Issue 5 - December 2009

by-students ISSUE 5

for-students NOTTINGHAM ECONOMIC REVIEW

DECEMBER 2009

HIGHLIGHTS:

Gambling on a Carbon Price Tag China in Africa

‘‘We are here for business, not aid’’

Brain Drain

The movement of skilled workers from poor countries to rich ones is nothing to fear Contact Us:

nottingham.econ.review@googlemail.com

Editorial Dear NER readers, We return for our 5th issue of the Nottingham Economic Review, the by-student for-student economics and politics magazine. This year we will be bringing you all the latest economic and political news and updates from all over the world. We hope you enjoy our most recent instalment of NER. In such hard times we have been very fortunate to gain the sponsorship of GlaxoSmithKline, and would like to extend our deepest gratitude to them for supporting NER. In addition the School of Economics and Econsoc have continued to support us with their generous donations.

So what economic delights can we offer you? We’re bringing you a huge variety of discussions, ranging from issues that dominate the global political agenda to issues that provide food for thought. There’s something here for everyone. This year we are very excited to introduce a brand new segment of NER: our fun-facts page, just some light-hearted economic facts to fill your head. Here we challenge America’s status as the Heavyweight Champion!

Moving on to our featured articles…we examine the environmental Carbon Trading scheme, review China’s FDI into Africa and analyse proposed financial regulations to tame the beast of the financial markets. Finally we see if the movement of skilled workers from poor countries to rich ones is nothing to worry about.

Without further ado, we wish you a very happy Christmas, and hope that you enjoy reading NER as much as we have enjoyed making it. We trust that the magazine will give you a much needed break from revision!

Enjoy The NER Editorial Team

James Rose Lily Steele Biliana Sourlekova Fanni Toth Sam Gardiner

by-students

for-students NOTTINGHAM ECONOMIC REVIEW

ISSUE 5

DECEMBER 2009

POLICTICS

ECONOMICS

Contents Pricing Carbon Emissions – Panacea or Hot Air?

4

Chinafrica: the Dawn of Prosperity or Neo-Colonialism?

7

Regulations, regulations, regulations!!!

10

The Heavyweight Championship

12

Interview with Andrew Witty: Samaritan Strategy of a Global CEO

14

Economic Growth and Well-Being: the Limits to Pessimism

18

Brain Drain

20

Obama’s Illness

23

The Treaty of Lisbon and the First President of Europe

25

Brazil’s Time is at Hand

28

INTERNSHIPS

30

Credits Editors: James Rose, Sam Gardiner, Lily Steele & Biliana Sourlekova.

Politics Editor: Fanni Toth Design Editor: Beatrice Omisakin Sponsorship Team: Christopher Gould, Ellen Wasden & Nima Ghodrati.

Design Team: Mustafa Tekman & Antonio Zhivkov.

Big Thanks To: Divya Deepthi, Lishia Erza, Sam Gardiner, Ben Mason, Richard Pass, Ian Saxon, Vishal Sharma, Christopher Stafford, Jose Costa & Robert Snashall Maximilian Stallkamp.

Special Thanks To: Michael A. Clemens, David Mckenzie, Foreign Policy Magazine & Tim Lloyd.

Contact Us:

nottingham.econ.review@googlemail.com

4 Nottingham Economic Review

Pricing Carbon Emissons - Panacea or Hot Air?

By Maximilian Stallkamp

Climate change, caused by the emission of greenhouse gases is regarded by many as one of the most pressing issues of our time.

Reducing the carbon emissions associated with our modern lifestyles is a tremendous challenge to engineers and policy-makers alike. With large parts of what has previously been called the developing world now urbanizing and industrializing rapidly, finding ways to “de-carbonize” economic growth is all the more important. Luckily, a vast array of new and improved technologies, materials and processes promises to help us reduce the size of our carbon-footprints. Among these are offshore wind farms, largescale solar-thermal plants in the Sahara desert, bio-fuels and electric cars, zero-energy houses and “smart” grids. But which of these technologies should we choose to cover our energy needs in a way that is both sustainable and affordable? Even if your answer is “all of the above” – priorities will need to be set and investment decisions will need to be made.

A key insight on the issue of decarbonization is that some emission reductions can be achieved at lower costs than others. For example, investing in better thermal insulation for your house might be cheaper than achieving the same emission reduction by putting solar panels on your roof.

A sensible strategy for reducing carbon emissions will take advantage of this, by harvesting the low-hanging fruit first and

implement the more costly measures only after all the cheaper opportunities have been exploited.

However, these different “abatement costs” can be hard to pin down, as they depend on specific circumstances and local conditions: Solar panels might be the better investment in a sunnier climate. Abatement costs also change over time: Innovations in photovoltaic technology could drive down the cost of solar panels, while shortage of silcon could cause skyrocketing prices.

A government policy that calls for uniform reductions by all polluters, or that mandates specific technologies to be used (e.g. solar panels on every roof) risks making the already challenging process of reducing emissions unnecessarily expensive. Information about low-cost abatement opportunities might just be too widely dispersed and changing too quickly for a centralized decision-making process to be efficient.

An obvious alternative is the “invisible hand” of the market. A market-based approach imposes a price on carbon which serves as an incentive for market participants to reduce their emissions.

Since it does not dictate specific technologies, methods or even amounts by which each individual or organization has to reduce their emissions, people are free to find the cheapest way available to them. Two systems of pricing carbon emissions have come to dominate the public debate: A cap-and-trade system and a carbon tax. Under a cap-and-trade system (also known as emissions trading scheme), the government limits or “caps” the overall level of emissions. It then allocates or sells emission permits to polluters. With a cap that is smaller than the initial level of emissions and which declines over time, some polluters will find themselves without enough permits to cover the amount of emissions they expect to produce. A firm in this position can either reduce its

Nottingham Economic Review 5

own emissions or try to buy a permit from somebody else. If another firm has lower abatement costs, it will be mutually beneficial for the second firm to sell its permit to the first .This way a market for permits emerges, in which the price of a permit is determined by supply and demand for the right to pollute.

The profit motive will ensure the least costly outcome: A firm with abatement costs higher than the price of emission permits will try to buy additional permits in order to avoid having to make costly reductions. A firm that finds it can cut emissions for less than the price of a permit can make money by selling off its unused permits.

A carbon tax is a more direct way of putting a “price tag” on carbon emissions. It can simply be imposed on carbon based fuels at the point of extraction/importation, but also at any other point in the supply chain. The higher the carbon content of a fuel (this determines the carbon emissions released during combustion) the more it is going to be affected by the tax. Thus, carbon-intensive energy sources become more expensive relative to less carbonintensive ones. Consequently, we can expect to see a shift away from carbon-intensive energy sources as people adjust their behavior to the new set of incentives.

On paper, the two approaches seem to be fairly similar: Both result in a price on carbon emissions, which induces market participants to reduce these emissions. There are however,

‘‘ Lack of competitive pr essure and heavy regulation means that power suppliers may not adopt the cheapest way of reducing emissions. ‘‘ important differences encompassing both economic and political aspects. Under an emissions trading scheme, the supply of permits is fixed while demand can fluctuate considerably with changing economic conditions.

The result is a volatile carbon price, which might discourage investments in low-carbon technologies. A carbon tax is more predictable, although it may change over time as well. Some designs for emissions trading schemes recognize this problem and include a “safety valve” mechanism that intervenes in the market to guarantee a floor and ceiling for the carbon price.

A cap-and-trade system allows more political favouritism because valuable permits can be handed out for free to politically important constituencies, instead of being auctioned off. While the initial allocation of permits should not affect the outcome (remember the Coase Theorem?), this tends to reward incumbents with high emissions (permits are often allocated based on current emissions) and punishes those that have already reduced their emissions, as well as newcomers to the industry. Furthermore, auctioning off permits or imposing carbon tax provides the government with additional revenue that could be used to reduce other taxes.

Both cap-and-trade schemes and carbon taxes have been implemented in various locations. The EU has its Emissions Trading Scheme; the US Congress is debating proposals for its own system. Carbon taxes have been imposed in Finland, Sweden and the Canadian province of British Columbia; France’s Nicolas Sarkozy has expressed his interest in the concept. Yet none of these jurisdictions rely on carbon-pricing tools alone to reduce emissions.

Many of them have efficiency standards for home appliances and cars, subsidies for renewable energies, building standards, and some even plan on banning incandescent light bulbs.

In other words, they use exactly the kind of command-and-control measures market-based approaches were supposed to make redundant! If carbon-pricing really is the silver bullet it is usually portrayed as, this is hard to explain. Supplementary policies would be unnecessary, because the emission reduction target can be attained via carbon-pricing.

