Issue 21 by Nottingham Economic Review

FEATURE

ISSUE 21: October 2020

TOP STORY

A SCRAMBLE FOR THE ARCTIC HOW MELTING ICE IS SHIFTING THE FOCUS OF INTERNATIONAL SHIPPING AND GEO-POLITICS

Dear Readers,

On behalf of the NER team, it is our pleasure to present the 21st issue of the Nottingham Economic Review. The NER continues to offer students from a variety of degree backgrounds from the University of Nottingham as well as other universities around the world the opportunity to showcase their economic and political knowledge and interest in unique topics of their own choosing. This is the first year the Nottingham Economic Review has gone completely virtual, given the impacts of Covid-19. As a result of these unprecedented changes, the NER has had to adapt and try to function in a way which has allowed our team to function from remote locations. This issue includes a selection of articles written by our own team of Editors-in-Chief as well as our associate editors highlighting the array of talent at our university boasts. Of particular note this year are the articles receiving the Gainsborough Prize (an essay competition run by the NER each summer) and we would like to extend our congratulations to the winner Luke McWatters (Associate Editor) and his thought-provoking article “A Scramble for the Arctic? How melting ice is shifting the focus of international shipping and geopolitics.” In addition, our runner-up articles “Isn’t it time America really paid back its debts for slavery?” written by Keval Shah (Editor-in-Chief) and “Who runs the World? – Discussion of Engineered Corporate Equality” written by Jessica Richens (Editor-in-Chief). These articles along with several others are proudly displayed in this issue and we sincerely hope you enjoy reading them as much as we enjoyed writing them! We invite you to have a look at our social media pages to keep up-to-date on NER activities and perhaps apply for the Associate Editor role in the 2020/21 team! We would like to extend our gratitude to the host of individuals who make the NER possible each year with their continued support and dedication to the School of economics, and in particular Francis Twiddy, Susie Howe, Louise Hemming Hillary Clayton, John Gathergood and, of course, Philip Watson. The NER would not exist without Philip, a University of Nottingham alumnus and we thank him sincerely for his vested interest and the wonderful opportunities he has provided us with. In addition, we are as always extremely grateful for Gill Williamson for her continued incredible designing work for the NER each year, in bringing each article to life. Finally, for many of our editors this was their final year studying at the University of Nottingham and they have now graduated. We thank them for dedicating their time to us and wish them all the best for the future we now look forward to welcoming our new team in the next academic year!

NER Editors in Chief

The NER Team About us The Nottingham Economic Review is a student-run annual journal whose purpose is to showcase undergraduate research and promote ongoing advancements in economic thought. We gather submissions and publish those which we believe contain the most thought provoking and insightful arguments while simultaneously capturing the interest of our readers. Our editorial team strive to create provoking, insightful and topical content, while simultaneously capturing the interest of our readers. We also welcome external submissions and publish those that add value to our magazine.

Editors in Chief

Associate Editors

Keval Shah Jessica Richens Abigail Davis

Luke McWatters Renee Gomez Vasilios Kyriacou Dylan Grice Katerina Ploussiou William Watts Samuel Oâ&#x20AC;&#x2122;Mara Joshua Tucker Oscar Miller Andrea Fernandes Jonathon Marshak

Special thanks to Professor John Gathergood Louise Hemming Suzy Howe Frances Twiddy Phillip Watson

Magazine design Gill Williamson

Find out more or get in touch nottinghameconomicreview@gmail.com

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THIS ISSUE ISSUE 21: October 2020

Letter from the Editors

About NER

Contents

Gainsborough Prize Winner 5

A Scramble for the Arctic? How Melting Ice is Shifting the Focus of International Shipping and Geopolitics Luke McWatters

Gainsborough Prize Runner-ups 9

Isn’t it Time America Really Paid Back its Debts for Slavery? Keval Shah

Who Runs the World? – Discussion of Engineered Corporate Equality Jessica Richens

Features 15

Coronavirus: Diagnosis of The World Economy Abigail Davis

Economic Tales: The Irony of the Diamond-Water Paradox Renee Gomez

From LIBOR to SONIA Vasilios Kyriacou

Economic Freedom Indexes Promote Growth – But they Need to Change Dylan Grice

Game Theory And Cold War Katerina Ploussiou

Crypto-Regulation: A Balancing Act William Watts

Does Scottish Independence Make Sense? Samuel O’Mara

Isolated and Alone: North Korea Joshua Tucker

Hypenomics: When Streetwear Reigns Supreme Oscar Miller

Move Over Free Trade, Protectionism’s Back... Or, Is It Andrea Fernandes

The UK Must Forge a New Path of Recovery from COVID-19 Jonathon Marshak

You can quickly access articles by clicking on the title or page number in this contents list.

GAINSBOROUGH PRIZE WINNER

WINNER GAINSBOROUGH PRIZE

A SCRAMBLE FOR THE ARCTIC? HOW MELTING ICE IS SHIFTING THE FOCUS OF INTERNATIONAL SHIPPING AND GEOPOLITICS By Luke McWatters

limate change is melting the Arctic sea-ice. This has been going on for a long time, but it is happening much faster than previously thought. Since the 1980s the polar ice caps have receded by about 30%. This trend is expected to continue. The receding ice brings governments and firms new environmental worries, but also new economic opportunities. Beneath the Arctic there are massive deposits of natural resources. Meanwhile, on the surface melting ice means waters are increasingly navigable, potentially allowing for shorter Europe-Asia transports across northern waters. The expansion of economic activity in the Arctic is fraught with environmental and geopolitical risk. The Arctic is home to a wide array of unexplored biodiversity which could be under threat from increased human activity. There are also numerous indigenous communities living in the region whose way of life might be threatened. Furthermore, the borders are poorly defined, which has left governments scrambling for influence over a new economic frontier.

FIGURE 1: Map of Arctic ice melting. (Humpert and Raspotnik, 2012, The Arctic Institute)

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For the moment, global shipping remains focused on southern routes through the Suez and Panama Canals. However, routes through the Arctic are generally 40% shorter and could result in fuel savings and journey times (Astrasheuskaya & Foy, 2019). This could mean an average cost saving of 10% (Bekkers et al, 2015). So if the routes are navigable and reliable then it would make economic sense for shipping companies to reroute. There has already been an increase in traffic along the two main Arctic Routes, with ships making use of the waters now open in summer. In 2017 the first ship sailed the Russian Northern Sea Route without help from icebreakers. Then, in 2018, Danish shipping firm Maersk Line sent a newly developed “ice-class” ship along the route (BBC, 2018). However, these voyages were exploratory and not cost-effective because of higher insurance costs from higher safety risks.

FIGURE 2: Distance travelled by ships in the Arctic 2013-2018. (Arcgis Storymaps, 2019)

For the route to be commercially viable it needs to become much more predictable, both to lower insurance costs and allow for reliable shipping schedules. To achieve this predictability, a large amount of investment is needed. At the moment, communication systems in the Arctic regularly fail and satellite signals can be faulty. The weather forecasting along Arctic routes is poor compared to other competing shipping routes. This is particularly important since the weather is so extreme and variable. There is some disagreement on the extent to which these problems will be overcome. Many studies predict that the Northern Sea Route – which goes along Russia’s northern coast – will be commercially viable soon and that it is only a matter of time before economic incentives spur on the investment needed (Yumashev, van Hussen, Gille et al., 2017, Bekkers et al., 2015). A report by the Copenhagen Business School claims that, assuming the Arctic continues to melt, it will compete with the Suez and Panama Canals by 2040. Some go even further and say that route could be navigable year-round by 2030, leading to two thirds of Suez traffic being rerouted to the Arctic and 5.5% of all trade (Bekker et al., 2015). Many disagree with this exuberant analysis. Some climate scientist say that the unpredictable nature of the ice means that even when ice coverage is low, crucial straits can be closed off. (Melia, Haines & Hawkins, 2017). They believe the prediction that the arctic could be navigable year-round to be unrealistic. Instead they think that the Arctic will see more short journeys than Europe-Asia shipping, brought by people travelling between the region’s massive oil, gas, minerals and fish supplies. The resources that are extracted will also need to be shipped. Furthering the need for short-hop shipping is the fact that permafrost and onshore ice is also melting, making land travel less reliable as much of the existing Arctic road infrastructure is built on ice. This need for smaller-scale shipping and investment may allow for the slow build-up

(Astrasheuskaya & Foy, 2019)

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of expertise and technology to tackle technical problems standing in the way of larger-scale trans-Arctic shipping. Whether or not year-round trans-Arctic shipping becomes a reality, some level of increased economic activity in the region is expected. This is incredibly difficult to reliably forecast, since it is impossible to know what technologies might be developed in the future or whether there will be a change in global trade patterns. While it is by no means definite that Arctic shipping routes will be a major artery of future trade, this is a real possibility. If it does not materialise, there will still be an increased international focus on the region. In spite of the uncertainty, Russia appears convinced by predictions of the Arctic rivalling the Suez and Panama Canals. President Putin announced that one-tenth of all Russian economic investments are now in the Arctic (Astrasheuskaya & Foy, 2019). Russia is building new fleets of icebreakers to assist ships. Putin says that the Russian Arctic fleet will have at least 13 heavy-duty icebreakers by 2035, nine of which will be nuclear powered (Vasilyev, 2019). Even if there is still some ice, the government plans to use these ships to break it and create safe passages. Furthermore, new ports will be built and old ones expanded on both ends of the route. At the start of this year, the Kremlin announced $300bn of incentives for new oil and gas projects in the region (Turner, 2020). Then in March it published a document outlining its 15-year plan to increase use of the Northern Sea Route, increasing the Arctic regional population and protect its territorial sovereignty, which it sees as compromised by increasing foreign interest. Under the Soviet Union the Arctic was seen as a priority for Moscow’s national security, since the country was isolated from much of the world. Stalin began prioritising the region with his “Red Arctic” propaganda in the 1930s (Melino & Conley, 2020). Throughout the Soviet era many airstrips and military bases were built. Arctic exploration was encouraged, with the first icebreaker reaching the North Pole in 1977 on the anniversary of the October Revolution. At the end of the Soviet Union in 1991 many of these bases were shut down. But 50 have now been refurbished. Many military analysts believe that Russia is trying to develop the Arctic to project power over its “avenues of approach” to the United States – territories between Russia and America – thus tilting the geopolitical scales in its favour. The military developments do not stop short at nostalgic rebuilding of Soviet-era bases. They are also testing new technologies such as hypersonic cruise missiles and undersea drones. The Russian message is simple: the Arctic is ours and if it becomes a crucial waterway you will abide by our rules.

Many military analysts believe that Russia is trying to develop the Arctic to project power over its “avenues of approach” to the United States – territories between Russia and America – thus tilting the geopolitical scales in its favour. The military developments do not stop short at nostalgic rebuilding of Soviet-era bases. They are also testing new technologies such as hypersonic cruise missiles and undersea drones.

The reason this is so concerning is that the borders in the Arctic are not clearly defined. Countries are normally given exclusive economic control over waters 200 nautical miles from their borders. Since the Arctic is so vast, there is a large amount of territory left unclaimed. Countries can claim this territory on the basis of their continental shelf extending from their borders into the unclaimed areas. The trouble is that Canada, Denmark (through Greenland) and Russia all have overlapping claims. Russia claims that it has a right to control waters extending to the North Pole. The way these disputes are dealt with is through the United Nations (UN). Countries should submit their claims to a scientific committee. Russia’s initial claim was rejected for lack of evidence, but it submitted a new one in 2015 (Oliphant, 2015). With Russia building up its military power in the region, many wonder if it would accept an unfavourable UN ruling on its territorial claims. Are we to believe that Putin’s government would just let Canada or even Greenland gain control over the territory? It is not just Russia that is being proactive about its position in a future Arctic economy. The Chinese government has declared itself to be an “important stakeholder in Arctic affairs” since it is a “Near Arctic State” (The State Council Information Office of the People’s Republic of China, 2018). Like Russia, China plans on extending its military capabilities and extracting natural resources in the area. Beijing is encouraging the development of the Northern Sea Route, with the first Chinese ship making the crossing in 2012. In 2013 the country gained “observer status” on the UN’s Arctic Council. President Xi Jingping also wants to extend China’s already massive Belt and Road Initiative to include a Polar Silk Road. This venture is in partnership with the Russian government, reflecting China’s pledge to work “jointly with Arctic states” (Wen, 2018). The diplomatic circuit speculates that part of this partnership might involve a deal where Russia recognises Chinese sovereignty in the South China Sea, where China has artificially built islands to extend its economic exclusive zone. This Chinese plan is far more longterm than the Russian plans. Beijing sees the Arctic as one of many areas where it can increase its global influence, while Russia sees the Arctic as part of its national identity.

Like Russia, China plans on extending its military capabilities and extracting natural resources in the area. Beijing is encouraging the development of the Northern Sea Route, with the first Chinese ship making the crossing in 2012. While these two major powers have been jointly planning how to project power in the Arctic, the obvious question is where are their geopolitical rivals? The other Arctic nations (Norway, Denmark/Greenland, Canada and the United States) are all members of the North Atlantic Treaty Organisation (NATO), set up during the Cold War to oppose Soviet influence. A generation after the Soviet Union collapsed, NATO and Russia continue to have frosty relations, with NATO members imposing sanctions on Russia for its annexation of Crimea. However, in the Arctic these countries have been rather slow to act. The United 7

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States ordered its first icebreaker in two decades last year (Astrasheuskaya & Foy, 2019). This late start means that it is well behind Russia in terms of icebreaking capabilities and military presence. Perhaps one reason for the slow start is the greater commitment to environmental standards of NATO members, at least until Trump’s 2016 election. The Canadian government says that its primary goal in Arctic policy is to protect its indigenous peoples and its second priority is to preserve the environment. This has meant that, along Canada’s vast Arctic coastline, investment has been limited when compared to Russia. Putin wields far more domestic power than his Western counterparts and using this power he has been able to waive regulations and taxation for companies operating in the Arctic. Both Putin and Xi are able to plan much further into the future than most Western governments. Their grasp on power is much safer than those of most Western heads of state. As a result, they can spend more on longer-term projects.

Both Putin and Xi are able to plan much further into the future than most Western governments. Their grasp on power is much safer than those of most Western heads of state. As a result, they can spend more on longer-term projects. Regardless of why NATO members have been so slow to act, they are beginning to act now. In 2018 NATO conducted its largest military exercise since the Cold War, with 50,000 troops taking part on Norway’s northern coast. Recently the US withdrew from the Intermediate-Range Nuclear Missiles (INF) Treaty and reportedly, in a move reminiscent of 19th century Alaska purchase, offered to buy Greenland from Denmark. Some defence analyst say this may mean that this is part of a “broader US strategy to enhance nuclear deterrence, which could envisage the installation of a network of missile defense and post-INF Treaty offensive missile systems in the Arctic to counter both China and Russia.”(Koh, 2020) With the United States and its NATO allies awakening to the geopolitical importance of the Arctic, it seems that the region is set to become a hotspot for great power competition. The danger is that such competition could reduce the importance of environmental protection and the preservation of indigenous communities in the eyes

of governments. If tension gets out of hand, then geopolitical risks might create so much uncertainty that companies will not want to invest in the region. The geopolitical struggles for economic opportunity may well diminish the very opportunities being fought over.

References: Astrasheuskaya, Nastassia, and Henry Foy. 2019. “Polar Powers: Russia’s Bid For Supremacy In The Arctic Ocean”. Ft.Com. https://www.ft.com/content/2fa827605c4a-11e9-939a-341f5ada9d40. Bekkers, Eddy, Joseph F. Francois, and Hugo Rojas-Romagosa. 2017. “Melting Ice Caps And The Economic Impact Of Opening The Northern Sea Route”. The Economic Journal 128 (610): 1095-1127. doi:10.1111/ecoj.12460. “China’s Arctic Policy”. 2018. English.Gov.Cn. http://english.www.gov.cn/archive/ white_paper/2018/01/26/content_281476026660336.htm. “Container Ship Takes On Arctic Sea Route”. 2018. BBC News. https://www.bbc. co.uk/news/business-45271766. “IBRU: Centre For Borders Research : Arctic Maps - Durham University”. 2020. Dur.Ac.Uk. https://www.dur.ac.uk/ibru/resources/arctic/. Koh, Swee. 2020. “China’s Strategic Interest In The Arctic Goes Beyond Economics”. Defense News. https://www.defensenews.com/opinion/ commentary/2020/05/11/chinas-strategic-interest-in-the-arctic-goes-beyondeconomics/. Melia, Nathanael, Keith Haines, and Ed Hawkins. 2017. “Future Of The Sea: Implications From Opening Arctic Sea Routes”. Assets.Publishing.Service.Gov.Uk. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/ attachment_data/file/634437/Future_of_the_sea_-_implications_from_opening_ arctic_sea_routes_final.pdf. Melino, Matthew, and Heather Conley. 2019. “The Ice Curtain: Russia’s Arctic Military Presence”. Csis.Org. https://www.csis.org/features/ice-curtain-russiasarctic-military-presence. Oliphant, Roland. 2015. “Russia Claims Resource-Rich Swathe Of Arctic Territory”. Telegraph.Co.Uk. https://www.telegraph.co.uk/news/worldnews/ europe/russia/11782413/Russia-claims-resource-rich-swathe-of-Arctic-territory. html#:~:text=Russia%20submits%20claim%20to%20large,tons%20of%20oil%20 and%20gas&text=Russian%20officials%20on%20Tuesday%20submitted,far%20 as%20the%20North%20Pole. Raspotnik, Andreas, and Malte Humper. 2012. “The Future Of Arctic Shipping Along The Transpolar Sea Route”. Arcticyearbook.Com. https://arcticyearbook. com/arctic-yearbook/2012/2012-scholarly-papers/20-the-future-of-arcticshipping-along-the-transpolar-sea-route. “THE INCREASE OF ARCTIC SHIPPING”. 2019. Arcgis Storymaps. https://storymaps. arcgis.com/stories/322f7ec35d8f46a6a4a26f3fe1aa8a17. Turner, Julian. 2020. “The Cold Thaw: Inside Russia’S $300Bn Arctic Oil And Gas Investment”. Offshore Technology | Oil And Gas News And Market Analysis. https://www.offshore-technology.com/features/the-cold-thaw-inside-russias300bn-arctic-oil-and-gas-investment/. Vasilyev, Dmitry. 2019. “Russia, Eyeing Arctic Future, Launches Nuclear Icebreaker”. U.S.. https://www.reuters.com/article/us-russia-arctic-icebreaker/ russia-eyeing-arctic-future-launches-nuclear-icebreaker-idUSKCN1SV0E4. Wen, Philip. 2018. “China Unveils Vision For ‘Polar Silk Road’ Across Arctic”. U.K.. https://uk.reuters.com/article/uk-china-arctic/china-unveils-vision-for-polar-silkroad-across-arctic-idUKKBN1FF0JC. Yumashev, Dmitry, Karel van Hussen, Johan Gille, and Gail Whiteman. 2017. “Towards A Balanced View Of Arctic Shipping: Estimating Economic Impacts Of Emissions From Increased Traffic On The Northern Sea Route”. Climatic Change 143 (1-2): 143-155. doi:10.1007/s10584-017-1980-6.

