Issue 12

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Nottingham Economic Review

Dear NER readers,

Nottingham Economic Review.

neronline.co.uk

Editorial

Our cover points the way to a range of great pieces in this season’s NER. Our writers have contributed a terrific range of pieces, covering different parts of current affairs each from different angles.

Credits Editor-in-Chief: Angus Naismith

Economics Editors: Gabbie D’Mello Roneeta Gupta Anthony Jackson

Things have perhaps become more subdued recently around the world’s economies. While Politics Editors: the Eurozone crisis rumbles on, it perhaps does Laura Curtis so more quietly; the UK has avoided a tripleLuca Lixi trip recession (although doing so isn’t exactly Matthew Richmond something to rave about); and stock markets have had a good time of 2013. But, this is no time to Web Editor: Harry Villa rest for the world’s leaders. There’s an awful lot of difficult decisions to be made - as our writers Design Editor: tell us. The fiscal austerity debate is still in full Luke Askwith swing; the choice of EU-in/EU-out is reaching fever pitch in the the UK for which Cameron Sponsorship and Marketing: may soon run out of stalling time; and, the role of Roham Kermani monetary policy is - as always - in the spotlight.

Usman Saleem Check out our website - www.neronline.co.uk - for the latest from the NER, and if you’re interested in getting involved with the journal, there’s information later in this issue.

Special thanks to: Oliver Pawle Hilary Clayton Janet Lewis

Contents Feature Spend Your way out of Debt by Jason Davis

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Where has the ECB Gone? by Alessandro Rocco

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Economics The Economics behind Charitable Giving by Raymond Sham

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Abenomics - a new package or just new packaging? by Ramsha Jamal

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Banking on the Bank by Graeme Douglas

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To frack, or not to frack? The shadowy world of Shale Gas by Ross Heard

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You put your Right-Wing in, your Right-Wing out, in, out, in, out and shake it all about by Rob Hudson

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Politics HMV, Piracy and the Industry of Music by Kev Sharp

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After the era of European collective security, are we about to experience an era of collective insecurity? by Tim Williams

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Thatcher and the Left by Holly Welsh

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Best wishes,

Forget Oil and Religous Wars, it’s Water we should be concerned about by Hannah Norris

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NER Team

Pursuing Economics in Malaysia by Wan Hong Kwan

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Thanks once again to our commmitted writers, and of course to you, our readers. We hope you enjoy the issue.

Cover Images: Terra Nova, 多摩に暇人, Medill DC, DGTresor, World Economic Forum, altogetherfool

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Spend Your Way out of Debt

By Jason Davis

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oody’s downgraded the UK’s credit rating one notch from AAA to Aa1 on the 23 of February. This can now be added to the long list of sovereign downgrades made by the major credit rating agencies since the start of the recession (including the US). This decision mainly stemmed from the combination of rapidly growing public debt and a poor growth outlook. UK Debt stood at 70.7% of GDP at 31 December 2012, which is equal to £1,111bn. The threshold level for countries entering the Eurozone is 60%.

George Osborne has pledged to use austerity measures to curb the national debt. I argue that austerity is not the answer. Growth is an automatic stabiliser. The best way to reduce debt within the UK is to spend our way into growth and then consolidate.

Who cares about the Debt?

Why does reducing national debt actually matter at all? The main reason revolves around investor confidence. If investors fear that the UK may not be able to meet their debt obligations, they will in turn demand higher interest rates on UK government bonds (gilts). This leads to the creation of a vicious cycle whereby increases in interest rates (larger interest payments) increase the national debt thus requiring further interest rates increases by investors and so on. Therefore if the government is not careful, debt above a certain threshold can rise exponentially in an explosive fashion and can risk leading countries into fiscal crises while also limiting a government’s options in terms of conducting its fiscal policy.

What really matters?

The key point to remember is that the raw debt figure is not the important statistic. More important is the ratio of debt to GDP. This tells us whether a government can afford its debt. In others words, we want to know whether national debt is rising too fast relative to the economy’s ability to repay it.

This ratio fundamentally depends on the growth rate and the real interest rate. If growth exceeds the real interest rate, then the debt to GDP ratio can decrease (even with a small budget deficit).

Image by Alan Cleaver

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My argument that we should spend our way out of debt revolves around the concept of an “automatic stabiliser”. This is a logical concept.

When a country goes into a recession, the budget deficit automatically increases. As unemployment increases, tax receipts fall and government expenditure increases to meet larger welfare demands. Conversely, in a boom period, budget deficits automatically fall. The rule of thumb is that a 1% decrease in output leads to an automatic increase in the deficit by 0.5% of GDP. Fiscal policy is an important tool and vital to governments experiencing a recession. However it must be used correctly. A cyclically adjusted deficit (CAD) is the annual deficit, adjusted to remove the effect of the “automatic stabiliser” I just described.

Over the medium-term we want our CAD to equal zero to maintain a non-increasing debt level. In order to do so and prevent the explosion of debt which would otherwise occur, a government must run surpluses in the boom and deficits in the bust periods. In fact, a government can even run a cyclically adjusted deficit in a recession as long as it runs the opposite in periods of high growth.

By running a deficit now (spending more than is received), we will certainly increase our debt stock further. However, expansionary fiscal policy can help create growth and growth automatically decreases a deficit. The time to run a surplus is when the economy returns to sustainable growth.

The problem with trying to run a surplus now is simple. A surplus will NOT reduce our debt to GDP ratio. Austerity decreases an already negative growth rate. The effect of a decrease in growth far outweighs what would be a small (if possible) budget surplus, decreasing our ability to pay our debt and pushing us into a downward spiral.

The NICE decade and Labour’s Moral Hazard NICE stands for non-inflationary consistent expansion. It relates to the period of high growth, over a decade, prior to the financial crisis. As explained above, in a period of high growth, the government must attempt to run budget surpluses to maintain a constant debt level in the long run whilst allowing for deficits in a bust. Labour was

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in power from 1997 to 2009. Of the 13 years in power, Labour only ran four budget surpluses (1998 to 2001). More importantly, in real terms, the largest surplus in this period was less than the smallest deficit. Up until 2007, before the first signs of the financial crisis, the Labour government should have done more to curb an increasing debt level. This would have allowed future governments to use expansionary fiscal policy in a downturn without a long run effect on debt.

There is however a moral hazard problem here. No party will choose to run consistent (large) budget surpluses. Government terms are too short to reap the benefits of being financially astute in good times. In others word, Labour had no incentive to fix the roof while the sun was shining. The budget should follow the business cycle. Labour certainly did follow this rule and reduce deficits from previous years. The mistake was running deficits in the early noughties.

What’s the solution?

There is a harsh reality in the solution. If we use austerity measures to decrease our debt now, growth will fall leading to lower tax receipts and larger welfare spending. The ability to repay our debt will spiral down into the ground.

However, if we continue to push and use expansionary fiscal and monetary policy along with quantitative easing, debt will obviously rise but

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so will growth. Growth leads to an automatic stabiliser. As people move into employment, government expenditure falls and tax receipts increase. The government can finally afford to reign in spending. Only then should the state attempt to run a surplus. More importantly, the state then must run a surplus, many surpluses.

200%! Japan currently has a debt stock of 225% and Italy well over 100%.

The harsh reality is that eventually taxes will increase and spending will have to be reduced. Then the debate ensues as to whether is it fair that future generations must bear the cost of the recession. It’s not fair but that is the nature of the business cycle which Gordon Brown infamously claimed his party had defeated. The same generation that pays the higher taxes will be enjoying a period of growth. When the next recession comes which it will, future generations following it will have to bear its cost. The point is, you bear the cost of a recession after the recession. Given the negative growth outlook and the fourth quarter contraction, we are by no means out of a bust.

You only need to look at the current state of government bonds to see this. Low interest rates reflect investor confidence.

Even though our credit rating was reduced a notch, our 10 year government bond yields 2.2%. This is an increase but compared to Greece (11.07%), or Kenya (13.5%), not one that should scare the government.

The US bonds stand at 1.94% and Euro Area at 1.48% at the time of writing and both have experienced downgrades.

Is this credible?

It seems like quite a simple thing to say. Let’s just spend more until we can afford not to. It sounds irresponsible at best. But do not let the wrong statistics sway your decision.

The question isn’t whether we should wait for austerity; it is whether we are able to do so.

The answer is yes. Our debt is high, but not historically high.

In the 1940s, our debt was over

The UK is not Greece. We can afford to run high deficits and still borrow long-term, just like the US. The pound is still the third most widely used reserve currency. The UK is still among the highly rated sovereigns.

UK and US debt is still widely accepted as safe. It will take a lot more debt and quite a few more downgrades for investors to start dumping the pound.

Given the UK’s ability to borrow long-term, the best way out of debt is to spend our way out.

Where has the ECB gone?

The European Central Bank and the Euro-debt Crisis

By Alessandro Rocco

The current European economic outlook is not at all reassuring.