They would be expensive because they would deviate from the least-cost solution determined by the market. In the case of a cap-and–trade system, they would be completely ineffective because overall emissions are determined by the cap, which implies that each additional ton of carbon dioxide avoided in one place would be emitted by some other polluter who buys the unused permit. A variety of explanations seems possible: Maybe politicians don’t really understand how an emission trading

6 Nottingham Economic Review

scheme works. Maybe they insist on promoting specific technologies as a form of industrial policy or because they are influenced by lobby groups representing particular industries. One might even suspect that environmentalists just like telling people what to do. Nevertheless, we must also consider the possibility that the approach of pricing carbon, despite its theoretical beauty, might by itself be insufficient in achieving dramatic reductions in carbon emissions in the real world.

Why might that be?

Carbon-pricing schemes do not always cover the entire economy. The EU’s ETS, for example, covers less than half of the EU’s carbon emissions as it is applied mainly to big, industrial polluters. Thus, supplementary policies might be adopted to deal with those sectors not covered by the carbon-pricing scheme.

However, many of these supplementary policies actually apply to the power sector, e.g., renewable energy mandates and subsidies. Since the power sector is at the heart of most carbon-pricing schemes, additional policies here must have some other justification. In many countries, the power sector is far from being a competitive market. Electricity producers usually enjoy some market power, and prices are often regulated. Regulators can be reluctant to permit price increases. Under a cap-and-trade system that gives some permits away for free, regulatory approval for price increases would allow the recipients of these permits to reap windfall profits. This risks provoking a public backlash by

consumers facing rising electricity bills. But preventing electricity prices from rising means eliminating the incentive to reduce power consumption. Moreover, lack of competitive pressure and heavy regulation means that power suppliers may not adopt the cheapest way of reducing emissions. Consider the case of rate-of-return investment, where regulators set prices in such a way that the producers earn a fixed rate of return on their investments. Under this regulatory regime, producers’ profits increase with the amount of investment undertaken. It thus promotes the most capital-intensive solutions, rather than the most cost-effective. Therefore, mandating the use of specific technologies can potentially reduce the costs of emission reductions.

Even in a relatively open and competitive electricity market such as Britain’s, supplementary policies might be necessary. For political reasons, carbon prices in most places are still too low and rising too slowly to induce a shift to cleaner power sources right away. This is problematic due the long lifespan of power plants (up to 40 years): today’s investment decisions will affect emissions for decades to come. For the UK, this issue is particularly pressing, as it is predicted to replace one third of its ageing generating capacity over the next decade. In the absence of viable carbon-sequestration solutions, we will need to end our reliance on coal if ambitious reduction targets – 80% by 2050 for the UK – are to be met.

Advocates of supplementary policies argue that these policies can make the transition smoother

and thus less costly than waiting until the carbon price reaches a critical level, at which coal plants will be shut down and leave the country scrambling for alternatives.Others make the more general point that price incentives do not always trigger reactions: There are plenty of unexploited opportunities to reduce emissions that pay for themselves, even without a carbon-price. As Dr. Hummel, a former Congressional Science Fellow, puts it: “If market failures have caused us to leave massive cost-effective energy savings sitting on the table for the past 30 years, why should we expect a price on carbon to suddenly restructure our entire energy economy?” Reading an introductory economics textbook, one might get the impression that carbon-pricing schemes provide a simple answer to a tough question. All we really have to do is get prices right, and the market will sort out everything else for us. Yet we need to keep in mind that all the neat graphs and mathematical models represent a simplified model of reality.

In the real world, carbon-pricing schemes can still be a useful tool to fight climate change, but they are no panaceas.

Nottingham Economic Review 7

Chinafrica: The Dawn of Prospersity or NeoColanialism?

By Richard Pass

China’s involvement in Africa has been visible for well over a decade, however, in the last four fiscal years, total trade between Africa and China has increased by 400% from $28 billion in 2005 to $108 billion in 2009, a startling increase which is providing new trade for Africa’s struggling economies. Such figures come at a time when China’s Premier, Wen Jiabao, has announced a new $10 billion low interest loan package to African states, adding to the $26 billion China has already invested in the continent.

It has long been known, that Africa needs FDI and a dramatic increase in trade to pull itself out of poverty. Looking at the numbers alone, it seems China is bringing this change about, however, many are now seeing China’s involvement, in particular its FDI in Africa, as a new wave of colonialism, where the long term interests of African’s come second to the needs of more developed countries and the governmental elite in those troubled and im-

poverished states with whom China is investing in.

There can be no doubt that many African states such as Angola are set to benefit from Chinese investment in an immediate way never seen before. Last year, China and the Democratic Republic of the Congo signed a $9 billion deal, the biggest China has ever done in Africa. The agreement is based on an increasingly common ‘infrastructure for minerals’ arrangement whereby the Chinese have promised to build 2,400 miles of road, 2,000 miles of railway, 32 hospitals, 145 health centers and two universities. In return, China gets 10 Million tonnes of copper and 400 000 tonnes of cobalt, which has a market value of $70 billion, the majority of which goes to China.

Considering Congo’s infrastructure is effectively non existent following years of civil war and a lack of funding, it is hoped the new roads and railways will spark the DRC’s economic recov-

ery. Deals like this are occurring with increasing pace across the continent in countries such as Guinea, Angola and Nigeria. The latest Chinese investment will provide potentially $23 billion to the Congo’s economy, whilst also providing the infrastructure outlined above. China wins and the DRC wins. Many African states are hoping that the development of their natural resource endowments will enable their countries to experience a change in fortune similar to that seen in Botswana, where a joint collaboration with the state and the famous Cecil John Rhodes’ De Beers mining corporation enabled the country to capitalize on its diamonds allowing Botswana to become one of the continents wealthiest nations in terms of GDP per capita, at $7544 which is higher than South Africa’s. Natural resources are Africa’s competitive advantage and the success of Botswana shows resources are not necessarily a curse; it just depends on whether ones government is actually competent and without the plague of corruption like Botswana’s, something that cannot be said for the vast majority of Africa’s states.

An interesting development over the last couple of years is the fact that Chinese enterprises like Sinopec and The China National Petroleum Company have increasingly been given contracts to develop oil fields over more established players in the energy sector like the French oil com-

8 Nottingham Economic Review

pany Total, in the case of controlling Angola’s oil fields. In 2004, Total was in the process of renewing its license on a large oil-production block, Angola refused, handing it instead to Sinopec. The reason for this can be explained by a number of factors: In the run up to Sinopec being awarded the contact in Angola, IMF officials were castigating Angola for corrupt oil dealings, China on the other hand gave the government $2 billion in credit to repair railway tracks bombed in the country’s long civil war and to construct new office buildings in the capital. The Chinese government therefore effectively courted the Angolans, putting its state run enterprise, like Sinopec, in a more favorable position compared to Total. Other tactics used by the Chinese entail giving prestige enhancing infrastructure such as stadiums in the case of Mali and Djibouti or even a parliament in the case of Mozambique. African states therefore have a vested interest in giving such contracts to the Chinese at the expense of western firms who do not provide such lavish ‘gifts’. Another important factor is that China goes to Africa with nothing else but business in mind and hence it loans and investment come with no strings attached, unlike those offered by NGO’s (World Bank & IMF etc.) and governments from Europe or America which often stipulate political and social reform as a prerequisite for receiving the loans. Many African states also dislike the paternalistic attitude of western powers and subsequently appreciate the tone of the Chinese which is best repre-

sented by their Prime Minister Wen Jiabao’s comment this year; ‘we are here for business, not aid’.

‘‘ They argue that China is returning Zambia to its colonial status as a provider of unprocessed and thus low value added resources, nothing more.”

Despite the immediate short term benefit that China’s involvement in Africa brings, there is a steadily growing dislike of the Chinese amongst many ordinary African’s, especially in Zambia where China has invested heavily in copper mines. Indeed, in the face of significant opposition, Zambia’s government under President Banda has recently signed a $3.5 billion with China for the use of the mines in the Northwestern and Copperbelt regions of Zambia. Critics suggest that the agreements Zambia’s government have signed with China equate to nothing but short term gains which many doubt are even possible. Instead, they argue that China is returning Zambia to its colonial status as a provider of unprocessed and thus low value added resources, nothing more.

Former Presidential candidate Michael Sata is a vocal critic of the Chinese and points to the poor negotiation of the current contracts with the Chinese which he feels have short sold Zambia in desperation or self interest on the part of politicians. In mines such as the Chambishi Copper Mine in North Western Zambia, wages have fallen under Chinese

ownership whilst working conditions have worsened to an extent where workers fear for their lives.