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RUNNER-UP GAINSBOROUGH PRIZE

ISN’T IT TIME AMERICA REALLY PAID BACK ITS DEBTS FOR SLAVERY? By Keval Shah

The racial wealth gap

ince the end of the Civil War, America has slowly and painfully worked to break down racial barriers and heal the wounds of slavery. This is no better highlighted than the first African American First Lady’s speech at the 2016 Democratic National Convention. Michelle Obama said:

The story that has brought me to the stage tonight. The story of generations of people who felt the lash of bondage, the shame of servitude, the sting of segregation, who kept on striving, and hoping, and doing what needed to be done. So that today, I wake up every morning in a house that was built by slaves. And I watch my daughters two beautiful intelligent black young women play with the dog on the White House lawn.”

It’s now 2020. 12 years ago, America elected its first African-American President, Barack Hussein Obama. Congress is more racially and ethnically diverse than ever – 12% of the US House of Representatives and Senate are black, roughly proportional to the national population. The United States of America is truly living in a post-racial era, right? Well, not exactly… In 1984, African-American families possessed just $4,000 in wealth on average. Wealth is the total financial value of all a family owns from savings and assets, minus any debts including home

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mortgages, credit card debts, and student loans. In America today, the wealth of African-American families increased to just only slightly more than $17,600. Contrary to this, average White families hold 10 times the wealth of average Black families. They have amassed a net median wealth of $171,000, increasing from $88,000 over the same period since 1984. This means the racial wealth gap between White and Black families has increased threefold over 36 years. The median Black adult who attended college has 7.2 times less wealth than the median White adult who attended college.

Contrary to this, average White families hold 10 times the wealth of average Black families. They have amassed a net median wealth of $171,000, increasing from $88,000 over the same period since 1984. The Black unemployment rate is typically about twice as high as the White unemployment rate. In 2010, after the Great Recession had officially ended, the average annual unemployment rate for black workers was 16.0 percent, compared to 12.5 and 8.7 percent for Hispanics and whites, respectively. Despite the abolition of slavery and the longest of journeys in the pursuit of racial justice, the racial wealth gap persist.

Slavery The American Dream is rooted in the Declaration of Independence. It proclaims that ‘all men are created equal’ with the right to ‘life, liberty and the pursuit of happiness.’ Americans can attain their own version of success in a society where upward mobility is possible for everyone. Given these inequities faced by Black Americans, does this American Dream hold for all Americans today? In understanding this, we have to go 150 years back. In the 1850s and 1860s, slaves were regularly illustrated on Confederate paper currency notes in Southern states, as shown below. Much of this Confederate currency was specifically designed to, not only celebrate its White heroes, but to further validate a system which held its black labourers in perpetual slavery. One $5 note depicted one black slave joyfully picking cotton, opposite whom, under the supervision of a white manager, other slaves worked hard in milling raw cotton. The clever way in which classical icons were juxtaposed with idyllic scenes of enslavement exemplified that the government based its economy crucially on the work of slaves and that history and tradition validated these systems. Note after note suggests a preoccupation with reminding those, from debtors, investors, as well as note-holding ordinary citizens alike, that slavery, one of the most important elements of the Southern economy, would continue to indefinitely exist, protected by the law and legitimatised by tradition. American Slaves in the 1800s did not just epitomise America’s wealth, they were America’s wealth. In 1860, over $3 billion was the value assigned to the physical bodies of enslaved Black Americans to be used as free labour and production, much more money than was invested in 10

railroads and factories combined. Most importantly, white families were able to keep this wealth, invest it, and pass it down to their child to do the same.

Housing discrimination One of the key driving forces underlying the setbacks faced by African Americans is land and housing. Home equities provide the largest source of wealth for roughly three-quarters of families. Following the Great Depression, which began in 1929 and did not abate until the end of the 1930s. By 1933, unemployment was at 25 percent and more than 5,000 banks had gone out of business. In response, the Federal Housing Administration (FHA), created in part by the National Housing Act of 1934 as part of the New Deal, was introduced by President Franklin D. Roosevelt. Their aim was to provide adequate home financing system through insurance of mortgage loans, and to stabilize the mortgage market, release mortgage credit across the American population. The American Dream became synonymous with possessing land and owning a home. However, the FHA faced criticisms for practicing housing policies which would not ensure mortgages in ‘risky’ locations. This was largely predicted by highlighting racial demographics in different areas and red-lining disproportionately occurred at the expense of Black communities. This federally enforced segregation impacted on all aspects of the lives of Black communities; the types of jobs accessible to Black people were limited, the type of schooling, quality of education and crucially, the rate at which the value of house prices increased. Jim Crow, the racial caste system which operated primarily, but not exclusively in southern and border states, existed between 1877 and the mid-1960s. Under which, a series of rigid anti-black laws were introduced and represented the legitimization of anti-black racism, relegating African Americans to the status of second-class citizens. 100 years of housing discrimination since slavery resulted in an enormous home-ownership gap. It was only in 1968 in which these housing discrimination laws were made illegal by President Lyndon B. Johnson. But even then, the discrimination persisted.

Subprime loans In the 1990s, President Bill J. Clinton attempted to open up the mortgage market to ‘help families who had historically been excluded from home ownership.’ Black families were eager to obtain the regular loans, which were typically given to white families since the Great Depression from the 1930s to 1980s. Instead, African-Americans were twice as likely to get subprime loans, which was very costly for low credit borrowers. Banks like Wells Fargo specifically targeted Black communities with exclusively subprime mortgages. Ministers of Black churches, unaware of this, received donations every time a parishioner received a mortgage and thought these mortgages would help parishioners, actively encouraging them. As a result of this, even 20% of Black borrowers with good credit receive subprime loans.

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Then the 2008 financial crisis hit, taking an extremely hard hit of 53% on the median net worth of Black households, relative to White households of only 16%. Those same Black communities, who were largely targeted by Banks, bared the brunt of America’s worst recession since the Great Depression. Unlike the Great Depression, however, the $440 billion Troubled Asset Relief Program was mostly not received by homeowners. The racial wealth gap has persisted and has continued to expand since.

Reparations for slave descendants The United States government has never compensated the descendants of slaves for their labour and the wealth they produced for white families during the slave era. Nor have they atoned for the lost equity from anti-black housing policies. Only a radical redistribution of wealth would be able to deal with this unprecedented racial wealth gap; something like reparations. Reparations are nothing new to America. Japanese Americans received $1.5 billion to those interned during World War Two, whilst the Marshall Plan supported and provided reparations for Jewish people for the Holocaust. Reparations would firstly involve individual payments to the descendants of enslaved Black Americans, to account for both lost wages and the inability to accumulate wealth over decades. Remission of tuition fees for descendants of enslaved Black Americans would support Black Americans to afford higher education, reducing racial disparities in education and social networking. Student loan forgiveness removes significant barriers in creating wealth and reduces the likelihood of receiving subprime loans with higher interest rates. Gentrification is the process in which households are forced from their homes due to rising rents and higher taxes; typically forcing African Americans out of the neighbourhoods they helped to build. Housing revitalisation grants for specifically Black communities that have been neglected due to a lack of government and corporate investment. Black neighbourhoods disproportionately need infrastructure and business, but Black business owners are less likely to obtain capital. Business grants for start-ups and expansions, to hire more workers and reduce Black unemployment, would help to remove barriers to economic and social mobility, as well as wealth building.

Conclusion The US government is responsible for decades of racist policies which have discriminated against the slaves, and their descendants. These policies provided the opportunity for white households to accumulate wealth and expand this wealth over decades, whist black households were not given the same opportunities. These created and exacerbated an unprecedented racial wealth gap in America. In order to finally address this, America requires a radical redistribution of wealth in order to close this gap, and really pay back its debts for slavery.

References M. L. Oliver and T. M. Shapiro. Disrupting the racial wealth gap. Contexts, 2019. Accessed 6th February 2020. https://contexts.org/articles/disrupting-the-racialwealth-gap/. R. Nunn, J. Parsons and J. Shambaugh. Race and underemployment in the US labor market. Brookings, 2019. Accessed 6th February 2020. https://www. brookings.edu/blog/up-front/2019/08/01/race-and-underemployment-in-the-u-slabor-market/. R. Ray and A. Perry. Why we need reparations for Black Americans. Policy 2020 Brookings: Big Ideas. Accessed 8th February 2020. https://www.brookings.edu/ wp-content/uploads/2020/04/BigIdeas_Ray_Perry_Reparations.pdf L. Schapitl. The racial wealth gap is where yesterday’s injustice becomes today’s inequality. And it’s growing. Vox, 2019. Accessed 1st February 2020. https://www. vox.com/2018/5/23/17377084/racial-wealth-gap-explained-netflix K. Bialik. For the fifth time in a row, the new Congress is the most racially and ethnically diverse ever. Factank, 2019. Accessed 1st February 2020. https:// www.pewresearch.org/fact-tank/2019/02/08/for-the-fifth-time-in-a-row-the-newcongress-is-the-most-racially-and-ethnically-diverse-ever/ J. d’Hemecourt. Beyond Face Value: Slavery Iconography in Confederate Currency. Exhibitions. Accessed 11th February 2020. http://exhibitions.blogs.lib.lsu. edu/?page_id=707 G. Samuels. Michelle Obama’s DNC 2016 speech: Read the transcript in full. Independent, 2016. Accessed 11th February 2020. https://www.independent. co.uk/news/world/americas/michelle-obama-speech-in-full-dnc-2016-barackhillary-clinton-democratic-party-us-election-a7156031.html BlackPast. President-Elect Barack Obama’s Election Night Victory Speech. 2008. Accessed 11th February 2020. https://www.blackpast.org/african-americanhistory/barack-obamas-presidential-acceptance-speech-nov-4th-2008/ .

MERICA A N E

DR EA M. ..

Gentrification is the process in which households are forced from their homes due to rising rents and higher taxes; typically forcing African Americans out of the neighbourhoods they helped to build.

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‘WHO RUNS THE WORLD? – DISCUSSION OF ENGINEERED CORPORATE EQUALITY’ By Jessica Richens

ack in 2011 Beyoncé answered this question simply: “girls”, in her song ‘Run the World’. Yet in 2011 only 12.5% of FTSE100 companies board seats were occupied by women (Griffiths 2018). Granted this is probably not the type of female empowerment Beyoncé was referencing, but the lack of women in positions of power in our corporate world in 2011 would contradict her answer.

In 2018 this percentage had risen to 29%.

What has changed? In 2011, Lord Davies introduced a voluntary target-based system to improve the gender balance on company boards in the UK, this voluntary approach was intended to increase the number of women in leadership roles, and therefore move towards greater corporate equality. This system was implemented with the ambition to improve gender equality specifically across UK businesses, by moving more capable women into seats on corporate boards.

FIGURE 1: Source: Grant Thornton 2019

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This voluntary approach has resulted in a 16.5% increase in the number of women on the board of FTSE 100 companies (Griffiths 2018). A doubling of the number of women on FTSE 100 boards seems like the voluntary approach has been a success. Norway in contrast introduced a highly successful gender quota law. Introduced in 2007 firms were required by law to employ a prescribed number of women to their board. Listed companies are required to have a gender ratio of at least 40/60. The result; a significant increase in female board members to 42% in 2016, up from just 6% before the introduction of the law. Norway has reaped the benefits as it has been found that boards with a higher proportion of women are less likely to be ‘beset by fraud or shareholder battles’ (Economist 2018). Plus, there has been no negative correlation between the implementation of quotas and return on corporate assets.

Should the UK be implementing quotas to keep up with the gains of Norway? Are quotas the way forward? Perhaps not. Despite the success in Norway quotas can promote the wrong people, regardless of good intention. Philippa Foster Back, Director at the Institute of Business Ethics, says: “In setting out to achieve the numbers you may not get the right people for the board, which is vital and takes time”, which in the context of our thinking may lead to women being promoted before they are ready. There are moral concerns surrounding quotas, applicants may form assumptions that positive treatment is based on their gender instead of their abilities and capabilities. This perception can have negative impacts on both the individual and their colleagues. (Grant Thornton 2019) and can have negative effects on workplace morale and productivity if there is resentment between workers.

There are moral concerns surrounding quotas, applicants may form assumptions that positive treatment is based on their gender instead of their abilities and capabilities. This perception can have negative impacts on both the individual and their colleagues. (Grant Thornton 2019) and can have negative effects on workplace morale and productivity if there is resentment between workers. Female promotion ahead of male colleague can be viewed as a ‘box-tick’ and can lead to the promotion of people above their current ability levels. However, this view is often not the case and is often a negative genderrole concept. These concerns can lead to a decrease in the overall effectiveness of the board. (PWC 2020). Therefore, a

voluntary target-based system is favourable for the UK as it removes the pressure off firms to promote merely to hit a quota and it drives accountability.

Why do we have inequality? So, what deters women from pushing themselves forward? There are studies to suggest promotion in a successful women’s life can have significant impacts on their domestic life. Johanna Rickne studied the trend between promotion and divorce among women in politics. She found that there is a higher divorce rate in women who get promoted vs women who did not. Whereas the relationship between men who got promoted and those who did not, and divorce is almost identical (TEDxTalks 2017). This indicates that moving up the corporate ladder can have a negative impact on a woman’s life, which may deter women from putting themselves forward for promotion. There is an inherent difference in attitudes toward competition, with women on average more likely to shy away from competition, which reduces the likelihood of a women putting herself forward for a board seat. There are gender differences in beliefs about relative performance, with men having more confidence in their abilities whilst women tend to be less optimistic about their abilities (Niederle and Vesterlund 2005). A commonly cited statistic is ‘men will apply for a job when they meet only 60% of the qualifications, but women will only apply if they meet 100% of them.’ (Hannon 2020), therefore we can predict that the number of women who apply for promotion to board level will be less, due to their lower confidence in their own abilities.

A commonly cited statistic is ‘men will apply for a job when they meet only 60% of the qualifications, but women will only apply if they meet 100% of them.’ (Hannon 2020), therefore we can predict that the number of women who apply for promotion to board level will be less, due to their lower confidence in their own abilities.

The need for equality We need more women in our corporate world, as more diversity ensures that a board is not compromised of likeminded individuals. Women have a different skill set to men, based on their personalities, with strong attributes such as courage, honesty and tact. Therefore, their inclusion at a higher corporate level can drive efficiency, and lead to a more innovative environment, as they work alongside men to bring a different point of view to a board. Despite the positive trends we have seen among UK businesses after the target-based system, women are still under-represented at the top level.

GAINSBOROUGH RUNNER-UP

Who should run the world?

References

A more equal corporate world sounds like a social utopia, however it is more beneficial that many would think. Today 682 women in total sit on Boards across the FTSE 350, compared to only 289 in 2011 (GOV.UK, 2015), however does this increase in women improve the quality of the board? It is noted that women have an improvement on aggregate performance through channels such as changing the nature of discussions and challenging ideas. According to the Harvard Business Review (2012), boards with a higher proportion of women report a 42% greater return on sales and a 53% higher return on equity. Women are more likely to deal effectively with risk, but also better address the concerns of customers and shareholders, whilst focusing on long-term priorities. The economic case for more shared corporate leadership, predicts stronger, positive GDP impacts, with higher levels of both employment and productivity (EIGE 2020). The European Institute for Gender Equality forecasts by ‘2050, improving gender equality would lead to an increase in EU (GDP) per capita by 6.1 to 9.6%, which amounts to €1.95 to €3.15 trillion’, whilst improvements in equality would also lead to an ‘additional 10.5 million jobs in 2050, which would benefit both women and men’. In our corporate world having a more equal board will lead to social and economic benefits. Girls need to continue to build on their belief in their talents and if the trends that governments are setting, through the introduction of voluntary targets and even quotas continue, soon we may have more of a fair share of girls in our top corporate seatsruling the corporate world.