The Eurozone economy has been in recession since the third quarter of 2011 and the latest data indicate the recession may have been deepening as of March 2013. The unemployment rate is at a record-high 12%, and year-on-year inflation is falling and is now down to 1.7%.

An indisputably key player in this sovereign debt crisis is the European Central Bank (ECB).

The ECB is the central bank for the Euro and so administers the monetary policy of the seventeen European Union nations which constitute the Eurozone.

A central bank is a public institution, usually independent of the government, which controls the monetary policy of an economy. Central banks generally have three main purposes: 1. Regulating the money supply, 2. Controlling interest rates, 3. Managing foreign exchange reserves.

In addition, central banks usually have supervisory powers

Image by Adam Baker

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over the banking sector (although this is not the case for the ECB). One of the most important roles of central banks arises during financial crises where they are supposed to act as ‘lenders-of-last-resort’.

This means lending to troubled governments and injecting liquidity into the banking sector in order to avoid a credit crunch and a collapse of the financial system.

Many modern central banks have been heavily influenced by Monetarism and Milton Friedman’s economic thought. Monetarism views the money supply as the most important aspect of an economy, and that economic growth is achieved through a stable quantity of money circulating in the economy. Furthermore, an excessive expansion of the money supply creates inflationary pressures.

Consequently, Monetarists argue central banks should mainly focus on price stability by keeping inflation low and stable.

More than any other central bank, the ECB was designed on the Monetarist concept. Its design was also strikingly similar to the Bundesbank, the German central bank. It was established in 1998 to govern the common monetary policy for the countries in the newly-born Eurozone. The ECB mandate, in line with the Monetarist concept, clearly states that its primary aim is price stability.

All other economic objectives are of secondary importance. This is in contrast to other major central banks such as the US Federal Reserve where economic goals such as full employment and economic growth are of equal importance to price stability. The mandate of the ECB also mentions the principles of “free competition”, “efficient allocation of resources” and “open market economy”. Some have argued that this laissez-faire, free market view of the ECB’s pre-crisis policies could have contributed to direct the Eurozone to where it is now.

The target set by the ECB is to keep nominal inflation rates below but close to 2%. A major problem of this ‘one-size-fits-all’ inflation target is that inflation varies considerably across Eurozone countries and so aiming for that target may be beneficial for some countries but detrimental to others.

As mentioned above, the ECB has price stability as its primary goal and therefore, in theory, should not be too worried about the dismal output and

Economics

employment figures described in the opening paragraph. This is a naïve view though: it is known that poor performances in output and high unemployment feed into falling inflation. If faithful to its mandate, the ECB should at least be concerned that inflation may soon fall well below its target. However, it so far seems to still be very passive.

Nevertheless, the ECB will probably argue it is doing all it can. In March, interest rates were decreased to a record-low 0.75%. This, however, is still higher than other major central banks.

Moreover, given the Eurozone economy in 2013 is predicted to shrink by almost as much as last year, many experts including the International Monetary Fund managing director Christine Lagarde and economist Nouriel Roubini (who predicted the 2008 crash) sustain the rates should be cut even further. In a CNN interview, Roubini said: “They have to cut the policy rate, they have to stimulate the economy, they have to try to weaken the value of the euro,” On this last point he added: “The euro should be 10, 20 or even 30% weaker to restore the competitiveness of the [Eurozone] periphery,” Roubini points out that the rising value of the euro has been the major cause of loss of competitiveness for European exporters, particularly in Southern Europe. Since July last year, the euro rallied from around 1.21 in US dollars to nearly $1.37 in February. Now it has fallen back to $1.30, partly due to the uncertain outcome of the Italian elections.

The President of the ECB, Mario Draghi, when questioned why rates are not lower, responds that the Eurozone is currently facing issues of monetary policy transmission. He argues that low rates have failed to lower borrowing rates for businesses in peripheral countries. The rates in these countries are still much higher than those in Germany or France, and Draghi fears lower rates might worsen these gaps inducing depositors to take their funds elsewhere, reducing the supply of lending money

and raising borrowing costs even further.

Monetary policy transmission problems, however, are a clear indication the ECB should start implementing more “unconventional” policies.

Maybe the ECB should learn from other major central banks.

For example, the Bank of England and the Federal Reserve are both implementing extensive asset-purchase programmes.

The Federal Reserve is buying assets to increase the expansionary influence of monetary policy and increase the flow of credit to housing markets which has remained low since the subprime crisis.

The Bank of England is also buying assets, mainly to improve the flow of credit to troubled businesses. The ECB could begin undertaking similar farreaching purchases programmes by buying asset-backed securities from peripheral states making monetary policy more stimulating in those countries.

It needs to be said though, that the ECB is in a much more difficult situation than other major central banks as it does not operate in a complete fiscal union environment, making its potential role as lender-of-lastresort much more complicated.

Furthermore, the idea of asset-purchases programmes are not viewed favourably by some policymakers such as Jens Weidmann, President of the Bundesbank, who consider them too much like a bailout of peripheral countries by Germany.

A typical argument against the ECB buying government bonds and thus acting as a true lender-of-last-resort, explains Lorenzo Bini Smaghi, a former ECB Executive Board member, is that it decreases the incentive of distressed governments to “adopt more stringent measures” in order to sort out their fiscal troubles. Smaghi adds that “the key issue is how you deal with moral hazard”.

As an example he highlights how once the ECB began purchasing Italian bonds in 2011, the government reduced its emphasis on structural and fiscal reforms.

Having said what the ECB has not done, we also need to give credit to the ECB for what it has done. In order to increase liquidity in the system, the ECB enacted a Long Term Refinancing Operation (LTRO) in December 2011, making available €530 (£450.5) billion in cheap (1% annual rate), threeyear loans to 523 European banks. Another round of the LTRO program was initiated in February 2012 when the ECB supplied €489 (£415.65) billion to 800 banks. The idea behind these refinancing programs was to act as a ‘lender-of-first-resort’ to distressed banks, which could then in turn buy debt of their troubled governments. These interventions helped to reduce uncertainty when both Italian and Spanish government bond yields had risen to record-high levels and were spiralling out of control, scaring investors away from banks and resulting in a lack of liquidity in the system.

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The LTRO temporarily worked to push down Italian and Spanish sovereign bond yields whose spreads over German Bunds tightened considerably as soon as banks began purchasing their own governments’ debt.

In response to the European sovereign-debt crisis, it can be argued that the ECB has implemented some temporary measures which have kept the situation under control and have made the current condition less worse than it could have been.

Nevertheless, when we realise how important a player the ECB is in this Euro debt crisis, it becomes obvious that not enough has been done. And this is even more evident when the ECB’s actions are compared to the ones taken by the Bank of England or the Federal Reserve.

Whether the ECB’s passiveness is due to a too narrow view in its mandate or due to internal political pressures (especially from Germany), the situation is critical and the time has come to make some radical decisions. If the ECB does not rapidly become an active central bank interested in promoting serious, effective and far-reaching monetary policy, Eurozone countries might soon realise that the costs of Euro membership might in fact outweigh the benefits.

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The Economics Behind Charitable Giving

By Raymond Sham

The market for charitable giving worldwide is enormous. In the UK alone for 2010/11, the UK Giving Survey reported that approximately 58 per cent of adults donated to charity, in total giving an estimated £11 billion. But why do so many people give to charity? When looking closer at the economic theory behind charitable giving, behavioural economics can help us understand the underlying motives. Perhaps

more importantly is the question of how we can usefully apply this theory. In recent times of austerity, charities are having to work harder to identify better methods of encouraging people to contribute. A better theoretical understanding of why people give to charity might mean institutions could improve the design of their collection methods.

Under standard economic

theory, we assume our behaviour is driven by an interest in maximising our own utility. Thus one would predict people should not give money to charity unless it pays off. In the context of charitable giving, this behaviour is highlighted by extrinsic motivators which can explain why people donate.

These are factors that encourage charitable giving because of the material return or benefit associated with donating; for

Economics 11

example, thank-you gifts.

Charities in theory could use material incentives to reduce the relative price of giving or introduce rewards for giving.

However, this cannot solely describe the behavioural patterns for contributions. People may be intrinsically motivated. So for example, individuals might donate to charity because they gain utility from giving. This could be in the form of altruism, whereby people are genuinely unselfish or are concerned about the wellbeing of others. Intrinsic motivation can also be characterised by ‘warm-glow’ behaviour.

This term describes the fact that people may also care about the act of giving rather than just the outcome of a contribution. But behavioural economic studies have uncovered further different motives for charitable giving. Image motivation refers to people’s tendency to be motivated by the perception of others. In other words, one may be more likely to contribute a higher donation in order to ‘look good’.