Such a fear is not misplaced given the death of 49 Zambian workers in 2005 when the miners were blown up in an explosives depot at the Chambishi mine due to lax safety measures. Interestingly, all the Chinese workers managed to escape from the depot unharmed. Last year, five miners at the same mine were shot dead in a riot over working conditions.

This certainly isn’t the development that Zambians envisaged and the Chinese and Zambian governments had promised.

The flaws in Zambia’s relationship with China do not stop with lower wages and unsafe working environments. Zambia once had a proud and relatively thriving cotton industry which provided employment to tens of thousands of Zambians. In Kabwe there was once, until a few years back, a textiles factory called Zambia China Mulungushi Textiles which won international awards for the quality of its produce. It employed over 1000 people and provided a livelihood for 1000’s more cotton farmers. Ironically, it was set up by the Chinese 30 years earlier in a very different geo-political climate. In 2007, Mulungushi Textiles closed and with it, the local economy surrounding Kabwe.

The factory shut down as a result of the competition from cheap Chinese imports which beat the price of Zambian made goods.

The textile workers lose and so do the traders in Kamwala (the capital Lusaka’s trading district) who have to also compete with Chinese owned retailers such as

Nottingham Economic Review 9

Heung II who sell the cheap Chinese goods. The only beneficiaries are the consumers who get cheaper goods, but when tens of thousands of jobs are being lost with no alternative forms of employment, the consumers also become the unemployed. In Zambia, Economics 101, where the invisible hand of the free market provides new jobs in more competitive sectors doesn’t apply, just like other African states that are not benefiting from globalisation. The situation is made worse by the fact the Chinese use as few local workers as possible to minimise costs still further. In the future, say critics, governments like that of Zambia should stipulate in any new contracts that the Chinese use Zambian workers, pay higher minimum wages and abide by more stringent safety regulations.

Although the direct impacts of China’s influence in Africa are of great concern, it’s the indirect impacts which are equally as negative. China has a poor human rights record at home and indeed, in Africa, such disregard for human life is evident in countries such as the Sudan. Since 1993, when China purchased several Sudanese oil refineries for $350 Million, the Chinese have also been arming the Sudanese government with small arms, ammunition, military vehicles and aircraft which is then used against its Christian population in the South. According to the government of Sudan’s own reported figures, from 2004 to 2006, Sudan purchased ninety percent of its small arms from China which amounted to over $55

to help quash the campaign by MDC leader Morgan Tsvangirai. Perhaps Prime Minister Wen Jiabao’s statement ‘we are here for business, not aid’ should be adapted to read; ‘we are here for business, not morality’.

“ ‘We are here for business, not aid’ should be adapted to read; ‘we are here for business, not morality’. “ million. Such sales have undermined a United Nations arms embargo imposed on Sudan in 2005 to try and end the conflict in the region of Darfur. In all, it is thought that 400 000 civilians have died in the conflict with almost 2 million displaced, not to mention the pain and suffering of those living. Despite, effectively a genocide occurring, China still exports its weapons to the region. In Zimbabwe, disgraced President, Robert Mugabe is supported by none other than China.

The Chinese not only built President Mugabe’s new $9 million mansion in 2006 whilst President Mugabe leveled Harare’s shantytowns, it has also provided $240 million worth of troop carriers, fighter jets, and small arms to quash the little political opposition left standing in exchange for gold, tobacco and platinum. China even provided radio jamming equipment last year in order

Although Africa is benefiting from the demand China’s economy has for Africa’s natural resources which raises prices, it is arguably not in Africa’s long term interest to let China take control of such resources in its current manner. Despite the lavish prestige projects and infrastructure that many African states like the DRC have received, it seems that China’s real strategy is increasingly becoming exposed: Beijing extracts natural resources at knockdown prices, whilst the continent’s economies are ruined by a flood of surplus labour and subsidised goods. However, African states can bargain harder given the world demand for such resources. China is not the only option, especially given Europe and North America’s increasing anxiousness with China’s influence in Africa. However such bargaining depends on efficient, capable and straight leadership from Africa’s governments, something that is as elusive as the dream African’s have of a brighter and more prosperous future.

10 Nottingham Economic Review

Regulations,

Regulations,

Regulations...

We are emerging from a recession that some have said would be the worst since the Great depression. The question troubling finance ministers is how we will prevent it happening again?

Bankers Bonuses Bankers Bonuses have been getting on the nerves of politicians.

It is hard to not feel annoyed that tax payer’s money is being channelled into the wallets of some of the people responsible for the crisis. But is this bonus scandal just an overblown issue. A recent survey of over 3000 companies found that 44% of directors have taken a pay freeze and 6% have actually taken pay cuts. On the flip side, this also means that 50% have received higher wages and in addition to this, directors in the city on average rewarded themselves with a pay rise of 6-7%. The US government intends to cut the cash salaries of executives by 90% if their company was bailed out. Once bonuses, stock options and other benefits are taken into account the cut is closer to 50%. Meanwhile, George Osbourne has proposed that the government should limit cash bonuses to £2000 for British high street banks, arguing that it would be ‘’inexcusable’’ for banks to pay so much in bonuses when so many businesses need the cash. Even so, the amount spent on bonuses would only translate into a tiny fraction of the money being lentout. Banks are

By Robert Snashall

currently lending small amounts not because the money is being channelled into bonuses but instead because they want to raise their capital levels. The main fear with excessive bonuses is that it may cause moral hazard. Paying executives high bonuses and redundancy packages has the effect of making them feel more secure and so willing to make more risky decisions. If bankers are not personally made to feel the cost that they have incurred on the economy, they are likely to repeat the same mistakes that caused the financial collapse.

However, currently the problem is that banks are being too risk adverse and not lending out money to businesses with low risk of default. Maybe because banks face significant risk of failure, their valuations of good leadership have risen and so increase bonuses to motivate employees and keep them working for the bank.

If this is the case, government interference might lead to an inefficient outcome. Having said that, there is a lack of understanding on how chief executives should be appraised. Shareholders can vote on appointing directors to the board but cannot reward or punish any director individually. This means that Chief-executives could do their own appraisal, which as you can imagine might involve a little bias.

What’s wrong with renting?

There are many issues in the mortgage industry that desperately

need addressing to stop a repeat of the sub-prime mortgage disaster. These include making checks on income mandatory, banning the sale of products with toxic characteristics and to make all mortgage lenders personally accountable to the FSA. This is all to protect consumers from themselves and shift the responsibility onto the lenders. Also, the FSA suggests that consumer’s cultue should be altered “away from

the idea that renting is bad and home ownership is good and away from seeing property as an investment”. This could reduce the size of future housing bubbles and the problems they produce when the burst, such as negative equity and the reduced labour mobility. The fear is that this could damage the Bank of England’s efforts to increase bank’s lending, especially if regulations and their penalties are made too harsh. Income checks could become too intrusive and inefficient, making getting a mortgage a bureaucratic nightmare. America is the real issue in this, for it was the American sub-prime

Nottingham Economic Review 11

bubble that threw so many banks into bankruptcy. It is surprising that this segment hasn’t been reregulated yet, but then the market for sub-prime derivatives is now non-existent, and falling house prices ensure that subprime loans will not be made.

Problems in the system It is clear that there is need for regulation reform on systematic problems in the banking system.

Paul Volcker, the ex-chairman of the Federal Reserve and now leader of President Obama’s Economic Recovery Advisory Board has called for fundamen-

tal change in regulation. He argues for a super regulatory agency as part of the Federal Reserve which could co-ordinate responses of the huge amount of regulatory agencies overseeing different parts of the financial system.

This ‘’super agency’’ would have a greater ability to see the bigger picture compared to specific regulatory agencies and thus able to see large scale problems emerging. It would also require the registration of hedge funds of substantial size. Under the old system, regulators never had the power to catch Bernard Maddoffs Ponzi Scheme until it was too late.

Mervyn King argued in his recent speech that large banking groups that are too big to fail are by extension too big. The European Union competition commissioner has proposed a plan that would split banks into 3 classes namely retail banks, corporate banks and asset managers. Retail banks would gather deposits and lend them to individuals and small to medium sized businesses.

They would be tightly regulated and guaranteed by Bank of England to insure against bank runs.

Corporate Banks would provide advisory, capital raising and underwriting facilities to companies and would have to fund themselves independently compared to the current situation of having financial conglomerates which can be funded by other divisions.

This would reduce the moral hazard incurred by little prospect of failure. It would also allow loss making divisions to fail instead of bringing the whole conglomerate down with them. Splitting investment banks into corporate banks and asset managers would reduce the problem of insider information that currently requires the two sides of the bank to be separated. Many top economists have also called for raising capital requirements to levels round about 8% in order to reduce risk.