“Are Gender Quotas Good For Business?”. 2019. Grant Thornton UK LLP. https:// www.grantthornton.co.uk/insights/are-gender-quotas-good-for-business/.

According to the Harvard Business Review (2012), boards with a higher proportion of women report a 42% greater return on sales and a 53% higher return on equity. Women are more likely to deal effectively with risk... concerns of customers and shareholders, whilst focusing on long-term priorities.

“Corporate Diversity: Law, Targets And Corporate Governance”. 2020. Pwc. https://www.pwc.co.uk/services/legal-services/insights/corporate-diversity-lawtargets-corporate-governance.html. Accessed 20/01/2020 “Economic Benefits Of Gender Equality In The EU”. 2020. European Institute For Gender Equality. https://eige.europa.eu/gender-mainstreaming/policy-areas/ economic-and-financial-affairs/economic-benefits-gender-equality. Accessed 20/01/2020 “Quotas To Gender-Balance The Board: Norway’s Drastic Action Worked”. 2020. Ideas For Leaders. Accessed February 9. https://www.ideasforleaders.com/ ideas/quotas-to-gender-balance-the-board-norway%E2%80%99s-drastic-actionworked. Accessed 09/02/2020 “Ten Years On From Norway’s Quota For Women On Corporate Boards”. 2018. The Economist. https://www.economist.com/business/2018/02/17/ten-years-onfrom-norways-quota-for-women-on-corporate-boards. Accessed 09/02/2020 “Women On Boards Davies Review”. 2015. Assets.Publishing.Service Gov.Uk. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/ attachment_data/file/482059/BIS-15-585-women-on-boards-davies-review-5year-summary-october-2015.pdf. Arguden, Yilmaz. 2012. “Why Boards Need More Women”. Harvard Business Review. https://hbr.org/2012/06/why-boards-need-more-women. Accessed 05/02/2020 Griffiths, Andrew. 2018. “Record Number Of Women On FTSE 100 Boards”. GOV. UK. https://www.gov.uk/government/news/record-number-of-women-on-ftse-100boards. Hannon, Kerry. 2020. “Are Women Too Timid When They Job Search?”. Forbes. Com. Accessed February 9. https://www.forbes.com/sites/nextavenue/2014/09/11/ are-women-too-timid-when-they-job-search/#dd31726411d6. Accessed 09/02/2020 Niederle, Muriel, and Lise Vesterlund. 2005. Do Women Shy Away From Competition? Do Men Compete Too Much?. Cambridge, Mass.: National Bureau of Economic Research. TEDxTalks ‘All the single ladies: Impact of job promotions on divorce | Johanna Rickne | TEDxUppsalaUniversity’ YouTube video, 13.47. 13 Dec, 2017. https:// www.youtube.com/watch?v=SCcX9TtdvWU Accessed 20/01/2020

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CORONAVIRUS: DIAGNOSIS OF THE WORLD ECONOMY By Abigail Davis

he outbreak of coronavirus disease (COVID-19) was first reported from Wuhan, China, on 31 December 2019. As of the 2/06/2020 the death toll is approximately 380,000. However, the following analysis was written on the 19th of February, where the death toll passed 2,000 with all but six of them in mainland China. Many economists are looking closely at the historical precedent from the SARS virus spread in 2003, but the coronavirus has already surpassed the total number of SARS cases in just two months. Infectious disease experts expect the outbreak to last for several months yet with tens of thousands afflicted before it runs its course (World Economic Forum 2020). While the outbreak of the coronavirus only occurred two months ago, the economic impacts are looming over the world. These impacts include slower economic growth, disruption to commerce, the impact on tourism and the question that’s been brought up from this, how prepared are we for epidemics or pandemics? Morgan Stanley reports China’s first-quarter growth could fall as low as 3.5%, if the spread of the outbreak is not contained fast enough for factory production to resume to normal levels (Lee 2020). Manufacturing activities have been disrupted as authorities shut down cities in China in an attempt to contain the spread of the coronavirus. China is the world’s second largest economy and is home to major parts of global supply networks that produce goods from textile to mobile phones and cars. Therefore, an economic fallout from coronavirus also threatens global growth. China is central to a diverse range of global supply chains: many of the world’s raw materials travel to China before being turned into a manufactured product. Therefore, global companies rely on supplies based in China. Due to the coronavirus there has been a shortage of products and parts from China which is having a huge impact on the whole of the world. Apple has reported it would not meet quarterly revenue expectations due to limited iPhone production and Chinese demand (Rabouin 2020). According to DHL’s Resilience 360 index, 50% of all manufacturing in Wuhan is related to the automotive industry and 25% to technology supplies from the region.

This explains why automotive executives in Europe and the US are warning they are just weeks away from shortages.

China is central to a diverse range of global supply chains: many of the world’s raw materials travel to China before being turned into a manufactured product. Therefore, global companies rely on supplies based in China. With Hyundai already shutting down operations in South Korea because of a lack of parts from China (Inman 2020). While entire supply chains – automotive, electronics, industrial – are facing risks, one of the main sectors hit early by the outbreak were the travel and tourism industry. In the current day tourism is a huge global business that accounts for 10.4 per cent of global Gross Domestic Product (GDP) and 10 per cent of global employment (World Economic Forum 2020). However, the Impact on travel to and from China due to the coronavirus has been devastating. Airlines, such as Air Canada, have cancelled all flights or significantly reduced the number of flights in and out of China. Russia closed its land border to passenger travel with China and Hong Kong (Pham and Ziady 2020). With this global airline revenues are expected to fall by $4-5 billion in the first quarter of 2020 as a result of flight cancellations, according to a report from the UN’s International Civil Aviation Organization (ICAO, 2020). The market response to travel restrictions to and from China has been swift, with share prices of major airlines, cruise lines and tourism companies dropping several percentage points (CBC, 2020).

With this global airline revenues are expected to fall by $4-5 billion in the first quarter of 2020 as a result of flight cancellations, according to a report from the UN’s International Civil Aviation Organization (ICAO, 2020).

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Figure 1: 2019 GLOBAL HEALTH SECURITY INDEX, STATISTA

The study which used 195 countries concluded national health security to be “fundamentally weak”, no nation is prepared to handle an epidemic or pandemic (World Economic Forum 2020).

Despite all these economic concerns, the coronavirus is most importantly a public health concern. The outbreak has brought an important question into sharp focus: just how prepared are we for a pandemic? The Global Health Security Index Finds No Country Is Prepared for Epidemics or Pandemics. A report finds weaknesses in countries ability to prevent, detect and respond to significant disease outbreaks. The average overall 2019 GHS Index score is 40.2 out of a possible score of 100, with 100 representing the highest level of preparedness. Even among the 60 highincome countries assessed, the average score is 51.9 (GHS 16

Index, 2019) China which is at the centre of the coronavirus outbreak scored 48.2. The study which used 195 countries concluded national health security to be “fundamentally weak”, no nation is prepared to handle an epidemic or pandemic (World Economic Forum 2020). The report suggests that the international community should work together to tackle biological threats, with a focus on financing and emergency response. This is emphasised especially as globalisation brings increasing trade, travel and population density and we are entering a new era in the risk of epidemic events.

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Globalisation has an important role to play, for instance as we compare the coronavirus to SARs, the coronavirus is spreading at a rate six times faster than SARs, mostly through human contact between people not yet showing symptoms. China is a much more open economy than it was in 2002 (SARSs outbreak), and so the disruption is expected to be greater due to the complex integrated supply chains and tourism mentioned above. On reflection we can now see that COVID-19 is now a global pandemic, with much of the above analysis occurring, confirming that no country has been truly prepared for a pandemic. We have seen a near shut down in the UK economy due to the lockdown with GDP in volume terms estimated to have fallen by 2.0% in Quarter 1 2020, the largest fall since Quarter 4 2008 (ONS, 2020). This negative growth has occurred despite Government schemes such as the furlough scheme, with many firms such as the aviation industry making staff redundant.

China is a much more open economy than it was in 2002 (SARSs outbreak), and so the disruption is expected to be greater due to the complex integrated supply chains and tourism ...

References “Economic Impact Estimates Due To COVID-19 Travel Bans”. 2020. ICAO. https://www.icao.int/Newsroom/Pages/Economic-impact-estimates-due-toCOVID-19-travel-bans.aspx. “GDP First Quarterly Estimate, UK - Office For National Statistics”. 2020. Ons. Gov.Uk. https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/ gdpfirstquarterlyestimateuk/januarytomarch2020. “Inaugural Global Health Security Index Finds No Country Is Prepared For Epidemics Or Pandemics - GHS Index”. 2019. GHS Index. https://www.ghsindex.org/news/inauguralglobal-health-security-index-finds-nocountry-is-prepared-for-epidemics-or-pandemics/. Inman, Phillip. 2020. “Will The Coronavirus Outbreak Derail The Global Economy?”. The Guardian. https://www.theguardian.com/news/2020/feb/10/willthe-coronavirus-outbreakderail-the-global-economy. Lee, Yen nee. 2020. “Morgan Stanley Says China’s First-Quarter Growth Could Fall As Low As 3.5% Due To Coronavirus”. CNBC. https://www.cnbc.com/2020/02/19/ coronavirusmorgan-stanley-economic-forecasts-for-chinas-growth.html. McCarthy, Niall. 2020. “Infographic: The Countries Best And Worst Prepared For An Epidemic”. Statista Infographics. https://www.statista.com/chart/20629/ ability-torespond-to-an-epidemic-or-pandemic/. “New Virus Could Trigger Travel Sector Woes Akin To Damage From SARS In 2003 | CBC News”. 2020. CBC. https://www.cbc.ca/news/business/coronaviruseconomic-impact-1.5437393. Pham, Sherisse, and Hanna Ziady. 2020. “Airlines Around The World Are Suspending Flights To China As The Coronavirus Spreads”. CNN. https://edition.cnn.com/2020/01/29/business/british-airways-coronavirus/index.html. Rabouin, Dion. 2020. “Economists Warn Coronavirus Risk Far Worse Than Realized - Axios”. Axios. https://www.axios.com/coronavirus-global-economicrisk-stock-marketchina-24da74a5-c824-4c79-a8c7-220213d28824.html. “These Are The Countries Best Prepared For Health Emergencies”. 2020. World Economic Forum. https://www.weforum.org/agenda/2020/02/these-are-thecountries-bestprepared-for-health-emergencies. “Trapped Tourists: How Is The Coronavirus Affecting Travel?”. 2020. World Economic Forum. https://www.weforum.org/agenda/2020/02/the-coronaviruswill-hit-the-tourismand-travel-sector-hard. Westcott, Ben, and Adam Renton. 2020. “Coronavirus News And Live Updates: Death Toll Rises Above 2,000 Worldwide - CNN”. CNN. https://edition.cnn.com/ asia/livenews/coronavirus-outbreak-02-19-20-intl-hnk/index.html.

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ECONOMIC TALES: THE IRONY OF THE DIAMOND-WATER PARADOX By Renee Gomez

he diamond-water paradox, also known as the paradox of value, is one of economics’ most well know fairy-tales, told to young economists crowded around the lecture board in Econ 101. This tale is a fable, told to teach budding economists a very important lesson: namely, the concepts of scarcity and marginal utility. On upon first hearing, the story seems obvious. Question: why are diamonds considered more valuable than water when water is essential to life? Answer: diamonds are scarce, and water is not, therefore one would place more value on the next diamond obtained. Simple enough, right? Except, perhaps the stars’ roles should be swapped, because as the truth behind the story shows, so-called scarcity of a resource is a function of management more than natural occurrence – and the effects on pricing and valuation can be messy.

Question: why are diamonds considered more valuable than water when water is essential to life? Answer: diamonds are scarce, and water is not, therefore one would place more value on the next diamond obtained. For example, our underdog here is water, assumed to be boundless whilst actually being disturbingly limited. Indeed, whilst the world’s surface is 70% covered in water, only 2.5% is fresh, and of this freshwater only 0.3% is easily accessible (Earthwatch, 2005). In practice, only 0.007% of the world’s water is available to 6.8 billion people (National Geographic, 2020). Even then, we still have enough for everyone to access, yet we feel the pinch of the water crisis. This crisis has two faces: physical scarcity and economic scarcity. Physical scarcity occurs in arid regions such as the Middle East, where there is not enough water to physically meet demand – although this can be managed with the right infrastructure in place. Receiving the right infrastructure can be difficult however, due to factors ranging from cost to incompetence: thus, economic scarcity occurs. 18

Physical scarcity occurs in arid regions such as the Middle East, where there is not enough water to physically meet demand – although this can be managed with the right infrastructure in place. For decades, there has been a trend of governments allowing poor infrastructure that leads to a lack of access to clean water and inefficiency in its supply. Take for example Mexico City, a land where it’s amazing downpours are enough to hydrate its 21 million inhabitants – and one where over half of its pipes are over 60 years old, leading to 40% of its water being wasted (NPR, 2018). The lack of infrastructure for capturing its heavy rains is due to the government’s unfocused urban development. Poor demand-side management isn’t unusual either; in Australia, rules put in place to manage the Darling River system have allowed irrigators to extract excess water (SBSNews, 2019), whilst in Mexico, farmers – the largest water consumers – have historically been allowed tax exemptions (OECD, 2004). Consumers utilize water as a free resource, whilst suppliers make it an economic good – a good with a degree of scarcity and therefore an opportunity cost. This is known as ‘the tragedy of the commons’ and reflects two issues: the first being that the market mechanism for pricing water is broken, and the second that in order water’s cost to be as low as possible, this man-made scarcity must be dealt with. So, what of the story’s champion, diamonds? They are not even in the top 10 list of rarest gemstones. They are one of the most common gems in the world. Recently, it has been revealed that in the 1970s Russia had found diamond reserves in the Popigai crater that could supply the market for 3000 years (Mining Technology, 2012). Their total supply in the earth’s crust is limited of course, but no more so than most natural resources. More myths about diamonds abound, such as their supposed value as longterm investments – in fact, a diamond loses 50% of its value as soon as it is bought from a jeweller (Priceonomics, 2013). Unlike gold and other commodities, it is neither liquid (easily

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In practice, only 0.007% of the world’s water is available to 6.8 billion people (National Geographic, 2020). Even then, we still have enough for everyone to access, yet we feel the pinch of the water crisis. This crisis has two faces: physical scarcity and economic scarcity.

exchanged) nor fungible (easily split) thus the market for resale is limited. Therefore, what causes the thousand-dollar price mark-ups? The answers lie in a monopolist’s favourite supply tactic: artificial scarcity. For over 100 years, De Beers has been the monopoly supplier of diamonds and followed the monopolist’s script perfectly. After gaining first-mover advantage by buying the massive diamond mines found in South Africa in 1888, De Beers gained an immovable stranglehold on the industry. Through De Beers Consolidated Mines Ltd, the company bought out competitors – or rather, they cooperated and formed a cartel – thus gaining control over the world’s supply of diamonds. A stockpile was established; De Beers carefully controlled how many diamonds would be released to the market for the year, whilst access to information about the stockpile was virtually unobtainable. By 1987, De Beers owned 80% of the market share (Paul Zimnisky, 2019), and diamond prices were at an all-time high. Demand was locked down as well. After prices plummeted during the Great Depression, De Beers drove demand through perhaps the most successful marketing feat in history. The slogan ‘diamonds are forever’ inextricably linked diamond rings to marriage, so that the percentage of brides receiving diamonds increased from 20% in 1939 to 80% in 1980 (De Beers Group, 2018). Rarity, love, financial success – _these were all words that caused diamond sales to follow the scarcity principle, which is the theory that limited supply drives higher demand. This in turn, gave diamonds the status of Veblen goods: items where a higher price leads to higher demand.

De Beers carefully controlled how many diamonds would be released to the market for the year, whilst access to information about the stockpile was virtually unobtainable.

In the end, what should we learn from the diamondwater paradox instead? Maybe it is that the natural availability of resources is not always reflected by the supply on the market. In addition, there are a range of factors that cause interference, whether it is due to opportunism, shortsightedness, or pure laziness. Or, maybe it is that the creation of scarcity in a market, whether artificial or accidental, tends to conflict with consumer perceptions to create an illusion of said goods’ value, which implies a failure of the price mechanism in said market. Ultimately, however we choose to reconsider the paradox, it is clear that the tale is much more complex than it appears; it’s kind of like finding out how much less wholesome the original tales that inspired our beloved Disney films really are.