An experiment by economists Ariely, Bracha, and Meier highlights the evidence of extrinsic motivators and image concerns. In their laboratory experiment called ‘Click for Charity,’ subjects could donate to a particular charity by clicking two keys on a computer keyboard. The more effort they put in (by clicking more) the higher the monetary amount would be donated. Participants were also randomly assigned to different treatments within the experiment in order to isolate the extrinsic and image motivators.

The visibility of the task was controlled by randomly assigning subjects to keep their donation choices public or in private. In addition, in order to test the effects of extrinsic motivators, participants were randomly assigned to receive, or not receive, in addition to the donation made on their behalf, personal monetary incentives. The greater the amount donated, the higher the personal monetary reward received. Finally, participants were randomly assigned to either a ‘good cause’ (Red Cross), or a ‘bad cause’ (National Rifle Association - NRA).

Given these different treatments, Ariely et al. predict that there will be no image benefit if subjects click in private; however, in public they get the additional benefit of a good opinion, or the penalty of a bad opinion. They anticipate that given that subjects click for the Red Cross, adding visibility increases effort. Likewise, given that subjects click for the NRA, adding visibility decreases effort.

Furthermore, if subjects get an additional personal monetary incentive, it is not clear whether they click for the charity or for the monetary return; are subjects truly pro-social, or just greedy?

Again the authors hypothesise that when subjects click for the Red Cross, adding extrinsic incentives is less effective under visibility. Similarly if subjects click for the NRA, adding extrinsic incentives is less effective under visibility.

Looking at the results, without any private monetary incentives, subjects put significantly more effort in public than in the private condition.

Figure 1 reveals, in the private condition, subjects pressed only 517 pairs. While in the public condition, they pressed, on average, 900 pairs for the Red Cross. In line with the predictions, subjects exerted more effort for a good cause in public, because they were able to signal their effort to others.

However, looking at figure 2 one can see that when donating towards the National Rifle Association, it is clear that in public, subjects were less willing to donate to a ‘bad’ charity. This again supports the theory of image motivation where subjects did not want make a poor impression.

Again looking at figure 1, this time with private monetary incentives, there is a decline in effort in public, from 900 to 814 key pairs on average, for a ‘good’ charity (Red Cross). In the private condition, there is a significant increase in effort, from 517 to 737 key pairs for the Red Cross. This result supports the second prediction, which suggests that private monetary incentives are less effective in public than in private. Again participants may be concerned about their image.

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Participants tried less hard to donate in a public setting when there were personal incentives as they may not have wanted to appear greedy. Furthermore, this result also implies that under a private setting, monetary incentives crowd-out the image motivation to behave prosocially.

How might fundraisers use this information? Institutions could try to appeal to this image motivation. If people do really care about the way they are perceived, then charities could

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contributions is social information. A number of studies have shown that giving people information about previous donations affects their own giving. Economists Martin and Randal conducted a natural field experiment to test the level of donations in an art gallery in New Zealand. In contrast to a laboratory experiment, participants did not know they were part of the experiment, in theory allowing for more natural behaviour to be observed.

Donations were deposited in a transparent box located in the

Fig 1: Red Cross + Visibility increases effort

the initial content of the box.

They anticipated that the manipulation of the contents would influence the visitors’ beliefs concerning both the value and frequency of previous donations. Four different conditions were tested. On separate occasions the box would either contain large denomination bills, small denomination bills, a large amount of coins, or kept empty.

So for instance, if you were to see the empty box, you might perceive that donations are infrequent.

The content of the box was collected and recorded at the end of each day. In addition, to make the experiment fair, the non-empty treatments were kept at a value of $100 at the beginning of each day. Also, each scenario was tested for an equal time period.

Given the results, Martin and Randal first found that non-empty treatments generated higher average donations per visitor. This implies there is evidence that by providing previous information, the amount people are inclined to donate can be influenced. As the figure below shows, the most effective treatment was the small bill denomination with an average of 6. 3¢

Fig 2: NRA + Visibility decreases effort

But, when looking at the frequency of donations, they found that the highest propensity to donate was for the lowest denomination of 50¢ (3.37%). This also supports the theory that by seeing lots of coins, this implies lots of previous donations, and so visitors were inclined to donate frequently too.

attempt to make their received donations more visible or public.

For example, charities now often use social media to let donors inform others that they have given to a cause.

Another factor that might affect the level of charitable

entrance lobby with the addition of a video-camera placed on top of the box to count the number of donations.

Importantly, in order to test how social information might affect one’s own giving, the experimenters manipulated

By manipulating the denominations of money, this could also influence perceptions of what people may believe to be the average or normal amount that one should donate based on what is in the box.

From the experiment it can be argued that by providing previous information, this can positively affect the behaviour of donors. Obviously it would not be straightforward, but if charities were able to succeed in effectively using social information to their advantage then these institutions could potentially encourage not just higher donation amounts, but also more frequent donations. However, it is important to realise that the theories have only been proven for particular experiments. One could argue that the two aforementioned experiments are only representative of a small sample. In order to test whether the results are truly common, more experiments should be repeated on a wider scale in different locations.

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Abenomics a new package or just new packaging?

By Ramsha Jamal The latest economics catchphrase to enter the mainstream, the successor to the “credit crunch”, and the “dead cat bounce”, has arrived.

“Abenomics”, a portmanteau of ‘Abe’ and ‘economics’, refers to the package of policies devised by Japan’s prime minister Shinzo Abe aimed at putting an end to Japan’s economic afflictions once and for all. Hailed by supporters as the answer to Japan’s woes, dismissed by critics as mundane at the very least and dangerous at the very worst, could this set of policies be the saviour for a country that’s been plagued by deflation for more than two decades?

After a brief stint as Prime Minister in 2006, Shinzo Abe resigned from the role, before being reelected at the end of last year. As the seventh Prime Minister to lead Japan in just six years, Abe inherited a quagmire of sumo-sized proportions.

Apart from the recent global recession, from which Japan has not been immune, the Japanese economy has long grappled with three major challenges: deflation, burgeoning public debt and an ageing population. In 2011, China leapfrogged Japan to become the world’s second largest economy behind the USA, a position Japan had held for more than forty years.

With an average growth rate of 5% in the early 1980s, Japan was a super economy on the rise, with many expecting it to eventually overtake the US as the largest economy in the world. Japan benefitted from a highly educated and productive workforce, high savings rates and high levels of investment, especially in capital. The country

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improved its industries substantially through high levels of research and development – to this day Japan remains renowned for its innovation and creativity, and is often highlighted as being one of the world’s frontrunners in technological advances. In 1989, after years of risky lending to homebuyers and real estate being over-valued, Japan’s housing bubble collapsed. In 1992, Japan entered a recession and a period of sustained deflation, the start of what economists would later dub “the lost decade”.

To the average consumer it might not be clear why deflation is a bad thing. After all, which consumer would complain about cheaper goods?

For an economy, however, deflation (a sustained fall in the general price level) is disastrous. Firstly, deflation has a lot to do with expectations: when people expect prices to fall tomorrow, they are less likely to spend today and also less likely to borrow. Furthermore, people are less willing to invest in something that they know will be worth less in the future. This has the potential to effectively bring the economy to a standstill.

Secondly, falling prices increases the real burden of debts, discouraging debtors from spending.

Although creditors gain from deflation, they are unlikely to increase their spending by as much as the creditors have decreased theirs, and so the net effect is depressed aggregate spending, which in turn leads to further deflation. Finally, on the supply side, when prices fall, wages very often have to fall with them. As there’s downward nominal wage rigidity, or in other words, it’s hard to cut nominal wages, the only way this can be achieved is if there’s also largescale unemployment, which causes workers to be desperate enough to accept a pay cut. Deflation and unemployment therefore go hand in hand.

During his electoral campaign, Prime Minister Abe promised to make the economy his number one priority. His approach to growth can be summarized best in his own words, “The DPJ [the previous government in Japan] began with the premise of equal distribution. If you don’t enlarge the economic pie first, all you get is equality in poverty”. This quote should have quelled any doubts as to whether economic growth was firmly number one on Abe’s agenda. The central bank of Japan has raised its growth target from 1% per annum to 2%, and Abenomics takes a

interest rates failing to stimulate borrowing and spending, it is hoped that the low interest rates will weaken the Japanese currency. Whilst a falling yen might not be good news for Japanese holiday goers abroad, it will make Japan’s export sector more competitive. According to figures from the World Bank, exports only accounted for 15% of Japan’s GDP in 2011.

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three-pronged approach to effecting this economic growth: quantitative easing, a massive fiscal stimulus, and extensive structural reform.