This would give banks a bigger buffer zone of liquidity to fall back upon in the event of heavy losses. Some argue that banks which haven’t received government bail-out money are being punished despite their solidity.

Who should pay for the bailouts?

There is still the issue of how to deal with a failed bank. One quite

popular idea is a resolution fund that banks pay into and then could receive aid in the event of a collapse. However this is unlikely to ever be large enough to provide stimulus on the 2008-2009 proportions. Also, an insurance fee levied on banks that hold systemic importance (too big to fail) in order to reflect the added cost of their failure. This would also encourage large banking conglomerates to break up, reducing this systemic risk and increasing competition.

How could it affect our competitiveness?

There have been concerns over the implementation of proposed G20 regulatory measures. The main reason for this is that not all countries will adopt this and whilst all G20 countries will adopt it, their regulatory bodies will implement it to varying degrees. This could massively jeopardise the competitiveness of the UK economy and cause many banking institutions to relocate elsewhere.

What’s next?

It is imperative that we regulate before another disaster. With fewer massive banking conglomerates, the banking system will be far more competitive in the future and more resilient to disaster. However, these regulations could easily go too far. Taking out a loan could become like the 1950’s and resources may not be allocated properly. My prediction is that we’ll go through a 20 year period of tight regulation until one day someone will wonder why they are all there, rub them out, and we’ll have a repeat of this whole disaster.

14 Nottingham Economic Review

GEP Lecture - Samaritan Strategy of a Global Global CEO

By Lishia Erza

“Sometimes, you just have to get on the stage, give a speech, and say, ‘get it done!’”

There are a few dilemmas in the pharmaceutical industry, one of the strongest is having the stigma of being a business entity that takes advantage of sick people (often in poor countries too), and being a force that generates greater social benefits out of their successful inventions. Andrew Witty, CEO of GlaxoSmithKline (GSK) shares his strategy.

For a global company, important decisions concerning survival, growth and sustainability of the company lies in the hand of its CEO. But for a sick person, decisions are made by a lot of other people. The doctor decides what medicine a patient needs, the market tells the company what medicines to produce and sell, the researcher comes up with discoveries that tell the companies what products are ready for production, the government decides - among

other things - what research and clinical trials are allowed, the civil society decides what government regulations should be put in place, and the chain of decision making process goes on, involving more people beyond the individual patient. GlaxoSmithKline as a pharmaceutical and vaccine business player operates in a complex environment simply because nobody wants to be sick and spend money. How does one go about selling products that people avoid buying?

The challenge does not stop there.

The pharmaceutical and vaccine business is highly regulated.

It is constantly under scrutiny with teams of auditors looming around their facilities. The length of time for investments to return and make profit is sometimes discouraging. The H1N1 vaccine for example, had been in research and development since 1992, but had only come to production in

2009. Most initiations fail, moreover, there are around 13,000 researchers to keep motivated and focused.

At GSK’s scale, the company consists of a wide range of independent businesses with various strategies to be reconciled. From pharmaceutical and vaccine units to consumer products. The good news is that once resources are effectively mobilized and breakthroughs happen, the payoff transforms lives, makes money, and leaves a legacy. The H1N1 vaccine sales alone hit £1 billion in the fourth quarter of 2009. It takes great capacity and sound strategy to be able to operate in a highly dynamic environment.

A company like GSK needs to maintain links with policy makers just as much as they need links with physicians. There is a massive demography worldwide that affects affordability. 80% of

Nottingham Economic Review 15

healthcare expenditure happen in life’s later years. In China for instance, in 20 years, there will be a huge number of old people to care for. Governments worldwide seek cost containment in both pricing and rationing, priorities are made on what diseases are important to put money into. It takes twenty years to develop a product, by the time it is ready for market, the company still needs to stay synchronized with market demands.

Eye for the market, Eye for the future With markets in Europe and USA maturing, GSK begins to shift its market focus to emerging economies. Relocating physical business to Brazil, India, China, Middle East and Africa provides space for invention due to low government intervention. The new market is also in need of pharmaceutical breakthroughs, especially in Africa where 70% of the world’s healthcare problem exist yet they have only 1% of the world’s healthcare budget to spend. GSK is the only pharmaceutical company doing research and development of treatment for neglected diseases in developing worlds.

In order to speed the process, GSK introduces a patent pool for

medicine for neglected tropical diseases. With that, GSK has pioneered the idea that there can be more than a unipolar approach.

This pool is open for groups to donate findings and to collaborate with pharmaceutical companies, patient groups, NGOs, and just about anybody else who can contribute to the cause. Therein lie the need to build and maintain trust with both the shareholders and the civil society.

“A company like GSK needs to maintain links with policy makers just as much as they need links with physicians.“ Trust inducing policies include transparency and engagement with the public. Shareholders need to have confidence in their investment. They have become more vocal in their need to understand the strategies takes by the CEO. Shareholders need to see results. On the other hand, pharmaceutical companies attract civil society’s attention, good and bad.

failures, it is quintessential for GSK to recover, develop and ultimately protect the trust of both the shareholder and civil society.

“Samaritan With Benefits”?

GSK is a fascinating business entity. Under Andrew Witty’s leadership, GSK established a solid foundation to stay as market and opinion leader in the pharmaceutical industry. The long history of pharma-giants making third world countries their waste-basket and experiment laboratories might come to an end if GSK could pull this off, maintaining their accountability to the society with their new approach.

Patent pools, 75% price cuts in less developed countries, developing infrastructure from profit, etc. The common strategic approach is to think ahead, get ahead, stay ahead. In this case, being the leading good Samaritan is apparently Andrew Witty’s strategy to ensure GSK’s future success.

Keeping civil society in the loop ensures GSK’s license to operate, particularly for research and experimentations. One of the things that GSK does is publishing all clinical research reports -- successes and failures. On

One cold day, many moons ago, a new GlaxoSmithKline salesman came into a doctor’s office. Upon saying hello, he was greeted by the reception, “Are you from GlaxoSmithKline? The doctor wants to see you.”

A young GP usually acts crazy around pharmaceutical salesmen. His first day, the waiting room was packed with sick people, and doctor wanted to see him. Right!

Out came the doctor, vigorously shook his hand and said, “Your drugs save people’s lives!”

The patients in the room started asking him which company did he work for, what drugs did his company sell, and that, was the beginning of Andrew Witty’s path to becoming CEO.

18 Nottingham Economic Review

Economic Growth and Well-Being: The Limits to Pessimism

By Ian Saxon

Gross Domestic Product is simple in concept: it tallies the total output of goods and services produced within a country’s borders over time, providing a single number to describe the size of the economy. Bigger economies tend to harbour higher consuming citizens, and few people or nations turn down the opportunity to consume more when given the chance. Broadly, that is why GDP is often used to assess government policies, measure progress in developing countries, and, more controversially, track overall well-being. If more is better, that makes a good sense. But what if more is worse?

There are good reasons to wonder. GDP does not, in fact, include the value of all output.

Market activity regularly produces output that goes un-priced, as is the case for negative externalities like air pollution and positive externalities like education.

Depletion of natural resources can also be considered a kind of “output” that may be un-priced or under-priced depending on the terms of their use. In general, there are plenty of human activities that contribute positively or negatively to others’ welfare and are not included in GDP statistics. Volunteer efforts and unpaid domestic labour are two oft-mentioned examples of this kind.

Among economic activities that do have prices attached, some seem to give the wrong signal when included in GDP. After all,

what sort of indicator of wellbeing rises when bad things happen—even at things like oil spills, car crashes, and cancer diagnoses? At first inspection, it looks like GDP has the potential to be both a faulty indicator and a cheerleader for unfortunate events. Perhaps, argue some, economists need to learn to subtract from GDP. So, can GDP be a useful measure of overall well-being, or is it more likely to be a distraction that would fail to alert us if the costs of economic growth came to dominate the benefits?

Consider first the merits of trying to distinguish between GDPincreasing expenditures that improve well-being and those that detract from it. There may be less to that idea than at first seems likely, since unfortunate events like oil spills, car crashes, and cancer diagnoses do nothing to raise GDP by themselves. Rather, it is the cleanup of oil spills, the rescue

services of ambulances after car crashes, and the treatment of cancer patients that raise GDP. There is a common pattern in these scenarios: a problem arises, time and effort and equipment are put toward solving it, and GDP rises as those factors are compensated.

Viewed that way, GDP growth as a result of an oil spill does not look very different from growth as a result of other, supposedly more virtuous causes. In fact, almost all expenditures that count toward GDP are the result of people spending money to solve problems. If you are hungry, you buy food; stranded without a car, hire a cab; sick, buy medicine.

