’s policies include import tariffs, export subsidies, intervention prices and direct payments. In its earlier incarnations, import tariffs and coupled payments were the most significant part of CAP with respect to direct market interventions. Since then, there has been a steady decoupling of direct payments while the severity of tariffs have declined in line with those of other WTO members. While in theory highly distortionary, export subsidies and intervention price policies have both today and in the past played a relatively small role in comparison to the rest of the policy set, consequently I won’t discuss their impacts in any detail.

Import tariffs on agricultural produce have the aim of increasing prices charged in the EU from the ‘rest of world’ (RoW) price to some desired level. This makes RoW firms artificially less competitive in the EU market, theoretically shifting production into the EU. While import tariffs should, in isolation, move developing country production to the EU, it is worth taking into account the EU’s generalised system of preferences. Under this scheme, 130 developing countries are granted tariff free access to EU markets (based on certain eligibility criteria), in essence giving them a comparative advantage over exporters from more developed nations, shielding them from the effects of these tariffs.

In fact, at the Doha round of WTO negotiations many delegates from ACP countries strongly opposed the proposed reduction of EU tariffs, given the preference erosion which would ensue. But, it should also be noted that the EU’s agri-food regulations are very stringent, to the extent that in 2008 it was found that only 12 external countries met the relevant phytosanitary regulations necessary to export beef to the EU,1 none of which were classified as LDCs. So while the preferences afforded under the GSP do give some protections to LDC producers, the regulations under CAP erode

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much of this for the agri-food industry. In terms of impacts for consumers, the tariffs enforced under CAP are likely to only have marginal effects, especially for those in developing countries. Theoretically speaking, were the tariffs to be lifted, world food prices should rise slightly while prices in the EU fall.

But, given the sheer size of global agri-food markets, marginal reductions in EU tariffs are unlikely to have any sizeable impact. When it is taken into account that the marginal

payments still contribute 35% of the income of EU cotton producers to the extent that were these payments to cease, production would stop altogether in Spain. This, unsurprisingly, is estimated to have significant impacts on certain developing country exporters, particularly in West Africa.

As a result of criticism stemming from the oversupply of particular agricultural products, the EU began to introduce quota systems in several markets e.g. in the milk market, in an attempt to keep EU supply to acceptable levels, regardless of payments or price controls. Under newer reforms these quotas are slowly being scrapped.

Milk quotas began being phased out in 2008 and there are movements towards eliminating the quotas for sugar. The external impacts of these changes depend almost entirely on the market conditions for the particular products.

Given competitive pressures and fairly healthy global supplies, dairy prices in the EU have tended to be fairly low (but volatile), meaning that (Courtesy Public Domain Pictures) the elimination of milk quotas propensity to import amongst consumers hasn’t expanded supply too greatly. But since in many developing countries tends to be the mid 2000s, sugar prices in particular relatively low the impact would be even more have been high in comparison to historical negligible. levels,4 meaning that the phasing out of sugar quotas in the EU could significantly increase The part of CAP which has been most world supply, having costly effects on RoW controversial in terms of its impact upon producers, especially those in ACP countries developing countries has historically been like Sudan who rely heavily upon the industry. the direct payments system. Before the process of decoupling occurring after the Since the MacSharry reforms, coupled 1992 MacSharry reforms, coupled payments payments have significantly declined in made up the majority of direct transfers to their importance. In their place, the EU has EU farmers. The aim of such payments is to introduced the rather unimaginatively named keep EU agricultural production and farmers’ decoupled payments. These payments don’t incomes at some desired level regardless of vary with production levels, instead their aim market conditions. Coupled payments are is to keep farmers’ incomes within desired often thought of as major contributors to the levels whilst allowing output to fluctuate in EU’s consistent problems with respect to the line with market prices. While the movement oversupply of agricultural produce. toward decoupling should come as a relief to RoW producers, the implications of their being While they have decreased in terms of their labelled as being ‘non-distorting’ by the WTO overall importance, coupled payments still are a little misleading. Decoupled payments provide significant support for certain EU still increase the EU’s agricultural production agricultural industries and thus significantly through a few channels. First, they artificially distort production in certain markets. improve the creditworthiness of agricultural For example, it is estimated that coupled firms, especially small holders, thus leading

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to a reallocation of credit within the EU toward the agri-food industry, generating to a skewing of supply over time. Second, given the stability of these payments, expected income variability falls for farmers, reducing risk averse behaviour and resultantly having a tendency to increase production.

If we took the effects of cutting direct support in isolation, there should be a shift in production away from the EU and toward RoW producers. The impact will be catalysed for developing country exporters by their preferential access agreements, but limited by regulations around product standards.

Concurrently, Conforti estimated the impacts of cutting direct payments and found that growth was largest for cereals along with not insignificant increases for oilseeds, fruits and vegetables, rice and plant-based fibre all of which tend to be less affected by CAP’s phytosanitary regulations.6 While exporting firms in the developing world should benefit, we also have to consider the impact on consumers.

The reduction in support for EU firms is likely to inflate food prices to a certain extent, ceteris paribus, reducing real incomes. But as before, this impact is likely only to be marginal.

Furthermore, if you take into account the relatively large share of workers employed in agriculture in LDCs, it would follow that there should be at least some nominal wage growth for such workers helping to counteract this effect. This has been evidenced in several country studies including that by Boysen, Jensen , Matthews (2015) which predicted modest real wage growth in Uganda after the removal of CAP measures, along with a ~0.1 point fall in the poverty headcount, indicating that the effects of imported inflation can be largely cancelled out by modest income gains. These gains will obviously be unevenly distributed across countries and demographics, with real incomes rising marginally for net exporting countries and falling for net importing countries; rural areas are also likely to fare better than urban ones.

As stated previously, the second pillar of CAP is concerned with funding the provision of environmental public goods in addition to investment in farm modernisation and regional development. Given the EU’s growing political focus on sustainability, the second pillar’s share of CAP funding has increased steadily over time. As the majority of these policies aren’t aimed at maintaining the EU’s supply of agri-food produce on global markets, this increased focus on the

second pillar should lead CAP as a whole to become less distortionary over time. This isn’t to say that the second pillar won’t have its external impacts. One route could be through the modernisation of production processes; this would lead to increased efficiency in the EU and thus tougher competition for RoW producers going forward. But given that this comes as a result of more efficient production methods, any reallocation of production could hardly be labelled as unfair. Instead, global productive capacity should marginally increase, having its benefits for consumers.

But given that this and that most of the policies contained in the second pillar tend to be concerned with the long run, their impacts are very difficult to predict.