Although in theory the central bank of Japan gained independence in 1997, it is still inextricably linked to the governmental ministry of finance, thus doubts are occasionally raised as to its ability to exercise complete autonomy in practice. Abe’s quantitative easing plan will involve increasing the money supply. The Bank of Japan has announced its intention to double the monetary base; it will achieve this through the purchase of more open-ended assets and more long-term bonds. Quantitative easing is nothing new for Japan; the Bank of Japan unsuccessfully used the unconventional monetary policy and kept interest rates close to zero for many years in their battle against domestic deflation in the early 2000s. Despite the possibility of decreased

There are two main ways in which this phase of QE is different from any that Japanese policy makers have instigated in the past. First, this is not merely quantitative easing, but what economist Willem Buiter has given the name ‘qualitative easing’ i.e. the Japanese central bank is not merely adding more assets to its balance sheet, but is changing the risk composition of its balance sheet by adding riskier assets - this will inevitably make the Japanese economy more vulnerable.

Secondly, whereas with previous rounds of QE the government has specified the amount by which the money supply will be increased, the BoJ has this time set a target growth rate of 2% and will not stop printing money until that target is reached. This type of open-ended policy is unprecedented.

The fiscal stimulus package, aimed at increasing public investment will create temporary jobs, and increased investment in infrastructure should create the groundwork for future growth.

The third prong, structural reform, includes overhauling regulations and strengthening economic partnerships with other countries.

Abenomics throws up two questions: 1) Will it work? 2) What happens if it doesn’t? The precarious nature of Japan’s economy means that there is no guarantee of success, but some would answer the first question by saying that it’s already begun to. Markets responded positively to the Bank of Japan’s unveiling of its new monetary policy package - Japan’s Nikkei 225 stock index climbed by as much as 4.7% topping 13,225 - its highest level for five years. The policy is, in a way, a self-fulfilling prophecy - if the government can convince consumers and investors that the package will work and instill enough confidence in them to make them open their wallets, then it will work. As to what will happen if Abenomics doesn’t work, the result could be catastrophic. Japan’s public debt is already more than twice its GDP. The greatest danger of Abenomics is that if the gamble does not pay and QE fails to halt deflation, the added debt could cause an economy on the brink of collapse to crumble.

Abenomics runs the risk of creating another asset bubble like the one that burst more than 20 years ago and that the country still hasn’t recovered from.

Albert Einstein once said that the definition of insanity is to do the same thing again and again but expect different results- Prime Minister Shinzo and his administration can take comfort in the fact that no one can accuse them of being insane by that definition. Whether they are labeled as such for doing something radically different remains to be seen.

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further reducing consumers’ spending power.

Public sector net borrowing, 1993/1994 to 2011/12 ONS creative monetary policy, provide households and businesses with access to affordable capital, thus spurring a private sector led economic recovery.

Image by James Stringer

Banking on the Bank

By Graeme Douglas

The Chancellor sticks to his guns and pledges his faith in the Bank On March 20th, the Chancellor of the Exchequer, as widely expected, unveiled a budget plan that pledged to persevere with his widely criticised deficit reduction programme.

This continuation in economic strategy comes despite a plethora of negative economic and business news bulletins, together with the burgeoning political pressure exerted on the Chancellor by both the opposing Labour party and incompliant Tory back-benchers.

Since the Government first

embarked on its audacious programme of austerity in June 2010, the British economy has stagnated and repeatedly flirted on the precipice of a recession such that national output has risen by a mere 1 per cent in almost 3 years of office (ONS).

Of equal significance, whilst the Government has successfully cut the deficit by a quarter since it came to office, the official deficit figures have consistently underperformed due in part to the slower than anticipated growth of the economy. This is manifest in recent figures released by the OBR, which state that the size of the deficit will remain frustratingly stable in the region of £120bn, for 2011-12, 2012-13 and 2013-14 (see graph below). And yet, even after the humiliating loss of Britain’s

cherished triple A credit rating by the Moody’s ratings agency, the Chancellor has chosen to uphold his deficit reduction programme and opt for more of the same.

So what is this magical economic strategy that will after almost 3 years finally produce results?

Well, the Chancellor’s strategy is constructed so as to utilise the range of economic tools available during this unappetising economic backdrop. To this end, the strategy of fiscal consolidation is combined with growth-orientated supply-side reforms, and crucially, monetary expansion. Theoretically at least, this strategy could allow the Government to get the budget deficit under control, whilst, through the use of

But is the Chancellor right to put so much emphasis on monetary policy? And if so, what measures, if any, could have a meaningful impact on the economy in this low-interest rate environment?

Starting with the first issue, the appropriateness of the current economic strategy can only be ascertained if the underlying cause of the economic stagnation seen in the UK is discovered. But with such vastly differing opinions expressed by economists and politicians alike, the solution to this economic puzzle remains highly contentious.

Those that associate the current economic fragility with weak underlying demand argue that, instead of relying almost exclusively on monetary policy, carefully designed expansionary fiscal programmes should be implemented to help to kick-start the economic recovery. For example, various institutions including the National Institute of Economic and Social Research have unreservedly voiced their desire for additional public sector investment in infrastructure.

Standard economic analysis, based on the assumption that the economy is described by a Keynesian aggregate supply curve, dictates that this fiscal stimulus would, ceteris paribus, result in a boost to aggregate demand, and consequently, total output, provided that the economy is not at full capacity. Problematically however, it is possible that this fiscal expansion will impose additional inflationary pressures on the British economy,

Crucially, it is the source of the funding needed for the fiscal stimulus that has led to the greatest controversy. Drawing comparison to the steps taken by the Government in the recent budget where future infrastructure projects were funded primarily by departmental spending cuts, one potential option available to the Chancellor is an extension of this strategy. However, this would inevitably involve further difficult decisions such as the removal of the voluntary ring-fences around the NHS and foreign aid.

An alternative funding option available to the Chancellor, as supported by the Business Secretary Vince Cable, involves the borrowing of money from international markets. However, this more flexible strategy would undoubtedly cause the Chancellor to extend his deficit reduction targets over a greater length of time, inviting additional political pressure on the coalition-Government.

Conversely, the opposing school of thought, which benefits from the broad support of the Chancellor, associates the recent economic stagnation with structural weaknesses that have developed over the past decade. Supporters of this theory point to the bloated public sector, the substantial accumulation of debt over recent years, the current account deficit that has approached a 25-year high despite the recent sell-off of Sterling, and a vast productivity decline that may symbolise a fall in Britain’s productive capacity.

Further, supporters argue that in order to position the British economy such that can it can compete in this cut-throat world, instead of narrow-minded fiscal programmes, an array of supply side policies should be introduced to increase the underlying competitiveness of the economy. Meanwhile, monetary activism should be introduced to stimulate the economy by providing businesses with access to affordable capital, thus driving an investment and export-led recovery.

Moreover, those who, like the Chancellor, are concerned with the market reaction associated with any dampening-down of the austerity programme argue that, in order to maintain the faith of the financial markets, the Government must be seen to be taking a firm stance against

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the budget deficit. Thus, beyond manipulating spending cuts and tax hikes so as to minimise the impact on aggregate demand, the Government is left solely with monetary policy in which to stimulate the economy.

But, even if we assume that the Chancellor is right and this latter argument is correct, with the official intervention rate already set at a record low, what further monetary measures can be used to kick-start the economy?

Standard economic analysis dictates that, in a lowinterest rate environment such as that currently seen in Britain, expansionary monetary policy is rendered ineffective as the economy is said to suffer from a liquidity trap. This occurs when the demand for money is perfectly elastic, implying that a change in the money supply has no meaningful impact on the spending and saving decisions of economic agents.

Moreover, in recognition of this constraint, prominent central banks around the globe have responded to the economic downturn by adopting further unconventional monetary measures, such as Quantitative Easing (QE). In Britain specifically, the Bank of England has purchased £375bn of assets since the onset of the financial crisis. This effective printing of money, which expands the Bank’s balance sheet, should through a variety of channels improve the liquidity of the economy.

However, the effectiveness of this policy is debated fiercely amongst economists. Several key points for consideration relate to the inflationary consequences of QE, its counterproductive impact on the speed of deleveraging in the UK, and the potential for QE to encounter diminishing returns.

So, besides the possible expansion of the assetpurchasing programme, what other options are available to the Bank?

One potential option involves the introduction of negative nominal interest rates, as suggested recently by the Deputy Governor of the Bank, Paul Tucker. However, whilst symbolising his ambition to introduce additional measures to lift the economy, this suggestion was promptly dismissed by colleagues due to the risks associated with its introduction, such as its impact on the incentives of economic agents.

An alternative option, as popularised by the incoming Governor Mark Carney, is an alteration of the BoE’s mandate. This approach could involve the introduction of a nominal GDP target, thus spelling the end for inflationary targeting as we know it, or more realistically, the introduction of a dual mandate that links monetary policy to some measure of the real economy. Sceptics however, such as the incumbent Governor, Sir Mervyn King, argue that it is inappropriate for the Bank to tie its hands and remove a degree of flexibility from its policy options. After all, it is this flexibility that in recent years has allowed the Bank to continue with its stimulative monetary policies despite the presence of consistently above-target inflation figures.

Furthermore, whilst a timely review of the current monetary framework is undoubtedly welcome, it is this author’s opinion that the Chancellor should not rely almost exclusively on the central bank to drive an economic recovery in the near term.

