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I N A U G U RA L E D IT O R I A L
I am thrilled to introduce you all to the Nottingham Economic Review, and would like to thank you for taking the time to read our very first issue. The Review is the brand new magazine of the University of Nottingham’s School of Economics and is also associated with EconSoc. Its primary focus is to act as a conduit by which Nottingham students can express their interests in economic areas beyond those covered in lecture material. These can include anything ranging from discussions about your opinions on current economic issues to the application of economic theory to everyday life à la Freakonomics - examples of which are contained in this issue. The project began in September and has been running full steam ever since in order to create a reputable and distinctive magazine for our very own School, and thankfully that goal has now been realised. It has been an exciting experience for me and the Review team to initiate and launch this magazine for the University of Nottingham. A quick browse through the magazine will show that we not only have student articles but contributions also from leading economic figures, as well as articles from the academic staff discussing their varied research interests. The creation of the magazine would have been a nigh impossible task had it not been for the support and contributions from key individuals, and for that reason, on behalf of the entire Review team, I would like to extend our gratitude towards everyone who has had a hand in helping build the foundations of the magazine. In particular I would like to thank the School of Economics and EconSoc who both wholeheartedly supported the project from the very beginning, as well as our sponsors who have made it possible for the magazine to reach a wider audience than we could ever have hoped for. However, equal recognition must be given to the rest of the staff who have worked tirelessly in order to bring you all the first issue of the Nottingham Economic Review. I would like to particularly highlight the contributions of Senior Editor Romanos Priftis whose constant exuberance and dedication helped in the realization of this collective dream of ours. Finally, I would just like to once again emphasise that this magazine is made by and for the students of Nottingham university. I therefore urge all the students who have anything to say concerning economics, whether they are studying economics or not, to take advantage of the opportunity presented by the magazine and please write! We look forward to receiving your intellectual contributions. Editor-In-Chief & Founder Malik Yusuf
Contents
Inaugural Editorial 3 by Malik Yusuf Welcome from the Head of Schoolof School 4 by Chris Milner Presidential Address 4 by Mugwe Manga Student Articles
China’s Foreign Exchange Worries by Rushan Pandya
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by Pan Tsang
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It’s all about love.. and economics Staff Articles
Bad Finance and High Economic Growth: Are They Compatible? by Alessandra Guariglia
Is Economics an Experimental Science? by Chris Starmer
Special Guest Articles
The Morality of Corruption by Ananda Aisola
Reforms Essential for Economic Progress and Prosperity by Dr. George Alogoskoufis Interviews
Interview with Sir Clive Granger
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by Daniel Guest
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by Malik Yusuf
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Debt: Why the British Consumer is Heading for a Black Hole
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Interview with Evan Davis Special Features
summary by Malik Yusuf Careers
The Future is Bright for Economics Graduates by Jan Perrett
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China s Foreign Exchange Worries Welcome from the Head of School Welcome from the Head of School
I am delighted to be able to write in support of this new publication, the Nottingham Economic Review, to be run by and for students of the Nottingham School of Economics. The School has excellent students who consistently produce work that is praised by our external examiners for its high quality. The Review will provide an excellent outlet for this work, and for students’ interests beyond the curriculum. It will also provide an excellent opportunity for engaging with the wider student and professional community. I hope very much that our student body will support the initiative by contributing to and using the Review. The School’s academic staff will, I am sure, also support the Review. It will give them an opportunity to report on their research interests and about their policy and advisory work in a way that the normal teaching activities do not allow. This can only help to increase interaction between students and staff, something I am keen to promote. I wish the current editorial team my very best wishes for a successful launch, and strongly urge students and staff to back this exciting development. Chris Milner Head of School & Honorary Editor
Presidential Address Presidential Address
I am honoured to welcome you all to the first issue of the Nottingham Economic Review! As president of Econsoc, I take overall responsibility for running the society and overlooking everything from sports to social events. This academic year EconSoc guarantees a fun-filled fresh experience packed with new and exciting trips, events and career opportunities that we hope will enrich your time here at our university and beyond.
In Autumn 2006 EconSoc became associated with and lent its support to the Review initiative in order to produce the School of Economics’ first ever magazine, which features articles written by the students and staff of our very own School of Economics as well as those written by featured guests and interviews with influential figures in the world of economics. It has been an exciting process seeing the growth of our ideas, however, even more exhilarating was working with my peers and highly influential personalities in the world of economics. This is a project on which the committee and I have worked tirelessly on, in order to produce a fruitful tailor-made magazine for those interested in economics. I hope you all enjoy the magazine, economist or not! Mugwe Manga Econsoc President
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Spring 2007
Honorary Editor Chris Milner
Editor-In-Chief & Founder Malik Yusuf Senior Editor Romanos Priftis Designer Anna Pichugina
Editorial Sub-Committee Members Mario Hinojosa Pan Tsang Daniel Guest Shruti Taneja
Contributors Chris Milner; Mugwe Manga; Rushan Pandya; Pan Tsang; Alessandra Guariglia; Chris Starmer; Ananda Aisola; Hon. George Alogoskoufis; Evan Davis; Sir Clive Granger; Jeff Randall; Jan Perrett; Daniel Guest; Malik Yusuf Acknowledgements Nottingham School of Economics; EconSoc; PricewaterhouseCoopers; The Economist; The Daily Telegraph; University of Nottingham Students’ Union; Richard Disney; Hilary Deacon; Tulha Patel; Sue MacCormick; Mantas Skardzius; Adeline Hong Zheng An; Ashkan Azerkan; Kasit Rochanakorn; Guled Yusuf; Jeff Randall; Matthew Greaves; Vasileios Tokakis; Emma Sullivan; Spiros Boughers; Alec Linley; Caroline Breakwell; Carrie Levenson-Wahl Nottingham Economic Review © 2007 The University of Nottingham School of Economics Printed March 2007 by Polar Print Group Limited, Venturi House, 9-17 Tuxford Road, Hamilton Industrial Park, Leicester, LE4 9TZ
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China, a country known for maximizing the rewards from international trade, has recently achieved a new milestone in its personal development when its total foreign exchange reserves reached US$1 trillion at the end of 2006.