Presidents manipulate the short run of the economy to improve their position for upcoming elections For the most part, the policies of CAP’s first pillar tend to have not insignificant negative spillovers for agri-food industries in the rest of the world while having only minor impacts on consumers. LDCs have a tendency toward being more sensitive to these effects than elsewhere, given their reliance on agriculture.

But, while many policies under CAP have their distortionary effects, these are becoming less pronounced over time. This is thanks to the adoption of more nuanced instruments in the first pillar and growth in the share of funding allocated to the more neutral second pillar.

The changing context of global agricultural markets should also be taken into account here. CAP was initially introduced in a period of falling food prices thanks to the opening up of international agri-food markets.

distorting direction, as has been signalled by the aforementioned publication. But I do say this tentatively; more often than not, food security is often taken by politicians to mean food self-sufficiency, the confusion about which is likely to make CAP’s more disruptive effects a little harder to budge. But this doesn’t change the fact that since the 1990s CAP’s negative external impacts for the developing world have grown notably less significant.

References 1. Desta, M. 2008. “EU Sanitary Standards and SubSaharan African Agricultural Exports: A Case Study of the Livestock Sector in East Africa.” The Law and Development Review 1 (1): 96–122 2. Matthews, A. (2011). Post-2013 EU Common Agricultural Policy, Trade and Development. ICTSD Programme on Agricultural Trade and Sustainable Development, (39).

3. Managing risk in the dairy sector: how futures markets could help. (2017). European Comission. 4. Rayner, V., Laing, E. and Hall, J. (2011). Developments in Global Food Prices.

Reserve Bank of Australia.

5. Cantore, N., Kennan, J. and Page, S. (2011). CAP reform and development Introduction, reform options and suggestions for further research. Overseas Development Institute.

6. Conforti, P. (2005) ‘The Effect of Direct Payments of the OECD Countries in World Agricultural Markets: Evidence from Partial Equilibrium and General Equilibrium Frameworks.’

FAO Commodity and Trade Research Working Paper 12 7. Boysen, O., Jensen, H. and Matthews, A. (2015).

Impact of EU agricultural policy on developing countries: A Uganda case study.

The Journal of International Trade & Economic Development, 25 8. European Comission (2010). The CAP towards 2020: Meeting the food, natural resources and territorial challenges of the future

Now, as a result of climate change and a growing global population, food prices are likely to be increasing as well as being more volatile, shifting the focus of policymakers away from income support and more towards food security and sustainability, as has been outlined in the EU’s ‘CAP Toward 2020’ publication. The changing political incentives with these changing circumstances could well push CAP further into its increasingly non-

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Kosovo: Reborn, But Not Yet Grown Mattias Nilsson

The flag of Kosovo (Pixabay)

J

...ames Blunt. You might wonder ..what on earth does he have to do with Kosovo? If you know him well enough you may recall that, before “flying high” on the undergrounds of London, the British singer served as a captain of a NATO reconnaissance unit deployed in the country.

With his guitar loyally following him strapped onto his tank, Blunt’s missions brought him ahead of the frontline deep into a war-torn Kosovo. On a summer day in June 1999, his unit found itself at the lead of a 30 000-strong convoy heading towards the small capital Pristina. The order from the Supreme Allied commander was clear: secure the airport by any means necessary. This implied directly engaging with Russian troops, who had already seized it.

Fortunately, the graveness of the situation was picked up by Gen Mike Jackson, commander of the Allied Kosovo Forces, who boldly refused his superior’s orders, for which we might have plenty to thank him for.

Blunt’s presence in the Balkans was part of a highly controversial NATO operation, distinguished by lacking approval of the United Nations. Regardless, the intervention brought an abrupt end to the last of the Yugoslavian wars, a series of conflicts notorious for reintroducing genocides to European soil. Although no final treaty marked the end of the conflict, Kosovo was set on the road to independence in its aftermath, which it disputably achieved in 2008. Since being “born anew” the continent’s youngest nation has undergone many changes. However, in certain aspects, little improvement has been made. Despite boasting one of the highest economic growths in the region, Kosovo remains amongst Europe’s poorest countries with a frail economy and nearly half of the population living below the poverty line.

Historically Kosovo’s economy has to a

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considerable extent been based on its natural resources. Rich gold, silver, lead and zinc mines scattered across the hilly region once brought it fame throughout the Balkans.

During the Yugoslav era, the Trepca mining complex was one of the country’s largest enterprises employing up to 23,000 people, although its profitability can be questioned.

However, the mines were targeted and largely rendered unusable during the civil

however, is the necessity of restructuring the energy sector. With Kosovo’s public energy corporation KEK in a difficult financial situation, the sector has been unable to provide a reliable supply, subjecting the country to frequent blackouts that have not made it any more appealing for foreign investments.

The iconic enterprise tells the tale of a troublesome country suffering a slow and painful transition from socialist to free market state. Unsurprisingly the consequences of unsuccessful privatization have been wide reaching. The country’s postal and telecommunications firm PTK is among those affected. Failure to sell 75% (Tota, 2013) of the state-owned company to a German-led consortium back in 2013 led it to lag behind in technologies such as 3G and 4G. More urgent,

If you are a big enough coffee lover, you might eventually find yourself in Kosovo. The word might not have reached you yet, but Kosovo has been praised for making the world’s best macchiato, something locals take great pride in. Half-jokingly Kosovars might tell you their secret is baristas that are qualified as nowhere else. With so many youths completing higher education, while businesses to employ them are lacking, the barista’s qualifications are often hard earned university degrees. The

In the void of efficient exploitation of natural resources, the construction sector has taken over as Kosovo’s largest postwar industry and greatest destination for Foreign Direct Investment. Unlike in Bosnia, where the wounds of war still show in the many facades covered by bullet holes, Kosovo has been reborn at least at the surface. The old has been replaced with new buildings of various forms, aspects, and standards which have rapidly appeared throughout the country. In the capital, Pristina, big apartment complexes have shot up and painted the city’s skyline.

However, many of Kosovo were allowed to play friendly matches by FIFA in 2014. (Pixabay) these apartments have stood empty for years, revealing a lack war. Even if privatization of the complex of coordination, regulation and a functioning would not guarantee enough investments market mechanism. In fact, as in many other for the necessary albeit expensive upgrades countries of the region, limits to the reach of and renovations, its failure has deterred the regulation is an issue that is felt throughout the capital, that is locally absent, from reaching entirety of the economy. Competition from the it. Thus almost two decades after the conflict unregulated and informal sector that accounts its melting furnaces remain mostly cool for approximately 40% (Fabris, 2014) of GDP overlooking an ethnically and administratively poses a major obstacle for businesses in the divided Mitrovica. country.