The desire to rebalance the economy and improve the competitiveness of British goods and services through the use of supply-side reforms is essential to Britain’s long-term success, but the immediate short-term pain is simply unacceptable.

With Britain’s key trading partners also engaging in a similar process of deleveraging, which has resulted in widespread unemployment and reduced consumer spending power, the British economy cannot reasonably expect to export their way out of stagnation in the near-term. Moreover, with British real wages declining consistently, corporate Britain, particularly SMEs, lack the necessary confidence to invest for the future.

The onus is therefore on the Government to adopt a more flexible fiscal stance in order to locate additional funding to invest in infrastructure projects. In times of economic pain, no areas of the Government budget should be entirely exempt from spending cuts. The Chancellor should recognise this and remove the voluntary ringfences around the NHS and foreign aid. Whilst this would undoubtedly attract further political onslaught, if the projects were suitably directed in a timely fashion, the corresponding green shoots of recovery may arrive opportunely for the Government’s re-election campaign.

To frack, or not to frack? The shadowy world of shale gas

By Ross Heard

‘Fracking.’ It is a word that most of us have heard by now. For those that haven’t, fracking is the common name given to hydraulic fracturing: the process by which natural gas is extracted from deposits of shale using high-pressure fluids (see Fig. 1).

Though rudimentary fracking has been tried and tested since the late 40’s, it was the technology employed this century that has finally made the process economically viable (i.e. horizontal slickwater fracturing). So, if it’s an idea that’s over 60 years old, why is it so important now?

The answer lies in its viability: since shale gas has become profitable, and new sources of fossil fuels are continually sought after, oil and gas companies in the United States are stepping up shale operations like never before. In fact, the growth in its use over the last decade year on year, has been exponential, with production increasing from 11 billion cubic meters (bcm) in 2000, to 138 bcm by 2010. Shale gas now accounts for 23% of natural gas production in the U.S., and the EIA expects that figure to double by 2035.

So, there should be little doubt about the growing significance of shale gas, but the reason that so many of us have heard of fracking is not simply because of its growing use, but because of the heated debate currently brewing worldwide, over the benefits and weaknesses of extraction. What makes that debate particularly difficult to settle is that not only are the pros and cons seemingly wellbalanced, but many experts from different fields have widely differing opinions about the facts concerning the outcomes of this technique. The most prominent pro has already been mentioned: there is money in it, and lots of it. By one estimate the global worth of the shale market was over

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universally agreed is that further research into emission rates is needed.

Image by Bosc d’Anjou £26 billion in 2011, and within the next twenty years it could very well be worth over £2 trillion.

The economic benefits are tantalising to say the least. So amidst the likely dollar signs flashing in fuel moguls’ eyes, what are the major cons?

Unsurprisingly, most of them are environmental.

Much (although not entirely) like any other fossil fuel, natural gas has its emissions, but perhaps unique to shale are the effects that result from the extraction process itself.

A briefing paper presented to parliament this year has made it clear that the environmental implications of shale gas are more extensive than equivalent conventional sources. Perhaps the foremost environmental issue under scrutiny is groundwater contamination. Though the liquid compound used in fracking is mostly water, the sheer amount required to release the gas means that millions of litres of chemicals are pumped into the soil. Though the compound is mostly recovered after the fracking process, some incurred loss is inevitable. The investigative site ProPublica reported that in 2011 alone that they had discovered over 1000 reports of water contamination near drilling sites in the U.S., and with the number of those sites increasing, it’s only natural that the reports would in turn increase.

Clearly, the contamination issues are non-

? negligible; but that’s not all we should be concerned with. One issue that might surprise a more uninformed reader is seismic activity.

Fracking uses so much water in the extraction process that it’s believed to cause slippages in fault lines, and subsequently, earthquakes; but this is one of those aspects of shale gas that are widely disputed, particularly in terms of severity.

Whilst environmentalists see it as another disaster inducing effect that should promote the restriction or ban of the practice, globally, only one case of an earthquake as a result of fracking has been confirmed. (By chance, and despite disproportionate adoption levels of fracking in the States, the confirmed case was in Lancashire.)

So let’s assume for the sake of examination that the seismic effects are negligible, and the contamination effects perhaps less so. Surely these negatives are outweighed by the lower carbon emissions of natural gas? Well, the jury is still out on that one. Some sources have claimed that the lower CO2 emissions compared to coal are countered by releases of methane in the production process, whilst other sources rebuke this assertion and claim that such leakages are not nearly so high; but what is clear is that these “fugitive” emissions do result in a greater greenhouse gas release than conventional gas; the problem, is measuring just how much greater the release is. One thing

Having focused on the negatives, there are some positives we should account for. In the same way that the negatives have been almost entirely environmental, the positives are mostly economic. First of all, having already spoken on the direct monetary benefits, shale operations have begun laying foundations for long term employment opportunities in the U.S. as they invest in infrastructure, and though it might seem insignificant at first glance, shale gas is cheap: cheaper than wind, solar, nuclear, and coal too. It is by far not the cleanest form of energy, but consultancies have estimated that with no real increase (and a possible decrease) in comparable carbon emissions, shale gas would still increase income to the average American household by $2000 a year; that is a positive sum game, right? The Oxford based environmental economist, Dieter Helm, might agree. By his reckoning we live in a world where people will advocate one form of energy, but still choose the cheaper source; in this sense, he admits that despite our desperate need to cut carbon emissions, gas is the only real contender to dethrone King Coal.

Some environmentalists have historically been known to attribute expensive energy to its conservation, but as economists, we know that that argument does not always hold true. Cheap gas would mean that resources are freed

for production in other areas, and perhaps even toward environmental protection (wishful thinking, but a possibility nonetheless). The fact is that shale gas is almost certainly cleaner than coal, and just because it is cheaper does not mean we are all suddenly going to be burning more of it; and even if we did, can we really afford to overlook the economic potential? Steve Sexton, an economist writing for the Freakonomics website, reminds us to consider the environmental Kuznets curve, and that individuals place different values on the trade-off between preserving the environment for future generations, and maintaining an economy that is sustainable for the one next in line. Despite the heated debate, shale gas may be the only appropriate compromise to bridge the competing interests.

Having weighed the case, Sexton asks “where are the throngs to welcome it?”

We’ve focused so far on the situation in the United States, so let’s be selfish a moment and talk about ourselves. Shale gas isn’t big in the UK like it is in the U.S., but in the foreseeable future that fact could change. A moratorium was recently lifted on test drilling, and so for us, the steaming debate surrounding shale is quite timely. Whilst the rest of Europe is slow on the uptake, with France and The Netherlands banning shale drilling altogether, Britain might be seen to be the country lifting its nose to the air, sniffing at the waft of both American success, and Europe’s sustained fears.

There are no shortages of shale

deposits on our side of the pond, but as The Economist noted earlier this year, it will take several years to effectively evaluate if the deposits exist in commercial quantities. However, this fact hasn’t prevented early birds from jumping on the bandwagon. Caudrilla, is the one fracking company currently licensed to operate in the UK, but since the aforementioned seismic activity near Blackpool rang alarm bells in government as recently as March, a third of their operations are again to go under review. Right now, when it comes to shale, uncertainty seems to surround almost everything.

The worldwide debate on shale gas is in a state of flux, and those of us tuned into it need hardly wait for the next article either shaming or supporting its rise. This writer has read much from journalists and so-called experts over the last few years, but the vox populi, the voice of the people on this issue, seems to be something that few are really paying attention to. Either way, the announcement of the budget last month has “brushed aside” concerns according to The Guardian, with Chancellor George Osborne openly supporting Britain’s prospects with shale gas. We have the opportunity now to evaluate fracking with a critical eye before the floodgates are open; we might well be pleasantly surprised, and find ourselves fracking frantically to catch up with the market; however, if we do not use this time to gauge the various costs, we might well miss what the shadowy world of shale gas really has in store.

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You put your Right-

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Wing in, your RightWing out, in, out, in, out and shake it all about

By Rob Hudson

Image by Guillaume Paumier

Dancing the Hokey-Cokey with European politics is the latest topic dividing the country (not so evenly) between the Europhile ‘ins’, the Eurosceptic ‘outs’ and the Euro-clueless ‘middle’. The Euro-clueless middle may in fact be larger than anyone is willing to admit. It is in truth difficult to ascertain the exact pros and cons of leaving the EU, weigh them up against each other and then come to a conclusive and politically neutral decision. Coming to a decision in such a way as this is, of course, unrealistic.

Seldom has policy been made in recent years without some influence of the political party in power. However, the decision on Britain’s place in the EU

should come down to economic reasoning, not Frontbench rambling. The reality is that the benefits of leaving or staying are difficult to quantify. It is not immediately clear how much business would locate elsewhere if Britain decided to jump ship, nor is it clear how much the economy would profit from the increased autonomy.

the relationship that Britain has with the EU regarding immigration has recently come under scrutiny. Many Britons have come to associate the EU with a flood of immigration from Eastern Europe. This in itself has caused a certain level of social animosity and has subsequently sparked the rise in popularity of parties such as UKIP.