That the original state of affairs causing you to spend money is undesirable does not necessarily indicate that a resulting increase in GDP is bad.

What about the possibility that a country might grow to a point where the costs of more economic growth overcome the benefits? It

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would be silly if, for example, an extra £1 million in economic growth created so much pollution that people were compelled to spend an extra £2 million on asthma medications. GDP would presumably grow in such a scenario (at least in the short-run), masking the underlying reality.

Some observers, noting that personal wealth, beyond a certain level, seems to have a small effect on self-reported happiness, argue that economic over-growth is already a reality. However, much else in the burgeoning research on happiness surveys suggests that GDP may yet have legs as a happiness tracker. Numerous studies have found a positive correlation between subjective indicators of well-being and income within countries, and two recent analyses using data from the 2006 Gallup World Poll (involving 134,000 respondents from 130 countries) found a strong positive correlation between income and life satisfaction within and between countries*. These studies did not find that the relationship was affected by a “satiation point”.

Because self-reported measures of well-being are often regarded skeptically, it is worth looking at some objective measures of wellbeing and their historical relationship with GDP growth. Life expectancy is one such objective measure, and it is particularly useful because it encompasses other important measures, such as access to basic health care, safe water, nutritious food, and sanitation. The historical trend has been, almost without exception,

positive. In 1900, global average life expectancy was around 31 years. Today, the world average is 68 years and children born in 153 of the world’s 195 countries can expect to live to at least 60 years. Even the most lagging region in the world, Sub-Saharan Africa, has seen improvements.

At 50, life expectancy in Sub-Saharan Africa is 60% higher than the global average 100 years ago.

There is plenty of room for improvement, to be sure, but these numbers provide important context when considering whether economic growth has so far been harmful or helpful to overall well-being.

Life expectancy, as it turns out, is highly correlated with GDP per capita. Although correlation does not imply causation, the relationship between the two figures carries vital information. Because steady growth in life expectancies has coincided with strong economic growth throughout the world, we can place a lower bound on the possibilities for pessimism. In other words, even if we give GDP rises no credit for

increasing life expectancies—an overly cautious assumption— we can at least be sure that economic growth has not done much harm to them. It is doubtful that life expectancy increases would have occurred at all if economic growth had been working in the opposite direction all this time.

Particularly because of all the things that GDP does not count, it is theoretical possibility for a country to pass from economic to uneconomic growth. But those who discount the value of GDP as a rough proxy for overall wellbeing are probably jumping the gun, and we ought to celebrate the so-far positive trend between the two figures.

Stevenson and Wolfers, 2008, Economic Growth and Subjective WellBeing: Reassessing the Easterlin Paradox.

Deaton, 2008, Income, Health, and Well-Being around the World: Evidence from the Gallup World Poll.

20 Nottingham Economic Review

Brain Drain

By Michsel A. Clemens and David McKenzie (donated by Foreign Policy Magazine)

The movement of skilled workers from poor countries to rich ones is nothing to fear. In the long run, it will benefit both.

“Allowing skilled emigration is stealing human capital from poor countries.”

No. Many of the same countries courted by the United States through aid and trade deals complain bitterly of the “brain drain” of their doctors, scientists, and engineers to the United States and other rich countries. If correct, these complaints would mean that current immigration policy amounts to counterproductive foreign policy. Thankfully, however, the flow of skilled emigrants from poor to rich parties can actually benefit both parties.

This common idea that skilled emigration amounts to “stealing” requires a cartoonish set of assumptions about developing countries. First, it requires us to assume that developing countries possess a finite stock of skilled workers, a stock depleted by one for every departure. In fact, people respond to the incentives created by migration: Enormous numbers of skilled workers from developing countries have been induced to acquire their skills by the opportunity of high earnings abroad. This is why the Philippines, which sends more nurses abroad than any other developing country, still has more nurses per capita at home than Britain

does. Recent research has also shown that a sudden, large increase in skilled emigration from a developing country to a skillselective destination can cause a corresponding sudden increase in skill acquisition in the source country.

Second, believing that skilled emigration amounts to theft from the poor requires us to assume that skilled workers themselves are not poor. In Zambia, a nurse has to get by on less than $1,500 per year -- measured at U.S. prices, not Zambian ones -- and a doctor must make ends meet with less than $5,500 per year, again at U.S. prices. If these were your annual wages, facing U.S. price levels, you would likely consider yourself destitute.

Third, believing that a person’s choice to emigrate constitutes “stealing” requires problematic assumptions about that person’s rights. The United Nations Universal Declaration of Human Rights states that all people have an unqualified right to leave any country. Skilled migrants are not “owned” by their home countries, and should have the same rights to freedom of movement as professionals in rich countries.

”It’s a waste of money to train people who just plan to emigrate.”

Not Really. The belief that skilled emigrants must cause public losses in the amount of their training cost is based on a series of stereotypes. First, large numbers of

skilled emigrants are funded by themselves or by foreign scholarships. A survey of African-born members of the American Medical Association conducted by one of the authors found that about half of them acquired their medical training outside their country of birth. Second, many skilled emigrants serve the countries they come from for long periods before departure. The same survey found that African physicians in the United States and Canada who were trained in their country of birth spent, on average, over five years working in that country prior to emigration. This constitutes a substantial return on all investment in their training.

Third, there is the stereotype that skilled migrants send little money to their home countries, as they tend to come from elite families and bring their immediate families with them when they leave.

But new research reveals this to be simply unfounded. Skilled migrants also tend to earn much more than unskilled migrants, and on balance this means that a university-educated migrant from a developing country sends more money home than an otherwise identical migrant with less education. The survey of African physicians mentioned above found that they typically send home much more money than it cost to train them, especially to the poorest countries. This means that for a typical African country as a whole, even if 100 percent of a physician’s training was publicly

Nottingham Economic Review 21

funded, the emigration of that physician is still a net plus.

Fourth, it is simply not true that all higher education in low-income countries must take place under massive public subsidy.

When publicly subsidized higher education is the only way for someone who is not already wealthy to acquire higher education, that person’s emigration necessarily means that the subsidy emigrates too. But even in very low-income countries, there are alternative ways of financing higher education. One is to create ways for students to pay up front for their own training, as Makerere University in Uganda has done, but many African universities do not. Another is for the government to give student loans so that students can pay for their own training after the fact, which Kenya has done, but many African governments do not. Both of these break the necessary link between the departure of a worker and the departure of a public subsidy.

In the Philippines, training of the vast majority of nurses who leave the country is financed by the students themselves, the recruiters, or the foreign employers, not by the public; there is no reason whatsoever why similar professional schools could not be established throughout Africa.

“Skilled migrants who leave for a rich country never come back.”

False. A striking example comes from recent research in the Pacific, which has amongst the highest rates of skilled emigration

return, those that do may be particularly motivated by a desire to help their home country and may return to key leadership positions. One recent calculation finds that since 1950, 46 current and 165 former heads of government received their higher education in the United States.

“The emigration of doctors kills people in Africa.”

globally. Consider Tonga, a small island nation with a population of only 100,000, where skilled workers might stereotypically be thought to have little incentive to go back. Even in this case, by age 35, just over a third of the nation’s academic brightest who had migrated after high school were already back working in Tonga.

And in Papua New Guinea, half of the most academically skilled migrants had returned home by their early 30s.

In the United States, more than 20 percent of foreign students receiving Ph.D.s already have firm commitments to return to their home countries at the time of graduation, and many more will likely return in subsequent years.

Of course there is large variation across countries: Migrants are much more likely to return to booming economies with good job prospects, as is seen by the flows of Indian tech workers back to India in the last decade. But even in cases where few migrants

Hardly. Allowing or encouraging doctors to leave Africa for rich destination countries can reduce the number of doctors within the countries they come from, although even this is not clear if more people undertake medical training with the hope of migrating. However, the level of medical care provided by doctors in Africa depends on a vast array of factors that have little or nothing to do with international movement -- such as scant wages in the public health service, poor or absent rural service incentives, few other performance incentives of any kind, a lack of adequate medical supplies and pharmaceuticals, a mismatch between medical training and the health problems of the poorest, weak transportation infrastructure, or abysmal sanitation systems.

To illustrate just one of these -the lack of rural service incentives -- policies that limit international movement choices per se do not change the strong incentive for African physicians to concentrate in urban areas far from the least served populations. Nairobi is home to just 8 percent of Kenya’s population, but 66 percent of its physicians. More Mozambican

22 Nottingham Economic Review

physicians live in the capital Maputo (51 percent) than in the entire rest of Mozambique, though Maputo comprises just 8 percent of the national population. Roughly half of Ethiopian physicians work in the capital Addis Ababa, where only one in 20 Ethiopians lives.

growth of the Taiwanese, Chinese and Indian information technology industries is an important example demonstrating that high-skilled workers abroad can have transformative impacts on home country industry. But unfortunately, this is the exception rather than the rule.