China's currency reserves are now so large that some economists fear they will unbalance the entire global economy.
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It was recently announced that China's foreign exchange reserves had reached $1.0663 trillion and that they are growing by approximately $18bn each month. Compare this figure to the $165bn foreign reserves that China reported in 2000, and it is clear that China’s increase in trade has been escalating dramatically. The huge surplus is undoubtedly a product of China’s success as an exporter to the world. China’s trade surplus, the difference between the amount it buys and sells from the world, topped $100bn, with the US being the major contributor to the imbalance. As a consequence of exports being far greater than imports, China receives a progressive amount of foreign currency each year, which it puts in its reserves. But China's currency reserves are now so large that some economists fear they will unbalance the entire global economy. Whilst a contrasting situation arose in Britain in the 1970’s, where a lack of foreign currency resulted in problems with the pound, it is the fact that China’s surplus is much more than China needs to cover its exports or pay for its own investments abroad that causes difficulties. A secondary problem is that the fate of the US is tied to that of China. China’s investment of $700bn in long-term US treasury bonds has enough influence to lower US interest rates by 1.5%; a situation which helped stimulate the recent housing boom. Subsequently, due to this major influence, if China decided to diversify its holdings, it could cause a collapse in the value of the dollar and higher inflation in the US. For
instance, if money was to be taken out of Treasury bills and put into, perhaps, equities, that will inflate share prices. Similarly if China decided to stop accumulating or slow down their rate of accumulation of the dollar, it could cause a dollar crash.
Economic theory would suggest that this big trade surplus would cause the Chinese currency to rise. However, due to China’s economic growth being heavily dependent on exports and investments, with little coming from domestic consumption, it is not unusual that the Chinese government wants to keep the value of its currency, the yuan, fixed at a rate tied to the US dollar (with a 3% variation allowed). This would help foreign investment, yet does not suggest a change in its long term strategy to switch its emphasis to domestic demand, something which will take time. In the shortterm it may be beneficial for both the US and China. The former obtains a cheap source of funding for its trade deficit (treasury bonds) with its inflation being kept in check as consumers continue to purchase cheap foreign goods; whilst the latter is able to maintain its export-led growth, generating jobs for its growing urban population.
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It is the fact that China’s surplus is much more than China needs to cover its exports or pay for its own investments abroad that causes difficulties.
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Yet, it is clear that any situation to loosen these huge imbalances could destabilise the world economy; unless the yuan value is reassessed, China will face an ever increasing pressure on its domestic industry. Hence, it comes as no surprise that many economists are claiming that these problems with adjustment and huge trade imbalances will generate growing protectionist pressures in the US and Europe, undermining
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It s all about love.. and economics support for free trade; a definite problem for future world economic growth.
Thus, China has been advised to diversify the use of foreign exchange. As dollar-denominated assets are by far the largest portion of the reserve portfolio, any depreciation in the dollar or falling treasury yields would lead to China suffering huge losses. Conversely if China was to use its reserves to import high-tech products and strategic natural resources, invest in huge holdings of stocks from foreign companies and inject capital into China's under-funded social welfare system, this would make the country more self-reliant. The pressure forcing the yuan higher, indicating a possible, gradual reduction in export income, has led to many quarters suggesting that the money should be spent domestically, but that raises the problem of having to convert the foreign currency back into yuan, thus adding unwanted liquidity to an economy that is flush with cash.
Currency fluctuations are also leading to many suggestions of the introduction of derivatives products, including a deepening forwards market, to help companies hedge against risks, as the yuan appreciates against the US dollar. Forwards are agreements in which assets are bought and sold at current prices for future delivery, whilst derivatives are financial instruments used to hedge risks. Options (similar to futures, but providing the buyer with the right rather than the obligation to complete the contract) and futures are the most common types of derivatives. However, banks operating in China have been banned from trading yuan derivatives in the offshore markets by China's State Administration of Foreign Exchange. Yet, foreign banks have been using offshore forwards to make bets on the yuan and avoid restrictions placed on onshore trades by the central bank. Hence, as the yuan rose for a second week on speculation that the central bank will let the currency strengthen to prevent exports from increasing China's record trade surplus and foreign-exchange reserves, rest assured that many banks and private investors will be watching the Chinese market extremely closely.
By Rushan Pandya
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When it comes to relationships, the typical scene is of a man chasing a woman; the latter is therefore considered the selector. To this extent, women seem to struggle less when it comes to finding a partner. In this article, I am not going to argue the superiority of sex in the matter of love but instead, I will apply economic theory to a situation that every individual encounters, and perhaps shed light onto how economics can help just about anyone when the time comes to make their next decision about a future relationship.
Generally, most of us want to find the perfect lover, though some may prefer to remain single rather than in a relationship, or may prefer a casual partner instead of a committed relationship. However, for most people, a relationship is an essential component of life.
In this simple model, our satisfaction, or in economic terms utility (U), attained from a relationship is represented as a function of benefit and cost in the following manner: U relationship = Benefit – Cost where
Benefit = f (happiness, pleasure, material reward, etc.) Cost = f (money, time, feeling, expected loss)
Before talking about the utility of relationships, we should recognise the costs of not being in a relationship (e.g. loneliness). One may enjoy being single, but as all romantic comedies tell us, there is always that special someone for everybody and by just sitting around on your own you may be foregoing the possibility of higher utility.
There are a number of obstacles (or barriers to entry if you want to use the economic term) in the way of beginning a relationship. These include, lack of ‘luck’ in finding a person just right for you, and imperfect knowledge. The latter leads us to make uninformed decisions, or sub-optimal choices. While lack of luck will result in higher ‘transaction costs’ (i.e. it would take a lot longer to search for and match yourself with someone), which would put you in a
disadvantaged position.