References “Water: A Limited Resource?” Earthwatch Fresh Water Watch, May 13, 2015. https://freshwaterwatch.thewaterhub.org/content/water-limited-resource. “Competing for Clean Water Has Led to a Crisis.” Clean Water Crisis Facts and Information, April 6, 2020. https://www.nationalgeographic.com/environment/ freshwater/freshwater-crisis/. Kahn, Carrie. ”Mexico City Keeps Sinking As Its Water Supply Wastes Away.” NPR. NPR, September 14,2018. https://www.npr.org/2018/09/14/647601623/mexicocity-keeps-sinking-as-its-water-supply-wastes-away?t=1590827503570. Bhole, Aneeta. ”In Rural Australia, People Are Struggling to Access Reliable Water.” SBS News, October 16, 2019. https://www.sbs.com.au/news/in-rural-australiapeople-are-struggling-to-access-reliable-water. “Sustainable Development in OECD Countries: Getting the Policies Right.” Paris: Organisation for Economic Co-operation and Development, 2004. “Awash in Diamonds: Russia’s Secret Stash Revealed.” Mining Technology | Mining News and ViewsUpdated Daily, September 19, 2012. https://www.miningtechnology.com/features/featurediamonds-russias-secret-stash-siberia-crater/. Dhar, Rohin. “Diamonds Are Bullshit.” Priceonomics, March 19 2013. Accessed January 13, 2020. https://priceonomics.com/post/45768546804/diamonds-arebullshit. Zimnisky, Paul. “A Brief History of De Beers -Paul Zimnisky: Diamond Industry Analysis.” Paul Zimnisky | Diamond Industry Analysis, March 20 2019. Accessed January 5, 2020. http://www.paulzimnisky.com/a-brief-history-of-de-beers. “The Diamond Insight Report 2018.” London: De Beers Group, 2018.

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FROM LIBOR TO SONIA By Vasilios Kyriacou

une 2012 saw one of the largest financial scams ever, with an MIT professor commenting that ‘it dwarfs by order of magnitude any financial scam in the history of the markets’. This is referring to the LIBOR scandal, which saw a series of fraudulent actions of traders colluding with other divisions in the Bank to report false interest rates on inter-bank loans in an attempt to increase profit. The London Inter-Bank Offered Rate (LIBOR) is the average interest rate calculated through submissions of interest rates of major banks across the world. LIBOR is enormously influential due to its use in the valuations of financial products worth trillion of dollars and as such, manipulation LIBOR will have massive consequences as its used as a benchmark for: mortgages, student loans, financial derivatives and countless other financial instruments.

LIBOR is enormously influential due to its use in the valuations of financial products worth trillion of dollars and as such, manipulation LIBOR will have massive consequences as its used as a benchmark for: mortgages, student loans, financial derivatives and countless other financial instruments. The entire US derivative market is based on LIBOR and an attempt to manipulate LIBOR is an attempt to manipulate the US derivative market. However, this isn’t new as this is thought to have been common since 1991, but the 2012 scandal brought all the inefficiencies and short-comings of the model to light. Since then the Financial Conduct Authority (FCA) and Bank of England (BoE) has looked into alternative risk-free rates (RFR) and as such, starting from the 2nd of March 2020, the BoE will transition from the LIBOR to the Sterling Overnight Index Average (SONIA). The implications of the transition from LIBOR to SONIA will be huge, and marks a shift in the way in which the financial markets operate. Since the financial crash in 2008, more and more regulations have been added on such as the Markets in Financial Instruments Directive (MiFID) in 20

2008 and the revised version brought out in 2018. LIBOR was established in 1986 by the British Banking Association and is defined as ‘the rate at which a Contributor Panel bank could borrow funds and then the accepting inter-bank offer in reasonable market size, prior to 11:00[am] (London time)’. The Contributor Panel (Banks chosen by the BBA) makes a blind submission and a complier (Thomas Reuters) averages the second and third quartiles. LIBOR soon became the fundamental interest rate because of three main characteristics: (a) it was viewed as a measure of the borrowing cost in the inter-bank market, (b) before the 2008 financial crisis it was interpreted as risk free and (c) lastly, it’s a sign of the health for the credit market. As it stands now the current system for calculating LIBOR cannot continue, so question arises – do you reform or replace LIBOR? The UK has decided to replace LIBOR in favour for SONIA, however, this transition won’t be an easy one and will require a great deal of finesse to pull off, especially in wake of the UK’s separation from the EU. This begs the question, did the UK make the right choice? The Wheatly Review, authored by Martin Wheatly the CEO of the FCA, suggests that reform is most advantageous option. The review stipulated that transaction data should be used explicitly to support LIBOR and that market participants should continue to play a major role in the oversight and production. To prevent history repeating itself, the report urged for an increase in oversight and enforcement, with the administration and submission of LIBOR to become regulated under the Financial Services and Market Act 2000. There’s a strong emphasis on sanctions in order to ensure compliance among the banks. The review outlined that three areas that are failing the current LIBOR model and explained the path reform. Firstly, there was an ‘insufficient independence from governance structure’, relying too heavily on participating banks and their own industry organisation. The review postulated that LIBOR should be a market-led benchmark led by a private organisation rather than a public body. Subsequently, this would curb the other two shot-comings, the lack of transparency and inadequacies that comes with the government organisations. There is still a lot of hesitations surrounding the potential of reform as many claimed it would not make a significant difference. A great deal of resources has been put into reforming LIBOR after the 2012 yet there has been no noticeable change and is still riddled with problems.

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However, that is not to say replacement will not be without its own issues. The replacement of LIBOR comes with three main issues for corporations; transitioning away from LIBOR to new contracts and dealing with existing legacy contracts. For new contracts, SONIA presents the problem of term structure, or the lack there of. The LIBOR index is published daily on various terms including one, two and six-month forward-looking period, whereas with SONIA is published first thing in the morning just as an overnight rate. So, loans with just SONIA referencing will require daily compounding. However, a possible solution to this could be a ‘term SONIA reference rate’, where the expected SONIA rate is used over a giver period (Schrimpf and Sushko, 2019). As of now, there is no ‘term product’ so it would require a set of agreed practices and what market data should be used and how. The other issue surrounded legacy contracts still remain, if the overhaul is too big or is not pulled off carefully with finesse then there could be significant legal complications to a lot of legacy obligations. Schrimpf and Sushko (2019) postulated that one potential solution for the legacy contracts could be to continue management and reporting of LIBOR until the contracts have matured or dissolved. However, this comes with a drawback, if LIBOR is still in the picture then the new reference rate might see stronger resistance.

As of now, there is no ‘term product’ so it would require a set of agreed practices and what market data should be used and how.

On the other hand, the resistance to the new reference rate such as SONIA may not be as strong as initially anticipated. Clear positive externalities will show itself once the transition to the new reference rate has taken place, as the advantages will be realised in the use of the same single rate. Adoption of a single reference rate will allow for greater liquidity and opportunities to trade and hedge against financial instruments that are tied to the rate; network effects suggest that the market participants benefit from in a non-linear fashion from the increase in total number of users (Hue and Skeje, 2014). As a result, the liquidity and market depth concerns would be eliminated, and such scale benefits could be harder to realise with a multi-reference regime. However, the risk diversification that comes with a multi-reference regime could prove to be advantageous, as it can mitigate or lessen any of the errors that can be found in the other rates. Another issue that presents itself it that of coordination. The transition from such a widely used and popular reference rate is likely to result in heavy path dependency (Hue and Skeie, 2014). Subsequently, policymakers will need to play a large role, in order to provide sufficient motivation for the private sector to adopt the new reference rate; the socially optimum outcome may not be fully realised and achieve critical mass if the adoption process if left solely to the private sector. The transition of such a historical reference rate is a monumental task but so is the development of a new reference rate. Developing the new reference rate

is not easy and it may not be feasible to preserve all the desirable features of LIBOR, whilst simultaneously ensuring that the new rate is grounded in actual transactions in the liquid markets. The ideal reference rate would be something like a Swiss army knife – suitable for any situation. One of the most important characteristics for the new rate, is for it to be a robust and accurate representation of the interest rates in the core money markets. It’s widely accepted that in order to fulfil such feature, the rate would have to be grounded in actual transactions in active and liquid markets, this prevents the benchmark from being susceptible to manipulation. The new benchmark would also have to be a reference rate for financial contracts that extent beyond the money markets, such as the Overnight Index Swaps (OIS) contracts with different maturities, without much difficulty (Centrus, 2018). Lastly, as financial intermediaries are both lenders and borrowers, they require a lending benchmark, so the new reference rate will have to serve as a benchmark for lending and funding (Centrus, 018). For example, a bank may fund a long-term loan by drawing upon short-term funding instruments at a variable rate. LIBOR fulfils two of these important characteristics, only lacking in the area where its robust and accurate and not susceptible to manipulation. In a white paper by Centrus, they explained that there are four reasons that explain LIBOR’s failure in this aspect. The first one being its design flaw, as the rate relies on reports from various banks instead of actual transactions and secondly, sparse activity in the interbank deposit markets stands in the way of benchmarks based on interbank rates. Third, an increase in the dispersion of individual bank credit post-crisis has undermined the adequacy of benchmark that aim to capture common bank risk. Lastly, due to regulatory and market efforts to reduce counterparty risk in interbank exposures, banks have also tilted their funding mix towards less risky sources of wholesale funding. With these shortcomings in mind, there are proposals for repairing rather than replacing LIBOR. A possible option would be to convert LIBOR into a transaction-based rate and can be done by taking the weighted average of actual rates and calculate the fixing (Coulter, Shapiro and

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Zimmerman, 2018). Supporters of this option view it as quick and low-cost method that will restore the integrity of the reference rate, whilst there those who oppose due to possibility of high volatility.

The ideal reference rate would be something like a Swiss army knife – suitable for any situation. One of the most important characteristics for the new rate, is for it to be a robust and accurate representation of the interest rates in the core money markets. The BBA considered two main changes in for processing LIBOR. The first being an increase in the LIBOR panels and the second is an enhancement of governance by adding non-contributor banks to the FX and MM Committee and a Scrutiny Mechanism. The President of Euribor ACI proposed a solution in an open letter to the BBA, where an independent body should conduct periodic controls of the data submitted by member banks. So, the most effective way to ensure reliability is for the BBA to mandate and undertake periodic sampling of actual transactions. This provides several advantages, one of them being that it doesn’t change the formulation of LIBOR, which maintains the integrity of the financial contracts that’s its built upon (Wong, 2009). Secondly, it allows the LIBOR data to remain transparent and available to public review, something which the BBA highly favours, while improving the accuracy of LIBOR. Furthermore, the Scrutiny Mechanism and noncontributor panel banks are greatly enhanced by the ability to sample transaction data. They can compare the reported rates with those that actual rates that are sampled and in doing so, they detect and eliminate two herd behavioural circumstances that’s been troubling for LIBOR (Wong, 2009). The first being when all banks manipulate their data for fear of being singled out as in financial trouble; and second when a particular bank would skew its data to match the banks (Wong, 2009). Lastly, this solution can fit neatly into the BBA’s other changes, such as allowing the Scrutiny Mechanism to fulfil the role of sampling transactional data.

To conclude, the transition from LIBOR to SONIA is going to be one of the largest finical overhauls in history, and will present many difficulties along the way, especially if not carried out carefully. The issues of existing financial contracts and legacy contracts will be a major factor in measuring the success of the transition; LIBOR underpins trillions of pounds worth of contracts and so will require a great deal of finesse. A possible solution for this will be to continue reporting on LIBOR until those contracts have dissolved or matured. In the meanwhile, there can be changes to LIBOR to help curb its current weakness of being susceptible to manipulation, which can be done through increased governance from through the Scrutiny Mechanism and addition of non-contributor banks. Furthermore, the BBA can implement the President of Euribor recommendation of undertaking periodic sampling of transactional data to ensure the validity of LIBOR. By continuing to report on LIBOR for existing contracts, this should provide enough time for corporations to prepare themselves and work on their transition to SONIA. Whilst the transition should be primarily market-led, the governing authorities should still be providing oversight and the necessary pressure to ensure a smooth and seamless move to SONIA.

References Hou, David, and David R. Skeie. “LIBOR: origins, economics, crisis, scandal, and reform.” FRB of New York Staff Report 667 (2014). Wong, Justin T. “Libor left in limbo; a call for more reform.” NC Banking Inst. 13 (2009): 365. Centurus: Market transition form LIBOR to SONIA (2018) Tata Consultancy Services: The End of the Road for LIBOR: Handling the impact on the Financial World Schrimpf, Andreas, and Vladyslav Sushko. “Beyond LIBOR: a primer on the new benchmark rates.” BIS Quarterly Review March (2019). Coulter, Brian, Joel Shapiro, and Peter Zimmerman. “A mechanism for LIBOR.” Review of Finance 22, no. 2 (2018): 491-520. Treasury, Her Majesty. “The Wheatley review of LIBOR.” (2012). MacKenzie, Donald. “What’s in a number? The importance of LIBOR.” Real-world economics review 47, no. 3 (2008): 237-242.

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ECONOMIC FREEDOM INDEXES PROMOTE GROWTH – BUT THEY NEED TO CHANGE Dylan Grice

Economic Freedom Indexes promote growth – but they need to change

Figure 1: (Miller, Kim and Roberts 2019)

f economic freedom resembles Hong Kong or Chile as they currently appear, then one would be forgiven for finding it unattractive. Yet despite this, according to the Heritage Foundation Economic Freedom Index (EFI), or that of the Fraser Institute, or those of myriad other organisations, it would seem that this is perhaps how it appears in practice. Indeed, the Fraser Institute deems Hong Kong the freest country on earth. Singapore, a de facto dictatorship with a ‘meticulously planned economy’ (Marshall 2016) comes a close second. Chile comes 13th in the midst of its current protests (Gwartney, et al. 2019), and placed even higher in most EFIs when under the leadership of General Pinochet. Pinochet, of course, tortured and brutalised countless citizens, but duly ran a free market economy as per the guidance of the ‘Chicago Boys’ who advised him, educated at the University of Chicago by Milton Friedman (Sigmund 1983). Each of these economies, past and present, suffers from vast inequality, and has shown on multiple occasions a willingness to suppress the political and civil rights of citizens. In 2015, Singapore jailed 16-year-old Amos Lee as an adult for posting a video criticising ex-leader Lee Kuan Yew. In 2019, Hong Kong attempted to curtail the civil rights of its citizens by introducing a bill allowing the extradition of the state’s political enemies to China, and brutally cracked down on public protest afterwards. It was withdrawn in September, but it now seems that China’s new national security law will be passed regardless. Chilean protests against inequality generally, triggered by higher subway fares, have been met by the government declaring a state of emergency, and the shooting and injuring of numerous protestors with rubber bullets. In most academic literature, however, it is widely accepted that the measures promoted and praised by such EFIs, when implemented by those countries aforementioned, among others, do promote domestic economic growth.

There are some exceptions, such as South Korea and, historically, the USA, whom economist Ha-Joon Chang emphasises developed rapidly due to their distinct mercantilist protectionism (Chang 2011). However, Hong Kong and Singapore are revered as success stories of globalisation, and the material wellbeing of their citizens, even their poorest citizens in an absolute sense, has without doubt seen growth as a result of their opening up to free trade and their domestic embrace of policies promoting economic freedom, as defined by EFIs.

In 2019, Hong Kong attempted to curtail the civil rights of its citizens by introducing a bill allowing the extradition of the state’s political enemies to China, and brutally cracked down on public protest afterwards. Let this article therefore, not be construed as antieconomic freedom, for the growth benefits that policies promoting such freedom can bring globally and domestically are clear. It must be recognised though, that a paradox exists, whereby many of those countries that have embraced 23

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economic liberalisation measures to enrich some of their populace economically, have seen unrest due to the civil, political and occasionally economic repression of sections of that same populace. This paradox has emerged due to the fact that EFIs’ narrow definition of economic freedom is inadequate for measuring the extent to which the economic growth brought about by increased liberalisation generally, actually benefits most of the general populace of the aforementioned countries, and for measuring the extent of the freedom it brings the individuals within them. Hong Kong’s macroeconomy is a prime example of this; in a country with an GDP per capita in excess of $60,000 (Miller, Kim and Roberts 2019), the Gini coefficient (a measure of inequality), sits at over 0.5. For context, the next highest Gini coefficient amongst developed countries, other than Singapore which will be addressed later, is the USA’s score of 0.41, and in most of Western Europe it sits in the 0.2s (World Population Review 2020). Indeed, such high levels of inequality can be a natural result of development, as originally displayed to us by the Kuznets curve, which displays a concave relationship between growth and inequality that emerges as a country develops (Kuznets 1955). However, with a GDP per capita more than double that of Britain, it is hard to argue that such levels of inequality continue to enhance freedom in countries such as Hong Kong. It is no wonder, therefore, that along with the political repression brought about by the lack of democracy and civil liberties afforded to its citizens, there is discontent amongst many people at the way in which the country is governed.

This paradox has emerged due to the fact that EFIs’ narrow definition of economic freedom is inadequate for measuring the extent to which the economic growth brought about by increased liberalisation generally, actually benefits most of the general populace of the aforementioned countries, and for measuring the extent of the freedom it brings the individuals within them.

On a micro scale, we can see a further explanation for the emergence of this paradox when looking at Singapore’s labour market. The Heritage Index of Economic Freedom affords Singapore the crown of presiding over the freest labour market on earth (Miller, Kim and Roberts 2019). There is no doubt that the significant liberalisation methods pursued by the country, making hiring and firing easier and allowing workers to constantly move to the jobs in which they have the highest marginal product, have led to increased economic growth, and the enrichment of many citizens. Furthermore, it is clear that such measures have increased economic freedom in a narrow sense,

since workers can move from job to job with little friction. Nevertheless, Singapore, with its GDP per capita of $93,906 per annum (Miller, Kim and Roberts 2019), has no minimum wage, and no unemployment benefit (Zaobao 2011). Thus, one must clearly question how truly free individual Singaporean labourers are, even if Singaporean labour is free as a collective, with no government enforced safety net to ensure that all workers have adequate bargaining power with employers. Perhaps it is thus unsurprising that Singapore has a Gini coefficient of 0.458 (World Population Review 2020). Indeed, the freedom of the individual labourer to choose between a sub-optimal job, and destitution, is no real freedom at all. All the liberalisation measures in the world could not truly free most of the populace to control their labour, without adequate social security measures to match.