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striking unemployment rate of almost 30% (CIA, 2017) has had great social implications, forcing a large portion of the population to seek work abroad, mainly in Germany and Switzerland. Often leaving family behind, diaspora constitutes an essential part of the country’s economy.

At a value of 62 million Euros in 2016, remittance is estimated to constitute 16% (World Bank 2017) of the country’s GDP and an important financial source for more than 43% (Fabris, 2014) of the population.

Although remittance can play an important role in supporting economic development and alleviating poverty, it cannot be relied upon in the long run. Such source of income is highly dependent on immigration regulations, an increasingly contended matter for most EU states. Furthermore, flows can be expected to decrease over time as migrants assimilate to their new country of residence.

Many blame a corrupt government made up of former warlords, once beloved heroes, for the country’s dire economic situation. These accusations may not be completely without substance as Kosovo till recently ranked 106th out of 169 countries included in the corruption index (Transparency International, 2015).

Whilst this might cause great frustration by the population, security risks to property, bribe related costs and an unreliable judicial system has led to an unattractive business environment.

This same elite is also being blamed for implementing questionable policies. This is clearly visible in the agricultural sector, amongst others. Agriculture, the economic backbone of many developing countries, has met stern difficulties in Kosovo. Lack of control on imported goods has meant that subsidized and dumped agricultural products from high-income countries have not only posed fierce competition on the international level for the country’s small sized farms but domestically too. Dairy products have been hit particularly hard.

While major local milk producers complain that they cannot even utilize 50% of the installed capacity, milk imported from Germany and Italy fills the market shelves.

Putting things in perspective, in 2016 total imported agricultural products valued 28% more than those locally produced and sold in Kosovo’s formal market. Additionally, reform in the sector has been hampered by farmer’s limited access to finance and a greatly

inefficient subsidy scheme. One aspect of this scheme has been paying farmers per owned cow, which has not incentivized improvement of the breed, and today 60% of the country’s mixed breed cattle remains of low productivity (Instituti GAP, 2016).

Erdogan’s controversial utterance “Turkey is Kosovo, Kosovo is Turkey” (Erdogan, 2013).

However, this is not a modern occurrence.

Kosovars, who ethnically are Albanians, embraced the ottoman culture and held a privileged role in the Ottoman Empire.

Nonetheless, everything that is going against it is not of Kosovo’s own making. With a mere two million inhabitants and low per capita income, the domestic market is a weak motive for investors. Some FDI has taken place in sectors like natural resources, commodities, telecom, finance and monopoly infrastructure.

Even so, the industries that have established in the country to target local demand, such as construction company TITAN, have rather taken over existing factories than built their own from scratch. Export of goods or services could, therefore, be expected to be the main motive for foreign investments.

They were often educated at universities and schools in Istanbul and some would go on to serve the sultan as generals, advisors and, in the case of Muhammad Ali Pasha, as the Vali (governor) of Ottoman Egypt. Today several cultural ties survive, and notably many families retain a foothold in both countries.

Whilst some 30 000 Turks live in Kosovo (OSCE, 2010), estimates suggest Turkey houses 1.3 million Albanian descendants, a number close to that of the population of Kosovo itself. With a thriving economy and about 700 registered businesses, often with notable market share, Turkey could once more provide a strong support. Indeed, a free trade agreement was signed by the two nations back in 2013. Although the agreement is yet to come into full force, Turkey, with an 8% trade turnover in Kosovo (Balcer, 2012), currently constitutes one of its most important partners and investors. If its cards are played right, this small state could see itself become a bridgehead into Europe for advancing Turkish businesses.

Many blame a corrupt government made up of former warlords, once beloved heroes, for the country’s dire economic situation However, being a landlocked country, Kosovo is heavily dependent on its neighbours for trade. Persisting Serbian political hostility can make the movement of goods into and out of the country a lengthy process, as trucks and cars are often stopped at the border for long periods. This, together with poor infrastructure in the region, means Kosovo finds itself largely cut out of the European market. Additionally, the nearby states, themselves quite poor, are not high up enough in the “food chain” to be significant importers of “Made in Kosovo” goods. The combination of low export rates and a heavy reliance on imports for most goods has pushed the young nation into a large and unsustainable trade deficit.

While finding little support from its neighbours, Kosovo enjoys connections to the outside world that it would do well to take full advantage of. Its large diaspora in Western Europe does not only supply remittance but constitutes a potential investment source, due to their personal ties to and knowledge of the country. This could further bridge Kosovo and the EU economically. Yet another direction to look towards is the Middle East. Kosovo’s particularly good relationship with Turkey was underlined by the Turkish president Mr.

Kosovo is therefore in an urgent need to find its own niche - one that does not rely on infrastructure and ties with its neighbours.

Small electronics, produced locally and flown easily to the rest of Europe could be one such solution that so far has not been explored.

The country’s youth may bring other options to the table. With almost half the population under 26, they constitute a great potential force for development. Since many of them have spent time living or working abroad, they bring home with them the extremely valuable assets of foreign languages. If nothing else this could cater the human capital for example for call centres, an industry that does not require the hard infrastructure that is lacking.

However, to take full advantage of its strengths, Europe’s youngest state needs to undergo serious institutional reforms to create a more attractive economic environment for foreign and local business. Among the thing it needs to do is push through thoroughly with privatization, strengthen its regulations, transform its informal sector and, most difficult of all, take sincere measures to reduce its high level of corruption.

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Change Begins at Home: Studying Energy Efficiency in the Domestic Sector Apoorva Bihani

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tthreatening increase in the concentration of greenhouse gases on our planet has led to several lifestyle changes in the past few decades.

There has been a rise in awareness and stress on the use of renewable resources, afforestation and lower carbon emissions. In addition, eco-friendly appliances, recycling, biodegradable substances and green energy are becoming popular household terms, as individuals are being incentivised to contribute on a micro-level.

Despite new energy saving measures, introduction of efficient energy appliances and rise of non-renewable energy, residences still primarily rely on inefficient methods from non-renewable sources of energy. Therefore, a vital method of reducing carbon emissions from the domestic sector is by increasing energy efficiency, which is measured as the output of energy produced per unit of input. An optimal level of energy efficiency would entail production at minimum cost, achievement of which is often seen as an investment made by consumers seeking to maximise utility. Several studies find a gap between the optimal level of the efficiency desired and the actual level realised, known as energy efficiency gap.