If we assume that one must confess before forming a relationship, then for each confession, there is an implied economic cost. It announces your preferred choice and deters other options, at the same time bearing the risk of rejection and a broken heart, which would perhaps lower your status and decrease confidence. Although a ‘yes’ would clearly provide a positive return, the expected return, due to the risk of rejection, is likely to be low and possibly even negative.
Let us quickly consider one example: if upon confessing, you get a positive reply with a 50 percent probability and a negative reply with the same probability, where for a positive answer your utility is 1 and for the opposite it is -1. Then a person who is typically averse to risk would never confess due to the uncertainty involved and as the expected utility of confession is zero.
Hence, men and women are wise to adopt different strategies in order improve the likelihood of obtaining a positive answer; they may spend extra time chasing to impress, please and search for hints. The matching process is therefore largely inefficient as we have to make the right choice of going after the right person, and the uncertainty and costs involved make the likelihood of doing so very slim. We can examine another model where an individual seeks to maximise their satisfaction by dumping their current partner for a perceived better partner, provided there are no ‘transaction costs’:
In the short-term, the lack of transaction costs means there is a dynamic process of matching. People would start to form relationships with little knowledge, and they would make decisions based on the most apparent traits of their potential suitors (their appearance), which would result in a chain of mismatches. The result is that the intangible inner qualities would be less valued, and most people would just look for the most attractive partners. There is therefore no equilibrium in this model, since the dynamic process and inefficiency involved create no stable outcome.
“perfect” candidates and a large number of less ideal ones, it is not possible for us all to reach our maximum utility. However, by applying the marginal utility theorem it is apparent that an equilibrium state occurs at the point where
marginal cost is equal marginal benefit.
The components of cost incurred in a relationship include money, time, feeling and expected loss. Money refers to material sacrifice in the form of things such as gifts, and going out. While time refers to the time spent together. Feeling is the commitment, determination and care offered to the counterpart. Finally, the fourth component, the expected loss, is the expected cost of a broken heart, the state of distress, and the potential loss of confidence and trust. It is ‘expected’ as in the long run, we cannot avoid loss (e.g. death of an aged partner).
One person’s cost is another’s benefit; a person receives gifts and attention at their partner’s expense. This fact may explain the typical attitude of most individuals as they would generally put in more effort (incur more costs) in order to preserve relationships with more attractive partners. One can therefore say that more attractive men and women have the ‘upper hand’ in the relationship as their partner incurs many costs simply to continue the relationship.
The components in the model are not static and they are dependant on the character of the relationship as we employ different strategies in a game and try to outwit the other. And although the models employed have displayed the already commonly known fact that relationships are far from perfect, one can still pray in hope that they one day luckily find “the one”, their perfect match.
By Pan Tsang
Seeing as there are only a small number of
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Bad finance and high economic growth: By Alessandra are they compatible? Guariglia A healthy financial system is generally seen as a prerequisite for high economic growth. Financial systems foster growth as they produce ex ante information about possible investment; monitor investment and exert corporate governance after providing finance; facilitate the trading, diversification, and management of risk; mobilize and pool savings; and ease the exchange of goods and services (Levine, 2005). Recent articles, based on data for several countries, have shown that those countries with better financial systems also benefit from higher growth.
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China is a counter-example to this finding. It has in fact a poorly performing banking system, but has experienced phenomenal growth rates in recent years, of the order of 10 percent per annum. Until recently, despite the large size of its banking sector, most bank credit was directed to inefficient state enterprises, leaving good private enterprises without access to external funding. The system was liberalized at the end of 1990s, when the Chinese constitution acknowledged the private sector to be an integral part of the economy, and theoretically it is not in place any more. In practice, however, banks still consider private enterprises to be riskier than their public peers either due to their short credit history or lower chance of being bailed out by the government. Moreover, lending by state banks is still determined by policy reasons, rather than by commercial motives. Yet, China has experienced unrivalled growth rates in recent years, and this growth has been driven mainly by private firms, which are discriminated against not only in terms of access to external funding, but also in terms of property rights protection, taxation, and market opportunities. Allen et al. (2005) document that between 1996 and 2002, the private sector grew at an annual rate of 14.3 percent, while the combined state and listed sector only grew at 5.4 percent.
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FDI may explain how China achieved
unusually high growth rates, despite its
malfunctioning financial system.
Alessandra Guariglia is an Associate Professor and Reader in Economics. She joined the University of Nottingham in July 2003. Her research interests are in the areas of applied econometrics and macroeconomics. Currently, the focus of her research is on firms' behaviour under imperfect capital markets; the economics of transition in Eastern Europe (including Russia) and China; and the determinants of household saving and consumption decisions. So where do private firms get the funding necessary to sustain their high growth? And how can high growth take place in the presence of a highly distorted financial system? Sandra Poncet and I have used data from 30 Chinese provinces (over the period 1989-2003) to answer these questions. We have shown that indicators measuring the level of state interventionism in finance are generally negatively associated with growth. This suggests that financial distortions represent an impediment to growth in China. Considering that China is among the top foreign direct investment (FDI) recipients in the world, we have then claimed that FDI may explain how China achieved unusually high growth rates, despite its malfunctioning financial system. Specifically, we have argued that those private firms that are unable to obtain funds from local banks, may form jointventures with foreign firms, which allows them to obtain the capital they need to grow. In support of this hypothesis, we have found that the negative effects of financial distortions on growth tend to be weaker for high FDI recipients.
Other explanations are also obviously possible. For instance, private firms can make use of alternative financial mechanisms such as internal finance, non-bank financial intermediaries, and coalitions of various forms among firms, investors, and local governments to sustain their high growth. Yet, whichever the explanation the Chinese case demonstrates that poor finance and high growth are not incompatible after all.
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Is economics an experimental science?
Is economics an experimental science?