This and the many other barriers to domestic effectiveness of physicians may explain why, across 53 African countries, there is no relationship whatsoever between the departure of physicians or nurses and poor health statistics as measured by indicators such as child mortality or the percentage of births attended by modern health professionals. If anything, the relationship is positive: African countries with the largest number of their physicians residing abroad in the rich country are typically those with the lowest child mortality, and vice versa.

This suggests that whatever is determining whether or not African children live or die, other factors besides international migration of physicians are vastly more important. Fiddling with immigration or recruitment policies of destination countries do precisely nothing to address those underlying problems.

In particular, skilled migrants from small islands and from subSaharan Africa, where highly skilled emigration rates are the highest, are not likely to be engaging in trade or investment.

New surveys find that less than 5 percent of skilled migrants from Tonga, Micronesia and Ghana have ever helped a home country firm in a trade deal, and when they have, the amounts of such deals have been modest. Few migrants from these countries had made investments in their home countries -- at most they had sent back amounts of US$2,0003,000 to finance small enterprises.

“Skilled emigrants build trade and investment ties.”

Not always. Just as fears about possible negative effects of brain drain are typically overblown, so is the hype over the ability of countries to tap their Diaspora to set up trade and investment. The well-known case of emigrants in Silicon Valley facilitating the

However, skilled workers do engage with their home countries in a number of other ways apart from remittances. They can be an important source of tourism for their home countries; more than 500,000 visitors to the Dominican Republic each year are Dominicans living abroad. They are also tourism promoters: 60-80 percent of skilled migrants from four Pacific countries and Ghana advise others about traveling to their home countries. They indirectly spur trade, through consuming their home country’s products, and they transfer knowledge about study and work options abroad. The lack of involvement in trade and investment therefore

largely reflects a lack of productive opportunities at home, not a lack of interest on the part of migrants in helping their home countries.

Conventional wisdom once held that the wealth of a country declined when it imported foreign goods, since obviously cash was wealth and obviously buying foreign goods sent cash abroad.

Adam Smith argued that economic development -- or the “wealth of nations” -- depends not a country’s stock of cash but on structural changes that international exchange could encourage. In today’s information age, the view has taken hold that human capital now rules the wealth of nations, and that its departure in any circumstance must harm a country’s development.

But economic development is much more complex than that.

But thanks to new research, we have learned that the international movement of educated people changes the incentives to acquire education, sends enormous quantities of money across borders, leads to movements back and forth, and can contribute to the spread of trade, investment, technology, and ideas. All of this fits very uncomfortably in a rhyming phrase like “brain drain,” a caricature that would be best discarded in favor of a richer view of the links between human movement and development.

The NER would like to strongly thank Michael A. Clemens and David Mckenzie for donating this article.

It was first published by ‘Foreign Policy’ October 22nd 2009

Nottingham Economic Review 23

Obama’s Illness

By Samuel Gardiner

In a speech to Congress on 9 September, Barack Obama stated that health reform was now his top domestic priority. In mid-November, his controversial 1,017page bill passed Congress. The statute will not only restructure the health economy in an attempt to alleviate the current worries facing Americans but also save the U.S. taxpayer money.

Why, then, does business news giant Bloomberg claim that 47% oppose the bill? Surely such a reform is impressive?

The health sector has long been a focal point in elections around the world. Political candidates promise the usual reform and money-saving now expected by the voters. Barack Obama was no exception – 21 out of the phenomenal 500 promises he made during his campaign were directed at healthcare – yet his recent move to stand by his pledges has sparked nationwide controversy and global debate.

It is commonly acknowledged that the American healthcare system leaves somewhat to be desired – and not just for those one would expect. Yes, the Medicare and Medicaid institutions, which help the elderly and the low-income groups with health expenses, are known for their imperfections

(and this is worrying, as they account for over 80% of U.S. health spending) but middle-class families with private insurance are also burdened with extra charges for prescriptions and atypical procedures. There is also the threat of being dumped by an insurance company at a time when you need it most, a remnant of a legal loophole that was never filled in.

In a speech to Congress on 9 September, Barack Obama stated that health reform was now his top domestic priority. In mid-November, his controversial 1,017page bill passed Congress. The statute will not only restructure the health economy in an attempt to alleviate the current worries facing Americans but also save the U.S. taxpayer money.

For one, Obama’s promises – and there are many – seem again and again too good to be true.

This problem isn’t restricted to the health sector but also to defence (which is still lacking the necessary funding) and the economy(which is still failing).

People are beginning to call him on his rhetoric and hope is swiftly being replaced by hype.

One can of course expect that the medical insurance companies are not all pleased with the reordering (perhaps they oppose the anti-discrimination rules against people with pre-existing conditions?) but the general dissatisfaction expressed by the public requires a closer look.

In the second week of September, a crowd of 15,000 marched on Minneapolis in protest, branding placards of Obama as Hitler. On 26 September a teenager started a Facebook poll asking whether

24 Nottingham Economic Review

President Obama should be assassinated, with the options ‘No’, ‘Maybe’, ‘Yes’ and ‘Yes if he cuts our healthcare’. One of the biggest stories this autumn is also one of the most controversial.

Those arguing against the reform dwell on the inefficiencies of government-run healthcare, citing a handful of European systems like Britain’s NHS. The problem of uninsurance shouldn’t be replaced by, say, spiralling costs if a second reform is to be avoided.

(Healthcare already costs America an annual $2.2 trillion, nearly double the OECD average.) One should also not forget that America has traditionally employed a laissez-faire government – its increasing interference in day-today life is unconstitutional to the conservatives.

One should also note that the re-

form is dubbed The Obama Plan. In the nine months that Obama has taken office the focus on him as an individual has greatly eclipsed that of the U.S. government.

Despite having few achievements to his name (as yet), he is an icon for his colour alone and has already been crowned a Nobel Peace Laureate.

This is incredibly unfair to Obama as, with this introduction, anything short of messianic is automatically disappointing. And it’s fair to say that his health proposals haven’t been welcomed as messianic.

So, with his pulling power waning – just look at Chicago’s Olympic bid – what challenges does Obama need to overcome?

continue. He may have to accept some compromise on the small print, as even his own party is split on the reform. Whether this means an overhaul of the proposed government regulation to an exterior body or an act as simple as a staged implementation of the reform is open to the American public: Obama has said that his door is open for any credible suggestions.

There is also pressure from the rest of the world. Post-WWII, countries have increasingly looked to the U.S.A. for direction and what Obama achieves here will likely become a global example – hopefully as a bar against which all healthcare should be measured, not as an excuse for not bettering a poor system.

The bill passing Congress is a notable victory – but the battle will

NEW HEALTH SYSTEM FACT BOX More stability and security for those currently with insurance: o Ends discrimination against people with pre-existing conditions. o Prevents insurance companies from dropping coverage when people are sick and need it most. o Caps out-of pocket expenses so people don’t go broke when they get sick. o Eliminates extra charges for preventive care like mammograms, flu shots and diabetes tests to improve health and save money. o Protects Medicare for seniors and eliminates the ‘donut-hole’ gap in coverage for prescription drugs.

Quality, affordable choices for those currently without insurance: o Creates a new insurance marketplace – the Exchange – that allows people without insurance and s mall businesses to compare plans and buy insurance at competitive prices. o Provides new tax credits to help people buy insurance and to help small businesses cover their employees. Offers a public health insurance option to provide the uninsured who can’t find affordable coverage with a real choice. o Offers new, low-cost coverage through a national ‘high risk’ pool to protect people with pre-existing conditions from financial ruin until the new Exchange is created.

For further information, please visit healthreform.gov.

Nottingham Economic Review 25

The Treaty of Lisbon & The First President of Europe

By Christopher Stafford

creation of a High Representative for Foreign Affairs and Security Policy, in effect, a revamped Foreign Policy Chief. The second major post created will be that of a permanent President of the European Council, replacing the current rotating Presidency, who will serve for a two-and-a-half year term and will be responsible for chairing EU summit meetings.

Ireland votes ‘yes’ There has been much discussion recently regarding the Treaty of Lisbon, which is expected to enter into force by the end of this year. The Treaty was created in the hope that it would rejuvenate the decision-making apparatus of the European Union’s institutions and hence, make the functioning of the European Union much more efficient.