Researchers study this issue with the use of an investment model, where consumersâ&#x20AC;&#x2122; decision to choose an energy efficient program over an inefficient one can be seen as an investment: at a relatively larger upfront cost, it pays return over time through future cost savings. Though such investment has been observed in industries as well as in vehicles, the domestic sector is still falling behind in adapting to energy efficient methods.

An explanation for high demand of conventional energy is the lower prices it offers, opposed to the initial cost of installing energy efficient technologies. Though it has been proved that use of efficient energy results in much lower bills in the long-run,

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A Home Economics class receiving instructions on cooking. Ottawa, Ontario, 1959. (Chris Lund)

the set up costs do remain an obstacle.

Installation of double glazed windows, increasing insulation and replacing customary bulbs, air conditioners and appliances with efficient ones is expensive for home owners.

A similar argument holds true for energy from renewable sources. The long-run rewards for efficient energy, isnâ&#x20AC;&#x2122;t prioritised by tenants just renting a property. On the other hand, landlords do not have much an incentive either if their tenants are paying the utility bills. In the case of home owners, high upfront costs are backed by more inconvenience and time claimed by the refurbishment process of their energy systems. So, there does lie a lack of incentive for individuals to demand energy efficiency.

The domestic sector is still falling behind in adapting to energy efficient methods.

Though inefficient energy creates environmental externalities, lack of its representation in the prices leads to usage well above the socially optimal level. The externality represents a cost the society pays on behalf of the consumer, leaving no incentive to the individual consumer to lower usage. Therefore, pricing of energy plays a big role in determining the consumption.

Additionally, given that investment in energy efficiency requires greater access to finance, liquidity constraints act as an additional barrier in the energy market; higher interest rates may discourage consumers from investing in efficient energy.

Another justification for underinvestment in efficiency energy is poor availability of information. Some consumers may not be fully aware of the benefits of investment in energy efficiency and its prospect of reduced future costs. Asymmetry of information also acts as a limitation, when the sellers of energy efficient technologies have to incur transaction costs in educating the consumers about

the benefits of their product. Furthermore, firms may suffer costs of innovation which may not be recovered by benefits of the energy efficient technology as knowledge of innovation is easily spread to competitors and consumers. In such a scenario, a spill over of knowledge results in lower costs for the competitors and hence a disincentive to innovate. Thereby, leading to a market failure.

Presence of several factors in the market prevent energy efficiency from reaching a social optimum, correction for which is vital to close the gap. A method of reducing the numerous market barriers and prevent market failures in the energy market is to implement an appropriate set of policies. For example, making it mandatory for new builders to make install appropriate energy efficient systems shall gradually shift consumers from conventional methods, as well as educate them about the long-term benefits of efficient energy. Similarly, governments can set energy efficiency standard requirements for products and appliances. These rules shall encourage sellers to produce only energy efficient products, increased availability of which shall lead to higher consumption. In order to tackle the environmental externalities, Pigouvian taxes could be implemented to monetize the social cost to the consumer, which shall discourage excessive usage, and direct consumers towards energy efficient goods via a substitution effect.

Market failures caused by asymmetric distribution of information may be avoided through increased awareness of advantages of investment in energy efficiency, also known as demand side management or information programmes. Such programmes shall lower transaction costs between buyers and sellers and may also encourage lenders to offer lower interest rates to those investing in energy efficiency. This would make the consumers capable of making a long-term investment in energy efficiency, by enabling them to save via lower future costs and hence, helping

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with early repayment of loans. Though some studies have found such programmes to be effective, high costs are suffered most of the times, and net benefits may not always be positive. Another method of demand side management is to provide financial incentives in the forms of subsidized rates or tax cuts to encourage investment. Apart from their doubt on cost-effectiveness, financial incentives have been studied by many researchers for their ability in increasing investment in energy efficiency as tax credits lead to higher likelihood of investment and may also encourage non-participants to follow.

After a closer look at the causes of market failure in the energy market, it can be concluded that there exists an energy efficiency gap in the domestic sector. Though, choosing an energy efficiency investment is socially optimal, lack of information, transaction costs and un-internalised externalities causes market failures that lead to poor investment decisions by consumers.

While several policies are suggested to correct for such failures, their effectiveness, especially at economic costs, is debatable.

However, it is worth acknowledging that achieving the social optimum is, however, tough, policies do drive sellers and consumers closer to it. Other than market failures, there are also behavioural factors on the consumers’ end that lower demand for energy efficient goods, known as behavioural failures. Further investigations into such failures and measures for correction shall provide us with stronger explanations about the energy efficiency gap in the domestic sector, and methods to close it.

The Case Against Economic Sanctions Oli Buss Chongsan-ri Farm, Kangso, North Korea. (Courtesy Stephan)

A Short History of Economic Warfare: ..conomics has been an acknowledged .component of warfare since time immemorial. The importance of maintaining supply routes and hampering those of the enemy was highlighted several times by Sun Tzu in his ancient treatise The Art of War. Since the invention of the nuclear bomb, the use of conventional warfare has become more problematic, with states often preferring less ‘direct’ methods of international coercion.

E

Economic sanctions are one of the tools that has come to the forefront of the foreign policy arsenal in this time. The basic rationale behind imposing economic sanctions on a country is the idea that foreign governments will capitulate to pressures, which may include barriers to trade and restraints on financial transactions, exerted upon their economies.

However, we will argue that all economic sanction regimes are needlessly harmful on civilian populations, even taking into account the ‘Bonn-Berlin Process’, an early 2000’s UN initiative for the design of less harmful sanctions. In some cases, economic sanctions harm the civilian population proportionally more than conventional warfare, while also being an ineffective means of achieving international objectives. Both of these factors make the use of economic sanctions as currently conceived indefensible as an instrument of foreign policy, especially when viewed in light of alternative policy options.

The Human Cost of Economic Sanctions There are a number of cases that illustrate the devastating impact that economic sanctions can inflict on civilian populations.

Take Iraq in the 1990’s, probably the most extreme example of the destructive nature of sanctions available. In 1990, the UN Security Council imposed strict financial and trade sanctions on the Republic of Iraq, which were more or less in effect until 2003. The initial aim was to compel Sadam Hussein to withdraw from Kuwait and to pressure the Iraqi government to eliminate any WMDs that they may possess.