By Chris Starmer
Chris Starmer is Professor of Experimental Economics in the School of Economics and Director of CeDEx (the Centre for Decision Research and Experimental Economics). He is a member of the editorial boards for Experimental Economics and the Journal of Economic Psychology. For those interested in the work of the Centre, you can see discussion papers and even sign up to participate in experiments at: www.nottingham.ac.uk/economics/cedex/
It has been part of the folk law of economics that the discipline is a non-experimental science. For instance, when I began my study of economics as an A-level student in the late 1970s, my first text book (Lipsey’s Introduction to Positive Economics, 1979) began with a chapter on the ‘Science’ of economics. This explained that the primary purpose of economics as a science is to produce theories of economic phenomena and to test them by comparing their predictions with the actual behaviour of the systems they are supposed to model (be they firms, markets, households or whatever). But unlike some sciences (such as physics or chemistry) where experimental methods have played a primary role in theory testing, Lipsey argued that economics is more akin to astronomy: we can watch events unfold and compare our observations with theoretical predictions but rarely, if ever, can we intervene in economic processes purely for the purpose of scientific testing. But here’s a simple economics experiment you can try yourself. Get a group of people together (thirty or more would be good). Divide them randomly into two groups (have them in different rooms if possible). Give the members of one group a good of some kind (say a Mars bar each) and the members of the other group some other good of similar value (say a can of Coke each). Then, give each individual the opportunity to swap the good you just gave
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them for the other one. Standard consumer theory (i.e. the stuff based on indifference curves) predicts that you should find that roughly half the individuals will choose to swap (can you work out why?). If you run this experiment, however, you are likely to find that individuals will have a tendency to stick with what you give them (this is what some have called the ‘endowment effect’, see Knetsch, 1989). What do you make of that?
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Some economists are even using experiments to explore questions in macroeconomics and political economy.
So you can do experiments in economics but what are they good for? When I was a graduate student, experiments were largely perceived of as a narrow, and perhaps somewhat cranky, specialist enterprise. But in recent years, there has been a near explosion of interest in them, growing numbers of economists are running them and while there remain sceptics, it is hard to deny that the pursuit has established itself as a recognised research tool in economics. No doubt this is partly a consequence of us learning about the scope of experiments. A glance across the contemporary literature shows that experimentalists are engaging with a very wide range of research questions. Some research focuses on ‘foundational’ issues
(e.g. what sorts of preferences do people have?); another branch examines behaviour in stylised strategic settings or ‘games’ (testing, for example, whether people play the -pure or mixed– strategies predicted by game theory); in another major research programme, experimenters construct ‘real’ markets to observe how trading is affected by various features of trading institutions (e.g. how many traders are there, what search costs do consumers face …?). Perhaps surprisingly, some economists are even using experiments to explore questions in macroeconomics and political economy. As such, these days, it’s probably misleading to think of experimental economics as a sub-field of economics: more accurate to think of it as a tool that can be turned to investigate a wide, and apparently broadening, range of questions. Several other aspects of experimental economics make it an attractive area to get into as a researcher. Being a young and expanding field makes it relatively easy to find interesting and worthwhile research questions to follow. Moreover, I predict that anyone who starts doing experiments regularly will quickly encounter surprising experimental results: such surprises make the activity exciting and constantly throw up new questions to pursue. Another appealing feature of experiments is that they provide a new, and relatively direct, way of connecting economic theory with evidence. Moreover, this confrontation is tending to produce some striking, and thought provoking findings. For example, research into individual decision making is producing large volumes of evidence which challenge the standard economic conception of the individual as driven by a bundle of consistent and stable preferences. While that looks like bad news for
preference theory, the news in not all bad and some economic theories seem to work better than we might have expected. For example, research using experimental markets shows that predictions (of, say, trade patterns and prices) based on competitive equilibrium theory often work well even in environments where assumptions which underpin those theoretical predictions (e.g. perfect information) definitely don’t hold (see Smith, 1994). For me, however, the most exciting thing is seeing how experimental research is promoting and shaping the development of new economic theories that are grounded in observation. A good example comes from experimental games where the evidence clearly illustrates that humans are not simply own-payoff maximisers. Consequently, new theories of ‘other regarding’ motives have been explicitly developed in attempts to explain observed patterns in experimental data (a good place to find out more about this literature is Camerer 2003). Of course, producing new theories is not the place to stop – the next thing to do is test them. But to my eye, experimental economics research is often characterised by lively and sustained dialogue between theory and evidence. That dialogue, I would dare to say, is more active in experimental economics than it is in some other areas of economics. Ongoing interplay between theory and evidence is, as it happens, precisely what Lipsey argued is essential to a healthy science. He, like most of us a few decades ago, had not yet realised how useful experiments could be in that dialogue.
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Corruption is single-handedly one of the biggest factors preventing less economically developed countries to progress both economically and socially. It creates a rift in society which results in those in power becoming richer and the impoverished remaining poverty stricken.
India is a unique case as ever since the country opened up in the mid-1990’s it has seen remarkable economic growth with a real GDP growth of 8.5% during 2006. This trend is set to continue due to the increasing role of the country in the international marketplace. Furthermore, this growth has resulted in great prosperity for many who have become wealthy overnight. This increased wealth has attracted foreign investment into the country and every day new and more expensive products are seen in stores as with increased prosperity comes increased demand for luxury goods.
Only a few years ago this would have been unthinkable and people would have focused on saving rather than rampant consumption. However, with the economy doing as well as it currently is, IT booming and stock market prices continually breaking previous records, things have changed. Manufacturers are quickly realizing India’s potential due in part to the fact that even though India faces the problems of many less developed countries, its upper class, who buy large quantities of luxury goods, greatly exceed the number of their counterparts in many European countries, making it one of the most lucrative markets for luxury goods.
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However, there lies a problem with this apparently rosy scenario: the Indian government is still the largest employer in the nation. This is a problem due to the fact that in the past, civil servants of the officer rank were once treated as part of the elite of society and had salaries that were on par with the private sector. However, the new found wealth enjoyed by India has resulted in a huge increase in private sector salaries whereas government salaries have remained relatively unchanged over the years. Due to this, the social and financial status of
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government employees has significantly declined and hence, many with the ability to misuse their positions for financial gain have chosen to do so in order to remain on par with those in the private sector.