For illustrative purposes let us consider a historical comparison.

Singapore and Malaysia were similarly unified as a single economic area, albeit for only a short space of time. The relationship between the two Asian countries was put under pressure from a disparity in racial policy as, in a similar way,

While racial tension between Malaysia and Singapore undoubtedly played a role in their breakup, the disparity of economic and political beliefs assuredly exacerbated the situation. The state leaders of Singapore and the Federal Government of Malaysia frequently clashed over political,

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economic and social policies, thus resulting in the terse relationship. Social unrest erupted in the form of riots in Singapore over the unpopular policies being imposed, in much the same way that the 2011 riots in England drolly dubbed the ‘English Spring’ were similarly spurred on by social animosity towards unpopular government policy.

On the 9th August 1965 Singapore was kicked out of Malaysia, becoming the only state in history to gain independence against its own will. The common market agreement that the two had entered was revoked and Singapore was left to fend for itself. Singapore’s Prime Minister at the time, Lee Kuan Yew, had to gear his country to a pro-growth stance if they were to have any chance of staying afloat. His economic approach gained much international acclaim and he is largely regarded as being instrumental in Singapore’s rise to power as an Asian Tiger.

If Britain were to go-it-alone and leave the EU it would mean a serious reshuffling of economic policy. Gearing itself towards lower taxation rates to attract FDI, lower unilateral trade barriers, reduced welfare payouts and a more competitive pound. The independent currency allows Britain to maintain competitiveness, while increased labour market flexibility would further the country’s competitive edge.

Whilst Singapore doesn’t maintain a minimum wage, believing it would hinder their

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competitiveness, Britain could focus on boosting labour market flexibility by reducing some of its labour force regulations such as the working-time directive. A departure from the EU would permit Britain to remove a number of these red tape restrictions that limit the amount of hours people can work, allowing for increased production whilst simultaneously attracting international business. Britain would, of course, still be required to meet all safety and product regulations in order to export to the EU but the strict labour laws that are currently bellowed from Brussels could, instead, be whispered from Westminster.

The fact that Britain does not have the Euro has given it the ability to independently set its interest rates, however it has also meant that in recent times it has been somewhat sidelined as the Euro-zone crisis envelopes all countries that carry the single currency. The EU of today is markedly different to the one Britain joined 40 years ago and if worries over the Euro continue to dominate EU agendas then Britain will be still further overlooked. The recent Cyprian calamity further highlight the central focus of the EU on the Euro and the question remains as to whether Britain should remain on the peripheries of the decision making, or whether it should detach itself altogether; ensuring it can set its own policy; tailored to its own needs.

If Britain left the EU but remained a member of the European Economic Area (EEA) it could still benefit from free-

trade agreements, though it is questionable whether other member states would permit such an agreement. However there are a number of immediate returns to an exit, such as the savings from the Common Agricultural Policy, which the treasury estimates to be around £8bn per year in overpayments.

London could also prove itself as the world’s financial hub and as an offshore haven for international deposits, currency trades and loan dealing in much the same way that Singapore thrives under the same guise.

Current tax levels combined with EU regulations have resulted in the exit of several hedge fund managers to offshore havens such as Switzerland, which lies outside the EU’s remit. The FT estimates that the exodus of these hedge funds has so far cost the treasury £500m, these moves were partly down to the EU’s blanket policies on alternate investments but were also spurred on by the raising of the top band of tax to 50% on earnings over £150,000.

Whilst Singapore was kickedout of its joint economics area, it is highly unlikely that Britain would ever be kicked out of the EU. Greece, Italy, Spain and a plethora of others would have to be ignominiously ejected before it was Britain’s turn to face the boot. However, Britain has the opportunity to voluntarily remove itself from the EU and, although many commentators cry of the perils of an exit, it should at the very least entertain this notion.

By Kev Sharp Shopping in most city centres, a trip to HMV is always worthwhile; to have a walk round, browse huge collections of music and consider consuming them online, either legally or illegally, but always at a cheaper price. The truth is that the music industry is booming, but the HMV business model has become incredibly outdated, meaning business as usual for HMV had to come to an end.

So what destroyed HMV and how does this affect the music industry?

A common threat to the industry is said to piracy. The RIAA (Recording Industry Association of America) reports that the annual losses from internet piracy are ‘credibly’ estimated at $12.5 billion and 70000 jobs to the American economy and in early 2011, they attempted to

sue the formerly popular peerto-peer site Limewire for $72 trillion, a figure exceeding world GDP. These inflated figures have been dubbed as “Copyright Math” by comic author Rob Reid, who, using similar arithmetic, concludes that an iPod Classic has the potential to hold $8 billion of pirated music – clearly a ridiculous concept.

True, recorded music industry revenue has declined about 60% in the last decade but can we really blame piracy for most of this this?

Obviously there is not a oneto-one substitution of bought music to pirated music; a large proportion of people wouldn’t even consider purchasing the same amount of music they would download for free, so total harm from piracy cannot be based on every song pirated.

Accurately analysing the impact

of piracy on music sales is hard and due to illegal nature of downloads, data is hard to find.

Luckily, in 2007, what economist call a ‘natural experiment’ was carried out by alternative rock band Radiohead when they independently released ‘In Rainbows’, letting fans pay what they wanted for it, including nothing. While not exactly mirroring market conditions, the ‘pay-what-you-want’ selling strategy is similar, where via the internet fans were allowed to choose from paying nothing for it (piracy) or a greater amount. The interesting result is that even though more people downloaded it for free than paid, Radiohead still managed to reap in sales of $3 million, a rather startling value. Dedicated fans still choose to pay a significant amount for an album that was being given away for free, an argument that rather dampens

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the evils of piracy.

Online MP3 files in the face of piracy are an example of a non-rival good; a string of 0’s and 1’s which are easily copied, allowing multiple users to own them at little cost. As with most nonrival goods, attaching rival goods to the product makes it much more valuable to suppliers, such as the physical CD product, album booklets and ever increasingly pre-order perks such as access to a pre-sale ticket window for the inevitable album promotion tour and signed merchandise.

Radiohead’s In Rainbows was later sold as an $80 box set containing limited content and created sales of $100000. By increasing the ‘rivalrous’ nature of albums and dramatically increasing the quality of the product, labels can create extra demand for albums, and warrant a higher mark-up – surely a good way to combat piracy, and give consumers a better deal. A large amount of music is pirated every year but the loss of industry revenue due to piracy is – against the opinion of RIAA experts – a very small fraction of the loss. Here’s why: The internet has radically revolutionised the way music is consumed. It gives consumers a much greater choice of what and how they consume.

Before the internet, labels killed off the singles market; for the same cost they could ship whole albums rather than singles and charge 3 to 4 times as much. With digital downloads, consumers can choose to download only a few songs of an album they like without purchasing the whole album as a cheaper alternative, thus resurrecting the singles market, and decreasing the record companies’ revenues. In 2012, UK sales of singles hit an alltime high, while album sales declined by 11.2%.

And revenue from singles is almost twice as large as album revenues, even though they sell for a tenth of the price! Inevitably, label revenues fell.

A noticeable change in the industry is the rising popularity of music streaming services, such as Spotify, which has 10 million subscribers (2.5 million of whom pay for a ‘premium’ version of the service). Consumers can conveniently and infinitely stream a huge range of music for a small fraction of the price than if they were to buy all this music, thus significantly reducing the revenue base. Though the late Steve Jobs was dubious of the concept (”consumers want to own their music, not rent it”) Google and Apple are now working

on their own streaming services, and it seems as if streaming services will play a large part in how the music industry will operate. Aside from their value for money and convenience, these services also appeal to the ‘trend’ nature of music – many listeners will choose to listen to the top charting music for a few weeks or months then move on and dispose of the music. What music labels can do is embrace these services and find ways to gain revenue streams from forming valuable contracts with them.

Concerts are still massively profitable. A music performance is considerably different to recorded music, in the way that this product is very rivalrous. The experience from a live performance is one that cannot be experienced elsewhere, even on poorly recorded iPhone clips uploaded to YouTube. This is primarily the way musicians make money and labels may want to exploit this.

The Rolling Stones’ 2005-2007 ‘Bigger Bang tour’ made $558 million – the second most highest grossing tour of all time behind U2’s ‘360o Tour’.

An increasingly important function of albums is to promote these highly grossing shows, and whether these albums are bought legally or illegally, they act as a powerful advert. In an interview with the New York Times, Mick Jagger rightly points out that throughout the history of the recording business there was a “very small window — say, 15 years where performers made loads and loads of money out of records”. It seems this window is truly shut and with a massive revenue base from ticket sales, mechanise and even sponsorships, labels may want to exploit concerts as more profitable ventures.