The Treaty was created in response to difficulties that arose due to successive enlargements of the European Union to include more members. Since May 2004, twelve new member states have joined the European Union, and there are still many more countries with aspirations to join. The first major attempt to solve this problem was the ill-fated European Constitution, which was famously rejected by French and Dutch voters in 2005. The Constitution attempted to replace all previous treaties and start afresh, which did not prove popular.

Voters also found it difficult to

accept the Constitution’s focus on EU symbols such as the flag and anthem, which many felt would devalue their own national symbols. This culminated in the Constitution’s downfall and led to the formulation of the Lisbon Treaty.

In contrast to the Constitution, the Lisbon Treaty simply amends the Treaty of Rome, which established the European Community, and also the Maastricht Treaty, which established the European Union as we know it today.

Agreed upon in June 2007, the text was officially signed by the heads of state and governments of the EU on 13th December 2007 in Lisbon, the Portuguese capital, from which the Treaty derives its name. The Treaty of Lisbon aims to streamline EU decisionmaking by a number of means, including the introduction of voting reforms in the European Council and also by strengthening the role of National Parliaments. The treaty also creates two new posts. One of these is the

The Lisbon Treaty has come back to the fore recently when, after a national referendum, Ireland accepted the Treaty. Most countries have ratified the Treaty by passing it through their Parliaments, Ireland being the only country to hold a referendum.

Irish voters initially rejected the treaty when they were asked to vote on it in June 2008. This led to the Irish Government holding a second referendum, after being granted some key concessions in areas such as the protection of worker’s rights, and also on family issues, such as abortion. Due to, although not exclusively to, Irish concerns, there will now be a Commissioner for every member state, whereas before the concession to Ireland, it was planned to have fewer Commissioners than the total number of member states.

Problems in the Czech Republic With the Irish nation having decided to accept the Treaty and the

President signing his country’s ratification on the 10th October 2009, the focus turned to the Czech Republic, which was the only member state left to ratify the treaty. The process was delayed by a motion from a group of Czech senators, who questioned the conformity of the Lisbon Treaty with the Czech Republic’s Constitution. The problem was further exacerbated by the Czech Republic’s Eurosceptic President, Václav Klaus, who said that he would not sign the Treaty into law whilst the Constitutional Court was still deliberating, although there were fears that he would try to delay the process further once the Constitutional Court had made a ruling.

Klaus demanded that the European Union grant the Czech Republic an opt-out from the Charter of Fundamental Rights, which would prevent Germans expelled from Czechoslovakia after the Second World War from making property claims. He was eventu ally granted such a guarantee and after the Czech Constitutional Court accepted the Treaty’s conformity on 3rd November 2009, and after much pressure from many within the Czech Republic, Klaus eventually signed the Treaty later that day, an act which surprised many.

Choosing the first European President Even before the Czech Republic had ratified the Treaty, there had been much focus on the role of the first permanent President of the European Commission. The Treaty of Lisbon set no official

criteria for deciding on the type of individual that should assume the role and hence there was much speculation as to who should fulfil it, with many potential candidates being put forward. On the 19th November 2009, EU leaders met in Brussels and, eventually, it was unanimously decided that Herman Van Rompuy was the best candidate for the job.

What follows is an evaluation of Herman Van Rompuy and his two main rivals for the post, Tony Blair and Jean-Claude Juncker.

Herman Van Rompuy The current President of Belgium since December 2008, Van Rompuy emerged as one of the front runners for the post quite late in the proceedings. Seen as a consensus builder, it was believed that he would act as more of a managerial figure in the role.

His supporters claimed that he would be the best candidate for helping the European Union to accept the Lisbon Treaty and any future enlargements. Another perceived advantage was that he would give member states a sense that they were working with him towards agreements, rather than for him, which was important to several countries.

The main argument against his Presidency are claims that he will not be able to give the European Union prominence on the international stage, that many international leaders may not take him seriously. Another problem is that when Van Rompuy assumes the role of President, he may do so at the expense of Belgium, which desperately needs a

famouspeoplebiography411.com

26 Nottingham Economic Review

politician of his skill to steer it through state reforms, which have already caused several problems within the country.

Tony Blair Former British Prime Minister between 1997 and 2007, currently serving as the Middle East Peace Envoy on behalf of the UN, the EU, the US and Russia. Blair was certainly one of the favourites, and at the same time the most controversial candidate proposed for the job in the early stages of the debate.

Support for Blair wavered towards the end of the proceedings however, especially within France and Germany, although he did retain support from the United Kingdom, Italy and several Eastern European states.

Blair’s personal links with many leaders in Europe would have been advantageous and most would agree that he was probably the most charismatic of the potential candidates. This could potentially have been used to help the EU become more forceful in international politics and

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hence bring the EU more recognition on the international stage.

Key arguments against him included the charge that he is too close to Washington, shown by his support for the unpopular war in Iraq. On the other hand, his ties with Washington could have proven beneficial for the EU, facilitating a greater dialogue between it and the US, with many feeling that Blair could have ultimately helped to make the USA view the European Union as a serious player on the international stage.

Other problems included the fact that his home country is not a member of the Eurozone or the

Jean-Claude Juncker The current Prime Minister of Luxembourg since 1995 and Finance Minister since 1989, he is also the President of the Eurogroup, the meeting of the Finance of the Finance Ministers from the Eurozone countries. When asked about whether he would be interested in assuming the post of President, he answered, rather modestly, “If I were called on, I would have no reason to refuse to listen�.

He is undoubtedly an extremely experienced politician and is well-traversed in the dossiers of the EU. His Presidency of the Eurogroup has provided him with many links to Member State Governments, thus improving his political influence within the European Union. Such attributes would have certainly been beneficial if he had been offered the position.

Despite charges of being too federalist, which sits uncomfortably with certain Member States, the main argument against him was that he is not especially charismatic, neither is he very popular outside of his home country.

Many feel that he may therefore have found it difficult to set up meaningful meetings and dialogues with leaders of countries outside of the European Union.

Juncker denied such claims however, stating his friendly relations with Vladimir Putin as evidence to the contrary.

peterdedecker.eu

ftopnews.in

Schengen Agreement, which abolished border controls between member states. Many of his opponents also claimed that he, like his home nation, is too Eurosceptic, although this charge was vehemently denied by his supporters.

A tough decision ahead Clearly, the European Union had a difficult decision when it came to choosing the first permanent President of the European Council. Each potential candidate had their good and bad points, and there was certainly no perfect candidate that would have suited all twenty-seven member states. Ultimately, the decision depended on whether the European heads of state wanted a charismatic President to figurehead the group, or whether instead they favoured someone who would act more like a chairman, someone less high-profile. Clearly, given the choice of Van Rompuy, it was decided that the EU heads of state preferred not to be overshadowed, and hence opted for a chairman. It will certainly be interesting to see how this choice affects the European Union both internally and with regards to its role within the world.

28 Nottingham Economic Review

Brazil’s time is at hand

By Jose Costa

Often cited as the country of the future, Brazil’s moment seems to be closer than it has ever been.

Brazil was one of the least affected countries by the financial crisis. In October, it had seen the world’s biggest stock market listing this year, the raising of $7 billion with the initial public offering (IPO) of part of the Santander’s Brazilian unit, Spain’s biggest bank, which was also the largest IPO ever conducted in Brazil’s history.

Brazil will also be the host to two of the biggest global sporting events: 2014 football World Cup and the 2016 Olympic Games.

Rio de Janeiro, also known by Brazilians as the ‘marvelous city,’ won the bid against three developed-world metropolises - Chicago, Tokyo and Madrid. It is estimated that R$25billion (£8.8bn) will be invested in infrastructure.

However, the Brazilian Senator Cristovam Buarque alerts that the results in hosting the Olympic Games are uncertain. Although

investing in sports facilities, transportation, hotels and urban redevelopment is primordial, the Senator argues that social investments should also be a priority in the government agenda. “As a nation attuned to the demands of the 21st century we need a society with equal opportunity, ecologically sustainable development, and an economy producing goods and services of great scientific and technological content”, he wrote in an article titled ‘Brazil Got the Olympics. Now We Need a Pact to Attune Us to the 21st Century’.

The announcement of Brazil’s victory in hosting the Olympic Games was accompanied by three other major events, given less attention, but of great importance nonetheless. One involved the winning of a temporary twoyear seat (2010/2011) on the UN Security Council. Brazil joins the council for the tenth time (frequency only reached by Japan) a strengthening its campaign to

become a permanent member of the Security Council. French President Nicolas Sarkozy, while visiting Rio de Janeiro, publicly supported Brazil’s campaign saying that Brazil had a vital role to play in global decision-making.

A second significant event was the upgrading of Brazil’s credit rating to “investment grade”

by Moody’s Agency, the only title that the country was missing among rating agencies, as opposed to other nations such as Greece and Ireland that have faced downgrades this year. This is significant because most institutional investors, governments and investment banks rely on credit rating agencies before investing in a country.