The new influx of foreign goods and luxury items has made most government employees feel as if they have been left behind while the rest of the country has been continually getting more prosperous. It is for this reason that corruption is so rampant in India. When a high ranking civil servant is making $300 a month and sees graduates from mediocre business schools making three times that amount soon after graduating, it is only natural that one might resort to illegal means in order to remove the discrepancy. The means to do so are readily available as government employees can force bribes out of just about any action they undertake, be it from granting a simple building permit or from a multi-million dollar developmental scheme. While the cost of living remains relatively low, the government salaries nonetheless barely allow employees to spend on things other than the bare necessities. Included is the fact that many face the added responsibility of having to take care of their family which gives them a bigger reason to resort to receiving money by means other than just their salaries. The combination of power and a lack of financial resources results in the perfect breeding ground in which corruption can lay its seeds.
Recently a proposal for a pay hike for all government employees was proposed, however it was quickly met with its fair share of critics, who proclaimed that the government was already too much in debt and that this would merely worsen the situation causing all social and infrastructural programs to go awry. Yet how can one really expect those in the government to continue living on the same salary they earned a decade ago as inflation continually rises. If anyone just stopped and thought for a second, they would realise that if the pie were more evenly distributed, civil servants would not have to resort to stealing government money which would free up millions of dollars for their original purposes. The solution is not a short term one but it involves a combination of getting rid of a number of government jobs in order to make it more efficient and less of a financial burden in accordance with measures to ensure that government salaries remain on par with the private sector. This can only be done if first of all, the collectors whose duty it is to collect taxes in their district are made to do so efficiently. This
is required because tax collection in most districts and states is pitifully low and the perennially indebted state governments are forced to rely on central government aid to survive, thereby creating another burden on the latter’s already low cash supply. Furthermore after these changes are made, measures to indict those who continue to be corrupt is necessary simply because the money would benefit society by going to its originally intended cause.
The problem of corruption needs to be addressed, and it needs to be addressed immediately. Until changes are made however, corruption is simply a correctional response to an increasing discrepancy between the rich and the impoverished powerful.
Ananda Aisola, McGill University
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Many with the ability to misuse their positions for financial gain have chosen to do so in order to remain on par with those in the private sector.
All of this makes me wonder whether this problem, which is surely only bound to get worse with more and more investment into the country, is a concern of anyone at all. India is currently listed 70th in Transparency International’s Corruption Perceptions Index showing that there is still a long way to go if it plans on getting rid of corruption.
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Reforms Essential For Economic In Greece, which joined the euro zone in 2000, the monetary stability and low interest rates associated with the euro have boosted private consumption and investment and facilitated servicing of the public debt. Unfortunately, however, the failure of the previous administration to push a reform agenda and rationalize public spending has led to disproportionate budget deficits and to a decline in the competitiveness of the Greek economy, thereby reducing the possible benefits from the euro. The present government has clear objectives: to contain budget deficits, to make the economy more competitive and to implement long-needed reforms. We have not wasted any time. Since the new government took office in March 2004, we have introduced multiple reforms in every area of the economy. We have reformed the tax regime by reducing corporate tax rates and making tax procedures simpler and more straightforward. We have introduced a new Investment Incentives Law to promote regional convergence and encourage investment aimed at exploiting Greece’s comparative advantages. We have introduced a Law for Public-Private Partnerships, so that we can build the necessary infrastructure more cheaply, more quickly and more efficiently. Our ambitious privatization agenda is already ahead of plan. Privatizations from March 2004 till the end of 2006 generated a total of €4.6bn, most of which came from foreign direct investment.
through the reduction of public spending. We have also introduced reforms to make the banking sector more efficient and competitive. We have pushed forward with long-awaited reforms in the labor market and have substantially reorganized the public sector
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The Greek people are in favor of our reform agenda and have realized that increased State intervention would not necessarily lead to optimal economic performance.
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At the same time, we have enacted a policy of gradual fiscal adjustment to bring our budget deficit below the three percent ceiling imposed on euro zone members. In 2006 the general government deficit is being reduced from 7.8% of GDP in 2004 to 2.6% of GDP. This significant reduction is primarily achieved
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Greece is not only the gateway for foreign investors to Southeast Europe, but also the gateway for Southeast Europe to the international capital markets.
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to fight red tape. It must be noted that Greece has emerged from an era of heavy government regulation, in which the State was practically omnipresent. This made our task much more difficult. Careful maneuvering was required to ensure maximum possible consensus. Currently, however, the Greek people are in favor of our reform agenda and have realized that increased State intervention would not necessarily lead to optimal economic performance. They have realized that well-targeted reforms are essential to catch up with the productivity and income levels of the more prosperous areas of the European Union. The Greek economy is responding satisfactorily to our reforms. Despite high energy prices and slow overall growth in the euro zone, the Greek economy is expected to grow by 3.8 percent in 2006, one of the zone’s highest rates. The economy is profiting from strong private consumption, a 13.1 percent increase in exports in 2005 compared with 2004 and a double-digit increase in foreign visitors. Unemployment fell from 11.3% in the 1st quarter of 2004 to 8.8% in the 2nd quarter of 2006, despite the end of all the activity surrounding the Olympic Games, which many economists feared would cause a considerable slowdown. Greece is also playing an important role in incorporating the surrounding region into the world economy. With the exception of Turkey, Greece’s neighbors in Southeast Europe (Albania, the States of Former Yugoslavia,
Progress and Prosperity by Dr George Alogoskoufis Bulgaria and Romania) have been coming out of a long period of central planning. These countries are now staging a remarkable recovery. They are enjoying high rates of growth, massive inflows of foreign direct investment and improving social conditions. They are gradually adjusting to the requirements of an open economy. The European Union has helped finance major infrastructure projects that aim to make economies in Southeast Europe part of the wider international economy. Among the measures that Greece has taken to help these countries are the following:
* In less than ten years, Greek direct investment in Southeast Europe has exceeded €12 billion. * Greece is the leading foreign investor in Albania and FYROM and ranks among the top three foreign investors in Bulgaria, Romania and Serbia. * Greek banks operate, directly or through their subsidiaries, a network of over 1000 branches across the region, employing 16,000 people and accounting for approximately 16% of the banking market share in Southeast Europe. * Greece has received more than 2 million immigrants from Balkan countries, relieving pressures during the transition from a centrally planned to a market economy. * The Greek government is committed to speeding up the implementation of the Hellenic Plan for the Reconstruction of the Balkans allocating €550mn and looking forward to a completely new economic environment in the economies of the region in the years to come.