Thus, one must clearly question how truly free individual Singaporean labourers are, even if Singaporean labour is free as a collective, with no government enforced safety net to ensure that all workers have adequate bargaining power with employers. Why is it, therefore, that EFIs so narrowly define the notion of economic freedom so as not to account for the security of workers, which serves in many countries to enhance their freedom? Partially, it is a data collection issue. It is difficult to define social mobility, or the extent to which individual workers have control over their own labour. However, there are subjective measures throughout the rankings of each of these EFIs. Much like the parable of the dishonest waiter, whose bill calculations always seem to favour himself, the nature of these subjective measures always seems to favour a world-view that looks to prioritise the freeing of markets, rather than the freeing of the individuals who act within them. A freedom that could be brought about through adequate security measures and perhaps through the imposition of the democratic elections that would most likely bring them about. This is due to the fact that most EFIs, whether they be that of the Cato, Fraser or Heritage Institutes, are published by free market think-tanks who come under the guidance of the libertarian Atlas network, funded by the Republican Koch brothers in the USA (Lawrence, et al. 2019). Furthermore, the Fraser Institute Economic Freedom of the World Index was devised by the Mont Pelerin Society, which included the likes of Friedrich Hayek, the Austrian economist, and Milton Friedman, as notable members (Slobodian 2019). As aforementioned, Friedman

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played a pivotal role in devising and implementing the economic policies of the ‘Chicago Boys’ in Pinochet’s Chile in the 1980s, and thus it is perhaps unsurprising that the index itself rewarded such policies at the time, and has rewarded similar policies in its rankings ever since. Clearly, therefore, the evidence does suggest the measures to promote economic freedom employed by those countries atop most EFIs do promote growth and prosperity. One only needs to survey the GDP per capita levels of Singapore and Hong Kong for confirmation. However, if EFIs want to be truly representative of the individual freedom held by each member of the citizenry of such countries, rather than being representative of a particular worldview, extra measures are required to enhance their ranking systems. None of the Fraser, Heritage or Cato Institute’s list democracy as an enhancer of economic freedom, as studies in political economy have shown it to be (Spindler, de Vanssay and Hildebrand 2008). Indeed, the hypothesis of one Milton Friedman’s book, ‘Capitalism and Democracy’, implies that the freest countries of earth should necessarily be democracies, as economic freedom brings with it political freedom (Friedman 1962). Furthermore, a fairer, more equitable EFI would mark countries down for proliferating inequality through policy, as measured through easily obtainable Gini coefficients. If such changes were given sufficient weight, one suspects that the rankings currently manufactured by these indexes would change drastically. Perhaps drastic change is exactly what is required.

References Chang, Ha-Joon. 2011. 23 Things They Don’t Tell You About Capitalism. Penguin Books. Friedman, Milton. 1962. Capitalism and Freedom. Chicago: University of Chicago Press. Gwartney, James, Robert Lawson, Joshua Hall, and Ryan Murphy. 2019. Economic Freedom of the World: 2019 Annual Report. Fraser Institute. Kuznets, Simon. 1955. “Economic Growth and Income Inequality .” American Economic Review 1-28. Lawrence, Felicity, Rob Evans, David Pegg, Caelainn Barr, and Pamela Duncan. 2019. “How the Right’s Radical Thinktanks Reshaped the Conservative party.” The Guardian, November 29. Marshall, Colin. 2016. “Sinagpore - The Most Meticulously Planned City in the World.” The Guardian, April 21. Miller, Terry, Anthony B. Kim, and James M. Roberts. 2019. 2020 Index of Economic Freedom. The Heritage Foundation. Sigmund, Paul E. 1983. “The Rise and Fall of the Chicago Boys in Chile.” SAIS Review. Slobodian, Quinn. 2019. “Democracy doesn’t matter to the defenders of ‘economic freedom’.” The Guardian, November 11. Spindler, Zane A., Xavier de Vanssay, and Vincent Hildebrand. 2008. “Using Economic Freedom Indexes as Policy Indicators: An Intercontinental Example.” Public Organisation Review 195-214. World Population Review. 2020. Gini Coefficient by Country 2020. January 13. http://worldpopulationreview.com/countries/gini-coefficient-by-country/. Zaobao, Lianhe. 2011. Minimum Wage Cannot Work. January 27. Accessed February 17, 2020. https://www.mom.gov.sg/newsroom/press-replies/2011/ minimum-wage-cannot-work.

...if EFIs want to be truly representative of the individual freedom held by each member of the citizenry of such countries, rather than being representative of a particular world-view, extra measures are required to enhance their ranking systems.

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GAME THEORY AND COLD WAR Katerina Ploussiou

ar has been with us ever since the dawn of civilization. Nothing has been more constant in history than war. An American psychologist, William Janes, suggested that war creates a sense of unity in the face of a collective threat. It binds people together, it brings a sense of cohesion, with communal goals, and inspires individual citizens to behave honourably and unselfishly, in the service of a greater good. Robert J. Aumann, a mathematician known for his research and breakthroughs on repeated games, argues that there isn’t a theory which can avoid wars; however, game theory provides the strategies to help decision makers in conflict situations to hopefully avoid war and devastation. In the framework of repeated games, Aumann explains that if rivals give the impression of willingness to fight then there will be no war. Mutual Assured Destruction is based on the theory of deterrence which explains that the threat of using strong weapons against rivals prevents the enemy’s use of those weapons. Aumann points to Cold War as an example of Mutual Assured Destruction. Cold war was an ongoing geopolitical rivalry between the United States and the Soviet Union who had disparate ideologies. Let’s model out the Cold War in a game to find out how it had ended.

Mutual Assured Destruction is based on the theory of deterrence which explains that the threat of using strong weapons against rivals prevents the enemy’s use of those weapons. In the game below, let’s consider that the Soviet Union makes the first move. It has to decide whether to utilize its nuclear weapons and attack, or not utilize its weapons and therefore choose don’t attack. If the Soviet Union, choose don’t attack, the game ends, and results in a stalemate where no nuclear weapons are used. However, if the Soviet Union choose to attack, the USA must then decide its move; whether to retaliate, or don’t retaliate. The payoffs for each player are shown at the end of the branches. In this game the payoffs are measured in “utility” to the player. The number are fairly arbitrary, and only matter in their relation to each other. If the two players choose don’t attack the game ends with both players getting a payoff of 0, which is not better or worse off than before. If the Soviet Union attacks, and the USA retaliates, both players receive a payoff of negative infinity, and the game ends in mutual destruction for both players. This leads to both players losing. If on the other hand, the Soviet Union chooses to attack, and the USA chooses don’t retaliate, the Soviet Union receives a payoff of 500 and the USA receives a payoff of -500. In this case both players are better off than receiving a payoff of negative infinity.

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In order to solve the game, we must work out which action the Soviet Union will take to start the game. So, the Soviet Union has two choices, the first choice is to don’t attack, and receiving a payoff of 0, and the second choice is to attack, however the payoff it will receive will depend on its rival’s choice of action. Consequently, the Soviet Union, before it decides what to do, it must work out what the USA will do so it can work out its payoff and make rational decisions. USA choice is simple, if it retaliates, it will receive a payoff of negative infinity, if it doesn’t retaliate, it receives a payoff of -500, given that the Soviet Union attacks. The best choice and solution to this game is for the Soviet Union to attack and the USA to not retaliate. However, an important component was left out. What if the USA could promise the Soviet Union that if it attacked the USA it would retaliate? No rational player would choose a payoff of negative infinity over -500. This is what game theorist call a “doomsday device’’, a device in the game that triggers retaliation if the first player attacks. Therefore, if the Soviet Union knows that the USA will retaliate if it attacks then its choices become: if it attacks it receives a payoff of negative infinity and if it doesn’t attack, it receives a payoff of 0. So, the best choice for the Soviet Union is to not attack, and we have a Cold War stalemate. The threat of complete nuclear destruction acted as a deterrent for either side using the weapons. Fortunately, neither nation was willing to play the final stage of a game in which the best possible outcome involved a victory that could only be celebrated by a handful of survivor’s underground. This idea is what roughly happened in the real war which had ended it. To prevent a war, one would think to disarm or lower the levels of armaments. However, that would be a mistake, doing the exact opposite would be the correct thing to do. This is highlighted by the fact that both the USA and Soviet Union used a few strategies equivalent to the doomsday device. They both established nuclear submarines all over the world, ready to strike back if their main bases were hit, the USA kept nuclear armed planes in the air for 3 decades ready to respond. As well as this, both sides adopted what is known as the madman strategy, convincing the other player that they are not rational

thinkers and they will respond with retaliation even if it is not in their best interests. The atmosphere was tense, and there was a constant threat of miscommunication leading to disastrous results This result is the tipping point of a nuclear war, it leads to a situation called Mutual Assured Destruction. It is a situation in which neither side has an incentive to either attack or disarm. The guaranteed mutual destruction that would follow a nuclear war prevents both sides from using the weapons. The threat of complete nuclear destruction acted as a deterrent for either side using weapons. Aumann points to the Cold War as an example, which turned into a scientific model and national security policy, aptly called Mutual Assured Destruction. Simply put, any possible nuclear attack would be retaliated in the same way. This would lead to a situation in which neither side could win and therefore to an armistice. “The possibility of disaster has to be serious. You can’t make other people believe it’s serious, unless it is serious,” Aumann explains, stressing the core factor that led to the Mutual Assured Destruction during the Cold War: an equilibrium of horror.

References Erickson, Paul, Judy L. Klein, Lorraine Daston, Rebecca Lemov, Thomas Sturm, and Michael D. Gordin. How reason almost lost its mind: The strange career of Cold War rationality. University of Chicago Press, 2013. How Game Theory Works? -Science. Available online at: https://science. howstuffworks.com/game-theory5.htm. The Washington Post, 2017: What Game theory tells us about nuclear war with North Korea. Available online at: https://www.washingtonpost.com/news/wonk/ wp/2017/08/16/what-game-theory-tells-us-about-nuclear-war-with-north-korea/ . UBS: Can game theory end world conflict? Available online at: https:// www.ubs.com/microsites/nobel-perspectives/en/laureates/robert-aumann. html?campID=PR-NOBELCONTENTPARTNERSHIP-GLOBAL-ENG-BI-CUSTOMPOST2AUMANN. UBS: Can game theory avoid wars? Available online at: https://www.ubs.com/ microsites/nobel-perspectives/en/latest-questions/2019/game-theory-avoid-wars. html . Weintraub, E. Roy. “Game theory and cold War rationality: A review essay.” Journal of Economic Literature 55, no. 1 (2017): 148-61.

The threat of complete nuclear destruction acted as a deterrent for either side using the weapons. Fortunately, neither nation was willing to play the final stage of a game in which the best possible outcome involved a victory that could only be celebrated by a handful of survivor’s underground.

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CRYPTO-REGULATION: A BALANCING ACT By William Watts

Crypto-regulation: A balancing act

Cryptocurrency, the conceptual brainchild of Bitcoin creator Satoshi Nakamoto, has erupted into a financial revolution. With its seeds quietly sowed in the midst of the worst financial crisis the world has ever seen, the monetary technology is now snapping at the heels of Wall Street and central banks alike – with mixed responses from both. Between the critical punts fired by JP Morgan’s Jamie Dimon (Imbert 2017) and the optimism of SEC Chairman Jay Clayton (Suberg 2019), it is becoming abundantly clear that cryptocurrencies must be regulated effectively – and quickly. However, when considering the partisan and anti-establishment vision of Nakamoto, there is a difficult balance to be struck in order to satisfy the interests of ordinary citizens, investors, financial regulators, and entire nations. On one hand, overregulation could trigger a futile collapse of the affected currencies as consumers lose the benefit of financial autonomy and digital security – contradicting the heart of the concept. Alternatively, sparse regulation will be fruitless in protecting consumers from huge price volatility, frequent scams and collateral damage caused by an increase in cyber-attacks. However, regardless of any discussion about regulatory balance, evidence of inherent vulnerability for cryptocurrencies and their stakeholders raises a poignant question: are cryptocurrencies even worth saving?

Worthy of regulation? To understand why we must protect the genuine existence of cryptocurrencies within our economy, and to prevent them retreating into the illicit shadows of underground markets, we must first understand the benefits they may reap. All cryptocurrencies and crypto-assets must be backed by blockchain technology (a type of distributive ledger technology) in order for the currency to operate on a completely decentralised basis that circumvents the need for a middleman. The permanent ledger means that transactions are added consecutively to a ‘chain’ of transactions which 28

cannot be manipulated by any party – not even the creator. Aside from the benefits of cryptocurrencies themselves, the application of blockchain is boundless. Already, distributive ledger technology is being used to protect landowners in Honduras who are susceptible to land title fraud from corrupt state officials (Jean-René 2017); peer-to-peer networks have the benefit of being indisputable – even to those at the highest level of government. This could be a revolutionary change to nations who suffer from corruption. Equally, when considering wealthy democracies such as the UK, the hole which crypto has an opportunity to fill is deep-rooted within a lack of trust in the financial system. The majority of the British public still doesn’t trust banks (White 2018), despite over a decade passing since RBS was bailed out by the UK government at a cost of almost £45 billion, which only goes to show the damage caused by the 2008 financial crash. Cryptocurrency is an attractive proposition for those who find it difficult to place their trust in these intermediaries, and wish for full autonomy over what belongs to them. Consequently, they seem like an asset worth regulating.

Cryptocurrency is an attractive proposition for those who find it difficult to place their trust in these intermediaries, and wish for full autonomy over what belongs to them.

The issue of genuine currencies Taking Dr Raja Ignatova’s $4 billion OneCoin scam as an example (Bartlett 2019), the usual watertight security and privacy of cryptocurrencies disappear when it is revealed there is actually no blockchain technology underpinning it. In genuine cryptocurrencies, transactions have public witnesses which make cyber-attacks more difficult, not to mention the vast number of distributed copies that need to be attacked simultaneously – making malicious changes by a single party incredibly difficult. Should these ‘imitation’ cryptocurrencies become commonplace by seeping through the cracks of weak regulation, it will cause paranoia within investors and consumers. This will inevitably lead to intermediaries creating

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platforms which distribute genuine currencies that have been verified independently – meaning we will have come full circle and are back to dealing with middlemen. To make matters even worse, increased adoption of cryptocurrencies which are generated and controlled by third parties, as opposed to the state, means that accountability is hugely reduced. Large banks, who already lack a golden reputation, don’t have the option of disappearing if a large scam is exposed – they must face the media and the courts. A shady creator under the alias of a “legitimate” cryptocurrency can easily withdraw billions of pounds worth of investments and make a run for it, disappearing in the shadows of offshore accounts and various money laundering schemes while avoiding accountability altogether.

A shady creator under the alias of a “legitimate” cryptocurrency can easily withdraw billions of pounds worth of investments and make a run for it, disappearing in the shadows of offshore accounts and various money laundering schemes while avoiding accountability altogether. A government verification scheme for proving genuine cryptocurrencies would seem like the ideal answer, especially for those who are just looking to dip their toes in the shallow end of cryptocurrency investment and will likely put their money towards large, reputable cryptoassets. As usual, purists will enter the scene with the typical laissez-faire reasoning of blocking out any state intervention in order to avoid corrupting the freedom of creators to establish independent currencies, concerned that tightening the market will lead to reduced consumer choice. There is merit to this argument. The legal principle of caveat emptor (buyer beware) lies at the heart of bargain-hunting platforms such as eBay and Gumtree, where buyers accept the tradeoff of purchases from unverified buyers in return for lower prices and greater choice; why shouldn’t crypto owners have the right to a similar proposition?

Problems of jurisdiction Questioning whether an action falls within the sphere of authoritative power is a conundrum which isn’t exactly new to the law. Problems of jurisdiction within the regulation of cryptocurrency is mainly centred around whether financial authorities are able to exercise regulatory power over certain currencies. In light of this issue, the US have already encountered difficulty in claiming jurisdiction over some currencies. The Howey Test used by the SEC ascertains whether a transaction is an example of an “investment contract”, thus classifying as a security and therefore establishing jurisdiction over, in this case, the cryptocurrency in question (Frankenfield 2019). So far, Bitcoin hasn’t qualified as a security due to its speculative nature – meaning that the SEC has no power to regulate it. Similarly, across the pond, the FCA have decided they won’t regulate Bitcoin either, as it is defined as an “exchange token” which doesn’t fall under their scope (Partz 2019). This will

come as a relief to crypto-enthusiasts who are concerned about “back doors” theory (Hansen 2017) which involves a desire from the authorities to influence commercial crypto standards and insert vulnerabilities to create weakness and exercise more control. For a technological marvel that prides itself on being immune to state control, this would be a living nightmare. That said, hesitation to impose jurisdiction over certain currencies may also come as a disappointment for investors and advocates. Alongside financial authorities sending the signal they are not yet prepared to take cryptocurrencies seriously, decisions to turn down regulation mean that the volatility of currencies will continue to be an issue as fraud and uncertainty persist. Ultimately, the implementation of crypto into the system is still a long way off.