Shortly after HMV filed for administration, major record labels agreed on a rescue plan to cut the prices of CDs to help preserve the high street brand. This shows suppliers still have incentives to keep HMV on the market to continue to sell their physical products which represent high margins.

HMV will have to downsize and reduce its number of outlets, but a respected retail outlet like HMV is still needed to capture the remaining demand for physical music products, even if that demand is increasingly falling. As the revenue from album sales continues to decline, there seems to be a shift in the importance of album quality, music singles, online streaming services and concert revenues.

Record companies who are willing to innovate can reap the rewards.

After the era of European collective security, are we about to experience an era of collective insecurity?

By Tim Williams

For most of recorded history Europe has been one of the most volatile regions in the world. The second half of the 20th century was however surprisingly peaceful. One of the most important reasons for this has been the collective security provided by NATO. It was established to provide collective security for Western Europe against the USSR, which in response, established the Warsaw Pact. Despite intervention in the Korean War, NATO nations were never engaged in direct warfare with the Soviet Union. In 1949 Lord Ismay, the first NATO Secretary General, stated that NATO’s goal was “to keep the Russians out, the Americans in, and the Germans down.” However the collapse of Communism meant that the USSR was no longer considered a threat and NATO had to reassess its role.

It intervened in the Balkan wars of the 1990s including the Bosnian War and Kosovo War, successfully ending each.

The Balkan interventions and more recently the War on Terror have given it purpose, yet as NATO’s military role in Afghanistan draws to a close, the organisation will again have to reassess its role in the World.

Could this alliance be coming to the end of its useful life? Will the long era of European collective

security be replaced by an era of collective insecurity?

One of the most important conditions of NATO membership is that each member should spend at least 2% of their GDP on defence. This was adhered to quite consistently during the cold war; only one NATO member spent less than 2% of their GDP on defence 1989.

The peace in Europe since the fall of Communism has however undermined commitment to this and domestic pressures have encouraged the majority of European States to reduce their defence spending.

Figures from Stockholm International Peace Research Institute (SIPRI) show that NATO’s combined military spending accounts for about 70% of global defence spending.

However the behemoth that is the US defence budget accounted for 40% of global defence spending. This equates to $711 billion in 2011 alone.

Consequently the rest of NATO only accounts for about 30% of global defence expenditure. Of the 28 NATO members only 5 now spend the suggested percentage of their GDP (2%) on defence. These are the US, UK, France, Albania and Greece.

European NATO members spend a combined 1.7% of

their GDP on defence and the UK and France are the main European contributors. The global recession and subsequent European financial crisis have made calls to cut defence spending even stronger. The UK for example has had several Defence Spending Reviews, is cutting the number of regular army personnel to 82,000 and will lack a naval carrier force for at least eight years. NATO is still a very important organisation but it is clearly too dependent on the USA. This has focused the attention of analysts and now even senior officials are questioning NATO future. In 2011 NATO’s Secretary General Anders Fogh Rasmussen said that “if European defence spending cuts continue, Europe’s ability to be a stabilizing force even in its neighbourhood will rapidly disappear”. Robert Gates, former US Defence Secretary, also stated that Europe faced the prospect of “collective military irrelevance”. What has been left is a continent which is unable to properly defend itself. Some may cite the intervention in Libya as a successful example of European NATO nations acting without the USA and to an extent it was. However the initial overwhelming show of force which crippled the Libya air

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Politics 29

and Kosovo. It was only four years ago that Russia invaded Georgia in an attempt to prevent it joining NATO. Russia also seems to be in the ascendency and has recently overtaken the UK and France to take third spot in defence expenditure.

According to SIPRI Russia will spend $71.9 billion on defence in 2012. The return of Putin to the Kremlin is likely to further strain Russian-European relations.

It is clear that the power that Russia can wield over Europe has not diminished. Their ability to control the natural gas supply has forced nations involved to carefully consider their relationship with Russia.

Combine this with the proximity of Libya to Europe and it shows that there are serious threats close to Europe as well as further afield.

Image from www.freestock.ca

defence, thereby allowing a no fly zone to be enforced was only made possible with American help. These disparaging comments should now galvanise opinions within Europe. The era of collective security in Europe is now at an end, replaced by an era of collective insecurity.

If we compare this to the situation in Asia the roles seem to be reversed. China is the most obvious example of the rise of Asia. In GDP it is now second only to the USA and this has allowed it to massively increase military spending. For the past decade it has increased military spending by about 12% each year according to official figures.

Some analysts have however suggested that these figures are

far too low as SIPRI usually adds about 50% to the official defence figure given by China.

The increase in defence spending has not been limited to China.

Defence investment has expanded hugely in recent years, especially in South-East Asia.

Analysts at IHS Jane’s say that the combined increase in SouthEast Asian defence spending was 13.5% last year, up to $24.5 billion. With expected increases, this figure is projected to rise to $40 billion by 2016. India also recently announced a 17% rise in spending this year; bring it up to $44 billion.

With the wind down of NATO operations in Afghanistan well under way and the new

American “pivot” towards Asia, what is the future of NATO? The USA quickly minimised its role in Libya in 2011 as it seems to be losing the stomach for intervention at the moment.

Combine this with the USA’s pivot towards Asia it is starting to look like they are abandoning Europe. The USA seems to believe that the next threats to world security will no longer come from Europe but from the middle-east and Asia. They have accordingly started forging stronger alliances in Asia.

However just because the USA’s focus has shifted it does not mean that the threats to Europe have disappeared. It was less than two decades ago that Europe saw ethnic cleansing on a terrible scale in Bosnia

There also exist many sub-state threats to peace. Afghanistan and other failed states such as Somalia provide the training grounds and safe havens desired by international terrorist organisations. NATO’s role in Operation Ocean Shield to combat Somali piracy has been quite effective in the last year but a reduction in defence investment will reduce NATOs ability to do this in the future.

Threats may develop abroad but Europe may be unable to intervene. Will this void be filled from Asia as it assumes a hegemonic role?

A recent report by the Brookings institute suggested that the best way of maintaining a viable military capability in Europe is through greater co-

ordination, but it still seems to still be lacking. Former Belgian Foreign Minister, Mark Eyskens, was quoted over two decades ago saying that the EU is that it is “an economic giant, a political dwarf and a military worm”; but can this problem be resolved or is it as true today as it was then? Problems of weapon compatibility have not been resolved even though NATO has existed for over 60 years. The new British Queen Elizabeth class aircraft carriers will not be able to fly French or American planes because they will lack the catapult and arrestor gears necessary. This should be a concern as the UK and France are the two greatest contributors to NATO other than the US and have had military alliances for over a century. It would therefore be expected that compatibility would be a priority. This makes the UK/French decision to share use of the aircraft carriers seem irrelevant. There is now a greater need than ever to link military assets to get the most efficient use. The recently announced possible merger of BAE and EADS could help make compatibility more possible and drive down costs, which could give European nations greater capability but without the political costs of complete military union.

Europe needs to maintain its independent military capability because of close threats and those further afield. The intervention in Libya showed the importance of having a strong military capability, but

it also highlighted that even without USA assistance, Europe continues to struggle. The recent intervention in Somalia has also been quite effective but with shrinking budgets the ability to repeat this comes under question. The move to integrate defence capabilities runs counter to a realist conception of IR which is still the dominant paradigm. It therefore seems unlikely to be achieved as States still want to maintain sovereignty over their defence.

But this could be the very undoing of collective European security at a time of reduced military budgets. The desire for states to maintain their own individual security is likely to come at the expense of collective security. However with each individual state lacking the resources to maintain a fully capable military, they may be resigning themselves and the rest of Europe to insecurity. With the US now focusing on Asia it seems to be a case of Europe uniting together or standing alone and vulnerable. The EU will have to become the new military alliance in Europe if it hopes to offset the declining NATO union. Now could be the best time to achieve this as a greater economic and political union in Europe seems ever more likely under the spectre of the Eurozone crisis. Whilst an EU military seems far off, increasing military union would be a logical and necessary next step. The military worm will have to grow if it hopes to compete with bear on its doorstep and the dragon in the east.

30 Nottingham Economic Review

Dear NER readers, Thank you for all your support over the last year.

Thatcher and the Left

Politics 31

By Holly Welsh

Sadly, for some of us on the team, this is our last issue. This means there’s spaces in the new team next year, so if you’d like to get involved with editing the magazine, here’s your chance!

If you have an questions, or if you’re interested in Economics editing, Politics editing, Design (including illustrations) or Marketing and Sponsorship, drop us an email at team@neronline.co.uk.

We’ll send out more concrete details on recruitment post-exams.