In Iraq, sanctions on importing chlorine resulted in a higher death toll than the 2003 Iraq War The destruction of much Iraqi infrastructure during the Gulf War, combined with these strict trade sanctions, turned out to be a deadly combination. The already weak agricultural sector was unable to keep up with domestic demand, resulting in widespread malnutrition – per capita calorie intake was 32% lower in 1995 than before the Gulf War. Additionally, the import of chlorine, a key method of water purification, was highly restricted due to the possibility of its use in the manufacture of poison chlorine gas, resulting in half of Iraqi children under 5 suffering from diarrhoea (a deadly ailment in countries that do not have

adequate healthcare systems) in May 2000 according to UNICEF, as well as other serious diseases.

The impact of the sanctions on children was particularly devastating, with the deaths of children under 5 attributable to the sanctions (in excess of regular figures) ranging from 400,000 to 500,000 between the years 1991 and 1998, according to another UNICEF study. It is true that there exist difficulties in arriving at accurate estimates, and these figures have been disputed by some on the grounds of data reliability issues, but the consensus is that they represent the reality of infant mortality rates in Iraq during that period.

It is also interesting to compare these figures with the estimated Iraqi death toll from the Iraq War of 2003 - 174,000 people between 2003 and 2013, with 112,000-123,000 being civilian non-combatants, according to the Iraq Body Count project, demonstrating that economic warfare can kill just as many people, if not more, than conventional warfare. Furthermore, the efficacy of the UN sanctions against Iraq is certainly dubious, none of the supposed aims having been achieved concretely - however there is still debate today regarding their outcome.

Another example of the human cost of economic sanctions is the US embargo on trade with Cuba, especially during the 90’s after the fall of the Soviet Union. President Obama

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only recently began to review the policy after 56 years and counting of its implementation.

The negative humanitarian effects that would ensue from the imposition of an embargo was no secret to its orchestrators - a formerly classified US State Department memo dated April 6, 1960 states that the purpose of the embargo was “to decrease monetary and real wages, to bring about hunger, desperation and overthrow of government.”

In a 1997 paper published in the American Journal of Public Health, Garfield and Santana suggest that the embargo, by restricting the supply of ‘humanitarian’ goods such as food and medical supplies, has made obtaining these goods more difficult and costlier than it would otherwise be. This has lead to the long term exacerbation of health conditions including, but not limited to, anaemia, lower birth weights, and a sight disorder called optic neuropathy, a symptom of vitamin deficiencies. While acknowledging the possibility of other causes, Garfield and Santana attribute such effects chiefly to the embargo, in fact claiming that Cuba’s equitable distribution system was one reason why the humanitarian effects have not been as severe as they hypothetically could have been.

Additionally, the long term impact of the embargo on Cuban GDP (per capita GDP being the most widely used standard of living metric) has been very substantial, amounting to over $783 billion USD cumulatively according to recent estimates by the Cuban government.

It is also worth noting that, notwithstanding the highly contentious and debatable nature of the embargo’s main political objective, i.e. the “overthrow of [the Castro] government”, after 56 years of the Castros in power that it has failed quite spectacularly in achieving it.

Moreover, although it is a controversial claim which is disputed by many, the above examples of Iraq and Cuba have even led to some senior figures in the UN and elsewhere labelling the measures taken against these countries as ‘genocide’, which demonstrates the severity of the human cost involved, even if not necessarily warranting such appellation.

Do Economic Sanctions Work?

Another example of the inefficacy of economic sanctions is North Korea. Sanctions against the country have proven many times to be resoundingly ineffectual. Indeed, the North are alleged to have recently (September 2016) conducted further nuclear tests, despite many

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years of US and UN attempts to prevent the country from becoming a nuclear power.

Besides, if the US and China, who probably do not want a nuclear DPRK on their doorstep either, tightened sanctions by withholding their regular humanitarian aid packages (mainly grain contributions), this would most probably lead to mass starvation among the civilian population without much affecting the elites, who mostly view citizens as expendable in the service of preserving the regime. Such disregard for the general populous was evident during the North Korean famines of the Kim Il-Sung and Kim Jong-Il eras.

Moreover, according to Korea scholar Andrei Lankov, exploiting external threats such as economic sanctions is actually part of the regime’s ‘logic of survival’, meaning that not only are they ineffective, but they may actually be counterproductive, contributing to the Kim regime’s longevity by lending credibility to their fervent anti-US propaganda.

A formerly classified US State Department memo states that the purpose of the embargo was “to decrease monetary and real wages, to bring about hunger, desperation and overthrow of government.”

In our age of mass media, with modern technology and information dissemination tools at their disposal, it is now the norm for regimes to manipulate public perception in such a way that hardship imposed from the outside can be used as a regime-bolstering political tool. Another recent example illustrating this point is Russia, where the largely state-owned mass media often portray EU sanctions, imposed in response to Russia’s annexation of Crimea and their alleged involvement in the Ukraine conflict, as an unjustified attack on the Russian people, and where buying domestically produced goods has been promoted as patriotic.

Regarding this example, sanctions (mainly on prominent Russian businessmen, banks and oil companies) have had, at least so far, a decidedly lacklustre impact on both the Crimea situation, which is still considered to be within the territory of the Russian Federation post-annexation, as well as on the Ukraine crisis, where eastern separatists

and Ukrainian government forces are still at a stalemate. They have only succeeded in escalating tensions between Russia and the West, in imposing economic costs on the Russian civilian population by contributing in several ways to the ongoing recession there, despite the sanctions being ‘targeted’, and in strengthening domestic support for the Russian state.

Furthermore, as a corollary to the above points, the imposition of sanctions against a civilian population in the hope that leaders will react to diminish the suffering of their people is not only a draconian and morally corrupt policy trajectory, but is also wholly ineffective, seemingly becoming less effective the more despotic the regime.

Are Economic Sanctions Necessary?

As argued above, economic sanctions are ineffective at achieving their goals and are harmful to civilians; they are rendered even more unnecessary when one considers alternative options. Indeed, there exist several avenues of international pressure other than economic sanctions and conventional warfare.

One such option is travel bans, either on specific people such as government officials, or groups of people such as those belonging to or representing certain organisations.

Travel bans are usually part of sanctions regimes and have been known to have some effect on target behaviour. For example, travel bans imposed on top officials are at least partially credited, albeit alongside other types of sanction, with an agreement by Fijian President Frank Bainimarama to hold elections in 2014 following his successful coup in 2006. Moreover, such measures have practically no effect on the regular citizenry of a country, while embarrassing and pressuring government figures to capitulate to the sanction imposer’s demands.

As an ancillary point, although not specifically related to sanctions, Turkey is currently using the issue of visa-free travel within the EU in return for help stemming the flow of refugees into Europe as leverage against the EU, demonstrating that non-economic factors can carry coercive weight in international affairs.

Military sanctions, namely arms embargoes, though technically a type of highly specific economic sanction, are yet another option.