The alignment of crypto with the current financial system The reluctance of the FCA to impose regulation on the crypto kingpins is a clear message that cryptocurrency integration is slightly beyond being ‘just on the horizon’. Essentially, the largest hurdle for legislators is that current rules on financial conduct gravitate around fiat currencies (money declared by a country as legal tender) which are distributed by a centralised institution – perfectly contrasted to the “decentralised revolution” of crypto-assets. As such, the scope for change is huge as regulation needs to be created, not just adapted or expanded. One of the main issues with cryptocurrency trading platforms is the current ability they have to absolve themselves from liability towards customers, meaning they have no legal burden to protect customers from fraud (Massad 2019). Other financial sectors such as securities, derivatives and banking cannot evade liability through exemption clauses, and will be liable for fraud or misrepresentation. The law could even go a step further. Concerns over the illicit use of cryptocurrencies derives largely from Bitcoin’s role as a method of payment on the notorious Silk Road, which ended up being valued at over a billion dollars. Imposing vicarious liability on cryptocurrency developers would mean they would be legally responsible for the activities their currency was interacting with – incentivising them to take reasonable steps to avoid certain markets. This could involve vetting buyers of the coin and monitoring their transactions while freezing suspicious activity. Of course, discretion of the courts would need to be generous in order to prevent excessive liability on crypto-developers and to ensure there was still an incentive to enter the market.

One of the main issues with cryptocurrency trading platforms is the current ability they have to absolve themselves from liability towards customers, meaning they have no legal burden to protect customers from fraud (Massad 2019).

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A future of dynamic equilibrium?

References

So, is crypto-regulation doomed to fail? Or can we reach a future of regulatory balance which will thrust us into a “decentralised revolution”? While utopian balance between the interests of the state and the individual is evidently impossible here, just as it is on the majority of matters, there is a glimmer of hope for a system which can successfully incorporate cryptocurrency. That said, like any sort of divisive matter, this is one which requires both sides to compromise. For any proposition of regulation there is always the recurring argument that the operation of cryptocurrencies is not to be interfered with by the state. However, crypto-advocates cannot expect cryptocurrencies, which often pose various threats to the financial system, to flourish if the state does not have some sort of input with how they interact with the economy and the people. For mainstream adoption, regulation is an absolute must. It would be a shame for Nakamoto’s brainchild to pass away before seeing adulthood.

Bartlett, Jamie. 2019. The Missing Cryptoqueen. November 4.

...crypto-advocates cannot expect cryptocurrencies, which often pose various threats to the financial system, to flourish if the state does not have some sort of input with how they interact with the economy and the people.

Frankenfield, Jake. 2019. Howey Test. June 25. Accessed February 19, 2020. https://www.investopedia.com/terms/h/howey-test.asp. Hansen, Dr Marit. 2017. Why crypto regulation is doomed to fail. Kiel, January 4. Imbert, Fred. 2017. JPMorgan CEO Jamie Dimon says bitcoin is a ‘fraud’ that will eventually blow up. September 12. Accessed February 17, 2020. https:// www.cnbc.com/2017/09/12/jpmorgan-ceo-jamie-dimon-raises-flag-on-tradingrevenue-sees-20-percent-fall-for-the-third-quarter.html. Jean-René. 2017. Honduras: end of land title fraud, thanks to blockchain technology. September 15. Accessed February 17, 2020. https://medium.com/@ JeanRene_K/honduras-end-of-land-title-fraud-thanks-to-blockchain-technologyfc7aede49998. Massad, Timothy. 2019. It’s Time to Strengthen the Regulation of Crypto-Assets . Thesis, Harvard: Brookings. O’Grady, Sean. 2018. Migrants sending money home are being charged far too much – it’s time we stopped taking their hard-earned cash. November 20. Accessed February 23, 2020. https://www.independent.co.uk/voices/unescoremittances-migrants-money-abroad-foreign-aid-a8642876.html. Partz, Helen. 2019. UK Financial Regulator FCA Won’t Regulate Bitcoin and Ether. July 31. Accessed February 19, 2020. https://cointelegraph.com/news/uk-financialregulator-fca-wont-regulate-bitcoin-and-ether. Suberg, William. 2019. SEC Cryptocurrency Approach ‘Measured,’ Chairman Clayton Tells Senate. December 11. Accessed February 17, 2020. https:// cointelegraph.com/news/sec-cryptocurrency-approach-measured-chairmanclayton-tells-senate. White, Lawrence. 2018. British public don’t trust banks 10 years after crisis, survey finds. August 6. Accessed February 18, 2020. https://uk.reuters.com/article/ uk-britain-banks/british-public-dont-trust-banks-10-years-after-crisis-surveyfinds-idUKKBN1L11EL.

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DOES SCOTTISH INDEPENDENCE MAKE SENSE? By Samuel O’Mara

he Brexit vote has highlighted the difference between Scotland and the rest of the UK and it appears the disconnect between the people of Scotland and the politicians in Westminster is widening and Scottish Independence is somewhat inevitable. Scotland voted overwhelmingly to remain in the EU with 62% voting remain compared to the 48% for UK as a whole (BBC News, 2016). In 2014 Scotland voted to stay in the UK with a vote of 55% against Scottish Independence. Despite the recent surge in support for independence in the opinion polls it seems unlikely that another referendum will take place in the immediate future (Milne 2017). In this article I’ll examine why there is support for Scottish Independence and whether it makes sense for Scotland to pursue Independence. It is important to note that Scotland already has some deal of autonomy. The Scottish parliament has had control over areas such as health and education since 1999 however a great deal of the decision making is done in Westminster. I will be discussing the impact of Scotland completely detaching from the UK although it is highly possible some other arrangement could be found, perhaps with the Scottish parliament gaining more power but still ultimately coming under the control of the UK government. Scotland’s economy largely revolves around services and the North Sea Oil industry (BBC News, 2017). Taking more direct control over North Sea oil would be a benefit for Scottish Independence, however it is an aging production area for an aging industry and is set to decline in importance. It is also a large misconception that natural resources always lead to long term prosperity. For example, mismanagement of wealth and political instability have caused Iran and Venezuela to squander the potential of oil deposits. Alternatively, Norway is a perfect example of how sensibly managed oil deposits can allow for long term, nationwide increases in living standards. So, does Scotland get a good deal from the UK? From examining the budget, we see that Scotland has a deficit

issue. Total spending for person is £1661 higher than the UK average and the notional deficit is at 7% compared to 1.1% for the UK as a whole. This means that Scotland has a bigger deficit than any country in the EU. Scotland would require cuts of around 11 billion to reach the UK level pointing to rather bleak prospects for the country financially if they were to split from the UK, as a deficit this high is not feasible. However Scottish Finance Secretary, Derek Mackay argues that independence would allow Scotland to take control of economic policy and so tackle this problem as a country.

This means that Scotland has a bigger deficit than any country in the EU. Scotland would require cuts of around 11 billion to reach the UK level pointing to rather bleak prospects for the country financially if they were to split from the UK, as a deficit this high is not feasible. However, it is hard to see how this can be achieved without some form of cuts to spending. He has also said an independent Scotland would not pay UK debt repayments instead offering solidarity payments to cover part of the historic debt. Perhaps there is some argument then that an Independent Scotland could tackle their deficit problem as £6.5 billion is spent on servicing UK debt payments and defence spending, including trident (Carrell, 2019). However, government data does not fully support this notion as Scottish expenditure growth is greater than that of the UK and the gap between expenditure per person is at 13.6% and seems to be growing. Although public expenditure as a share of GDP is falling despite being higher than the UK, with 45.3% and 37.9% respectively (Scottish Government, 2019). It seems a large degree of the support for independence comes from a point of Scottish nationalism and pride and a clear desire to claim sovereignty and control over policy. Ironically, this shares many of the same arguments 31

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as those who supported Brexit despite Scotland voting overwhelmingly to remain.

It seems a large degree of the support for independence comes from a point of Scottish nationalism and pride and a clear desire to claim sovereignty and control over policy. This perhaps highlights how Scottish nationalism is placed far higher than pride in the union despite it being present for over 300 years. Some in favour of Scottish independence point to potentially rejoining the EU as an argument for Scottish independence. However, it is not clear as to whether this is realistic. Desperate to deter similar independence movements, such as that of Catalonia, Spanish officials have said that Scotland would be at the back of the queue for joining the EU. Furthermore, the EU requires a deficit of lower than 3% to join and as previously mentioned this would require a 4% cut. Additionally, from 2020 joining the EU requires adopting the euro, which could be a bonus for Scottish people. With two thirds of Scottish trade with the rest of the UK, it makes little sense for them to favour closer ties with the EU than the UK from a trade point of view. Indeed, most economists would argue that trade integration almost always leads to positive outcomes and so protecting trade with the rest of the UK should be of primary importance and so it could be argued adopting the British pound over the Euro (Constable, 2017).

Desperate to deter similar independence movements, such as that of Catalonia, Spanish officials have said that Scotland would be at the back of the queue for joining the EU. Furthermore, the EU requires a deficit of lower than 3% to join and as previously mentioned this would require a 4% cut.

Controlling other policies could also benefit Scotland. Around 9% of the population are migrants compared to 14% in the UK as a whole (Rienzo, Vargos-Silva, 2020). Taking control over Scotland’s migration policy, targeting areas of labour shortages and bringing in skilled labour could help boost an independent Scotland’s economy. SNP leader Nicola Sturgeon has already made clear an independent Scotland would instantly scrap Trident, the UK’s nuclear deterrent facility based in Clyde keeping the Faslane base as a conventional navy base for the Scottish Navy. The presence of nuclear weapons is always a hot button issue and for the Scottish people removing them from their shore whilst also freeing up some spending money is a major bonus of independence (Barford, 2014).

References BBC News. June 2016. “EU Referendum Results”. Available at https://www.bbc. co.uk/news/politics/eu_referendum/results Milne, Claire. 15th March 2017. “A second independence referendum: what does Scotland think?”. Full Fact, available at, https://fullfact.org/scotland/secondindependence-referendum-what-does-scotland-think/?utm_source=content_ page&utm_medium=related_content BBC News. 15th March 2017. “Scotland Profile - Overview”. Available at https:// www.bbc.co.uk/news/world-europe-20718605 Carrell, Severin. 21st August 2019. “Scotland’s deficit seven times higher than UK as a whole last year”. The Guardian, available at https://www.theguardian.com/ uk-news/2019/aug/21/scotland-2018-deficit-higher-than-uk-as-a-whole-last-year Scottish Government. 21st August 2019. “Government Expenditure and Revenue in Scotland (GERS): 2018 to 2019”. Available at https://www.gov.scot/publications/ government-expenditure-revenue-scotland-gers/pages/1/ Constable, Simon. 17th March 2017. “Why the Economics of Scottish Independence Don’t Make Sense”. Forbes, available at https://www.forbes.com/ sites/simonconstable/2017/03/17/why-the-economics-of-scottish-independencedont-make-sense/#3f1491eb65db Rienzo, Cinzia. Vargos-Silva, Carlos. 12th October 2020. “Migrants in the UK: An Overview”. The Migration Observatory, available at https://migrationobservatory. ox.ac.uk/resources/briefings/migrants-in-the-uk-an-overview/ Barford, Vanessa. 30th June 2014. “Scottish independence: Where might Trident go?”. BBC News Magazine, available at https://www.bbc.co.uk/news/ magazine-28009977 Salamone, Anthony. 19th November 2019. “What a Scottish independence referendum in 2020 would mean”. London School of Economics and Political Science, available at https://blogs.lse.ac.uk/politicsandpolicy/indyref-2020/

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ISOLATED AND ALONE: NORTH KOREA An examination of the development that brought DPRK to its present economic position

By Joshua Tucker

he Democratic People’s Republic of Korea (hereafter the DPRK) is the only country in the last decade to be found guilty by the UN Human Rights Council of crimes against humanity, as well as organising politically motivated assassinations such as that off Kim-Jong-nam (half-brother to Kim Jong-un). Furthermore, the CIA ranks the DPRK as having the 214th lowest GNI per capita out of 228 countries (Country Comparison – Central Intelligence Agency 2020). Yet the DPRK has held and, in some cases hosted, historic summits with the heads of both China and the USA. So how did one of the most secretive and isolated countries in the world end up in such a unique position? Answers might be found by looking at the history of economic development in the DPRK, and its potential role in the global economy. Established in 1948 by Kim Il-sung the DPRK modelled itself on its communist allies, China and the former Soviet Union, economically it developed incredibly quickly up till the 1970s, with a GDP per capita similar to that of South Korea (Kim 2017). However, rapid over-investment in industries, funded by billions in foreign loans that it could not repay, and a structural decline like that faced by the Soviet Union led to a fall in living conditions and growth. Unlike the Soviet Union, the ruling party managed to maintain complete power and punished any political opposition. Despite its history, the view that the DPRK has a failing economy oversimplifies a complex issue. Although it lags behind its more developed democratic neighbours including South Korea and Japan, the exact scale is hard to measure as the government restricts access from foreign countries. This represents over 5% of the population, and to this day 41% of North Koreans are malnourished. In response to the famine, black markets emerged selling food and medicine. These products were obtained and smuggled in illegally

from China, organised by defectors. This was the first sign of deviation from a controlled economy.

One consequence of the slowdown in growth combined with the mismanagement of food supplies, and poor farming conditions, was famines in the 1990s. An estimated 1–3.5 million North Koreans died due to famines (Natsios 2001). Recent crackdowns on defections from the DPRK has restricted the supply of information as refugees put the secretive state in context and help journalists report on the country. However, at the same time tourism in the DPRK has increased, although still very dangerous guided tours can travel to more regions and the overtly propagandised tours show that the DPRK is concerned with foreign perceptions. The elite in the DPRK have unprecedented power to travel abroad, and their children are often privately educated in foreign countries (North Korean Students Studying Abroad 2020). The possibility of adopting western attitudes are higher now than ever before, boosted by increased access to media and foreign news. Large scale changes such as these show that the DPRK is open to more development than in the past. In 2015 The Economist referred to the DPRK as a “changing region” as countryside farmers defied official crackdowns and a slow change to a market rather than state collective began. The state wage which most people earn is not enough to live on and international food aid rarely reaches the people that need it, so most citizens also work in the private (illegal) economy. Many of these unregulated activities are ignored as long as bribes are paid to those in charge (Tudor 2020). Reports of movement towards a 33

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less oppressive state get wildly reported and may have influenced the international community to regard the DPRK as being open to seismic change, however, any deviation from the party line is dependent on there being no threat to the ruling party’s power. The DPRK still heavily relies on foreign support to evade sanctions levied against it due to its continual development of nuclear weapons. By employing the argument that food and oil are humanitarian goods” (Wertz et al. 2020), China avoids the sanctions placed on the DPRK by the international community and continues to mitigate some of the damage. There is also evidence to suggest that many Chinese companies violate sanctions to work with the DPRK and that Chinese tourists help provide the struggling nation with foreign currencies. However, there is a conflict as much of the support from China and, to a lesser extent, Russia is not the high-value capital and skills-transferring investments that would help the DPRK develop and is instead merely enough to keep them reliant on foreign governments allowing them powerful influence over the DPRK. The summits between China and the DPRK are a fragile show of interdependence when the DPRK relies on China as their largest trading partner, accounting for 90% of all trade.

The DPRK still heavily relies on foreign support to evade sanctions levied against it due to its continual development of nuclear weapons. By employing the argument that food and oil are humanitarian goods” (Wertz et al. 2020), The role of the DPRK as a potential proxy country for China draws similarities with how the Soviet Union and the USA vied for influence during the Cold War. This has led to fears of China’s growing power (Zhang 2018), which push western states to welcome the DPRK into the international community. China’s vested interest in the DPRK can be argued as a partial justification for the US-DPRK summits, along with the aim to denuclearise the DPRK. A more optimistic sign for future development and integration into a globalised economy occurred on the 31st March 2013, at the Central Committee of the Worker’s Party of Korea, when Kim Jong Un, the first secretary, announced the construction of economic zones (Mimura 2015). The special economic zones were to act as incubators of foreign investment both for the central government and the individual provinces. They were planned to be specific areas where foreign companies would be encouraged to enter and where economic negotiations could take place. These had been enormously successful in China and helped open the economy to foreign investors. In 2015 there were 19 economic zones set up in the DPRK; to facilitate them the ruling party had to change their manifesto which originally banned foreign intervention indicating clear signs of change from their previously hostile position to any cooperation. The history of the SEZ’s in the DPRK shows that the zones adjacent to the south were easily influenced by tensions between the North and the South and those bordering China developed slowly but steadily. The economy of the DPRK is more diverse than a decade ago, but the 34

areas are too sparsely populated and too far from cities for potential large-scale investments.