Best wishes, NER Team

Image by cseeman Never before has the passing of a frail, 87 year old lady borne witness to such open celebration and criticism of her life and accomplishments; Baroness Thatcher is, in this as in many other aspects, truly like no other. Her recent death has sparked wide debate in the media, and rekindled the divisive nature of her policies and the extent to which they saved or destroyed Great Britain. Whilst there is an enormous amount to discuss about the leader herself, and whether the changes she made were necessary, justified or cruel, I do not aim to tackle that here. What I found more troubling was the response from the opposition, from Labour MPs and supporters, past and present, and from leftleaning individuals across the country.

Parties on the streets of Brixton and Glasgow made the news, celebrating the death of the woman who made many people’s lives miserable during her time in office and by her legacy that remains today.

The anti-Thatcher party-goers included a number of young people who, like myself, were too young to have lived through her policies and all were criticised (quite rightly) for being disrespectful. The question remains, however, of how opponents are expected to respond in this situation; union leaders and politicians were frequently interviewed on national broadcasts and had to tread the careful balance between offering condolences to her family

and praising her successes, and maintaining their stance against all that she stood for. Indeed, how can one ‘respect’ that a woman did well to achieve her dream, if fundamentally opposed to that vision and how she went about attaining it?

The death of Thatcher has thus put the left in a pickle; strong criticism of the Iron Lady is condemned in her wake, particularly following distasteful statements against her on social media around the world. Yet, even for Thatcher’s fiercest opponents, celebration should not be the answer.

In a time of economic depression and welfare cuts, British society is facing tough times, with a government promoting divisive policies that offer benefit ‘scroungers’ as scapegoats and avoid addressing more fundamental problems and inequalities with the financial system. Now is not the time for the left to be pointing fingers about disrespecting Conservative leaders of the past, they must take the reawakening of Thatcher’s legacy as an opportunity to unite, organise and prepare more effective and fair policies. Labour has been advised by former leader Tony Blair this week against moving too far to the left and becoming a party for the whingers, but it really needs to decide what it does stand for and begin a consistent and coherent campaign. It’s not the time for celebrating what has passed; it’s the time for planning a better future.

32 Nottingham Economic Review

Forget Oil and Religious Wars, It’s Water We Should Be Concerned About.

By Hannah Norris

Politics 33

By 2025, 48 countries will be severely short of water and half the people on earth will not have access to fresh water supplies.

Water is more vital to our life on earth than anything else, yet due to our current unsustainable practices, it is running out.

The average American lifestyle is fuelled by 2,000 gallons of water daily. If this is allowed to continue the geopolitics of ownership rights of freshwater sources will undoubtedly lead to military conflict and the breakdown of order.

activities or items. But our diet also has a massive impact on the hydrological cycle, in fact, we use about 70% of the water we have on agriculture. 338 gallons of water are used for one serving of beef (3 ounces) and the average American eats 7 servings a week. In China it takes up to 1,000 tonnes of water to produce 1 tonne of wheat.

Looking at the facts it seems quite appalling that there is not more being done to repair the damage to the hydrological cycle, especially considering the effects.

Why are we running out of water?

What does a scarcity of freshwater mean?

Due to global warming and rising temperatures, more precipitation is falling as rain rather than snow. This means there is more chance of flooding and surface run-off rather than water being held as snow and slowly melting into the river system. Thus, water is contaminated as surface runoff by silt and pesticides and is therefore undrinkable. Secondly, the fact that more rain is falling instead of snow means that melting glaciers are also not being replenished so the rivers to do not have a constant supply of water.

If freshwater becomes more and more scarce, as scientists are predicting, developing countries would be disproportionately affected. Many of them already suffer from water-shortages and they lack the infrastructure and money to import water or food on a large scale from other countries. We only need to look at the recent famine in the Horn of Africa to see that. On top of this, considering that 1.8 million children die each year due to diarrhoea and 443 million school days are lost as a result of waterrelated diseases, then it becomes clear just how much potential of the future generations is lost when there is little freshwater available and how development could be severely rolled back if water challenges are not dealt with. Given how much water is needed to produce food and that both water and food are needed for survival, it seems quite probable that a country lacking in either or both would become

A second and more drastic reason is us - the human race.

All over the world countries are striving for more development and better standards of living.

Flushing the toilet uses 7 litres of water and a litre of bottled water can take up to 5 litres of water to produce. These examples are simple household-related Image by Darwin70

exceptionally unstable and likely slide into conflict, leading to thousands of refugees and knock-on regional instability.

This panic would potentially be even more acute when several countries share the same dwindling water supply. There is a severe lack of universal legislation concerning countries that share water supplies which means a country like Turkey is within its rights to dam one of its rivers, despite the fact that this is to the detriment of Iraqi water supplies, further downstream.

There are several areas of the world where a potential ‘water war’, due to this very situation, is likely in the future. The Nile, Volta, Niger and Zambezi river basins are all areas serving more than one country that are affected by high population growth and water shortages. A pre-emptive water war could break out if one country decided to invade another to ensure its future supply of water was protected, before the situation became critical. But it could also occur during a state of famine or drought if any ‘upstream’ country made moves to dam a river or divert a water supply in any way. Indeed it could be a very potent blackmailing tool.

An extremely volatile situation is the Near East where some say there is a strong possibility of war between Israel, Jordan and Syria, not over religion or history, but over water. In the 1967 war Israel took the Golan Heights from Syria and these now account for one third of Israel’s water supply.

Syria did launch an attack to

Politics 35

34 Nottingham Economic Review

retake the Heights, but was unsuccessful. Often the role of water is overlooked in the area, as people are too quick to look at the roles of oil, religion and WMDs, but Jordan has said that the only reason it would go to war with Israel in the future would be over water. Indeed an Israeli water commissioner has said that: “I can promise that if there is not sufficient water in our region, if there is a scarcity of water, if people remain thirsty for water, then we shall doubtless face war.” This idea is supported by the fact that two thirds of Arab countries depend on sources outside of their borders for their water supply.

Given the current turmoil in Syria, it seems unlikely that any Syrian regime in the near future would be organised and stable enough to launch an attack on the Golan Heights, especially given its humiliating defeat in

the past. But who knows when the Assad regime will fall, or if it will. The problem of a lack of water will not disappear in this region regardless of what politics is occurring in Syria.

Considering the politics of the region and that Israel is a nuclear weapons state, the prospect of a new war between Israel, Syria and Jordan is more than sobering. With Iran, an ally of Syria, making developments with its nuclear programme, Israel is getting more and more fidgety and more and more outspoken.

Thus, it seems clear that the UN needs to prepare legislation concerning shared ownership of water supplies and confidence building measures must be taken between countries that share the same supply. As for those countries that do not share, but may be forced to invade another in order to support

their poor water stocks, there must be an immediate global movement to reduce the amount of water used in the developed world. Scientists highlight that while global warming must be stopped in its tracks in order to ameliorate this situation, there is currently also enough water in the world for everyone, but just 12% of the world’s population use 85% of the world’s water.

While even an immediate and effective global movement to cut water consumption will not be quick enough to save some areas, it is still imperative.

Hopefully, with this movement, coupled with global diplomacy and confidence building measures, water wars can be averted and water supplies can be shared.

Pursuing Economics in Malaysia

Image by zwaj

By Wan Hong Kwan, Chief of Editorial Board, Economics Student Society Malaysia Campus Malaysia’s economy is positioned strongly in South East Asia with promising economic growth. Though the country had its fair share of hits and misses in the economy in the past decades, the current economic policies in place should propel the country to a high income nation by the end of this decade.

not, as much as the country touts its economic policies and plans, the economics undergraduate course is not widely available in Malaysian universities (public and private) as compared to business management and finance courses and even fewer undergraduates hold a degree in economics in Malaysia.

To be pursuing economics in the context of this country is most certainly exciting. Believe it or

The University of Nottingham Malaysia Campus is one of few institutions that offers an

Economics degree and so the pioneer students of this course are fortunate to be pursuing their course of interest. Being part of this group certainly has its benefits. The new Economics Student Society club has also provided an avenue for the students to bond over coursework and also to cater to the economics students’ needs and interest. Internship opportunities, visits to the Malaysian National Bank and

inviting local economists for lectures which are each tailored to the students’ interests. Given the small size of the School of Economics, the students make full use of this platform to chart our respective interests in economics by organising activities relevant to the course.

students from the Malaysia Campus to the United Kingdom campus will already have friends around the campus. The experience of an exchange adds flavors and excitement to the course, gaining the best of both worlds of studying environments.

More interestingly, the structure of the course in the Malaysia Campus allows for a student exchange with the home university in Nottingham.

Each year, there is a great exchange of cultures between both campuses. For the students in Malaysia who receive the exchange students from United Kingdom, it has been a bond and friendship worth making. Next year, exchange

As the School of Economics in the Malaysia Campus grows from strength to strength from year to year, the experience of pursuing economics will always be enriching. In the meantime, students should make the best out of being the pioneer group, while keeping in touch with the development of the Malaysian economy and the larger area of South East Asia.

36 Nottingham Economic Review

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