Finally, a third major event was Brazil’s agreement to provide the International Monetary Fund (IMF) with a $10billion loan, thus becoming a creditor to the Fund for the first time. This has a symbolic impact, considering Brazil

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was one of the IMF’s largest supplicants in the past years, and it was widely celebrated by the leftwing government.

Another important event worth mentioning is the recent oil discovery off oil offshore. In 2007 Petrobras, a partly state-controlled oil company, found what is estimated up to 12 billion barrels beneath the Atlantic, approximately 250km off the Brazilian coast, and 5km below sea level.

Extracting the newly-found oil will be a giant task which will attract huge investments. Despite the discovery Brazil is already self-sufficient in oil and 46% of its energy matrix is obtained from renewable sources. Most of its own electricity comes from hydro energy and what was once considered a utopian dream is now seen as a great alternative to oil; a large proportion of Brazilian cars are now powered with sugarcane ethanol.

However, despite all the good news and the winds of change that seem to blow in Brazil’s direction there are many problems that must be urgently solved.

The homicide rate in Brazil which reaches tens of thousands of violent deaths a year, can be considered as a low-intensity civil war, using United Nation’s parameters. Brazil is dominated by economic inequality, endemic corruption and violent crime contrasting with its natural beauty. The country has now the opportunity to deal with its rooted problems.

The issues go beyond crime. Deforestation in the Amazonian

it has no ethnic conflicts and is a multi-party democracy. Brazil is at peace with its neighbors and does not have any unusual turbulence within its borders. Unlike in many other democratic states, the results in presidential elections are announced without any problems and usually on the same day of the election.

Forest puts Brazil as one of the world’s largest producers of carbon dioxide gas. Brazil’s infrastructure, such as the rail, road and airport facilities demand massive investment. There is a giant gap between rich and poor that can be easily seen everywhere. [Brazil’s public bureaucracy is one of the world’s most wasteful and the low quality education system is abysmal.] The deficit is so immense that Brazilian Senator Cristovam Buarque has urged for the eradication of illiteracy by 2016 to become a top priority. “Without this, the 14 million illiterate Brazilians will not recognize the flag that will wave at the Olympic Opening Ceremony because they will not know how to read the words “Ordem e Progesso” [Order and Progress] written on it”.

Yet Brazil is a country with an amazing potential. It is the world’s number one exporter of sugar, orange juice, coffee, beef and chicken. Unlike many countries,

Moreover, another piece that was missing in Brazil’s puzzle is expected to be announced shortly.

Rio de Janeiro has offered Woody Allen $2 million of subsidies to persuade the director to film his next movie there. It will be an opportunity to the city and the country to highlight its qualities and beauties to the world.

There is no discussion about Brazil’s outstanding potential. It is already one of the top ten largest economies in the planet and is host to some world-class companies such as Petrobras, (the largest company in Latin America), Embraer, (the fourth largest global airplane maker), Vale (the second-largest mining company in the world) and JBS (one of the world’s biggest meat producers).

Brazil’s self-esteem is higher than ever. More than ever it is time to show that the day of ‘the country of tomorrow’ has come. The world will be closely watching during the seven years to come.

30 Nottingham Economic Review

The real deal on internships Once an informal means of getting practical work experience, internships have now become an essential part of the career ladder in most professions. Employers do invest a lot of resources in training undergraduate students and subsequently recruit a large proportion of their interns to their graduate schemes. In some extreme cases, employers do not even consider applications for penultimate year internships anymore because all spaces have already been taken by students who interned with the institution in their first year (this was the case with HSBC this year). Thus, the sooner you think about gaining work experience in the industry that you would like to join as a graduate, the more chances you will have to secure your desired career.

In this section of NER we would like to provide you with three Nottingham University undergraduates’ experiences as interns in various companies around the world. Enjoy!

Data is taken from the Final Report of the Panel on Fair Access to the Professions

Bank Negara Indonesia Easter 09

By Vishal Sharma I am currently in my second year studying economics at Nottingham University. During the Easter holidays of my first year of university, I completed a spring internship at the London office of BNI (Bank Negara Indonesia). I had the opportunity to work in Accounts, Credit, and Trading, as a result of which I gained a broad overview of the workings of a bank.

At the beginning of my internship I worked in Accounts and Credit where I had to help out with analytical work using their accounts software. Tasks included numerical analysis of client account details and updating customer data on their database.

During the remainder of my internship, I spent most of my time in trading where I was shown how to operate basic functions on the Bloomberg terminals, on which the trading took place. The office was located in the heart of the city and the atmosphere was

absolutely amazing - I realised it was the sort of place I would like to work in the future!

The staff at the bank were extremely friendly and helpful and even threw a sending off party on my last day, which was extremely nice of them.

I got the chance to network with senior executives and hope to work with them again.

Nottingham Economic Review 31

Mercedes-Benz R&D

By Divya Deepthi I Interned with Mercedes Benz Research and Development India Private Limited in Bangalore, India during the summer for 5 weeks. I worked with the Business Services department on “Opportunities for Mercedes Benz power-trains in India for Business Innovation team in Germany.”

The core objective of this department was to deal with Strategy, Business Research and Analysis.

While seeking an Internship, I had forwarded my CV to the Business Services Department via Email and a few days later, the Team leader conducted a preliminary Interview over the telephone. Subsequently, I was called for a Personal Interview where I was chosen to join the team.

My Time at Deloitte

by Ben Mason I had an internship with Deloitte in the summer of 2008, based in the Leeds office. The placement started with half a week of team building and business games with the rest of interns from all the non-London offices at a hotel just outside Birmingham. This was a really good chance to get to know people in a similar position to myself and, in particular, the other interns working in the Leeds office. Following this we had some IT training in the Leeds office. For my first day in Corporate Tax, I was lucky enough to start on their ‘away day’ which meant I got meet my new

I worked within a team comprising of six Business Analysts. I was given the task of making detailed and informative reports of some of the companies that manufacture diesel engines. The companies that I personally profiled were John Deere, Navistar Inc., Mitsubishi MVDE, Simpson & Co. Limited, Ashok Leyland Limited and Larsen and Turbo Limited.

The company profile included the Company snapshot, shareholding pattern, key financial figures and the engine portfolio. The tools used to find the required information consisted of Yahoo finance, Money control and news reports. The Net Revenue and the Net Income growth rate of these companies were ascertained after a detailed study of the Annual Report.

sensitive information about these companies, such as the shareholding patterns and the revenue break-up by region. I overcame these challenges by going through the presentations and the micro reports of the Company which were basically intended for the investors.

To sum up, it was an overwhelming experience where I was given an opportunity to sharpen my career skills, whilst being able to gain an insight into the workings of a Multinational Corporation.

It was a struggle to find some

colleagues while playing on it’s a knockout style inflatables and a barbeque! I enjoyed my three weeks in Corporate Tax, the department was really friendly and everyone, especially my ‘buddy’, was extremely good at helping me whenever I needed a hand, which was quite often. I got to do a range of work including tax computations, phoning HMRC for information and researching potential new clients.

I spent the following three weeks in Enterprise Risk Services (ERS).

This started, much to my surprise, with a trip to Brussels! I worked alongside an experienced guy who gave me real responsibility from day one. Our work

centred on IT auditing, basically checking the security surrounding the accounts at big companies. After Brussels I got less exotic posts in Teesside and the outskirts of Leeds. ERS contrasted with tax in that you tended to be going to client sites and working directly with their IT departments, whereas tax was largely an office based job. Overall, I would highly recommend a Deloitte internship. It gives you a great experience in one of the ‘big four’ accountancy firms, is a well structured programme (getting to work in two departments is an excellent idea) and it pays quite nice.

by-students ISSUE 5

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for-students NOTTINGHAM ECONOMIC REVIEW

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DECEMBER 2009

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GREEN ECONOMICS [p4] ----------------------------------------------------------------------------A LOOK AT TRADE & GROWTH TRENDS

GDP growth as a result of an oil spill does not look very different from growth as a result of other, supposedly more virtuous causes.

So, is GDP a useful measure of overall well-being?

Or would it fail to alert us if the costs of economic growth came to dominate the benefits? [p18]

----------------------------------------------------------------------------NEW FINANCIAL REGULATIONS Mervyn King argued in his recent speech that large banking groups that are too big to fail are by extension too big.

The European Union competition commissioner has proposed a plan that would split banks into 3 classes namely retail banks, corporate banks and asset managers. [p10] Thanks for reading. If you wish to contribute to future editions, please contact nottingham.econ.review@googlemail.com