Experience suggests that they do not always work, but there is some evidence to suggest

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that UN arms embargoes can have an impact on the behaviour of sanctioned states, provided they are well enforced, with their success rate also depending on the type of objective pursued. One advantage to this type of sanction is that they do not tend to have a negative humanitarian impact: in fact by restricting weapons flows into a country, depending on the political situation there, reduced civilian suffering is the likely outcome, as this decreases the capacity of tyrannical regimes to physically oppress their people.

Other sanctions, for instance banning athletes from competing in sporting events like the Olympics, may also be an effective alternative: one example is South Africa, whose athletes were banned by the International Olympic Committee and other sporting bodies in the 1970’s in response to apartheid, something which is often credited with contributing to the demise of the policy.

Although such measures have been criticised for targeting athletes rather than politicians, the costs pale in comparison to the real and widespread suffering that can be exacted by

economic sanctions.

The efficacy of such alternative foreign policy tools are certainly open to challenge, but given that the effectiveness of economic sanctions is equally or more dubious than other methods, and given that the former do not carry with them (sometimes heavy) tolls on civilian populations, any future use of the latter is therefore not only unnecessary, but indefensible.

“The Greatest Turnaround in UK Business History” Paige Portal Tesco Entrance, Northallerton. (Courtesy Chrisloader)

Bruce Marsh was hired by Tesco when they were reeling from a succession of scandals and management blunders that left the UK’s biggest retailer at the crossroads.

The 25-year veteran of UK retailing has been one of the leaders to take the helm at Tesco and help re-focus the organisation and steer its course. But with more choppy waters ahead has he done enough to steer clear of the brewing storm?

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.ne probably knows that Tesco is a ..massive retailer and perhaps where the confectionary aisle is in their local Tesco Express but other than that, your knowledge of the brand may be fairly limited.

An hour long talk from its Finance Director, organised by NEFS, is all it takes to really appreciate the journey taken by Tesco and the business nightmares that it has endured.

Tesco is the UK’s largest retailer. It has a £48.4bn annual turnover, with 6902 shops worldwide. In the UK 50 million people shop there every week, so it is hardly surprising that 40% of us have a Tesco club card in our pocket.

It all began in 1919 when Jack Cohn, son of a Jewish migrant, began selling groceries at a small stall in East London. It was the first retailer to operate computerised checkouts and launched Tesco.com in 2000, five years ahead of any other retailer. However, like many before it, Tesco fell victim to the promise of the US markets. When trying to crack the

US, it was met with hostility and ultimately, forced out. But, not before extreme damage had been done. The misguided attempt to break into the US market led to a massive cash drain, starving the UK of investment.

From there it all deteriorated and between 2011 and 2015, hoping to retain profitability, Tesco held a fire sale but more problems came its way.

like many before it, Tesco fell victim to the promise of the US markets In 2013, the meat industry was rocked by the horse meat scandal and was a particular blow to Tesco, which received the most criticism and media attention. Overnight Tesco lost its consumer confidence; it then managed to lose the trust of its investor too. In essence, Tesco’s profits had been overstated by £260 million and a fraud investigation was triggered.

This sparked an internal diffusion. Multiple members of senior management left the business and in 2015 Tesco suffered a massive £6.4bn loss. The retailer was featured across all UK headlines and continues to be - on the 28th March, this year, Tesco agreed to pay a fine of £129m to avoid prosecution for the fraud.

Mr Marsh arrived at Tesco during its most devastating period. His career has spanned

over 25 years, working with some of the biggest names in business. He faced his biggest challenge two years ago when he received a call from Tesco asking him to join the business. It became clear to the new bosses that Tesco needed to change and in a big way. It had three main goals: • Regain competitiveness • Protect its balance sheet • Rebuild trust and transparency Mr Marsh explained that Tesco must rebuild its relationship with its shareholders but more crucially, it must win back its customers. Its first step was to strive for better service. Tesco employed 12000 more staff and retrained nearly 60 thousand in order to enhance its reputation. The new management orientated towards the development of good working relationships. It changed the Tesco culture.

Each staff member had family and friends who could either be promoters or antagonists of the Tesco brand and the best way to ensure that Tesco received positive advertisement was through the forum of its staff.

In addition to a new customer based recovery, Tesco felt that it was imperative to improve its relationship with suppliers. Mr Marsh described Tesco’s previous reputation as ‘terrible’, so there was yet another challenge facing its recovery. Tesco thus implemented a new initiative. Along with a similar strategy of improving relationships, Tesco completely

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reorganised its fruit distribution process.

Simply put, Tesco developed a packing house in Spain, the heart of fruit supply. This was a genius plan. It reduced production costs but also ensured an improvement in quality. Fruit is now dispatched from the Spanish packing house directly to the Tesco shops, so the food is fresher by two days. It was one step that worked towards rebuilding its reputation with customers.

Overall, Tesco is recovering. Supplier and customer satisfaction has improved and Tesco has benefitted from positive volume growth in nine consecutive quarters coupled with doubling profitability. Its business model in pursuing further recovery consists of i) continued positive volume growth, ii) operational leverage, iii) customer investment and iv) margin recovery. Mr Marsh is part of one of the largest turn-arounds in UK business history.

The Nottingham Economic Review

food industry, with a particular inflationary emphasis.

Tesco, thus far, has dealt with its challenges with a surprising amount of grace and dignity.

It stuck to its new business plan and managed to preserve a substantial amount of integrity.

However, there is concern for the future of Tesco’s new culture. Tesco has confronted its, fairly self-inflicted, problems by changing its relationships and working towards rebuilding trust and quality.

Yet, the impending challenges could expose imperfections in the new business model.

transparency when it comes to suppliers. He went on to say: “Our job is to make sure the overall offer of price, quality and service is so good the customer comes back to us time and again rather than shopping around.’’

This ideal probably birthed the slogan ‘Every Little Helps,’ bringing recognition to even the smallest of savings. He recognized that, on a price level, Tesco will struggle to go toe to toe with discount stores but how this was due to exceedingly distinctive business models, with Tesco levying more importance in quality and service.