Greece is not only the gateway for foreign investors to Southeast Europe, but also the gateway for Southeast Europe to the international capital markets. We help our neighbors gain access to international organizations and we fully support their efforts to join the European Union in the future. At the same time, we commend our neighbors’ efforts to open their economies further to the rest of the world and to introduce rapid reforms. Although it may be too soon to talk about the Southeast Europe economies joining the Euro, I believe this could be feasible sometime in the next decade. I am convinced that the wider region will enjoy an even more impressive economic performance in the future, and that it could well become one of the most attractive places for business in the years to come. And this development will be the fruit of the methodic and decisive implementation of structural reforms.
George Alogoskoufis is the Minister of Economy and Finance of Greece. He is a Member of the Hellenic Parliament for the governing New Democracy Party, and was first elected in 1996. He was Opposition Spokesperson on Economics from 1997 to 2004. He served as Chairman of the Council of Economic Advisors at the Ministry of National Economy in 1992, and was responsible for drafting the First Convergence Program for the Greek Economy. He has been an advisor to the World Bank and the European Commission, as well as to other international economic organisations. Mr. Alogoskoufis obtained an MSc in Economics in 1978 and a PhD in Economics in 1981 from the London School of Economics. He holds a Chair in Economics at the Athens University of Economics and Business and was Lecturer and Reader at the University of London from 1984 to 1992. He has written four books and has had over 40 articles published in some of the most prestigious international academic journals. His book “The Drachma: From the Phoenix to the Euro” was awarded, in December 2002, the annual Prize of the Academy of Athens
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Interview with Sir Clive Granger Sir Clive Granger received the 2003 Nobel Prize in Economic Sciences, sharing it with Robert Engle. He received his B.A. in Mathematics and Ph.D. in Statistics from the University of Nottingham and eventually went on to teach at Nottingham for 22 years before leaving for UCSD in 1974. In 2005, the former Economics and Geography Building was renamed the Sir Clive Granger Building in his honour. What led you to take an Undergraduate degree at Nottingham? I went to school in West Bridgford and so Nottingham was not my first choice as the tendency was to go to university in another city but I also wanted to take a combination of Maths and Econ, and Nottingham was the only place offering. I was the only student in the course.
How were the university and the city like at the time? When I started at Nottingham the city was similar but with some substantial differences, the city square was very active as all the buses left from there and it was surrounded by major shops. From just south of the square to Trent Bridge was a large area of very poor housing and rather depressing. The big difference between then and now are the fogs, which used to be thick and frequent , but after the law was changed and made the burning of coal illegal in houses the fog vanished, as it did in London. In 2003 you received a Nobel Prize in Economic Sciences for "Methods of analyzing economic time series with common trends (cointegration).� How did your interest in time series emerge and in what ways do you think your discoveries have contributed to econometrics? My interest in time series started once I started to look for a topic for my thesis. I found just one book on the topic concerning economics and realised that it had great potential. Apart from a few wrong turns, such as spectral analysis, I have helped develop new forms of model and approaches that have greatly changed the way econometrics is done. You only have to compare the contents of econometric texts thirty years ago, where time series methods got a brief mention at the back of the book to now where they take up most of the space. Time series methods are greatly used in macroeconomics and in finance. My development of ideas such as 'causality' and cointegration' have played central roles.
What impact has the Nobel Prize had on your life? Since getting the Nobel Prize I have received many exciting invitations, so that in 2006 I visited 12 countries. I also interact with some well-known people.
Do you feel your education and teaching experience at Nottingham gave you the tools for your success in the field? My education at Nottingham provided me with a sceptical viewpoint about economic theory and a solid basis in Maths and Statistics, which has proved useful. According to your autobiography, you were surprised at the age of 23 to be appointed the position of Junior Lecturer in statistics at Nottingham. This must have been an interesting experience for you. Could you tell our readers a bit about this? At the age of 23 I was in the second year of my Ph.D. and knew a certain amount of theory, but little that was practical. At this time universities around the country were expanding rapidly. The Maths Dept. at Nottingham obtained a position for a Junior statistician but only got one applicant, which they found embarrassing and so asked me to apply. I was reluctant to do so but did it to please them once I was assured that there was no chance that I would get the job. I entered the interview with no nerves and later found that the other candidate, who was very well qualified, annoyed the committee so I was offered the position. In your eyes how has the study of economics and econometrics changed over your career? The biggest changes over my years has been the growth of Finance as a field, the speeding up of computing and the increase in the amount of data available. Although I am not a particularly good observer, economic theory seems to progressing more in a circular pattern than in a straight line. The battles between theorists and empirical economists are exactly same now as they were a hundred years ago.
How has life been treating you now that you are retired? Retiring is the best thing that I ever did, no more lectures or committees, I don’t referee papers for journals, I do not need to publish and I can travel whenever I want to. My wife, Lady Patricia and I go to the South Island of New Zealand for two months each year, in their spring, which is magnificent.