In 2015 there were 19 economic zones set up in the DPRK; to facilitate them the ruling party had to change their manifesto which originally banned foreign intervention indicating clear signs of change from their previously hostile position to any cooperation. Pyongyang’s establishment of foreign investment zones suggests the country is wary of over-dependence on China.” Their trade deficit is always increasing with China: The Chinese may overlook some debt, but North Korea is spending its own money,” Go Myonghyun of the Asan Institute told Asia Times. “China only gives North Korea enough to survive, and that is why North Korea complains about Chinese lack of generosity.” Certain border cities in China have become important areas for North Korean businesses. High ranking North Korean officials have even visited China’s border cities to discuss cooperation (Chunshan 2020), and in May 2018, shortly after Kim Jong Un announced that economic development would now be the country’s top priority, Pyongyang sent a large delegation of top officials to China to tour industrial sites (China-North Korea Relations 2020). A rarely reported reason why the DPRK attracts attention from foreign countries is their natural resources. The Korea Mining Improvement Corporation Report (Republic of Korea) 2004, estimated the DPRK has over $2 trillion of natural resources, thought to be nearly thirty times of that of South Korea’s as of 2005 (Kim, Young Yoon, 2007, p. 13). Private mines are illegal, and although state-run mines provide 15% of the country’s GDP, they are extraordinarily inefficient. The potential for developing this business in the DPRK remains incredibly high, many of the resources include rare metals needed in electronics and coveted in China. The potential trade with countries that are allied with them increases the DPRK’s bargaining power, especially as the supply of resources in the world is depleted and shifts to higher-cost sources.

A rarely reported reason why the DPRK attracts attention from foreign countries is their natural resources. The Korea Mining Improvement Corporation Report (Republic of Korea) 2004, estimated the DPRK has over $2 trillion of natural resources, thought to be nearly thirty times of that of South Korea’s as of 2005 (Kim, Young Yoon, 2007, p. 13).

Despite issues with national security and the risk of a nuclear North Korea; there are strong motivators that push countries to still engage with this unique country. Influence over human rights abuses and de-nuclearization is often reported as the most pressing concerns onlookers have regarding the DPRK. However, it is clear that the potential

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The potential trade with countries that are allied with them increases the DPRK’s bargaining power, especially as the supply of resources in the world is depleted and shifts to higher-cost sources.

upside which could be achieved by integrating the DPRK into the global economy, along with the politics of power and influence in an increasingly fractured world, enable western states to push for reconciliation and turn a blind eye to the totalitarianism and corruption of the DPRK.

Tudor, Daniel. 2020. North Korea Confidential [S.l.]: Tuttle Publishing.

References

“Spring Release”. 2020. The Economist. https://www.economist.com/ asia/2015/02/26/spring-release.

“Country Comparison :: GDP - Per Capita (PPP) — _The World Factbook - Central Intelligence Agency”. 2020. Cia.Gov. https://www.cia.gov/library/publications/theworld-factbook/fields/211rank.html.

Zhang, Weiqi. 2018. “ Neither Friend Nor Big Brother: China’S Role In North Korean Foreign Policy Strategy”. Palgrave Communications 4

Kim, Young Ho. 2017. “ROK-U.S. Cooperation For Unification Of Two Koreas: Possibility And Challenges”. KRINS QUARTERLY 2 (2): 83-108. doi:10.46322/ krinsq.2.2.4. Natsios, Andrew S. 2001. The Great North Korean Famine. Washington, D.C.: United States Institute of Peace Press. “North Korean Students Studying Abroad”. 2020. World.Kbs.Co.Kr. https://world. kbs.co.kr/service/contents_view.htm?lang=e&menu_cate=northkorea&board_ seq=379188.

Wertz, Daniel, Benjamin Silberstein, Bradley Babson, and Rebecca Hersman. 2020. “China-North Korea Trade: Parsing The Data | 38 North: Informed Analysis Of North Korea”. 38 North. https://www.38north.org/2020/02/dwertz022520/. Mimura, Mitsuhiro. 2015. “The Newly Created Economic Zones In The DPRK”. The Northeast Asian Economic Review 3.

Chunshan, Mu. 2020. “North Korea’S Economy: The View From China”. Thediplomat.Com. https://thediplomat.com/2019/11/north-koreas-economy-theview-from-china/. “China-North Korea Relations”. 2020. NColateNK. https://www.ncnk.org/ resources/briefing-papers/all-briefing-papers/china-north-korea-relations. Kim, Young Yoon “DPRK’s Mineral production systems and future”, Korea Reunification Institute, 2007

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HYPENOMICS: WHEN STREETWEAR REIGNS SUPREME By Oscar Miller

sually, the picture of young individuals camping out on the streets of London on a cold Wednesday night provokes feelings of sympathy. However, it’s not sympathy the long lines of hopeful campers on Soho’s Peter Street are seeking – it’s opportunity. These fashionconscious entrepreneurs, usually under the age of 25, are looking to get their hands on the newest range from New York streetwear brand Supreme. The brand has been successfully building ‘hype’ on social media for weeks in an attempt to add to demand which already greatly outstrips supply. Those able to successfully purchase items from limited weekly ‘drops’ boast both exclusivity and profitability, with some pieces selling on aftermarkets for nearly ten times their retail price. Consumers may queue for hours or even days, estimating what items will be ‘dropping’ and what sort of price they may be able to charge customers on the aftermarket.

Those able to successfully purchase items from limited weekly ‘drops’ boast both exclusivity and profitability, with some pieces selling on aftermarkets for nearly ten times their retail price. Firstly, it is important to look at the consumers driving this excess demand. Data from PwC’s Global Consumer Insights Survey revealed that consumers spend five times as much per month on streetwear than non-streetwear, despite 70% of consumers reporting an income of less than $40,000 a year (Leeb, Menendez and Nitschke, 2019). These consumers are primarily concerned with the conspicuous consumption of ‘status goods’, those which elevate social standing (Veblen, 1899). This is known as a ‘Veblen Effect’, where consumers use product price as a signal of wealth (Mason, 1992) and where utility is derived from societal perception. The diagram below (WallStreetMojo, 2020) 36

illustrates the demand curve for a Veblen good. The demand curve is upwards sloping, with those on higher incomes consuming more of a good because it has ‘snob value’, a clear violation of the law of demand.

Figure 1: Veblen good. (WallStreetMojo, 2020)

However, the concept of snob value doesn’t quite apply to Supreme in the same way. Expensive items may not be the most unobtainable, and it isn’t always the expensive items that attract the most attention from fellow consumers. In the case of Supreme it is rarity that drives admiration from peers rather than product price. Where traditionally it is income restrictions that make products unobtainable, in the case of streetwear brands it is simply a case of a supply shortage. One of Supremes’ most coveted items, the ‘box logo’ t-shirt, or ‘bogo’ for short is little more than a cotton t-shirt with a small rectangular print retailing for £35. This is somewhat of a challenge to Veblen’s theory, as consumers aren’t always well-off individuals looking to flaunt wealth, but instead consumers who have gone above and beyond to purchase items that signal scarcity. In behavioural terms,

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these consumers can be said to be prone to ‘effort heuristics’, where the value of an item can be determined by how much effort went into obtaining it (Kruger et al, 2004). In fact, those able to obtain pieces at the retail price receive more kudos from fellow streetwear fanatics than those who pay inflated prices on secondary markets, where having the financial means to pay over the list price is seen as less impressive than buying directly from Supreme. In this sense, admirative consumers may not ask ‘how much did you pay?’ but rather ‘how long did you queue?’.

In fact, those able to obtain pieces at the retail price receive more kudos from fellow streetwear fanatics than those who pay inflated prices on secondary markets, where having the financial means to pay over the list price is seen as less impressive than buying directly from Supreme. When we look elsewhere at product releases in other sectors, we often find a direct relationship between supply and demand. Manufacturers try to supply goods and services according to market demand, removing need for an aftermarket. Though streetwear brands like Supreme adopt a different strategy. Instead, supply is perfectly inelastic fixed at artificially low levels and demand is ignored, which given the scope for profitability seems a little strange. The diagram below (Gauge, 2020) illustrates the results of these differing strategies, with Supreme making less than their non-streetwear counterparts as a result of restricted supply, while normal sellers produce where demand and supply are in equilibrium. Supremes’ founder James Jebbia put it succinctly in an interview “if we can sell 600, I make 400” (O’Brien, 2009).

Figure 2: Supply and demand.

Although, this approach may seem more plausible when considered as a marketing strategy rather than a sales strategy (Ibid). When the market is cleared, the demand for Supremes’ products doesn’t disappear, it is merely postponed to the next drop. In fact, it is the manufacture of scarcity that enables Supreme to perpetuate demand season after season and generate growth in the long-run, while ensuring the retention of brand image and consumer loyalty. By allowing shortages in the short run, Supreme is able to sustain demand the in long-run, thus ensuring profitability year in, year out. It is on this basis that they will likely never meet market supply, as doing so would be detrimental to both their business model and brand image, both of which are built on scarcity. It is therefore valid to conclude an inverse relationship between quantity supplied and desirability when it comes to streetwear brands like Supreme.

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By allowing shortages in the short run, Supreme is able to sustain demand the in longrun, thus ensuring profitability year in, year out. It is on this basis that they will likely never meet market supply, as doing so would be detrimental to both their business model and brand image, both of which are built on scarcity. If windswept streets and sub-zero temperatures aren’t your thing, you will be relieved to know Supreme do sell items online; but it’s when we get to online sales that the camping makes sense. Supremes’ latest box logo t-shirt in April 2020 sold out in under 7 seconds, meaning only those with the swiftest fingers or computer-programmed checkout ‘bots’ were able to purchase at the retail price. This clearly leaves the probability of a successful online purchase extremely low. Those who manage to purchase with the intent to resell then do so on secondary markets like StockX, an online marketplace that facilitates the exchange of streetwear and sneakers. The site which in 2017 surpassed eBay in aggregate sneaker sales (Gebel, 2019) operates a variable pricing framework not dissimilar to that of a stock market, with historical data providing buyers and sellers with price information. The graph below (StockX, 2020) shows price fluctuations of the Adidas Yeezy Boost 350 ‘Turtle Dove’ over the last 5 years, with prices reaching a high of $1990.00 in 2017 compared to release date lows of $855.00. Other popular releases include Virgil Abloh’s Off-White x Nike Air Force collaboration shoe which commands $900 on StockX, representing +430% added value on the aftermarket or the Supreme ‘Brooklyn’ Box Logo which sells for $887 despite a $52 retail price – representing added value of 1,606%. Streetwear drops here resemble initial public offerings, with retail and resell markets emulating primary and secondary capital markets respectively. Sneakers in particular are prone to speculative price bubbles, where consumers respond to the risk of discontinuation or lack of ‘restocks’, resulting in no future increases in supply. These bubbles inevitably burst with updated releases and a resultant shift in consumer preferences. StockX is symbolic of the assetisation of streetwear products, where wardrobes

Figure 3: (StockX 2020)

become portfolios and consumers become investors, many of whom depend on reselling via secondary streetwear markets as their primary source of income. All this notwithstanding, Supremes’ achievements are difficult to replicate from a business perspective. Their success is down to unpaid celebrity endorsements and excellent product placement as much as it is carefully orchestrated strategy and it’s their nicheness which enables them to operate differently to their non-streetwear counterparts. However, with consumer preferences ever changing, it is valid to question the sustainability of Supremes’ ‘hype’ oriented business model, with sceptics claiming it’s a situation of the Emperor’s New Clothes. But in the meantime as April’s oil prices take a plunge, I can’t help but think that a box logo or two on each barrel might be enough to help prices recover.

References: Gauge, J., 2020. Justinsgage.com. Available at: <http://justinsgage.com/topics/ streetwear-market.html> Gebel, M., 2019. Detroit-Based StockX To Hire 1,000 With $44M Investment. [online] Eu.freep.com. Available at: <https://eu.freep.com/story/money/ business/2018/09/13/stockx-detroit-jobs/1287927002/> Kruger, J., Wirtz, D., Van Boven, L. and Altermatt, T., 2004. The effort heuristic. Journal of Experimental Social Psychology, 40(1), pp.91-98. Leeb, L., Menendez, E. and Nitschke, D., 2019. Streetwear: The New Exclusivity. PwC. Available at: <https://www.strategyand.pwc.com/gx/en/insights/2019/ streetwear.html Mason, R., 1992. Meaning, Measure And Morality Of Materialism. Salford: Department for Business and Management Studies, University of Salford, pp. Pages 88-95, Modelling the Demand for Status Goods. O’Brien, G., 2009. James Jebbia Is Supreme - Interview Magazine. Interview Magazine. Available at: <https://www.interviewmagazine.com/fashion/jamesjebbia-is-supreme> StockX, 2020. Available at: <https://stockx.com/adidas-yeezy-boost-350turtledove> Veblen, T., 1899. The Theory of The Leisure Class. 1st ed. USA: Macmillan. WallStreetMojo. n.d. Veblen Goods (Definition, Example) | Demand Curve of Veblen Goods. Available at: <https://www.wallstreetmojo.com/veblen-goods/>

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MOVE OVER FREE TRADE, PROTECTIONISM’S BACK... OR, IS IT? By Andrea Fernandes

nce synonymous with prosperity, free trade today has evolved to be commonly seen as a “utopian evil”, drawing political heat and mounting backlash. Centered on the Theory of Comparative Advantage as advocated by David Ricardo, it was hailed as a philosophical achievement of the 18th and 19th centuries. However, in today’s dynamic world, the comparative advantage is viewed as being highly idealised, prompting nations to reinstall their trade barriers. Thus, if free trade is a ‘necessary evil’, why is protectionism surging again?

Embracing free trade In theory, free trade policies allow for an efficient allocation of scarce resources, with countries being able to focus on producing products that they are best at. This relates to products which have a lower opportunity cost - essentially a “comparative advantage” that enables specialisation. Hence, promoting increased efficiency, output and employment which, ceteris paribus, should improve living standards and facilitate economic growth. Free trade rewards risk-taking and process innovation by increasing sales and market share. The opportunity to invest in capital means that businesses may expand and hence, create job opportunities. For instance, the expansion of trade that occurred after the North Atlantic Free Trade Agreement (NAFTA) and then the subsequent establishment of the World Trade Organization (WTO), meant that since 1990, the U.S. economy has grown by almost a quarter and raised the wealth of the average American consumer by more than $5,500 (Froning, 2000).

NAFTA’s replacement with the USMCA), believe that it caused a growing loss of jobs in America’s manufacturing industry. The current U.S administration went on to bolster several protectionist measures ranging from signing into law tariffs of 25% and 10% on steel and aluminium respectively, in March 2018, to effectively creating a trade war with China in 2019 - when around $200 billion worth of Chinese goods were taxed. China retaliated by taxing $60 billion worth of American products (The New York Times, 2019). Their respective manufacturing and agricultural sectors were hit the most, as illustrated in Figure 1, with less trade affected by Chinese tariffs due to its huge bilateral trade surplus with the U.S (UNCTAD, 2019)

Free trade rewards risk-taking and process innovation by increasing sales and market share. Figure 1. Source: (UNCTAD, 2018)

Protectionism’s tit for tat However, many opponents of free trade and the NAFTA - including U.S President, Donald Trump (who is leading 39

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Figure 2. Trade interventions implemented during 2016-2918 (G20 countries only) Source: Global Trade Alerts (GTA) Database

This distinct rise in protectionism (interlinked with immigration and manufacturing concerns) was reflected elsewhere in the world- through Brexit within Europe, but also in developing countries like India, whose tariffs are now amongst the highest in the world (BBC, 2019). Figure 2 highlights the sheer number of trade distortions that favoured domestic firms instead of foreign rivals over 2 years. Trade dialogue was simultaneously consumed by accusations and retaliations about unfair trade practices, trade-distorting subsidies, and the exploitation of WTO exceptions.

Rising anti-trade sentiment? Protectionism’s ‘comeback’ is partly due to how nations have grown weary with the fact that many of free trade’s purported advantages have not translated as effectively into the real-world. Adding in free trade’s dubious assumptions, a weakened argument in its favour emerges. Firstly, it is assumed that there are no capital movements which would affect the exchange rate. Globalisation, though, means that capital flows freely from high-wage countries to low-wage countries. Mainly because new investment is utilised to build production facilities that produce products for consumption in high-wage countries. Secondly, production is assumed to be subject to constant returns to scale and hence, factors of production are moved between industries from less-valuable to morevaluable uses. However, this may not occur, as inflexibility due to geographical and occupational immobility exists within the labour market. Therefore, a change in an economy’s comparative advantage may not reallocate inputs into an industry with lower opportunity costs, but into unemployment. This is usually the case with countries that have rigid employment laws and high minimum wages like Western Europe (Fletcher, 2011). Even if retraining were used within the labour market to reduce friction, there would still be a time lag which could cause the loss of jobs. 40

Another point of contention is that the potential gains of free trade may not be fairly distributed within an economy and may only benefit a select few. So, while an economy may get bigger, individuals may lose income. Free trade may put downward pressure on wages due to the expansion of the world’s effective supply of labour being faster than the supply of capital. As a result, free trade strengthens the bargaining position of capital relative to labour. Growing capital mobility has exacerbated this process and hence, people whose income relies on returns on capital (the wealthy) gain, while people who rely on income from labour (everyone else) lose.