Although evidence agrees with Mr Marsh, it seems possible that Tesco may not be able to continue to compete with these brands as Brexit and reduced UK growth takes hold. Consumers will shop for cheaper products and the issue of quality will become less vital. Tesco’s competitiveness will also be threatened by changing However, it is not a fairy tale shopping patterns. Weekly shops recovery. Mr Marsh made it have declined in popularity with very clear that Tesco still faces smaller, more frequent shops challenges. He recognises that taking their place. This presents the UK has benefited from GDP A Tesco Express store which opened in Wooton High Street, Isle of Wight in 2010. (Courtesy Editor5807) an issue for larger stores, such as growth, but the Bank of England Tesco Extra. does not expect this to continue and instead The aim to simplify ‘behind the scenes’ predicts inflation to exceed the target rate operations has resulted in the closing of two Consumers are less willing to go down the and no real wage growth to occur. This is a UK distribution centres and created 1,000 aisles of a massive store for an hour a week. massive concern for the retail business as redundancies. This may be part of Tesco’s Instead, they prefer to spend little and often. consumers will adjust their consumption recovery but it could also help alleviate Online shopping can counteract some of this behaviour accordingly. some of the difficulties anticipated by Brexit. loss.

Ultimately, Tesco advertises a ‘family-friendly’ Additionally, vast consequences of Brexit are and ‘happy staff’ persona, but it is a profit One student asked how Tesco will adapt to anticipated. Uncertainty is undeniably going to pursuing business confronting institutional changes in consumer behaviour and whether increase as the UK reacts to Article 50 being adversity and to forget that, would be naïve. superstores will survive long term. Mr Marsh triggered. The risk of tariffs and the impacts of suggested that online shopping depends on reduced migration are all contributing factors It is justified to be sceptical of the turn-around supply and demand. It would be impossible for to a fall in positive volume growth. Tesco will as a new challenge comes to light. Students Tesco to deliver to every customer. Demand no longer have access to cheaper labour from are on a budget. Many previously shopped is likely to increase as consumers prioritise across the EU market and costs will inevitably at Tesco, spending around £40 a week on convenience. rise. food. However, as Crisis nights turn into a necessity, a student can find herself spending However, Mr Marsh went on to explain There is also a threat to the Common half as much at Lidl. When Mr Marsh was that there are only so many timeslots in a Agricultural Policy (CAP), resulting in a asked about how Tesco plans to deal with day and so, physically, it cannot continue to reduction in subsidies to farmers, effectively this increased competitiveness from cheaper increase its home delivery service. This high reducing output. Whether the UK diverges brands he said, “It is tough. The way that we demand could mean could mean the upward to a ‘soft’ or ‘hard’ Brexit remains to be are approaching it is by dramatically reducing adjustment of delivery costs. Smaller stores seen and the direct consequences are still our price. We have worked hard to close the could take precedent if this pattern continues. relatively uncertain in each case. A ‘hard’ gap between Tesco prices and discount prices Despite Mr Marsh’s reasonable justification, it Brexit however, will be detrimental to Tesco. to a point where the gap is much smaller. We seems likely that students will continue to shop When the UK leaves the EU, it will not belong then want to invest in service and quality.” at Lidl for the foreseeable future, until bank to a trade bloc and thus be subject to the statements are looking a lot less daunting and World Trade Organisation and its restrictions.

Mr Marsh then described how Tesco offers they can afford the luxury of Tesco once again.

This will have a dramatic impact on the UK greater efficiency in shopping and complete

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The Nottingham Economic Review

Digital Globalisation: Unlocking the Economy’s Potential Ashita Gaglani (Courtesy Translate Media)

T

..he digital frontier continues to push technological boundaries thus, disrupting the status quo as virtually every cross-border transaction now involves a digital component. As the economy experiences a flattening of global trade, digital disruption has fuelled a new era of knowledge-intensive flows that are exerting a larger impact on economies. The extent by which industries and firms embrace digital globalisation will determine their success in a global economy that is entering a new phase of instant access to information and data; such flows additionally support the movement of goods, services, labour and finance.

Interestingly, those firms embracing the change are leading in profits and market share, with many reshaping and rearranging value pools to their own advantage. Hence, digital globalisation is providing the advantage to developing countries and millions of individuals to access a multi-use platform that enables idea-sharing, communication and enhancing a global network in a more efficient manner. Such digital transformation is allowing the idea of even the smallest firms to compete successfully with large multinationals. Albeit, less capital-intensive business models can be applied, firms will face a new array of risks and policy challenges to combat.

Differing Digital Capabilities The extent of digital adoption varies amongst countries; from those leading the frontier to many struggling to keep up with the fast pace of innovation. The recent MGI Index has ranked 139 countries in regards to their flows of goods & services, finance, labour and data and concludes in identifying a large digital gap between several leading economies.

For instance, Europe exploits its digital potential by only 12% in comparison to the US of 18%. However, sectors such as trade and professional services are contributing greater to the digital frontier in Europe and interestingly, are running a digital trade deficit of approximately 5.6% of total services trade

between themselves and the US; UK are exploiting its digital potential at 17%.

others makes it difficult to isolate the true effects from technological change.

Through an econometric study by MGI, country-effects are identified to explain a third of the variation in digital capabilities thus, the extent of digital transformation can be influenced by the tools of the domestic economy. Hence, this has led to the argument of many firms finding it easier to buy innovation rather than build it due to insufficient capital allocation to reach digital goals. Interestingly, a study by EY finds that those firms embracing the idea of buying innovation are finding themselves to be key competitors in a digitally transformed economy. This is due to the positive correlation between digital intensity and productivity growth.

Accelerating the Digital Transition Nevertheless, accelerating the transition into a digital future is required by economies in order to survive a landscape that is rapidly changing. “The force and velocity of disruption today are unlike anything seen before. It’s a perfect scenario for companies to erupt in value or be destroyed and disappear” (Liu (2015)). Interestingly, digital flows are identified to be more concentrated amongst a set of developed rather than developing economies. Exploiting digital capabilities by developing economies gives many small entrepreneurs the opportunity to transition into “micro multinationals”.

“The force and velocity of disruption today are unlike anything seen before.

It’s a perfect scenario for companies to erupt in value or be destroyed and disappear”

Albeit, Europe and the US are key leaders of the digital frontier, they have exploited only a small percentage of digital capabilities so far.

Thus, companies must assess the importance of digital to their business models and adapt their organisations accordingly. A 2016 World Bank Report reiterates that digital ambitions will successfully be achieved only when economies continue to improve and invest in education to allow digital technology as a medium to reduce inequality and increase productivity growth.

Challenges of Digital Disruption However, economies must consider the potential impact on job displacement as it is important to note that digital disruption creates both opportunities and challenges.

Interestingly, economists Brynjolfsson and McAfee find that rapid technological disruption is creating an increase in job displacement rather than job creation in the US due to stagnating median income and rising inequality growth.