Interviewed by Daniel Guest
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Interview with Evan Davis
Evan Davis has been the BBC’s economics editor since 2001 and has been working for the BBC since 1993. He has won several awards including the Work Foundation's Broadcast Journalist of the Year award in 1998, 2001 and 2003, and the Harold Wincott Business Broadcaster of the Year award in 2002. He is also the host of BBC Two’s Dragon’s Den, in which entrepreneurs pitch their ideas to business experts (known as the ‘Dragons’) in order to acquire funding. What, in your view, are the global economic issues that currently require priority attention from the international community?
I think there are what one might call the big long term issues, and the more short term, macro issues.
Under the big long term issues, I'd mention the obvious ones: climate change, global poverty and the rules of world trade. Of course, these go beyond economics, but economists should get stuck right in to them. We have a lot to contribute. It's good that the profession has been given some prominence on climate change with the Stern Review. Who else can design efficient incentives and promote the appropriate use of price signals to alter behaviour? Who better understands the "prisoners' dilemma" which characterises the problem of reaching agreement on these issues?
Perhaps more immediate though, in direct economic impact, are the macro economic problems facing us at the moment. To use a corny metaphor, it is as though the world economy is residing comfortably in San Francisco -- we are in a pleasant situation, the climate is fairly benign, but there is an enormous great fault line underneath us that threatens at some stage an unpleasant earthquake.
In the case of the world economy, that fault line relates to the dependence of the world on a probably unsustainable imbalance between low savings in the west and high savings in Asia. Asian savings have (partly) led to low real interest rates that have encouraged the Anglo-Saxon economies to borrow and spend, and to drive up asset prices (from houses and shares to vintage wine and renaissance art). If real interest rates rise at some point, we may find the debt we have taken on to be uncom
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fortably high, houses to be overvalued and consumer spending to be curtailed. That could create a nasty bump.
Which of these do you believe most affects the UK?
The story of global imbalances looks pretty significant to the UK. We are one of the economies that has really responded to low real interest rates by borrowing and spending, so we are one of the countries that may turn out to have overdone it, if conditions now change.
In your book ‘Public Spending’ you argue that public services could be more efficient and productive by hiring competitive private service firms to supply them. Which public service do you believe requires this sort of change most urgently?
The purpose of the book was to highlight some of the differences between traditional public sector provision, and market provision. My view is that there is nothing magically better about one type of service over the other. I'm sceptical of the view that public sector workers are nicer or more caring than private sector ones, or that private sector workers are innately more industrious and hard working than public sector ones. What is the case though is that there is more fluidity in the market sector. It is easier for a new, superior provider to take business from an incumbent.
For example, take the case of public sector schools in this country. We have traditionally tended to only open new schools if there are more children than there are school places in an area. But imagine a market driven schools system, you would probably get new schools
even if there were already adequate places -just as long as a new provider thought he could provide better places that parents would want to send their children to. In the short term, that makes little difference. In the long term, it can make a very big difference.
Of course, there are costs to having a marketised schools system -- you probably end up having more school places than you need. And there might be other social issues too. But it is worth at least thinking about the long term effects of letting the market allocate capital, rather than the administrators.
As to your question, I don't have a strong public view about what we privatise or marketise - it's just a matter of people being aware of the different ways of running a section of the economy, and the benefits and costs of each.
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Dragons’ Den shows the viewers that business is something on which we are all entitled and qualified to hold some opinions.
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Do you believe that your show, Dragons’ Den, has affected entrepreneurial spirit in the UK for better or for worse?
Undoubtedly for the better. That's not just because it has promoted the idea of entrepreneurship in a populist format, but also because Dragons’ Den shows the viewers that business is something on which we are all entitled and qualified to hold some opinions. Unlike the complicated, technical stuff you might read in the business section of a newspaper, about rights issues and mergers, Dragons’ Den brings business home to people by inviting them to form their own view of products pitched to the Dragons. As a viewer, you cannot but help ask yourself "will that sell?" when an entrepreneur pitches, and by getting people to make that judgement, the programme makes business accessible. Business suddenly feels closer to the viewer than they might have realised it was.
You were once quoted, referring to your predecessor Peter Jay, saying “his insight was that economics journalism is not about reporting the facts, there are too many facts.” What, in your opinion is economics journalism about?
It is about drawing the big story from the multiplicity of data out there. It's like watching the waves lap on to the shore of a beach. You really don't want to be too obsessed with any one wave; you want to look at the pattern in the waves to determine whether the tide is coming in or going out. Many city economists are a bit focussed on the short term data flow, and thus lose sight of the medium term story that is what really matters.
How do you use economics in your daily life (other than at work)?
Well, I think very clearly about non-economic issues in my life, because economics is great for giving you analytical tools to organise your thoughts on issues. But I don't use my economics brain to play the markets or anything, so I struggle as a wage slave like most other people. Do you have any suggestions for our magazine?
Produce a couple of issues and then get feedback as to what the readers like or don't like. I'm afraid I don't know, and nor do you. So your job is to acquire information about the tastes of the buyers, and the skills of the writers -- and then to edit them into neatly matching combination. But business is really about acquiring information, and then using it cleverly. And the best information in this context, incidentally, is not gained by asking people questions, but watching what they buy or read.
Interviewed by Malik Yusuf
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DEBT:
Debt: Why the British Consumer is Heading for a Black Hole
The School of Economics was recently lucky enough to host a lecture by editor-at-large of the Daily Telegraph, Jeff Randall. The lecture, entitled ‘Debt: Why the British Consumer is Heading for a Black Hole’, brought Mr. Randall back to Nottingham where he studied economics as an undergraduate student. It focused on problems that represent a potential threat to the wellbeing of British consumers; problems that remain largely unknown to the average person and of which he focused on three: personal debt, stock market performance, and pensions. However, before discussing the first problem he introduced the topic with the caveat ‘Just because we’re spending more, it doesn’t necessarily mean that we’re all getting richer,’ referring to Britain’s apparent economic success over the past decade.