Salvaging multilateralism Following this, it is easy to see why some may consider free trade to be evil. However, all economic theories have drawbacks - consequences that must occur and can be mitigated in the future. Despite all the negatives associated with free trade at present, there are undeniable benefits. Nations that enact free trade policies allow for the emergence of a more dynamic economy that fosters opportunity and prosperity amongst businesses and consumers. Developing countries too can break through poverty cycles by allowing for a more export-orientated growth strategy in the short run. Furthermore, as Figure 3 demonstrates, a positive correlation emerges between economic growth and trade which Ortiz-Ospina and Beltekian (2018) underpin as being a causal relationship due to the possible growth-enhancing factors and efficiency gains global integration provides. The allure of free trade is still visible in the way countries like Japan are undertaking trade negotiations with the UK post-Brexit to protect foreign interests and how Africa is considering a 54-nation continental free-trade zone – the world’s largest aspirational single market (World Economic Forum, 2019). With free trade driving competitiveness, businesses and the workforce are required to adapt to any shift in global demand to maintain their competitive edge,

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Figure 3: Source: (Ortiz-Ospina and Beltekian, 2018)

which in turn fuels long term growth and dynamism. In the long run, free trade along with other market mechanisms shift resources to more productive resources – increasing efficiency, wages, and investment in infrastructure, possibly allowing for a better functioning economy.

References

Engine of growth

Fletcher, Ian. 2011. “Why the Theory of Comparative Advantage is Wrong.” International Journal of Pluralism and Economics Education 2, no. 4: 421-429. Available at: https://doi.org/10.1504/IJPEE.2011.046029

Free trade ushered in a new era of market globalization and innovation, one with its problems. From being viewed as a milestone breakthrough centuries ago to a ‘necessary evil’, the magnitude of its positive impact has now seemingly diminished as nations fight to keep industries and jobs at home. Present strategies mostly revolve around retaliating with protectionist measures. Economics and history, however, will prove again that free trade (or some degree of open trade) is at the heart of kickstarting economic growth and sustained development.

Froning, Denise. 2000. “The Benefits of Free Trade: A Guide for Policymakers.” The Heritage Foundation. Available at: https://www.heritage.org/trade/report/thebenefits-free-trade-guide-policymakers/#_ftn33

With free trade driving competitiveness, businesses and the workforce are required to adapt to any shift in global demand to maintain their competitive edge, which in turn fuels long term growth and dynamism.

BBC. 2019. “Trade Wars, Trump Tariffs and Protectionism Explained.” BBC. Available at: https://www.bbc.co.uk/news/world-43512098 Cloete, Kim. 2019. “Africa’s New Free Trade Area is Promising, Yet Full of Hurdles.” World Economic Forum. Available at: https://www.weforum.org/agenda/2019/09/ africa-just-launched-the-world-s-largest-free-trade-area/

Kwatra, Nikita. 2019. “Protectionism Should Worry India.” LiveMint. Available at: https://www.livemint.com/news/india/rising-protectionism-not-rcep-withdrawalshould-worry-indians-11573540972497.html Ortiz-Ospina,Esteban and Diana Beltekian. 2018. “Trade and Globalization”. Our World in Data. Available at: https://ourworldindata.org/trade-and-globalization Sorscher, Stan. 2011. “Free Trade: Flawed Theory and Bad Policy.” HuffPost. Available at: https://www.huffpost.com/entry/free-trade-flawed-theory_b_682707?guccounter=1 Swanson, Ana and Jeanna Smialek. 2019. “Trump Says Mexico Tariffs Worked, Emboldening Trade Fight with China.” New York Times. Available at: https://www. nytimes.com/2019/06/10/us/politics/trump-mexico-tariffs-china.html The Economist. 2018. “A Healthy Re-examination of free trade’s benefits and shocks.” The Economist. Available at: https://www.economist.com/openfuture/2018/05/04/a-healthy-re-examination-of-free-trades-benefits-and-shocks The Economist. 2018. “What is the Future of Free Trade?” The Economist. https:// www.economist.com/open-future/2018/06/27/what-is-the-future-of-free-trade UNCTAD. 2019. “Key Statistics and Trends in Trade Policy 2018.” United Nations Conference on Trade and Development. Available at: https://unctad.org/en/ PublicationsLibrary/ditctab2019d1_en.pdf

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THE UK MUST FORGE A NEW PATH OF RECOVERY FROM COVID-19 By Jonathon Marshak

n its current trajectory, the United Kingdom’s economic recovery from the governmentmandated shutdown looks bleak. Not only are we facing a protracted downturn in consumer and business confidence, but the economy must also grapple with being pulled out of the European Union’s single market from 2021. A radical approach in how we finance government expenditure and therefore stimulate the economy must be taken, or we face the prospect of being left behind for good. As the United States contends with civil unrest, the UK must heed its ally’s warning. We cannot let our hidden economic problems continue.

The Chancellor was able to push through policies that would have been thought too radical for the party that brought us austerity only a decade ago. The Treasury has reacted to the crisis so far with £176.7bn of immediate fiscal stimulus, £50bn of tax deferrals and up to £330bn in business loan guarantee programmes, and the highlight being the Coronavirus Job Retention Scheme which has effectively nationalised wages for 31 per cent of employees. Not to downplay the scale of this government intervention, but simply propping up businesses until 1st August, at which point businesses will have to pay an increasing share of their employees’ salaries, will only delay the inevitable. The Office for Budget Responsibility warned that up to 20% of the 9.5 million workers placed on furlough could be made redundant. We must avoid what has been seen in the US, where unemployment has doubled compared to levels seen

Figure 1: UK Consumer Confidence Index. Source: OECD

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Figure 2: UK Business Confidence Index. Source: OECD

during the 2008-09 financial crisis. However, according to the most recent Deloitte CFO Survey, 61 per cent of CFOs polled wish to reduce costs over the next 12 months, and 90 per cent believe hiring will be scaled back within the same time frame. The combined forces of redundancies, reduced hours and a lack of vacancies, which in particular are 23% lower than at the peak of the financial crisis, has caused real pay to shrink by 1.3% between March and May this year. How much further financial strain can households tolerate, when real wages only surpassed pre-financial crisis levels in February? In 2018, a study by the Royal Society of Arts found that 70% of the UK’s working population is “chronically broke.” Another worrying feature of our labour market is the rising number of workers in the gig economy and on zero-hour contracts, standing at nearly 6 million people combined. As the workforce face even lower bargaining power due to much reduced job vacancies, it would not be unreasonable to expect these figures to climb further still.

In 2018, a study by the Royal Society of Arts found that 70% of the UK’s working population is “chronically broke.” Another worrying feature of our labour market is the rising number of workers in the gig economy and on zero-hour contracts, standing at nearly 6 million people combined.

Figure 3: UK Productivity. Source: Tradingeconomics.com

The UK economy is also experiencing a long-term stagnation in productivity. The cornerstone of long-term growth, the UK has failed to return to the productivity growth levels seen before 2008. As it stands, UK productivity is currently more than 30 per cent behind the US, and around 10-15 per cent behind Germany. There are also stark differences in productivity levels between different geographical regions of the UK. If the Prime Minister is truly concerned with ‘levelling up’, this issue must be tackled first and foremost. Our ‘productivity puzzle’ must be addressed with radical policy reform if we are to avoid being left behind from the next decade and beyond. In order to relieve the looming financial burden on the middle class, thereby providing a much-needed boost to consumer confidence, the government must go beyond a furlough scheme and provide a Universal Basic Income (UBI) for its population. The long-lasting impact of the financial crisis, and the speed at which the economic fallout from coronavirus took hold, suggests that the current economic stabilisers are inadequate to prevent large downturns in GDP. If we are to sufficiently suppress the troughs of the business cycle (notwithstanding the fully artificial way in which the economy was shut down in March) and address 43

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our productivity crisis, then we must raise the financial floor of the working-age population.

Figure 4: The Market for Loanable Funds

The long-lasting impact of the financial crisis, and the speed at which the economic fallout from coronavirus took hold, suggests that the current economic stabilisers are inadequate to prevent large downturns in GDP. A UBI would provide remuneration for carers, volunteers and homemakers; work that is undervalued in our society. The scheme, which would replace means-tested benefits, would fulfil one of the government’s main aims; to reduce the bureaucracy and administrational costs in the Department for Work and Pensions. Whilst Universal Credit does try to tackle this problem, it does not go far enough. There is still much stigma associated with applying for benefits, and the process itself may be considered by many an unnecessary one if they think they can get back to work. This is shown by the 500,000 people who have stopped working, not been furloughed and have not claimed benefits during the pandemic. And whilst in principle targeted benefits make a lot of sense, the reality is that the extensive intrusiveness of government get in the way of any savings of efficiency that can be made. In addition, the benefits system in its current form is not one of the ‘untouchable’ arms of government. Election after election, the responsibilities of government departments are changed, the intricacies of policies altered. There is no reason why UBI, a system without all of the needless complexities of Universal Credit, could not reach the status of the National Health Service (NHS), which was one of the few post-war programmes which Thatcher did not want to roll back. This absence of political interference would also help to reduce the economic anxiety felt by many. An additional advantage of a universal programme is that, in times of crisis, the fiscal stimulus is immediate. The safety in knowing that such an income is accessible could subdue contractions in household expenditure in the event of an economic downturn. Considering that household expenditure accounts for around 60 per cent of the UK’s GDP, mitigating sharp contractions in this area, the likes of which we have seen over the last few months, must be a top priority of government. The work of Modern Monetary Theory (MMT) economists such as Bill Mitchell and Stephanie Kelton has shown us that we do not need to stick to the rigid fiscal rules of a previous era. If we are to accept that substantial investment is required to recover from this recession, less we experience something akin to the sluggish recovery from the global financial crisis (if we did ever truly recover), then the ideas of such economists must be included in the debate. The mainstream, neoclassical view of government spending and deficits says that the government must raise taxes to finance deficits, or risk interest rates climbing higher as both the public and private sector compete over a limited supply of loanable funds. When interest rates are too high, it becomes expensive for private individuals to take out loans and mortgages and for firms to borrow in order to fund investment. This combined effect can cause a drag on economic growth. The government may also have to print money, risking hyperinflation, or default on its debts, tarnishing its reputation and making future borrowing much more expensive. 44

MMT argues that, providing inflation remains within reasonable bounds, the government can finance its expenditure through deficits and can borrow as much as it likes. This can all take place providing that the government possesses ‘monetary sovereignty’, meaning that the government can control the supply of its own currency. If it needed to, the country could print money to pay off its debts, and can, therefore, never go bankrupt. It is important to remember that countries have been printing trillions of dollars since the financial crisis. In the UK, the government initiated a Quantitative Easing (QE) programme totalling £745 billion as of June 2020. However, we have yet to see inflation reaching anywhere near the ‘crisis levels’ of the 1970s. In the US, the Federal Reserve’s asset purchasing programme peaked at $4.5 trillion in 2015, before climbing to over $7.1 trillion in April 2020, a figure which could reach $10 trillion by the end of the year. In addition, The European Central Bank’s Pandemic Emergency Purchase Programme has been extended to €1.35 trillion, and could potentially rise by a further trillion euros. The sheer scale of these programmes, which are in effect money-printing efforts, has furthered the case for MMT. We have not seen rising inflation in the economic regions that have used QE programmes. MMT economists argue that it is the lack of productive capacity in an economy, rather than the printing of money itself, which will lead to inflation. On the subject of deficits, MMT economists such as the late Wynne Godley say that if the government is running a deficit, then there must be a surplus elsewhere in the economy. If anything, it is important that the government should continue to run a deficit, as to run a fiscal surplus means that there is a private sector deficit. This would only be necessary in instances where there is high inflation, but if there is not, then the leading MMT economists Mitchell, Wray and Watts say that recessions will occur, such as in 2001. Mitchell, Wray and Watts have more to say on the framework of how government financing and expenditure works. They say that the government taxes for two reasons. Firstly, so that residents must use the sovereign currency for tax payments, meaning that it will also be used for consumption. This gives the government control over its currency. Upstart currencies such as Bitcoin and Libra threaten the effective monopoly that governments have

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Figure 5: UK Inflation Rate 1960-2020. Source: www. macrotrends.net

in this area. Taxes are also used as a contractionary fiscal policy in order to reduce inflation. By lowering the amount of money that consumers and businesses have to spend, the government can prevent aggregate demand passing the threshold of full employment, which would lead to a dangerous rise in inflation. For this purpose, MMT economists argue that taxes are still necessary.

Figure 5: Keynesian View of LRAS

The upshot of MMT is the realisation that governments, within the limits of inflation, have room to increase public expenditure without the need to raise taxes. Depending on the level of inflationary pressure, there may even be room to reduce taxation as a way of boosting economic growth. This new strand of economic thinking will become increasingly more mainstream as governments look for ways to address the recession caused by the coronavirus pandemic. As the public become increasingly aware of environmental issues, we should expect to see politicians and businesses react to the preferences of their respective voters and consumers. Businesses have called for the prioritisation of a ‘green economic recovery’ in the UK, and it is now up to the government to carry out its response. Boris Johnson has said that it would be a ‘mistake’ to return to austerity, which will mean greater public borrowing from a government much less worried about the links between debt and economic growth than it was just a decade ago. If the government is serious about fixing the UK’s productivity crisis, which has to be a top priority if we are to avoid another stagnant recovery, then it must find the fiscal manoeuvrability to enact major economic reforms such as UBI. The Chancellor has shown willingness to go beyond the norm through his furlough scheme. He must continue

this momentum in order to aid our recovery and ensure our collective prosperity in the years ahead.

References “Consumer confidence index (CCI)”, OECD, 2020. Accessed: July 22nd 2020. https://data.oecd.org/leadind/consumer-confidence-index-cci.htm; “Business confidence index (BCI)”, OECD, accessed July 22nd 2020, https://data.oecd.org/ leadind/business-confidence-index-bci.htm#indicator-chart. “Coronavirus Job Retention Scheme statistics: July 2020”, HMRC, 2020. Accessed: July 22nd 2020. https://www.gov.uk/government/publications/coronavirusjob-retention-scheme-statistics-july-2020/coronavirus-job-retention-schemestatistics-july-2020. Partington, Richard. “UK paid employment falls by almost 650,000 as Covid-19 crisis bites.” The Guardian, July 16th 2020. Accessed: July 23rd 2020. https://www. theguardian.com/business/2020/jul/16/number-of-uk-workers-on-companypayroll-falls-by-650000-amid-covid-19-crisis Lacurci, Greg. “A second Great Depression? Unemployment crisis hits big cities hard.” CNBC, July 21st 2020. Accessed: July 22nd 2020. https://www.cnbc. com/2020/07/21/some-big-cities-are-hitting-great-depression-unemploymentlevels.html “Average weekly earnings in Great Britain: July 2020”, ONS, 2020. Accessed: July 23rd 2020. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/ employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/ july2020 “Labour market economic commentary: February 2020”, ONS, 2020. Accessed: July 23rd 2020. https://www.ons.gov.uk/employmentandlabourmarket/ peopleinwork/employmentandemployeetypes/articles/ labourmarketeconomiccommentary/february2020 Robertson, Harry. “Tackling UK productivity crisis could yield £83bn a year for economy, says PwC.” City A.M, November 26th 2019. Accessed: July 23rd 2020. https://www.cityam.com/tackling-uk-productivity-crisis-could-yield-83bn-a-yearfor-economy-says-pwc/ Inman, Phillip. “UK’s hidden problem of rising unemployment may soon be exposed.” The Guardian, July 16th 2020. Accessed: July 23rd 2020. https:// www.theguardian.com/business/2020/jul/16/rising-unemployment-uk-hiddenproblem-furlough-coronavirus “Consumer trends, UK: April to June 2019”, ONS, 2019. Accessed July 23rd 2020. https://www.ons.gov.uk/economy/nationalaccounts/satelliteaccounts/bulletins/ consumertrends/apriltojune2019 “What is quantitative easing?”, Bank of England, 2020. Accessed: July 24th 2020. https://www.bankofengland.co.uk/monetary-policy/quantitative-easing “Credit and Liquidity Programs and the Balance Sheet”, Federal Reserve, 2020. Accessed: July 24th 2020. https://www.federalreserve.gov/monetarypolicy/ bst_recenttrends.htm Smith, Elliot. “ECB could boost bond buying by another trillion euros, economist projects”. CNBC, June 29th 2020. Accessed: July 24th 2020. https://www.cnbc. com/2020/06/29/ecb-could-boost-bond-buying-by-another-trillion-euroseconomist-projects.html Matthews, Dylan. “Modern Monetary Theory, explained”. Vox, April 16th 2019. Accessed: July 26th 2020. https://www.vox.com/futureperfect/2019/4/16/18251646/modern-monetary-theory-new-moment-explained “UK ‘must prioritise green economic recovery’”, BBC News, May 8th 2020. Accessed: July 26th 2020. https://www.bbc.co.uk/news/business-52580291

Nottingham Economic Review School of Economics 2020 nottinghameconomicreview@gmail.com

ÂŠNER, 2020. Published October 2020. Images throughout ÂŠiStock.

Issue 21

Articles inside

The UK Must Forge a New Path of Recovery from COVID-19

Move Over Free Trade, Protectionism’s Back... Or, Is It

Hypenomics: When Streetwear Reigns Supreme

Does Scottish Independence Make Sense?

Crypto-Regulation: A Balancing Act

Game Theory And Cold War

Isolated and Alone: North Korea

Economic Freedom Indexes Promote Growth – But they Need to Change

Isn’t it Time America Really Paid Back its Debts for Slavery?

Features Coronavirus: Diagnosis of The World Economy

A Scramble for the Arctic? How Melting Ice is Shifting the Focus of International Shipping and Geopolitics

Economic Tales: The Irony of the Diamond-Water Paradox

Who Runs the World? – Discussion of Engineered Corporate Equality

From LIBOR to SONIA

Letter from the Editors - Keval, Jessica and Abigail