On the other hand, concluding technological change to be the biggest contributor to slow job growth is far from conclusive as many labour economists have argued. This is due to factors such as the aftershocks of the financial crisis and flattening global trade amongst

The persistent need to push economies towards the frontier of technological transformation is crucial for growth as flows of digital information continue to surge. Digital disruption is providing vast opportunities for economies to redefine their competitive and comparative advantage. MGI research indicates that world GDP would be 13 percent higher today if the global economy contributed as a whole to global flows at the same rate as the top quartile in the past decade. Hence, proving that opportunities to catch-up towards the digital frontier are far too significant to ignore.

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Women: Why We Must Like Them Arushi Prasad Suffragists Protest Woodrow Wilson’s Opposition to Woman Suffrage, October 1916 (Courtesy Burke & Atwell, Chicago)

W

.ttith the exception of Finland, .Norway and France, governments of 193 countries in the world are male dominated. Clearly, our leaders are failing to set a precedent for gender equality.

Cultural and societal impediments that stand in the way of female empowerment are often economically irrational and damaging to growth and development. Hence, to make amends to the dismal state of gender equality, progressive reform needs to be both bottomup and top-down.

While a change in the attitude of society is a fundamental pre-requisite to institutional change, a thrust is needed in the form of gender sensitive domestic and foreign policies. We cannot get closer to achieving this Sustainable Development Goal of ‘Women’s Equality’ without putting women’s issues on the forefront. Assertive, gender progressive mandates and good gender-neutral practices must replace a rampant but inconsequential slogan shouting culture.

Research by the World Bank shows that countries with a higher number of women in parliament enjoy low levels of corruption.

all; an annual average rise in the world GDP growth rate of 0.03 to 0.6 percentage points by 2030.

Countries with a higher number of women in parliament enjoy low levels of corruption

While progress has been made in some parts of the world, leading to a tangible improvement in social entrepreneurship, living standards, infant mortality rates- regions such as Asia, Middle East and sub-Saharan Africa lack reform and gender equality continues to be largely ignored.

Women are less likely to engage in anti democratic activities such as bribery and that corruption is less severe where women make a large portion of the senior government officials as well as the labour force. Enhancing women’s equality in society has positive externalities such as increasing food security.

Since about 43% of the world’s agricultural labour market is female, increasing their access to resources would enhance their productivity and greatly reduce world hunger (Food and Agricultural Organisation estimates that it would reduce the number of hungry people in the world by 150 million!).

Recently, the United Nations warned African Nations of failing to meet their poverty eradication goals by unless they address gender inequality. The unequal treatment of women in the labour market costs SubSaharan Africa about USD 95 billion annually between 2010 and 2014, peaking in 2014 at USD 105 billion, or 6 per cent of gross domestic product, according to a report released by the United Nations Development Programme in August, 2016. With 36 of the 54 African nations ranking at the very bottom of the list of gender equal nations, the future of the continent looks dismal. The effects of the economic slowdown in China on the African economy have been exacerbated because of the lack of participation of women in the workforce, which prevents economies from realising their full potential.

Moreover, gender-based discrimination There is no doubt that women are critical to in social institutions entails tremendous economic development and good governance, even more so in developing countries. Underrepresentation of women in government roles causes serious problems in furthering the women’s empowerment agenda. The If the distribution of power World Economic Forum between men and women says that only 15 per cent continues to remain unequal, of the gender gap has been economies will experience bridged in the political arena. diminishing returns to scale.

These statistics are especially Despite its economic benefits, discouraging because most selective attention has been countries have some sort of given to achieving gender gender based quota system parity. Since education, labour to encourage gender equality. and health attract most donors, In contrast to this, women are seen to occupy top-level roles in President Barack Obama signs into law the Lilly Ledbetter Fair Pay Act in January 2009.(Courtesy Joyce Boghosian) issues of discrimination in social institutions have been conveniently non-governmental organisations. costs. According to a 2016 OECD report ignored even though it is one of the root causes While this is certainly a step ahead, women on The Economic Costs of Gender-based of gender inequality. Focusing on creating continue to be underrepresented in decision Discrimination in Social Institutions it has cost non-discriminatory social institutions will have making governmental roles. This has a direct the global economy up to USD 12 trillion. positive spill over effects for education, health impact on their status as active members of Reducing discrimination in social institutions and labour market opportunities. For example, society. could lead to serious macroeconomic gains for by delaying the marriage age for girls and

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providing support for married women, it will be easier for girls to access secondary education and subsequently increase their participation in the labour force, their skill set and productivity.

Politics, agriculture and other labour markets are all in need of more active female participation. The benefits of including

women in the workforce far outweigh the costs. The only way forward is to give men and women are given equal access to resources. Strengthening of social institutions underlines any progress that has to be made in terms of gender parity. It is time that our leaders recognise the costs that gender inequality entails and work towards female empowerment not only to achieve economic

development but also to move towards a more egalitarian society. A change in the attitude of the government in the of policies is likely to have a proportionate change in social attitudes towards women; reducing the constraints that women face in the workplace and in the domestic sphere.

Question Time Last Issue’s Problem: Drilling a Cube

A cube of 1 unit side is drilled from all three sides with a drill size of 1 unit in diameter. What is the volume of one of the eight corner pieces that remain?

Solution

Area of circular drill cut out is πr2 = π/4 Thus length of side of ‘square’ drill is √(π/2) 1st Cut: 1 x √(π/2) x √(π/2) 2nd Cut: √(π/2) x √(π/2) x (1– √(π/2)) 3rd Cut: √(π/2) x √(π/2) x (1– √(Π/2)) Thus total volume of removed is: 2 x {√(π/2) x √(π/2) x (1 – √(π/2))} + 1 x √(π/2) x √(π/2) Simplified: (π/4 x (3 – √Π) Approx. = 0.964 cu. units Thus, the volume of a residual corner of the 8 corners is approx. 0.0045 cu. units Notes: 1. To determine the side of the ‘square’ drill, the square root of the area of the hole that the circular drill would cut.

2. This is then multiplied by the length to get the volume of the first cut, namely 1 unit.

3. The 2nd and 3rd cuts by the square drill are identical. The volume is size of the drill times its cut. The size of the drill is √Π/2 x √Π/2. The length of the cut, required to determine the volume is unity minus the cut through already made, namely √Π/2. Thus the length is 1 – √Π/2.

4. The total volume removed can be simplified by letting B=√Π/2. Thus: = 2{B x B x (1 – B)} + B x B = 2{B2 x (1 – B)} + B2 = 2 B2 – 2B3 + B2 = 3 B2 – 2 B3 = B2 (3 – 2B) Thus: π/4 x (3 – 2√(π/2))

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