When talking about debt he began by discussing the fact that due to recent low levels in interest rates Britons have been loading up on debt, leading to unprecedented levels of debt, which in his view “is a time-bomb ticking under the British economy.” He included a number of facts and figures in his argument, the most surprising of which is that fact that the British public (excluding the government) currently owes £1.3 trillion, which surpasses the external debt of both the entire continents of Africa and South America combined. Such debt, he argued, is “creating a very sizeable underclass in a debt trap,” as the 10% most indebted people increase their borrowings by more than 30% annually. He continued, stating that the problem will likely be made worse by house prices as about four-fifths of UK personal debt is secured against the value of houses and recent trends indicate that a property crash similar to those experienced in 1973 and 1990 could soon be upon us. He went on to quote Roger Bootle, who in his book, Money for Nothing wrote “Just as in the dot.com boom, people think that money will cascade to them from rising house prices, without effort or desert, merely by sitting there – money for nothing. The bursting of the house-price bubble will puncture this illusion and bring people face-to-face with the grim realities of their financial situation.”
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He linked his next two topics, stock market performance and pensions, together, asserting the fact that due to the constant share price increases and overoptimistic assumptions about returns a number of companies, encouraged by the Conservative government, significantly slowed down contributions to their employee’s funds as these schemes were over-funded. These companies foolishly forgot “that the surpluses of the fat years were there to protect pension funds from starvation in the lean years.” However, when the bubble finally burst many companies, including British Airways and the Royal Mail, were “left nursing massive pension-fund deficits.” He carried on about how this, unfortunately, was not the only problem, as increased life expectancy and an aging population would lead to “too many people drawing out, and not enough paying in,” in another words the “funds are being bled dry.” Although all the problems outlined in the lecture pose a significant threat to Britain, Mr Randall came up with a solution, albeit one that may prove to be unpopular; “we’re all going to have to work longer, save more and spend less.”
The future is bright for economics graduates
Students choose their degree subject for a variety of reasons. Some of you may have enjoyed studying it at A-level, others may have viewed it as a route into a specific career. Whatever your reason, it’s a good choice. Economics graduates are successful in the job market and can access a wide range of careers within the UK and overseas. According to the most recent statistics on the destinations of graduates, only 5% of Nottingham Economics graduates were unemployed six months after graduation. That’s much lower than the national average – so most of you will be able to start paying off your student loan pretty quickly!
So what do Economics graduates do?
Well, the destinations show that they are successful in both the public and private sector – and not all of them are accountants! The financial sector has always been a big draw for Nottingham graduates with a large number going into professional services, banking and investments. Could it be the salaries? Surely not! It’s much more likely to be the excellent development opportunities, the access to professional training and the chance to live and work in an exciting and challenging sector (trust a Careers Advisor to write like a CV!)
But it isn’t only finance. Nottingham Economics graduates are also to be found in marketing, law, consultancy, government, actuarial work as well as teaching. Most employers welcome the combination of skills which an Economics degree gives you – numeracy, problem solving, analytical skills, creative thinking and so many more skills that you earn in your course of study. So if you’ll excuse the personal comment, you’re an attractive proposition. You can find details of the destinations of Nottingham graduates at the Centre for Career Development in the Portland Building.
Is one degree enough?
There are an awful lot of graduates in the UK and you may feel that an extra degree will be helpful. We all know that students in other European countries often study for longer and so may seem to offer more to a potential employer. In many cases, your undergraduate degree is sufficient for UK employers and their training programmes are designed to give you all the knowledge you need to do the job. However, in other cases, postgraduate study might be useful. For example, if you want to be an economist or you want to work in development, then a Masters programme could be really essential. The statistics show that Economics graduates go on to study a range of courses including finance, international relations, law and business. Just be sure it’s right for you, before you add to your mountain of debt. Is it essential and is it going to add value to your future career? Of course, if you really, really want to do it – go for it – but don’t tell your parents that I said so!
Who’s going to employ me?
Just about any of the larger graduate recruiters will be interested in you – both private and public sector. Sometimes you have so much choice, that it’s overwhelming. And all those presentations in the autumn term! You can feed your whole house from the scraps!
Economics graduates are working for the major banks, the government, the NHS, the Big 4, advertising agencies, IT consultancies and many more sectors.
Equally, there are really exciting opportunities in SMEs (small and medium-sized enterprises) where a graduate can really forge ahead in specialist roles. So don’t be blinkered – look at the whole range of employers – you may find exactly what you want outside the ‘biggies’. CCD has contacts with large and small employers, so look before you leap.
Summary by Malik Yusuf
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Get some experience
Virtually every employer will look at your work experience, so get that sorted as soon as you can. Whether it’s an internship or some other summer employment, it’s going to be critical in your applications. Voluntary work is good too – both here and overseas. If you’re an international student and you can’t get any experience in the UK, then look for some back home – employers will value it just the same. And I know it’s really boring to listen to a careers advisor in your first year, but if you are a first year, get involved in university societies if you can. It really does help develop your CV and you’ll certainly enjoy it. It’ll save a lot of heartache in your final year when you’re filling in all those dreadful online application forms. Remember that CCD advertises all kinds of work experience and internships, so have a good look at the web site.
Need any help?
Come and talk to someone at CCD. We’re in the Portland Building above the banks – and you must have visited the banks sometime. There’s loads of information in the Centre and lots of friendly (and knowledgeable) people to talk to. We even have Open Days with drinks and muffins – how desperate is that!
If you can’t make it down the hill, remember that we have a really useful web site www.nottingham.ac.uk/careers - you can get to it through the portal and through your own school intranet. And I’ve started a special page for you http://www.nottingham.ac.uk/careers/students/start/subject/notts_subjects.php which contains more information and will shortly have case studies.
So all the work is worthwhile – honest! Your future should be bright – whatever colour you choose it to be .
Jan Perrett Deputy Director, Centre for Career Development
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Next Issue’s Focus:
Development Featuring an inter view with the United Nations Industrial Development Or ganization DirectorGeneral Kandeh Yumkella
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